AUDITING & ASSURANCE: CONCEPTS & APPLICATIONS SCORE

QUIZ # 2
TOPIC(s) COVERED: AP 02 – CASH TO ACCRUAL BASIS

NAME:__________________________ YEAR & SECTION:__________ DATE:____________

INSTRUCTIONS: FROM THE FOLLOWING MULTIPLE CHOICE QUESTIONS BELOW, CHOOSE THE LETTER OF
THE BEST ANSWER BY SHADING IT TO A SEPARATE ANSWER SHEET PROVIDED.

PROBLEM 1
You were assigned to audit the financial statements Fever Corporation in application
for a bank loan. Fever Corporation maintains accounting records under cash-basis
accounting. The following were discovered in line with your investigations:

a. Summary of cash transactions were as follows:

CASH RECEIPTS:
Cash sales P 3,550,000
Collections on accounts receivable,
including recovery of previously
written-off accounts 28,950,000
Collections on notes receivable-trade 2,980,000
Interest on notes receivable 260,000
Purchase returns and allowances 420,000
CASH DISBURSEMENTS:
Cash purchases 2,350,000
Payments on accounts payable 17,590,000
Sales returns and allowances 390,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000

b. The following changes in account balances would have been observed had accrual
basis been used.
INCREASES
Cash 4,200,000
Accounts receivable 1,980,000
Allowance for bad debts 111,000
Accounts payable 970,000
Prepaid insurance 200,000
Advances to suppliers 255,000
DECREASES
Interest receivable 60,000
Equipment 100,000
Notes receivable-Trade 600,000
Accrued salaries expense 300,000
Inventory 875,000
c. Additional information:
Total purchase returns and allowances amounted to P 950,000 (including the
refunded portion) while the total sales returns and allowances amounted to P
1,280,000 (including the refunded portion).
Accounts receivable written-off during the year was at P 315,000 while recovery of
previous write off was at P 150,000.

REQUIREMENTS:
1. Net sales
A. 35,870,000 C. 36,635,000
B. 36,220,000 D. 37,870,000
SOLUTION:
Cash sales P3,550,000
Collections from accounts receivable, including recoveries of pre 28,950,000
Collections from trade notes receivable 2,980,000
Total 35,480,000
Add: Sales returns and allowances (no refund) 890,000
Write-off of accounts receivables 315,000
Increase In Accounts receivable 1,980,000

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 Total 38,665,000
Less: Decrease in Notes receivable (600,000)
Recovery of previous write-off _(150,000)
Gross Sales 37,915,000
Less: Sales returns (total) (1,280,000)
Net sales, per audit P36,635,000

2. Cost of sales
A. 21,110,000 C. 21,710,000
B. 21,400,000 D. 21,950,000
SOLUTION:
Cash purchases P2,350,000
Payment- of accounts payable 17,590,000
Total 19,940,000
Add: Purchase returns and allowances (no refund) 530,000
Increase in Accounts payable __970,000
Total 21,440,000
Less: Increase in Advances to suppliers (255,000)
Gross Purchases 21,185,000
Less: Purchase returns and allowances (total) (950,000)
Net purchases, per audit 20,235,000
Add Decrease in inventory __875,000
Cost of Sales, per audit P21,110,000

3. Depreciation expense
A. 100,000 C. 900,000
B. 800,000 D. 1,000,000

4. Bad debt expense

A. 265,000 C. 276,000
B. 426,000 D. 271,000

5. Net income
A. 2,424,000 C. 2,529,000
B. 2,849,000 D. 2,924,000
SOLUTION:
Net sales, per audit P36,635,000
Less: Cost of Sales, per audit (21,110,000)
Gross Profit 15,525,000
Interest income (260,000-60,000) 200,000
Total 15,725,000
Less: Expense
Insurance (700,000-200,000) P 500,000
Salaries (10,000,000-300,000) 9,700,000
Depreciation (100,000+800,000) 900,000
Bad debt expense (111,000+315,000-150,000) 276,000
Other expenses 1,500,000 (12,876,000)
Net income P2,849,000

PROBLEM 2
You were assigned to audit the financial statements Adelaida Corporation in
application for a bank loan. Adelaida Corporation maintains accounting records under
cash-basis accounting. All sales and purchases transactions were made on account. The
following were discovered in line with your investigations:

a. Summary of cash transaction were as follows:

CASH RECEIPTS:
Total collections from customers 28,950,000
Collections of interest on notes 260,000
Purchase returns and allowances 420,000

CASH DISBURSEMENTS:
Payments to suppliers of merchandise 17,590,000
Sales returns and allowances 390,000
Insurance 700,000
Salaries 5,000,000
Equipment 800,000
Miscellaneous expenses 1,500,000
Dividends 1,000,000

b. The following changes in account balances would have been observed had accrual
basis been .used.
INCREASES
Cash ?
Accounts receivable 1,980,000

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 Prepaid insurance 200,000
Inventory 840,000
Equipment, net 100,000

DECREASES
Interest receivable 60,000
Notes receivable - trade 600,000
Accounts payable 720,000
Accrued salaries 300,000
Advances to suppliers 970,000

c. Additional information:
Total purchase returns and allowances amounted to P 950,000 (including the
refunded portion) while the total sales returns and allowances amounted to P
1,280,000 (including the refunded portion). Sales and purchases discounts were P
326,000 and P 224,000, respectively.

REQUIREMENTS:
6. Net sales
A. 31,564,000 C. 30,266,000
B. 29,940,000 D. 29,666,000
SOLUTION:
Total collections from customers P28,950,000
Sales returns and allowances (P1,280,000 – P390,000) 890,000
Sales discounts 326,000
Increase in accounts receivable 1,980,000
Less: Decrease in Notes receivable (600,000)
Gross Sales 31,546,000
Sales discounts (326,000)
Sales returns (total) (1,280,000)
Net sales, per audit P29,940,000

7. Cost of sales
A. 17,420,000 C. 16,804,000
B. 16,400,000 D. 16,580,000
SOLUTION:
Total payments to suppliers P17,590,000
Purchase returns and allowances (P950,000 – P420,000) 530,000
Purchase discounts 224,000
Decrease in Accounts payable (720,000)
Decrease in Advances to suppliers 970,000
Gross Purchases 18,594,000
Purchase discounts (224,000)
Purchase returns and allowances (total) (950,000)
Net purchases, per audit 17,420,000
Increase in inventory __(840,000)
Cost of Sales, per audit P16,580,000

8. Depreciation expense
A. 100,000 C. 900,000
B. 800,00 D. 700,000
SOLUTION:
Net increase in equipment P100,000
Cost of equipment purchased during the year (800,000)
Depreciation expense P700,000

9. Net income
A. 6,420,000 C. 6,560,000
B. 6,160,000 D. 6,920,000
SOLUTION:
Net sales, per audit P29,940,000
Less: Cost of Sales, per audit (16,580,000)
Gross Profit 13,360,000
Interest income (P260,000 - P60,000) 200,000
Total 13,560,000
Less: Expense
Insurance (P700,000 - P200,000) P 500,000
Salaries (P5,000,000 - P300,000) 4,700,000
Depreciation 700,000
Other expenses 1,500,000 (7,400,000)
Net income P6,160,000

10. (This question is independent from the previous questions and given information.)
Using accrual basis, AKAI’s reported its operating expenses at P150,000 for the

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 calendar year 2022. Additional information regarding its operating expenses is as
follows:
1/1/2022 12/31/2022
Prepaid expenses P25,000 30,000
Accrued expenses 45,000 60,000
Depreciation during the year is P25,000.
What amount was paid for operating expenses?
A. P115,000 C. P135,000
B. P140,000 D. P160,000
SOLUTION:
Cash Basis – operating expenses paid (SQUEEZE) P115,000
ADD: Prepaid Expense Beginning 25,000
Accrued Expense Ending 60,000
LESS: Prepaid Expense Ending (30,000)
Accrued Expense Beginning (45,000)
Accrual Basis – operating expenses paid (150,000 – 25,000) 125,000

PROBLEM 3
Percy Company is engaged in a small export business. The company maintains limited
records. Most of the company's transactions are summarized in a cash journal; non-cash
transactions are recorded by making memo entries. The following are abstracted from
the company's records:
Accounts receivable 370,000 increase
Notes receivable 200,000 decrease
Accounts payable 150,000 decrease
Notes payable - trade 200,000 increase
Notes payable-bank 300,000 increase
Sales returns (P50,000 was refunded) 80,000
Sales discounts 20,000
Purchase returns (P30,000 was refunded) 80,000
Purchase discounts 35,000
Accounts written - off 60,000
Recovery of accounts written off 18,000
Cash sales 300,000
Cash purchases 250,000
Cash received from account customers 1,500,000
Cash payment to trade creditors 1,200,000

REQUIREMENTS:
11. What is the amount of gross sales?
A. P1,780,000 C. P2,080,000
B. P2,062,000 D. P2,130,000
SOLUTION:
Increase in accounts receivable P 370,000
Sales returns (P80,000 - P50,000) 30,000
Accounts written off 60,000
Collection 1,500,000
Sales discount 20,000
Total P1,980,000
Less: Decrease in notes receivable P200,000
Recovery of write-off 18,000 218,000
Sales on account P1,762,000
Cash sales 300,000
Gross sales P2,062,000

12. What is the amount of gross purchases?

A. P1,335,000 C. P1,585,000
B. P1,365,000 D. P1,615,000
SOLUTION:
Notes payable-trade (increase) P 200,000
Payments to trade creditors 1,200,000
Purchase discounts 35,000
Purchase returns (P80,000 - P30,000) 50,000 P1,485,000
Accounts payable-decrease 150,000
Purchase on account P1,335,000
Cash purchases 250,000
Gross purchases P1,585,000

PROBLEM 4
Premium Company is engaged in a small export business; hence, the company maintains
limited records. Most of the company's transactions are summarized in a cash journal;
non-cash transactions are recorded by making memo entries. The following balances are
taken from the company's records:
January 1, 2014 December 31, 2014

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 Accounts receivable P150,000 P 100,000
Accounts payable 200,000 100,000
Accounts written-off - 5,000
Cash received from customers - 2,100,000
Cash paid to creditors - 1,400,000
Sales discounts - 4,000
Sales returns and allowances - 10,000
Notes receivable - trade 50,000 100,000
Purchase discounts - 2,500
Purchase returns - 5,000

REQUIREMENTS:
13. How much would be the gross sales for the year?
A. P2,055,000 C. P2,105,000
B. P2,100,000 D. P2,119,000
SOLUTION:
Accounts receivable, December 31, 2014 P 100,000
Notes receivable, December 31, 2014 100,000
Sales returns and allowances 10,000
Accounts written off 5,000
Cash received from customers 2,100,000
Sales discounts 4,000 P2,319,000
Accounts receivable, January 1, 2014 P 150,000
Notes receivable, January 1, 2014 50,000 200,000
Gross sales P2,119,000

14. How much would be the gross purchases for the year?
A. P1,200,000 C. P1,300,000
B. P1,207,500 D. P1,307,500
SOLUTION:
Accounts payable, Dec. 31, 2014 P 100,000
Purchase returns 5,000
Cash paid 1,400,000
Purchase discounts 2,500
Total P1,507,500
Less: Accounts payable, Jan. 1, 2014 200,000
Gross purchases P1,307,500

15. Under the cash basis of accounting

A. The matching principle is ignored.
B. Revenue is recorded when earned.
C. Accounts receivable would appear in the statement of financial position.
D. Depreciation of assets having an economic life of more than one year is not
recognized.

PROBLEM 5
You were assigned to audit the financial statements Logan Corporation in application
for bank loan. Logan Corporation maintains accounting records under cash –basis
accounting. The following were discovered in line with your investigations:

a. Summary of cash transactions were as follows:

CASH RECEIPTS:
Cash sales 3,550,000
Collections on accounts receivable 28,950,000
Collections in notes receivable-trade 2,980,000
Interest on notes receivable 260,000
Purchases returns and allowances 420,000

CASH DISBURSEMENTS:
Cash purchases 2,350,000
Payments on accounts payable 17,590,000
Sales returns and allowances 390,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000

b. The following changes in account balances would have been observed had accrual
basis been used.
INCREASES
Cash 4,200,000

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 Accounts receivable 1,980,000
Accounts Payable 970,000
Prepaid Insurance 200,000
Inventory 1,940,000

DECREASES
Interest receivable 60,000
Equipment 100,000
Notes receivable 600,000
Accrued Salaries Payable 300,000

c. Additional Information:
Total purchases returns allowances amounted to P950,000 (including the refunded
portion) while the total sales returns and allowances amounted to P1,280,000
(including the refunded portion.

REQUIREMENTS: Determine the audit balances of the following:

16. Net sales
A. 35,870,000 C. 36,470,000
B. 36,220,000 D. 37,870,000
SOLUTION:
Cash sales P3,550,000
Collections from accounts receivable 28,950,000
Collections from trade notes receivable 2,980,000
Total 35,480,000
Add: Sales returns and allowances (P1,280,000 – P390,000) 890,000
Increase In Accounts receivable 1,980,000
Less: Decrease in Notes receivable (600,000)
Gross Sales 37,750,000
Less: Sales returns (total) (1,280,000)
Net sales, per audit P36,470,000

17. Net purchases

A. 20,990,000 C. 20,400,000
B. 20,490,000 D. 20,340,000
SOLUTION:
Total payments to suppliers (P2,350,000 + P17,590,000 P19,940,000
Purchase returns and allowances (P950,000 – P420,000) 530,000
Increase in Accounts payable 970,000
Gross Purchases 21,440,000
Purchase returns and allowances (total) (950,000)
Net purchases, per audit 20,490,000
Increase in inventory __(1,940,000)
Cost of Sales, per audit P18,550,000

18. Cost of sales

A. 18,550,000 C. 18,750,000
B. 18,400,000 D. 18,950,000
SOLUTION:
Total payments to suppliers (P2,350,000 + P17,590,000 P19,940,000
Purchase returns and allowances (P950,000 – P420,000) 530,000
Increase in Accounts payable 970,000
Gross Purchases 21,440,000
Purchase returns and allowances (total) (950,000)
Net purchases, per audit 20,490,000
Increase in inventory __(1,940,000)
Cost of Sales, per audit P18,550,000

19. Depreciation expense

A. 100,000 C. 900,000
B. 800,000 D. 1,000,000
SOLUTION:
Net decrease in equipment (P100,000)
Cost of equipment purchased during the year (800,000)
Depreciation expense P900,000

20. Net income

A. 5,420,000 C. 5,250,000
B. 5,150,000 D. 5,920,000
SOLUTION:
Net sales, per audit P36,470,000
Less: Cost of Sales, per audit (18,550,000)
Gross Profit 17,920,000
Interest income (P260,000 - P60,000) 200,000
Total 18,120,000
Less: Expense

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 Insurance (P700,000 - P200,000) P 500,000
Salaries (P10,000,000 - P300,000) 9,700,000
Depreciation 900,000
Other expenses 1,500,000 (12,600,000)
Net income P5,520,000

- END OF EXAMINATION -

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