Chapter 1

1. How does accounting affect your daily life?

a. It allows one to become more conscious of their expenses. It also
encourages analysis in terms of the personal budgeting done especially
with spending.
2. What are the other reasons why a person goes into business?
a. Enhancement/Maximization of wealth; to make the most of the current
wealth and to multiply it.
3. Why do businesses play an important role in the economy?
4. Enumerate the different resources needed to run a business. How should these
resources be handled in order for the business to be successful?
a. Machinery, Fixed capital & working capital, Labor skills and workers, Raw
materials
b. These resources must be handled and managed in a way wherein they
are used efficiently for the achievement of goals of the business
5. What are the two main sources of capital?
a. Primary source: owner or investor
b. Secondary source: relatives, friends, financial institutions
6. Why is investing in a business always risky? How do we minimize the risk?
a. Investing in a business or in establishing a business is always risky
because it is always uncertain whether the business will gain profit or will
operate well.
b. We can minimize the risk by being clear of what the goals are and finding
much more efficient over effective ways of how to reach them. Risks can
also be minimized by proper planning of how the operations of the
business is intended to go.
7. How is the success of any business measured?
8. What is profit, how is it earned and what is its effect on business?
9. Discuss the forms of business that may be organized. Give the advantages and
disadvantages of each.
a. Sole Proprietorship
b. Partnership
c. Corporation
10. What is the main difference between merchandising and a manufacturing
business?
a. The main difference between the two is that of the production of the goods
they sell. Manufacturers create their products from raw materials, while
merchandisers buy and sell goods.
11. Give examples of corporations operating as a service provider, merchandiser,
and manufacturer.
 a. Service: PLDT
b. Merchandiser: SM Supermarket
c. Manufacturer: Toyota Motors
12. Differentiate return on investment from return of investment.
a. Return of investment refers to the revenue of the entity that is equal to the
initial capital or investment. Return on investment refers to the remaining
amount after the investment is deducted from the revenue of the business.
13. Explain the role of the different departmental managers in a business
organization.
a. Finance
b. Sales
c. Marketing
d. Production
e. Personnel
14. For a business to be successful, management must be efficient and effective.
Explain.
15. Describe the four functions of management.
a. Planing
b. Organizing
c. Directing and controlling
d. Decision making
16. Give the differences in computing for the profit of a service business, a
merchandising business, and a manufacturing business.
17. When is revenue recognized by a service provider? By a merchandiser? By a
manufacturer?
a. When a service is rendered
b. When a merchandise is sold
c. When a manufactured good is sold
18. Explain unlimited liability. Who are the investors affected by this?
19. Define accounting. What is its basic purpose?
a. Accounting is the process of identifying, measuring, and communicating
economic information to permit informed judgment and decisions by users.
It is also a service activity that provides quantitative information, primarily
financial in nature, intended to be useful in making economic decisions.
b. The basic purpose of accounting is to provide information that is useful in
making economic decisions.
20. Why is accounting called the language of business?
a. Accounting is the language of business because it is the heart of
information of an entity. It contains the processes needed in properly
 assessing the entity and the information needed in the decision making of
owners and managers.
21. What is AIS?
a. Accounting Information System, the system that includes various
processes that has an end goal of summarizing financial information that
were derived from the transactions of the business.
b. It is an orderly way of accumulating and summarizing business
transactions through a process of analyzing, measuring, recording,
classifying, and summarizing from which reports are generated for proper
communication to decision makers.
22. Give the four phases of an accounting information system.
a. [Data gathering], [analyzing, measuring, and recording], [classifying and
storing], [summarizing, reporting and interpreting]
23. Explain the four types of reports that are generated by the accounting information
system.
a. Statement of Financial Position, Income Statement, Statement of Changes
in Equity, Statement of Cash Flows
24. Discuss the components of an AIS.
a. People - these are the people involved in the system and manipulation of
various devices from collection up to the interpretation
b. Documents - evidences that back up data found in the collection
c. Methods -
d. Equipments/Devices - computers and the like that are used in the process
of the system
25. Give examples of internal control procedures a business enterprise must
implement.
a. Internal Control requires that only qualified individuals are hired for a
specific position or task
b. Internal Control requires
26. Give the advantages of a computer-based over a manual-based accounting
system.
27. Enumerate and explain the five fundamental principles that guide accountants in
designing the AIS of firms.
a. Control Principle
b. Cost-Benefit Principle
c. Relevance Principle
d. Compatibility Principle
e. Flexibility Principle
28. Which phase(s) of the accounting information system may be computerized?
a. Phases 1-4
 29. Explain why the computer cannot take the place of the accountant.
a. While the computer can fulfill tasks that are performed by accountants,
they do not have the critical thinking skills needed in analyzing the data
gathered and summarized to be used in decision making.
30. What is bookkeeping?
a. Bookkeeping is the recording of business transactions and journalizing
them in a way called journal entries.
31. Enumerate the financial statements prepared by the accountant along with the
financial information provided and the user(s) interested in this information.

Chapter 3
1. Enumerate and explain the qualitative characteristics that financial statements
must possess.
2. Why is consistency needed in compliance with the comparability requirement?
3. Materiality depends on the nature and size of the item. Explain what it means.
4. Explain why disclosure is necessary in making the financial reports reliable.
5. Explain the following concepts and principles which are needed in identifying,
measuring, and recording economic information: accrual, business entity, going
concern, measurement unit, objectivity, disclosure, reporting period, exchange
price.
a. Accrual - when a transaction occurs, not when it is paid PAS 1 par. 27-28
b. Business Entity - separate from its owners, separate from the owner’s
other entities
c. Going concern - assumes that the entity will live in an indefinite amount of
time PAS 1 par 25
d. Measurement Unit - money only
e. Objectivity - backed up by documents; characteristic of reliability
f. Disclosure -
g. Reporting Period - division into specific time intervals which would be
considered the accounting periods; required yearly PAS 1 par 36-37
h. Exchange Price - record based on cost PAS 1 par 15-16
6. What does the acronym FRSC stand for? How are these formed and what
authoritative body/ies is/are responsible for its creation and pronouncement?
a. Financial Reporting Standards Council
b. Members come from PICPA, BIR, SEC, CHED, FINEX, and the PRC
7. Explain what is the fundamental identity and why this must always be
maintained.
a. The fundamental identity of the three elements (assets, liabilities, and
equity) or the relationship of balance must be respected as assets are
claimable by the creditors and owners/investors.
 b. “because every asset that a business owns has been acquired solely from
the funds that are supplied by its owners and creditors.”
8. What three accounting values affect the financial structure of a business?
a. Assets, Liabilities, and Equity
9. Give two ways of expressing the fundamental identity of presenting the statement
of financial position.
10. What are the three features of an asset?
a. Acquired from a past event
b. Will give a future economic benefit to the entity
c. Entity has control over it
11. Give five examples of assets owned by a hospital, a grocery, and a shoe factory.
Are there differences in their assets?
12. Define liability by giving its three features. Give five examples of liabilities.
a. Present obligation
b. Arose from a past event
c. Settlement is expected by an outflow of resource
13. Why is owner’s equity also called net worth? Give two transactions affecting
owner’s equity.
a. This is called the net worth because it is the net amount of the Total
Liabilities deducted from the Total Assets. It represents the amount of the
entity that belongs to the owners.
b. Investment of capital into the business, receiving revenue from sold goods
or services
14. What is a business transaction? What are its three characteristics?
a. Exchange of values
b. At least two parties are involved
c. In terms of money
15. What is the Venetian Model all about and how does one use this in analyzing
business transactions?
a. Double Entry Bookkeeping - with every debit there must be a
corresponding credit amount
b. In analyzing transactions, it allows us to understand that an increase in an
economic resource also involved a sacrifice.
c. “For every value received by the business, there must be an equal value
parted with.”
16. What financial statement shows a listing of assets and liabilities of the business?
a. Statement of Financial Position or the Balance Sheet
17. How do liabilities and owner’s equity differ? And in what respect are they similar?
a. They differ because liabilities represent the debt that the entity owes, while
the equity represents the amount of funds invested in an entity. The
 similarity between them is that the assets of the business were financed
by them.
18.