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Hernandez, Eunice D.

MBA505- Financial Accounting

Chapter 1: Introduction to Accounting


Discussion Questions:
1. Define Accounting
Accounting is a service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making economic
decisions, in making reasoned choices among alternative courses of action.
2. Describe accounting as an Information System
Accounting is actually an information system that measures business activities, processes
information into reports and communicates the reports to decision makers. It is for this reason
that accounting has been called the “Language of business”, because it serves as a
communication link between the business entity and the users of financial information.

3. What are the three forms of Business Organization? Explain each.


a. Single or Sole Proprietorship- is a business owned by only an individual called the proprietor.
It is the form of business easiest to organize since there are only minimal requirements to
follow.
b. Partnership- Is an association of two or more persons who bind themselves to contribute
money, property or industry to a common fund, with the intention of dividing profits among
themselves.
c. Corporation- A corporation is an artificial being created by operation of law having the rights
of succession and the powers and attributes expressly authorized by law or incident to its
existence.
4. What are the three types of business as to operation? Describe each.
a. Service Business- This business renders services to customers or clients for a fee. Example:
parlors, security agencies, laundry shops etc.
b. Merchandising business or trading- This kind of business buys goods or commodities and
sells them at a profit.
c. Manufacturing Business- This type makes finished goods from raw materials or unassembled
parts. A manufacturing business produces the goods that it sells.
5. Explain Generally Accepted Accounting Principles (GAAP). Mention at least 5 GAAP and explain
each.
GAAP defines what is accepted accounting practice and they are like laws that must be followed
in financial reporting.
a. Business Entity concept- Under this concept, the business entity is treated as separate and
distinct from its owner/s and from other business units. It limits the economic data in the
accounting system to data related to the activities of the business.
b. Going concern of continuity assumption- this assumes that unless there is evidence to the
contrary, the business entity will continue to operate for an indefinite period.
c. Time Period Assumption- this assumption requires that the indefinite life of the business be
divided into time periods or accounting periods for the purpose of preparing financial
reports in the performance and financial position of the business.
d. Unit of measurement assumption- this specifies that the accounting should measure and
report the results of a business’ economic activities in terms of a monetary unit such as the
Philippine peso.
e. Accrual basis. The accrual basis of accounting requires that revenue or income should be
recognized when earned regardless of when collection is received; and expense should be
recognized when incurred regardless of when payment is made.
6. What is meant by business entity concept?
Business Entity concept- Under this concept, the business entity is treated as separate and
distinct from its owner/s and from other business units. IT limits the economic data in the
accounting system to data related to the activities of the business.
7. Differentiate Accounting from Bookkeeping.
Bookkeeping is the process of systematically maintaining a record of all business transactions.
while Accounting is responsible for interpreting, classifying, analyzing, reporting and
summarizing financial data.
8. What are the Specialized field in accounting. Explain each.
a. Public Accounting- Accountants and their staff who render services for a fee are said to be
engaged in public accounting. In this field, an accountant may practice as an individual or as
a member of an accounting firm.
b. Private accounting- Accountants employed by business firms or by a not-for-profit
organization are said to be engaged in private accounting
c. Government accounting- Accountants who are employed in any governmental units are said
to be in the field of government accounting.
d. Accounting Education- Accountants employed as instructors, professors, or reviewers or
researchers are in the field of accounting Education.
9. Who are the users of financial information? Why do they need said information?
a. Management- for planning and controlling the operation of the business
b. Creditors and suppliers- in order to evaluate the borrower’s ability to pay and in deciding
whether to extend credit to debtor
c. Owner/s of the firm-in order to know if the business is operating at profit or loss
d. Investors- to determine if their investment is profitable and safe and in deciding whether to
invest in the business or not. Also, whether they should buy, hold or sell their shares of
stocks
e. Employees-employees are interested in information regarding the profitability and stability
of tan enterprise so they can assess their employment status and whether the company has
the ability to provide better remuneration and additional benefits
f. Government and their Agencies- to regulate the activities of the enterprise, determine
taxation policies and as basis for national income statistics.
g. Customers- as basis for evaluating the possibility of price changes and identifying their other
sources of heaper services and commodities
h. Financial Analysts and advisors- as basis in evaluating the position of the business in the
industry and render an opinion on the business potentials regarding profitability risks and
opportunities.
i. Trade Associations- to report industry statistics; industry comparison and analysis un order
that firms belonging to the same industry can make relevant economic decisions
10. What are the Basic Financial Statements? Explain Each.
a. Statement of Comprehensive Income- IS the financial statement that shows the summary of
the company’s revenue and expenses for a given period.
b. Statement of financial Position (Balance Sheet)- shows the list of a company’s asset,
liabilities and owner’s equity as of a specific date, usually at the close of the last day of a
month or a year.
c. Statement of Changes in Owner’s Equity/ Capital Statement- summary of changes in the
owner’s equity that have occurred during a specific period of time, such as a month or a
year.
d. Statement of Cash Flows- is the financial statement that provides information about the
cash receipts and cash payments of an entity for a given period of time.
e. Notes to the financial statements-this statement presents in narrative form the significant
accounting policies and other related explanatory notes that have affected the preparation
of financial statements.
11. What are the Basic elements of a Financial Statement?
The Basic elements of a financial statement are: ASSETS, LIABILITIES, CAPITAL, REVENUE OR
INCOME and EXPENSES.
12. What are assets? Give examples.
Assets are defined as resources controlled by the enterprise as a result of past transactions and
events and from which future economic benefits are expected to flow to the enterprise.
Example: Cash, Accounts receivable, Notes Receivable etc.
13. What are Liabilities? Give Examples.
Liabilities are defined as present obligations of an enterprise arising from past transactions or
events, the settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits. Example: Accounts Payable, Mortgage Payable,
Salaries Payable etc.
14. What is Capital
Capital represents the equity or claim of the owner on the assets of the business.
15. What are revenues? Give examples.
Revenue or income is the gross inflow of economic benefits during the period in the form of
inflows or enhancements on assets or decrease in liabilities that result in increase in equity,
other than those relating to contributions from owner or owners. Example: Sales, Rent income,
Service Revenue etc.
16. What are expenses? Give examples.
Expenses is defined as the gross outflow of economic benefits during the period in course of
ordinary activities when the outflows result in decrease in equity other than those relating to
distribution to owners. Example: Rent Expense, advertising expense, insurance expense etc.
Exercises
A.
1. A 11. B
2. A 12. B
3. C 13. A
4. A 14. A
5. B 15. A
6. A 16. B
7. A 17. A
8. A 18. B
9. B 19. C
10. B 20. C

B.
1. L 18. A
2. A 19. A
3. A 20. A
4. E 21. L
5. L 22. L
6. A 23. A
7. A 24. A
8. R 25. L
9. E 26. A
10. A 27. A
11. R 28. R
12. A 29. E
13. A 30. R
14. C 31. E
15. C 32. L
16. E 33. R
17. L 34. L

MULTIPLE CHOICE
1. A
2. D
3. C
4. A
5. B
6. D
7. D
8. D
9. B
10. B
11. D
12. D
13. D
14. A
15. B
16. D
17. A
18. B
19. D
20. C

MATCHING TYPE
1. P
2. Q
3. G
4. E
5. D
6. H
7. A
8. C
9. O
10. M
11. L
12. N
13. J
14. K
15. I

IDENTIFICATION
1. EXPENSE
2. FINANCIAL ACCOUNTING
3. CASH
4. AUDIT
5. MANUFACTURING BUSINESS
6. INVENTORY
7. FRIAR LUCA PACIOLI
8. ASSETS
9. ASSETS
10. PREPAID EXPENSE
11. FINANCIAL STATEMENT
12. MANAGERIAL ACCOUNTING
13. MORTGAGE PAYABLE
14. SALES
15. UNEARNED REVENUE
16. INCOME STATEMENT
17. ACCOUNTS RECEIVABLE
18. CASH FLOW STATEMENT
19. SHAREHOLDERS
20. PARTNERSHIP
21. INTERIM FINANCIAL STATEMENT
22. BALANCE SHEET
23. MERCHANDISING BUSINESS
24. STATEMENT OF CHANGE IN OWNER’S EQUITY
25. ACCOUNTING
26. GAAP