CHAPTER 1

PROBLEMS

PROBLEM 1:TRUE OR FALSE

1. The main purpose of accounting is to provide information that is useful

in making economic decisions.

2.All business transactions are recorded in the books of accounts.

3. Accounting information is expressed both in numbers (e.gn monetary

amount) and in words (e.g, descriptions and explanatory information.

4. Accounting is considered a practical art because it requires the use of

creative skills and judgment.

5. Accounting, as an information system, consists of an input, a process

and an output.

6. Although bookkeeping is part of accounting, the two are not the same.

7. Entity A buys goods and sells them at a mark-up. Entity Aisa

merchandising business.

8. Entity B is required to file audited annual financial statements with the

SEC. Entity B can either be a corporation or a partnership, but not a sole

proprietorship or a cooperative.
9. A school is most likely to be considered a manufacturing business- the
raw materials are the students and the finished products are
responsible and competent. Business professionals.

10. A business that produces goods in large quantities can save on fixed
costs. This is called economies of scale.
PROBLEM 2:TRUE OR FALSE

1. Only accountable events are recorded in the books of accounts.

Accountable events are those that affect the accountant.

2. General purpose financial statements are the end product of the

financial accounting process. These statements are intended for internal
users.
3. Accounting is the major facet of a business that is responsible in
generating funds needed to support the business operations.

4. A business transaction is considered an accountable event if it affects

the assets, liabilities, equity, income or expenses of the business.

5. You and your friend are members in a cooperative. You hold 1 share,
while your friend holds 10,000 shares. During members' meetings, your
friend can cast 10,000 votes, whereas you can only cast 1 vote.

6. Mr.A owns and manages a sole proprietorship business. The financial

reports prepared tailored to Mr. A's financial information needs are not
general purpose financial statements.

7. Mr. A (in #6 above) accepts Mr. B as co-owner to his business. The

business is now called A&B Co. The business of Mr. A and Mr. B is a
partnership.

8.Mrs.C is a taxi and jeepney operator. Mrs. C has three taxis and five
jeepneys. Mrs. C's business is registered with the DTI. Mrs. C's business is
a corporation.

9. Mr. A and Mr. B in #7 above decided to acquire the business of Mrs. C

in #8. The newly formed business is called ABC, Inc. ABC, Inc. is owned
by Mr. A, Mr. B, Mrs. C and two drivers of Mrs. C. ABC, Inc. issued
shares of stocks to the owners representing their ownership interest in the
business. The newly formed business is a partnership.
10.The word “Inc." in ABC, Inc. (see #9 above) is the abbreviation for
incorporated, which connotes a corporate business.

CHAPTER 2

PROBLEMS

PROBLEM 1:TRUE OR FALSE

1. The terms "accounting concepts" and “accounting principles" (and other

similar terms) are usually used interchangeably in practice. Collectively,
these refer to a generally accepted set of logical notions and procedures
that serve as guide in recording and communicating accounting
information.

2. There are numerous accounting concepts and principles that the

accountant needs to. consider when recording and communicating
accounting information.

3. The separate entity concept contributes to the objective evaluation of the

financial strengths and weaknesses of d business.

4. A business that is not a going concern is called coming concern.

5. A reporting period that starts on May 1 of the current year and ends on

April 30 of the following year is called a fiscal year period.

6. An item that is considered material by one business is always

considered material by all other businesses.

7. The cost of providing financial information should exceed the expected

benefits to be derived from the information's use.

8. The accounting standards used in the Philippines are represented by the

PFRSs.
9. The accounting standards used in the Philippines are the same as the
standards used internationally.
10.The Conceptual Framework is not a Standard. Rather, it serves as guide
in developing, understanding or analyzing the Standards.

PROBLEM 2:TRUE OR FALSE

1. The assumption that a business entity will not cease its operations in
the near future refers to the concept of Consistency.

2. Using the same accounting treatment for identical items from one
period to another is an application of the concept of Time Period.

3. Entity A acquires a regular ballpen. Instead of recognizing the cost of

the ballpen as an asset to be subsequently depreciated, Entity A
immediately charges it as expense. This is an application of the
concepts of materiality and cost-benefit.

4. You own a business. Your business extends credit to various

customers. One day, you found out that one of your customers became
bankrupt. You immediately charged that customer's account as loss
because you don't expect that the customer will be able to pay you
anymore. You are applying the concept of Cost-benefit.

5. Under the Accrual basis of accounting, income is recognized when

earned, not when cash is collected, and expenses are recognized when
incurred, not when cash is disbursed

6. Corporate and partnership businesses in the Philippines are regulated by

the Department of Trade and Industry (DTI)

7. After becoming a Certified Public Accountant(CPA),Mr.A worked as an

external auditor in one of the biggest auditing firms in our country. Two
years later, an international auditing firm offered Mr. A an external
audit job abroad, which Mr. A accepted. Mr. A will be applying
accounting standards in his new job compared to those that he has
applied in his previous job.
8. The term “Standards" is used in practice to refer to both the
PFRSs and the Conceptual Framework.

9. Qualitative characteristics are the traits that determine whether an

item of information is useful to users, and therefore included in the
financial statements.

10. Information has the qualitative characteristic of relevance ifit is

capable of making a difference in the decisions of users.

PROBLEM 3: FOR CLASSROOM DISCUSSION

Basic Accounting Concepts

1. These are guidelines that accountants follow when recording and

communicating accounting information.
a. Accounting concepts and principles
b. Accounting laws and regulations
c. Accounting memos and guidelines
d. Accounting walkthrough, guides and cheats

2. Treating a business and its owner as one and the same violates which of
the following principles?

a. Verifiability
b. Separate entity
c. Materiality
d. Going concern

3. This concept requires the preparation of financial statemenls at least

annually.

a. Reporting period
b. Accrual basis
c. Materiality
d. Separate entity

4. What concept justifies the use of the accrual basis and

historical cost concepts?

a. Going concern
b. Materiality
c. Monetary Unit
d. Full disclosure

5. Under the accrual basis of accounting, a business records a sale

a. when the sale occurs.

b. when the sale price is collected.

c. at the point in time when (a) and (b)above are satisfied
d. a or b, as an accounting policy choice

6. Providing and using information entail cost. Accordingly, there should

be a balance between the cost of providing and using information and the
information's usefulness, such that the information's usefulness justifies its
cost. This relates to which of the following concepts?

a. Reporting period
b. cost benefit
c. stable monetary unit
d. prudence

7. Under this concept, amounts in the financial statements are stated in

Philippine pesos and changes in the purchasing power of the Philippine
peso due to inflation are generally ignored.

a. Prudence
b. Materiality
c. Stable monetary unit
d. Ignoring concept

Accounting Standards
8. Which of the following statements is incorrect regarding the accounting
standards used in the Philippines?

a. The accounting standards used in the Philippines consist of the

Philippine Financial Reporting Standards (PFRS).
b. The PFRSs are derived from the International Financial Reporting
Standards (IFRS).
c. The accounting standards used in the Philippines are similar to those
used in other countries worldwide.
d. The accounting standards used in the Philippines are inferior compared
to international standards.

9. Which branch of accounting is governed by the Philippine Financial

Reporting Standards?

a. Management accounting

b. cost accounting

c. financial accounting

d. tax accounting

The Conceptual Framework for Financial Reporting

10. Information has this qualitative characteristic if it provides a true,
correct, and complete depiction of what it intends to represent.
a. Relevance
b. Faithful representation
c. Comparability
d. Understandability

11. Information has this qualitative characteristic if two different users

could reach a. general agreement as to what the information intends to
represent.
a. Relevance
b. Faithful representation
c. Comparability
d. Understandability
CHAPTER 3

PROBLEM 1:TRUE OR FALSE

1. All the processes in an accounting system must observe the equality of

the accounting equation.

2.The basic accounting equation is Assets +Liabilities = Equity.

3. The terms 'economic resource' and 'present obligation' refer to 'income'

and 'expenses', respectively.

4.When determining the existence of an asset, legal ownership is always a

necessary factor to consider.

5. Control is an essential aspect in the definition of an asset. Control

means legal ownership.

6. An entity controls an economic resource if it has the exclusive right to

enjoy the economic benefits from the resource, including the ability to
prevent others from enjoying those benefits.

7. A property that you do not have the right to use, sell, lease, transfer, or
other similar rights may not be your asset, even if you are the legal owner
of that property.

8. Legal obligations arise only from law.

9. A present obligation can result from a future event.

10. Equity is defined as a residual amount - being the difference between

total assets and total liabilities.

PROBLEM 2:TRUE OR FALSE

1. Income is defined as increases in assets or decreases in liabilities that

result in an increase in equity, other than those that relate to contributions
by the business owner (s).

2. Both the definitions of income and expenses encompass changes in

assets and liabilities but excluding those changes that relate to business
owner's investments to, or withdrawals from, the business.

3. You own a business. Your business lacks capital so you provided

additional cash. This transaction would result to income by your business.
4.The difference between income and expenses is profit or loss. There is
profit if income exceeds expenses.

5. Physical possession is a necessary condition in order for control over an

asset to exist.

6.An economic resource can produce economic benefits in many ways,

including the potential of the resource to provide the entity, directly or
indirectly, with cash.

7.The settlement of a liability requires the transfer ofan economic resource.

8. An intention to obtain control over an economic resource at a future

time does not result to the recognition of an asset at present.

9. Your business has total assets of P10M, total liabilities of P6M and total
equity of P4M.This means that out of the total P10M resources, you have
provided P6M.

10. Income decreases equity, while expenses increase equity.

PROBLEM 3:TRUE OR FALSE

1. Total assets are P10. Total liabilities are P6. Therefore, total equity is
P4.

2. Total assets are P20. Total liabilities are P16.Therefore, total equity is
P36.

3. Total assets are 80. Total equity is P60.Therefore, total liabilities are
P20.

4. Total liabilities are P60. Total equity is P30. Therefore, total assets are
₽30.

5. Total income is P100. Total expenses are 40.Therefore, the difference

of P60 is profit.

6. Total income is 50. Total expenses are 60.Therefore, the difference of

P10 is loss.

7. Beginning equity is P100. Profit during the period is P20. If there are no
other changes in equity, the ending balance of equity must be P120.

8. Beginning equity is P10. Loss during the period is P4. If there are no
other changes in equity, the ending balance of equity must be P6.
9. Total assets are P100. Total liabilities are P40. Total equity, before
income and expenses, are P40. Therefore, profit is P20.

10. Total assets are P100. Total liabilities are P60. Total equity, before
income and expenses, is P30. If total income is P50, total expenses must be
P30.

CHAPTER 4

PROBLEMS

PROBLEM 1: TRUE OR FALSE

1. Chart of accounts is the basic storage of information in accounting.

2. Debit means the left side of an account, while credit means the right.

3. The difference between the total debits and total credits in an account
represents the balance of that account.

4. An account has total debit of $80 and total credits of P20. This account
has a balance of $60.

5. The balance of the account in #4 above is referred to as a credit balance.

6. If the total debits in an account exceed the total credits, the account
would have a debit balance.

7. There are five major types of accounts used in accounting.

8. Income and expenses are the balance sheet accounts.

9. The "used up" portion of a prepayment (e.g., prepaid rent) is an expense,

while the "unused" portion is an asset.

10. The "used up" portion of supplies bought during the period is called
"Prepaid supplies."

PROBLEM 2: TRUE OR FALSE

1. The right side of an account is called credit.

2. Accounts payable and accounts receivable are opposites, meaning if I

have an account payable to you, you, in turn, have an account receivable
from me.
3. You are selling banana cue. If I buy your banana cue and informally
promise to pay for it tomorrow, your 'accounts payable will increase.

4. In conjunction with #3 above, my 'accounts receivable' will increase.

5. If after sometime, I haven't paid yet my dues to you in f3 above, and

you don't expect that I can pay you, you will recognize an expense called
bad debt expense.
6. An entity that borrows money from the bank would most likely present
interest income in its income statement.

7. The terms "receivable" and "prepaid" connote an asset, while the terms
"payable" and "unearned" connote a liability.

8. Collectively, land, building and equipment are referred to as "Property,

plant and equipment.

9. Gains are income that arises in the ordinary course of business activities.

10. Mr. Monkey's main business activity involves selling bananas. One
time, Mr. Monkey sold an iPhone with carrying amount of P17 for P20.
Mr. Monkey recognizes a gain of P3 on this transaction rather than
revenue.

CHAPTER 5

PROBLEM 1: TRUE OR FALSE

1. The three books of accounts are the journal, ledger and T-account.

2. The ledger is called the "books of original entries."

3. Journals can be classified into General Journal and Special Journal.

Special journals are used to record transactions of a similar nature. Those
that cannot be recorded in the special journals are recorded in the general
journal.

4. Entity A has total accounts receivable of P12M. This information is

most likely to have been taken from the General Journal.

5. Of Entity A's total accounts receivable of P12M, P4.8M is due from

Entity B. This information is most likely to have been taken from the
Special Journal.

6. An account that necessarily needs a breakdown is called a controlling

account.
 7. The normal balance of an asset or expense account is debit, while the
normal balance of a liability, equity or income account is credit.

8. Combining a debit amount with a debit amount results to addition.

9. The system of recording used in financial reporting is called multiple-

entry system.

10. Every transaction has a two-fold effect on values. This concept is

called "matching."

PROBLEM 2: TRUE OR FALSE

1. Debit is simply the left side, while credit is the right side, of an account.

2. When recording business transactions, you see to it that for every peso
that you debit, there is a corresponding peso that you credit. You are
applying the concept of equilibrium.

3. If you want to increase the balance of a liability account, you will debit
it.

4. Under the double-entry system, sometimes a business transaction is

recorded through a debit alone or a credit alone.

5. Your general ledger shows total notes payable of P10M. You only have
two bank loans - one from Bank A and the other one from Bank B. If the
loan from Bank A has a balance of B4M, the loan from Bank B must be
P8M.

6. The balance of an account is simply the difference between the total

debits and total credits in that account.

7. This morning, you had cash of P100. During the day, you collected
accounts receivable of P920 from your friend and you spent P70 for
transportation, meals and utilities expenses. The ending balance of your
cash is P190.

8. The cash collection from your friend in #7 above is recorded in your

personal books of accounts as a credit to cash.

9. The collection in #7 above will increase your accounts receivable from

your friend.

10. If you are a liability and your mama tells you that she will debit you,
this means that she will either decrease your allowance or put you up for
adoption.