CHAPTER 1

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.g., 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 A is a
merchandising business.
8. Entity B is required to filed 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.
PROBLEM 3: MULTIPLE CHOICE
Definition, nature and function of Accounting
1. Which of the following does not properly describe accounting?
a. It is a process by which useful information is generated.
b. It is a social science.
c. It requires the application of creative skills and judgment.
d. It is often referred to as the “language of the soul.”
Users of accounting information
2. Which of the following is considered an internal user of financial
information?
a. Rank and file employees of the reporting entity
b. Stockholders of the entity who are not directly involved in
managing the entity
c. Lenders and other creditors
d. The entity’s management
3. What type of information needs of users do a general purpose
financial statements cater to?
a. common needs
b. specific needs
c. a and b
d. caring needs
4. Which of the following is lease likely to be a decision made by an
external user of the financial information of an entity?
a. whether to buy, hold or sell investment in stocks
b. whether to extend loan or other forms of credit
c. whether to obtain additional financing
d. all of these are decisions that external users make
Branches of accounting
5. This branch of accounting deals with the preparation of general
purpose financial statements.
a. General accounting
b. Management accounting
c. Financial accounting
d. Auditing
6. General purpose financial statements are intended to meet
a. all the information needs of all users – external and internal
alike.
b. the common needs of both external and internal users.
c. the common needs of external users, primarily investors, lenders
and other creditors.
d. both the common and specific needs of external users.
Forms of business organizations
7. This type of business organization is created by a contractual
agreement between two or more individuals.
a. corporation
b. cooperative
c. partnership
d. sole proprietorship
Types of business according to activities
8. Which of the following refers to a manufacturing business?
a. buying and selling of goods in their original form
b. sale of a skill-set and not necessarily a physical object
c. ability or potential to mass-produce
d. absence of ability to stock goods for future sale
Advantages and disadvantages of the different types of business
9. A disadvantage of a partnership is
a. better decisions - “two heads are better than one.”
b. business risk is assumed by more than one owner.
c. unlimited life.
d. unlimited liabilities of the partners
10. This type of business organization has the tendency to become
monopolistic. It can hamper the economy by funneling wealth to only
few individuals (i.e., the organization’s top owners) restricting
the redistribution of wealth to the majority of the members of the
society.
a. Cooperative
b. Sole proprietorship
c. Partnership
d. Corporation
PROBLEM 4: MULTIPLE CHOICE
1. Which of the following statements is correct?
a. Accounting is not a service activity.
b. Both accountable and non-accountable events are recorded in the
books of accounts.
c. Recording is the accounting process in which financial statements
are prepared.
d. Posting is the process of classifying the effects of recorded
events on the accounts.
2. It is the basic storage of information in accounting.
a. Account
b. Journal
c. Memory card
d. USB
3. The terms “record” and “recording” are most synonymous with
a. identifying.
b. journalizing.
c. posting.
d. communicating.
4. Imagine you are an accountant. Which of the following would most
likely describe your basic purpose?
a. to be used by unscrupulous persons in embezzling funds
b. to count money, cows and sheep
c. to provide objective information about a reporting entity that
is intended to be useful to interested users in making different
types of economic decisions
d. to chitchat with officemates, regularly check Facebook, drink
coffee, kill time, wait for 5pm then go home
5. Which of the following statements is incorrect?
a. The basic purpose of accounting is to provide information that
is useful in making economic decisions.
b. Although bookkeeping and accounting are interrelated, they are
not the same.
c. Accounting is often referred to as the “language of business”
because it is fundamental to the communication of financial
information.
d. Fra Luca Pacioli is the mother of modern accounting.
6. Which of the following statements is correct regarding financial
accounting?
a. Financial accounting is mainly intended to provide financial
information tailored to the needs of the entity’s management.
b. Information processed in financial accounting is not used in the
other branches of accounting.
c. Financial accounting is the branch of accounting that deals with
the inspection of an entity’s financial statements for the
purpose of expressing an opinion thereon.
d. Compared to the other branches of accounting, financial
accounting necessarily needs to conform to the Philippine
Financial Reporting Standards (PFRSs) for it to be able to
produce useful information.
7. Without this branch of accounting there will be no accountants.
a. Tax accounting
b. Auditing
c. Accounting education
d. Daddy accounting
8. You are planning on investing in the stock market. You have your
eyes on ABC Corporation. Being an accounting student, you know that
“haste makes waste.” Accordingly, you downloaded ABC Corporation’s
financial statements from the internet to help you analyze whether
the current market price of ABC Corporation’s shares of stocks are
undervalued or overvalued. In this regard, what type of financial
statement user are you?
a. External user
b. Internal user
c. Wi-Fi user
d. User name and password
9. ABC Co. is a car dealer. It buys cars from companies like Toyota,
Mitsubishi and Ford and resells the cars to end consumers. What type
of a business is ABC Co. according to the type of activity it
undertakes?
a. Corporation
b. Partnership
c. Merchandising
d. Manufacturing
10. It is the form of business organization that provides the highest
degree of continuity.
a. Sole proprietorship
b. Partnership
c. Cooperative
d. Corporation
PROBLEM 5: MULTIPLE CHOICE
1. You are the accountant of a business. Your company entered into a
transaction. After identifying that the transaction is an
accountable event, what should you do next?
a. Record it.
b. Communicate it.
c. Ignore it.
d. Tell your boss about it.
2. Users of financial information are broadly classified into external
and internal users based on
a. their relationship with the reporting entity.
b. the extent of their ability to affect the internal affairs of
the reporting entity.
c. whether they reside inside or outside of the company’s main
office building.
d. the first letter of their surnames.
3. It is the branch of accounting that supports virtually all the other
branches of accounting.
a. Management Accounting
b. Financial Accounting
c. Government Accounting
d. General Accounting
4. Although financial accounting and financial reporting are similar
and are frequently interchanged in practice, there is a subtle
difference between them. Which of the following is correct regarding
this difference?
a. Financial accounting involves accounting, while financial
reporting does not.
b. Financial accounting involves the processes of identifying,
recording, classifying and summarizing, while financial
reporting involves only the process of communicating.
c. Financial accounting is governed by U.S standards, while
financial reporting is governed by international standards.
d. Financial accounting focuses on general purpose financial
statements, while financial reporting focuses on general purpose
financial statements plus “other financial reporting.”
5. Your friend says he is a stockholder. This means that your friend
is
a. a part owner of a corporation.
b. a co-owner of a partnership.
c. an owner of a sole proprietorship business.
d. raising chickens and other livestock.

6. Sole proprietorship businesses are registered with the

a. DTI.
b. SEC.
c. CDA.
d. all of these
Use the following information for the next two questions:
You want a new laptop computer and a good internet connection so you can
market your products on Facebook. The problem is you are short of cash.
You went to Papa to get a loan but he said, “No way, Jose!”

7. Which of the following would most likely persuade Papa to give you
the loan?
a. Cry like a spoiled brat while running up and down the stairs.
b. Look at Papa with teary eyes while wiping the liquid dripping
from your nose.
c. Get Mama on your side.
d. Show Papa your projected financial statements, explain to him
your business plan and confidently assure him that you will pay
back the loan.

8. Papa’s decision on whether to extend you a loan is a decision made

by a(an)
a. external user.
b. internal user.
c. wise man.
d. kuripot man.

9. You are business owner. It came to your attention that some of your
products are overstocked, while some are frequently out-of-stock.
Warehousing costs have been increasing and you are losing potential
sales. To come up with a right mix of products to store in your
warehouse, what should you do?
a. Fire your sales personnel.
b. Fire your warehouse custodian.
c. Cry like a little baby; face pressed on a pillow.
d. Obtain an accounting record of your sales per product line and
identify which products are sold faster than the others. Stock
more of those products and stock less of the products that take
longer to sell.

10. Your friend offered you a business proposal. According to your

friend, the initial investment is P10,000. You will get some products
– 2 skin whitening soaps and 1 bottle of dishwashing liquid. If you
get other investors to invest and those other investors get other
investors and those “other” other investors get some more investors,
you will receive a house and lot! (Wow!) As a business learner, you
should do any of the following except
a. give your parent’s hard-earned money to your friend.
b. ask if your friend’s business is properly registered with
government regulatory agencies, e.g., securities and exchange
commission ‘sec’. ask if you can examine the related registration
documents.
c. obtain an objective understanding of your friend’s business and
his or her ability to give you a house and lot. ask if your
friend owns a house and lot. if he or she answers “no,” there is
a small chance that he or she could give you one.
d. say lol. in your mind, you are thinking “i am an accounting
student. you cannot fool me with your scam.”
CHAPTER 2
PROBLEM 1: TRUE OR FALSE
T 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.
T 2. There are numerous accounting concepts and principles that the
accountant needs to consider when recording and communicating
accounting information.
T 3. The separate entity concept contributes to the objective evaluation
of the financial strengths and weaknesses of a business.
F 4. A business that is not a going concern is called a coming concern.
T 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.
F 6. An item that is considered material by one business is always
considered material by all other businesses.
F 7. The cost of providing financial information should exceed the
expected benefits to be derived from the information’s use.
T 8. The accounting standards used in the Philippines are represented by
the PFRSs.
T 9. The accounting standards used in the Philippines are the same as
the standards used internationally.
T 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
F 1. The assumption that a business entity will not cease its operations
in the near future refers to the concept of Consistency.
F 2. Using the same accounting treatment for identical items from one
period to another is an application of the concept if Time Period.
T 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.
F 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.
T 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.
F 6. Corporate and partnership businesses in the Philippines are
regulated by the Department of Trade and Industry (DTI).
F 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 different accounting standards in his new job compared
to those that he has applied in his previous job.
F 8. The term “Standards” is used in practice to refer to both the PFRSs
and the Conceptual Framework.
T 9. Qualitative characteristics are the traits that determine whether
an item of information is useful to users, and therefore included
in the financial statements.
T 10. Information has the qualitative characteristic of relevance if it
is capable of making a difference in the decisions of users.
PROBLEM 3: MULTIPLE CHOICE
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 statements 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. Verifiability
PROBLEM 4: MULTIPLE CHOICE
1. Which of the following is least likely to be a source of an
accounting concept?
a. The Standards (i.e., PFRS or IFRS)
b. The Conceptual Framework for Financial Reporting
c. the general acceptance and long-time use in practice.
d. Laws enacted by the Congress.
2. Which of the following is incorrect regarding accounting concepts
and principles?
a. They are practicable, meaning they can be applied to real-life
situations.
b. They are intended to make financial reports useful to users in
making economic decisions about an entity.
c. There are only twelve (12) accounting concepts and principles
used in practice.
d. There are numerous accounting concepts and principles and it is
not practicable to make a complete list of them all.
3. Which of the following statements in not correct regarding the basic
accounting concepts?
a. An entity that is going out of business is a going concern.
b. Rounding-off of large amounts when presenting financial
statements is acceptable under the concept of materiality.
c. Applying the separate entity concept allows the reporting of a
true and fair picture of business financial affairs.
d. Applying the same accounting treatment for similar items from
one period to another relates to ‘Consistency’.
4. Which of the following statements in not correct regarding the basic
accounting concepts?
a. Under the cost-benefit concept, the information’s costs of
processing and communication should exceed the benefits expected
to be derived from its use.
b. Information is material if its omission or misstatement could
influence the decisions of users.
c. The concepts of historical cost, going concern, matching, accrual
basis, and reporting period are all interrelated. The application
of one necessarily results from, or results to, the application
of the other.
d. The simultaneous recognition of income and expenses is referred
to as ‘Matching’.
5. When making judgments and estimates under conditions of uncertainty,
the accountant chooses the potentially unfavorable outcome over the
favorable one. This concept refers to
a. Separate entity.
b. Going concern.
c. Prudence/Conservatism.
d. Reporting period.
6. When reporting information in its financial statements, an entity
strives for a balance between detail and conciseness because neither
too much detail nor too little information helps users make good
decisions. This is an application of which of the following concepts?
a. Accrual basis
b. Cost-benefit
c. Full disclosure
d. Going concern
7. The official accounting standard-setting body in the Philippines,
as promulgated by law, is the
a. Philippine Institute of Certified Public Accountants (PICPA).
b. Financial Reporting Standards Council (FRSC).
c. Accounting Standards Council (ASC).
d. Kapisanan ng mga Kontador sa Pilipinas (KKP).
8. The process by which accounting standards are established is, by
nature,
a. bureaucratic because only a group of privileged accountants
decides on whether a standard is to be implemented.
b. democratic because a majority of the members of the congress need
to concur before a standard becomes implemented, and those
representatives are elected by the people.
c. democratic because a majority of practicing accountants worldwide
must agree with a standard before it becomes implemented.
d. authoritarian because only one accountant dictates the standards
to be used throughout the world.
9. This accounting concept is ‘entity-specific’, meaning it depends on
the facts and circumstances surrounding a specific entity.
a. Matching
b. Separate entity
c. Materiality
d. Going concern
10. The punctuality of information to be able to affect the decisions
of users refers to the qualitative characteristic of
a. Relevance
b. Faithful representation
c. Timeliness
d. Verifiability
PROBLEM 5: MULTIPLE CHOICE
1. You own a fish ball business. When you get fish ball from your
business for your personal consumption, you pay for it, even though
you are the business owner. You are applying which of the following
accounting concepts?
a. Cost-benefit
b. Separate entity
c. Going concern
d. Fishy business
2. Mr. X and Ms. Y are co-owners of Entity A. Which of the following
transactions does not violate the separate entity concept and
therefore is appropriately recorded in Entity A’s accounting
records?
a. Mr. X buys Ms. Y a cake on her birthday.
b. Mr. X purchases a car for his personal use. The car is registered
to Mr. X.
c. Ms. Y provides capital to Entity B, another business entity.
d. Ms. Y provides capital to Entity A.
3. You acquired goods with normal selling price of P10,000 at a
discounted price of P8,000. You recorded the goods at P8,000. You
are applying which of the following concepts?
a. Discounted price concept
b. Materiality
c. Historical cost
d. Accrual basis
4. Your business is engaged in the buying and selling of goods. You
initially treat the cost of goods purchased as asset and recognize
it as an expense only when the goods are sold. You are applying
which of the following concepts?
a. Matching
b. Separate entity
c. Historical cost
d. Accrual basis
5. Today, you went to Kina Roger’s Canteen and ordered “halo-halo.”
You told Mang Roger, the canteen owner, that you will pay him next
week. Mang Roger records immediately the sale today, rather than
next week after collecting your due. Mang Roger is applying the
accounting principle of
a. Historical Cost.
b. Accrual basis.
c. Cost-benefit.
d. Stable-monetary unit.
6. You went abroad and forgot to pay Mang Roger (see #5 above). Mang
Roger contacted you 10,000 times on your Messenger reminding you of
your debt but you repeatedly ignored him; you even blocked him (very
bad ). Feeling hopeless and with teary eyes and stuffy nose, Mang
Roger reluctantly crossed-out your dues in his accounting records.
Mang Roger is applying which of the following accounting concepts?
a. Separate entity
b. Materiality
c. Prudence
d. No conscience concept
7. Entity A, an established business, purchases two staplers costing
P300 each. Entity A charges the cost of one of the staplers as
expense but recognizes the cost of the other stapler as asset. Which
of the following concepts is violated?
a. Materiality
b. Historical cost
c. Consistency
d. Stapler concept
8. These are the qualitative characteristics that only increase the
usefulness of information that is already useful, but cannot make
information that is not useful to be useful.
a. Fundamental qualitative characteristics
b. Enhancing qualitative characteristics
c. Materiality
d. Usefulness traits
9. Entity A, a big corporation, purchases a calculator for P500. Entity
A immediately charges the cost as expense. This is acceptable under
which of the following concepts?
a. Prudence
b. Cost-benefit
c. Materiality
d. b and c
10. “Look it’s Superman,” he says. “No, it’s just a little bird,” she
says. The information lacks
a. Faithful representation
b. Timeliness
c. Comparability
d. Verifiability.
CHAPTER 3
PROBLEM 1: TRUE OR FALSE
T 1. All the processes in an accounting system must observe the equality
of the accounting equation.
F 2. The basic accounting equation is Assets + Liabilities = Equity.
F 3. The terms ‘economic resource’ and ‘present obligation’ refer to
‘income’ and ‘expenses’, respectively.
F 4. When determining the existence of an asset, legal ownership is always
a necessary factor to consider.
F 5. Control is an essential aspect in the definition of an asset. Control
means legal ownership.
T 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.
T 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 owners of that property.
F 8. Legal obligations arise only from law.
T 9. A present obligation can result from a future event.
T 10. Equity is defined as a residual amount – being the difference between
total assets and total liabilities.
PROBLEM 2: TRUE OR FALSE
T 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).
T 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.
F 3. You own a business. Your business lacks capital so you provided
additional cash. This transaction would result to income by your
business.
T 4. The difference between income and expenses is a profit or loss.
There is profit if income exceeds expenses.
T 5. Physical possession is a necessary condition in order for control
over an asset to exist.
T 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.
T 7. The settlement of a liability requires the transfer of an economic
resource.
T 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.
F 9. Your business has total assets of ₱10M, total liabilities of ₱6M
and total equity of ₱4M. This means that out of the total ₱10M
resources, you have provided ₱6M,
F 10. Income decreases equity, while expenses increase equity.

PROBLEM 3: TRUE OR FALSE

1. Total assets are ₱10. Total liabilities are ₱6. Therefore, total
equity is ₱4.
2. Total assets are ₱20. Total liabilities are ₱16. Therefore, total
equity is ₱36.
3. Total assets are ₱80. Total equity is ₱60. Therefore, total
liabilities are ₱20.
4. Total liabilities are ₱60. Total equity is ₱30. Therefore, total
assets are ₱30.
5. Total income is ₱100. Total expenses are ₱40. Therefore, the
difference of ₱60 is profit.
6. Total income is ₱50. Total expenses are ₱60. Therefore, the
difference is ₱10 is loss.
7. Beginning equity is ₱100. Profit during the period is ₱20. If there
are no other changes in equity, the ending balance of equity must
be ₱120.
8. Beginning equity is ₱10. Loss during the period is ₱4. If there are
no other changes in equity, the ending balance of equity must be
₱6.
9. Total assets are ₱100. Total liabilities are ₱40. Total equity,
before income and expenses, are ₱40. Therefore, profit is ₱20.
10. Total assets are ₱100. Total liabilities are ₱60. Total equity,
before income and expenses, is ₱30. If total income is ₱50, total
expenses must be ₱30.
PROBLEM 4: MULTIPLE CHOICE
The Basic Accounting Equation
1. Which of the following is incorrect regarding the basic accounting
equation?
a. Essentially all aspects of financial accounting, from recording
to communicating financial information, involve the observance
of the equality of the basic accounting equation.
b. The basic accounting equation is ‘Assets = Liabilities + Equity’.
c. The basic accounting equation is an algebraic equation. Hence,
other variations or relationships can be derived from it
d. The basic accounting equation is applicable only in basic
accounting but not in higher accounting.
Asset
2. Which of the following is not an essential factor in determining
the existence of an asset?
a. the presence of an economic resource that resulted from past
events
b. control over the economic resource
c. potential of the economic resource to produce economic benefits
for the entity
d. present obligation
Liability
3. For a liability to exist, there must be a present obligation, along
with the other aspects of a liability. A present obligation exists
if
a. the entity has already obtained economic benefits or taken an
action, and as a consequence, the entity will or may have to
transfer an economic resource that it would not otherwise have
had to transfer.
b. the entity is required by law to pay either the government or
another party.
c. the entity has incurred a duty or responsibility, even if
settling that duty or responsibility would not in any way
required the transfer of an economic resource.
d. the entity expects to enter into a future transaction wherein
the entity would be required to pay cash or to transfer other
resources.
Equity
4. Which of the following is incorrect concerning equity?
a. It is to Assets minus liabilities.
b. It is a residual amount.
c. It represents the business owner’s claim against the total
economic resources of the business.
d. It is different from capital, net assets or net worth.
The Expanded Accounting Equation
5. Which of the following is not a correct variation of the expanded
accounting equation?
a. Assets = Liabilities + Equity + Income – Expenses
b. Assets – Liabilities = Equity + Income – Expenses
c. Assets + Expenses = Liabilities + Equity + Income
d. Assets = Liabilities + Equity – Income + Expenses
Income and Expenses
6. Which of the following statements about income is incorrect?
a. It results from increases in assets or decreases in liabilities
that result in increases in equity, except those that pertain to
the business owner’s contributions to the business.
b. It results to profit if it is greater than expenses.
c. It cannot result from decreases in assets or increases in
liabilities.
d. It results in decreases in equity.

Applications of the Basic and Expanded Accounting Equations

7. An entity has total liabilities of ₱360,000 and total equity of
₱90,000. How much are the total assets?
a. 270,000
b. 450,000
c. 360,000
d. None of these
8. An entity has total assets of ₱360,000 and total equity of ₱90,000.
How much are the total liabilities?
a. 270,000
b. 450,000
c. 360,000
d. None of these
9. An entity had a beginning equity of ₱123,000. If the total income
for the period is ₱59,000, while the total expenses are ₱81,000,
how much is the ending balance of equity?
a. 130,000
b. 110,000
c. 101,000
d. None of these
10. An entity had total liabilities of ₱340,000 at the end of the year.
The beginning equity is ₱280,000. If during the year, the entity
earned income of ₱420,000 and incurred expenses of ₱390,000, how
much is the ending balance of total assets?
a. 560,000
b. 650,000
c. 780,000
d. 960,000
PROBLEM 5: COMPUTATIONS – BASIC EQUATION
Instruction: Compute for the missing amounts.
ASSETS = LIABILITIES + EQUITY
1. ₱460,000 ₱190,000 ?
2. ₱230,000 ? ₱70,000
3. ? ₱990,000 ₱130,000
4. ₱1,020,000 ? ₱410,000
5. ₱820,000 ₱580,000 ?

PROBLEM 6: COMPUTATIONS – BASIC EQUATION

Instruction: Compute for the missing amounts.
ASSETS = LIABILITIES + EQUITY
1. ₱780,000 ₱290,000 ?
2. ₱990,000 ? ₱270,000
3. ? ₱890,000 ₱170,000
4. ₱1,420,000 ? ₱360,000
5. ₱1,920,000 ₱890,000 ?
PROBLEM 7: COMPUTATIONS – EXPANDED EQUATION
Instruction: Compute for the missing amounts.
ASSETS = LIABILITIES + EQUITY + INCOME - EXPENSES
1. ₱590,000 ₱380,000 ₱130,000 ₱210,000 ?
2. ₱490,000 ₱280,000 ₱40,000 ? ₱180,000
3. ₱860,000 ₱220,000 ? ₱360,000 ₱80,000
4. ₱360,000 ? ₱90,000 ₱180,000 ₱70,000
5. ? ₱410,000 ₱170,000 ₱480,000 ₱190,000
PROBLEM 8: COMPUTATIONS – EXPANDED EQUATION
Instruction: Compute for the missing amounts.
ASSETS = LIABILITIES + EQUITY + INCOME - EXPENSES
1. ₱920,000 ₱710,000 ₱290,000 ₱440,000 ?
2. ₱870,000 ₱310,000 ₱240,000 ? ₱150,000
3. ₱890,000 ₱240,000 ? ₱600,000 ₱190,000
4. ₱740,000 ? ₱170,000 ₱1,900,000 ₱1,860,000
5. ? ₱780,000 ₱470,000 ₱680,000 ₱490,000

PROBLEM 9: COMPUTATIONS – ACCOUNTING EQUATION

Instruction: Determine the effects of the transactions or events
described below on the basic accounting equation.
Example: You invested ₱100 cash from your personal savings to your
business.
Answer:
ASSETS = LIABILITIES + EQUITY
₱100 0 ₱100
1. You found additional ₱20 underneath your pillow. You also invested
this amount to your business.
2. Your business obtained a loan of ₱500.
3. Your business earned income of ₱2,000 during the period. The income
did not affect your liabilities.
4. Your business incurred expense of ₱800 during the period. The
expenses did not affect your liabilities.
5. Get the totals of the assets, liabilities and equity, INCLUDING the
effects of the given example. Check if the accounting equation is
balanced.
*Hints:
− If you don’t know the effects of these transactions, go back to the
definitions of income and expense. See what else do these items
affect other than liabilities.
− Show decreases in the elements of the accounting equation as negative
values, i.e., amounts in parentheses.
PROBLEM 10: MULTIPLE CHOICE
1. Which of the following is not an essential element of an asset?
a. Legal ownership over the resource
b. Control over the resource
c. Past event resulting to control
d. Potential to produce economic benefits
2. In which of the following would you most likely have an asset?
a. You own a building that you rent to various tenants. However,
every time you visit the building, the security guard shoots at
you. So the tenants are actually remitting rentals not to you
but to the guard.
b. You own and old computer that is obsolete. Nobody wants to buy
that computer.
c. You have clothing that you dot not need. However, these can be
sold online as secondhand or donated to the less fortunate.
d. Your Grandma promised to give you her jewelry if you get good
grades in First Year College. You dropped your accounting subject
because you found it very difficult.
3. Which of the following is not an essential element of a liability?
a. Present obligation
b. Past event resulting to a present obligation
c. Potential to cause the transfer of an economic resource
d. Intention to obligate oneself in the future
4. A liability does not result from
a. a contract that an entity has entered into.
b. an intention to acquire assets in the future.
c. a legal obligation resulting from a requirement of the law.
d. a past practice that has created valid expectation on others that
the entity will accept and discharge certain responsibilities.
5. An entity obtained a loan. What is the effect of this transaction
on the entity’s financial statement elements?
a. Total assets increased
b. Total liabilities increased
c. Total equity increased
d. a and b
6. Which financial statement element is defined as a residual amount?
a. Asset
b. Liability
c. Equity
d. Income
7. The claims of creditors on the total assets of an entity are also
called
a. assets.
b. liabilities.
c. equity.
d. income.
8. Which of the following is correct about income and expenses?
a. Income decreases equity, while expenses increase equity.
b. Income plus expenses equals profit or loss.
c. Income is increases in assets or decreases in liabilities, while
expenses are decreases in assets or increases in liabilities.
d. Income includes investments by the owner to the business, while
expenses include distributions by the business to the owner.
9. Which financial statement element is defined in terms of changes in
assets and liabilities?
a. income.
b. expenses
c. equity
d. a and b
10. Which of the following increases equity?
a. incurring a liability
b. income
c. incurring a loss
d. b and c
PROBLEM 11: MULTIPLE CHOICE
1. Which of the following is not a correct variation of the basic
accounting equation?
a. Assets = Liabilities + Equity
b. Assets – liabilities = Equity
c. Assets – Equity = Liabilities
d. Assets + Liabilities = Equity
2. Which of the following is an essential aspect in the definition of
a liability?
a. a present right over the economic benefits that the economic
resource may produce
b. potential of the economic resource to produce economic benefits
for the entity
c. a present obligation that may arise from a future event
d. potential of the present obligation to cause a transfer of an
economic resource from the entity
3. You acquired a cellphone through a monthly installment plan.
According to your contract, you are required to return the cellphone
to the supplier if you miss out on two installment payments. Upon
signing the contract, the supplier gave you the cellphone. You
immediately took photographs of your face and uploaded them to the
internet. Which of the following statements is true?
a. The cellphone becomes your asset only after you have fully paid
the installment price.
b. The cellphone is already your asset because you control the
economic benefits from it. Legal ownership is not a necessary
criterion when determining the existence of an asset – control
is!
c. The cellphone is the supplier’s asset until you have fully paid
the installment price.
d. The cellphone looks nice but the selfie is not.
4. Upon taking possession of the cellphone in #3 above, you will record
it as
a. an asset and a liability.
b. an asset and equity.
c. an asset only.
d. to be recorded only upon full payment of the purchase price.
5. Several months before your birthday, you repeatedly posted on
Facebook that you will be throwing a party. You invited all your
classmates, neighbors, strangers, friends and “netizens” from all
over the world to come. On your birthday, you will be obligated to
throw a party because of a
a. legal obligation.
b. constructive obligation.
c. Facebook post.
d. life event.
6. An expense could not possibly result
a. in a decrease in equity.
b. from an increase in assets.
c. from an increase in liabilities.
d. from a decrease in assets.
7. Which of the following is a correct computation?
a. Liabilities – Equity = Assets
b. Income + Expenses = Profit or loss
c. Equity, beg. + Profit = Equity, end.
d. Equity, beg. – Income + Expenses = Equity, end.
8. Which of the following statements is correct regarding income and
expenses?
a. Income results in decreases in equity, while expenses result in
increases in equity.
b. If income exceeds expenses, the excess represents loss.
c. Contributions and distributions between the business owner and
the business are not income and expenses.
d. If expenses exceed income, the excess represents profit.
9. What is the effect on an entity’s financial statement elements when
an owner invests money to the business?
a. Total assets increase
b. Total equity increases
c. Total assets and total liabilities both increase
d. Total assets and total equity both increase
10. In the expanded basic accounting equation, why is income added to
equity?
a. because income increases equity
b. because income decreases equity
c. because income are increases in assets
d. because income are decreases in liabilities
PROBLEM 12: MULTIPLE CHOICE
1. Entity A’s total liabilities are ₱50M, while its total equity is
₱10. Entity A’s total assets are
a. ₱60M.
b. ₱50M.
c. ₱40M.
d. Any of these
2. Entity A’s total assets are ₱120M, while its total liabilities are
₱90. Entity A’s total equity is
a. ₱210M.
b. ₱30M.
c. ₱90M.
d. ₱50M.
3. Entity A’s total assets are ₱40M, while its total equity is ₱9.
Entity A’s total liabilities are
a. ₱31M.
b. ₱49M.
c. ₱40M.
d. ₱94M.
4. Entity A earned total income of ₱40M and incurred total expenses of
₱9. Entity A’s profit (loss) is
a. ₱31M.
b. (₱31M).
c. ₱49M.
d. (₱49M).
5. Entity A earned total income of ₱40M and incurred total expenses of
₱59. Entity A’s profit (loss) is
a. ₱49M.
b. ₱19M.
c. (₱19M).
d. (₱99M),
6. Entity A earned total income of ₱60M and reported a profit of ₱16M.
Entity A’s total expenses were
a. ₱44M.
b. ₱76M.
c. ₱12M.
d. ₱16M.
7. Entity A earned total income of ₱50M and reported a loss of ₱8M.
Entity A’s total expenses were
a. ₱42M.
b. ₱58M.
c. ₱16M.
d. Sorry, I don’t know.
8. Entity A incurred total expenses of ₱60M and reported a profit of
₱16M. Entity A’s total income was
a. ₱72M.
b. ₱44M.
c. ₱76M.
d. I’m tired and I want to sleep.
9. Entity A incurred total expenses of ₱40M and reported a loss of
₱12M. Entity A’s total income was
a. ₱42M.
b. ₱28M.
c. ₱52M.
d. Stop making me solve problems.
10. Entity A’s beginning equity was ₱60M. If during the year, Entity A
earned total income of ₱16M and incurred total expenses of ₱8M, how
much is Entity A’s ending equity?
a. ₱68M.
b. ₱76M.
c. ₱84M.
d. I’ll ask my classmate later.
PROBLEM 13: MULTIPLE CHOICE
1. Entity A’s beginning equity was ₱80M. If during the year, Entity A
earned total income of ₱10M and incurred total expenses of ₱18M,
how much is Entity A’s ending equity?
a. ₱88M
b. ₱72M
c. ₱90M
d. ₱52M
2. Entity A’s equity had beginning and ending balances of ₱80M and
₱100M, respectively. If there were no contributions from, or
distributions to, the owner during the period, which of the following
is most likely to be true?
a. Entity A earned profit of ₱20M.
b. Entity A incurred loss of ₱20M.
c. Entity A earned total income of ₱20M.
d. Entity A incurred total expenses of ₱20M.
3. Entity A had total assets, liabilities, and equity of ₱120M, ₱75M
and ₱45M, respectively, at the beginning of the period. During the
period, Entity A’s total liabilities decreased by ₱20M, while its
profit was ₱25M. There were no other transactions or events that
affected equity during the period. How much is Entity A’s ending
total assets?
a. ₱70M
b. ₱85M
c. ₱95M
d. ₱125M
4. Entity A had total assets, liabilities, and equity of ₱140M, ₱90M
and ₱50M, respectively, at the beginning of the period. During the
period, Entity A’s total liabilities decreased to ₱40M, while its
profit was ₱25M. There were no other transactions or events that
affected equity during the period. How much is Entity A’s ending
total assets?
a. ₱75M
b. ₱95M
c. ₱115M
d. ₱125M
5. Entity A had total assets of ₱100M and total liabilities of ₱60M at
the beginning of the period. If at the end of the period, total
assets increased by ₱30M, while total liabilities remained the same,
Entity A’s total equity at the end of the period would be
a. ₱70M
b. ₱60M
c. ₱90M
d. ₱80M
6. Entity A had total assets and total liabilities of ₱120M and ₱75M,
respectively, at the beginning of the period. During the period,
Entity A earned total income of ₱60 and incurred total expenses of
₱45. How much is Entity A’s ending total equity?
a. ₱60M
b. ₱80M
c. ₱90M
d. ₱120M
7. Entity A had total assets and total liabilities of ₱120M and ₱70M,
respectively, at the beginning of the period. During the period,
Entity A earned total income of ₱60 and incurred total expenses of
₱40. Entity A’s total assets increased to ₱130M by year-end. There
were no additional contributions by, or distributions to, the owner
during the period. How much is Entity A’s ending total liabilities?
a. ₱60M
b. ₱70M
c. ₱80M
d. ₱90M
8. Entity A has ending total assets of ₱60M and ending total liabilities
of ₱45M. Entity A had a beginning equity of ₱10M. If Entity A earned
total income of ₱25M during the year, how much were the total
expenses?
a. ₱0
b. ₱15M
c. ₱20M
d. ₱25M
9. Entity A has ending total assets of ₱160M and ending total
liabilities of ₱90M. Entity A had a beginning equity of ₱30M. If
Entity A incurred total expenses of ₱50M during the year, how much
was the total income?
a. ₱70M
b. ₱80M
c. ₱90M
d. ₱120M
10. At year-end, Entity A’s total assets and total liabilities are ₱180M
and ₱70M, respectively. If Entity A had a beginning equity of ₱75M
and there were no contributions from, or distributions to, the owner
during the period, how much profit (loss) did Entity A earn (incur)
during the year?
a. ₱35M
b. (₱35M)
c. ₱25M
d. (₱25M)
PROBLEM 14: MULTIPLE CHOICE
1. Yesterday, you cooked siopao asado for a total cost of ₱4,000. The
total cost consists of the costs of the ingredients, including
transportation costs from the market, and allocated overhead costs
for liquefied petroleum gas, electricity, and depreciation of
steamer and other kitchen utensils. Today, you sold all the siopaos
to your classmates for a total sales price of ₱15,000, on credit.
Your classmates promised to pay next week. You incurred additional
₱100 in transporting the siopaos from your house to the school. If
you prepare financial statements today, how much would be your profit
(loss) under the accrual basis of accounting?
a. 10,900
b. (4,100)
c. 11,000
d. 0
2. Manong Magba Balut sells balut. At the beginning of the day, Manong
Balut had ₱1,000 cash. Manong used that amount to buy “balut”
(uncooked), cook the “balut” and sell the “balut” online. At the
end of the day, Manong Balut had ₱1,700 cash. Assuming all other
expenses were accounted for and Manong Balut did not incur any
liabilities during the day, which of the following is most likely
to be a valid statement?
a. Manong Balut earned profit of ₱700, representing the increase in
Manong’s assets (i.e., cash) resulting to an increase in his
equity.
b. Manong Balut earned profit of ₱1,700, representing the increase
in Manong’s assets (i.e., cash) resulting to an increase in his
equity.
c. Sorry I can’t solve this because I don’t know what a “balut” is.
d. I don’t know. I think I’d better ask Manong Balut to teach me
accounting.
Use the following information for the next eight questions:
Papa gives you a weekly allowance of ₱20. In the next questions, we will
treat your weekly allowance as your weekly income and the amount you
spend out of the allowance as your expenses. Any unspent amount (i.e.,
savings) represents your profit.
3. You spent ₱18. Which of the following statements is correct?
a. Your profit for the week is ₱20.
b. You incurred a loss ₱18.
c. Your profit for the week is ₱2.
d. Papa is kuripot.
4. To earn a profit of ₱10 in a month, your weekly spending should be
(use 4 weeks per month)
a. ₱17.5
b. ₱71.5
c. ₱70.
d. That is impossible! I would starve myself first before I can earn
that profit.
5. You spent all your allowance for the week. In addition, you purchased
1 “balut” worth ₱16 from Manong Balut (see #2), on credit. You told
Manong Balut you will pay him next week. Under the accrual basis of
accounting, your profit (loss) for the current week is
a. ₱16.
b. 0.
c. (₱16).
d. 1 balut.
6. If your total spending for the year was ₱936, your profit (loss)
would be (use 52 weeks per year)
a. ₱0.
b. ₱104.
c. ₱1,040.
d. I don’t know. Accounting is so complicated!
7. On Day 1 of the first week of the year, your accounting equation
will show which of the following? (Note: the allowance is
nonrefundable to Papa.)
ASSETS = LIABILITIES + EQUITY
a. ₱20 0 ₱20
b. ₱20 ₱20 0
c. ₱20 ₱20 ₱20
d. 0 0 0
8. You spent all of your allowance for the first week. Your accounting
equation at the end of Week 1 will show which of the following?
ASSETS = LIABILITIES + EQUITY
a. ₱20 0 ₱20
b. ₱20 ₱20 0
c. ₱20 ₱20 ₱20
d. 0 0 0
9. You spent only ₱18 of your allowance for the first week. Your
accounting equation at the end of Week 1 will show which of the
following?
ASSETS = LIABILITIES + EQUITY
a. ₱20 0 ₱20
b. ₱18 0 ₱18
c. ₱2 0 ₱2
d. 0 0 0
10. Your accounting equation at the end of the week for #5 above
(‘balut’) will show which of the following? (Note: You already ate
the ‘balut’ and now it’s gone.)
ASSETS = LIABILITIES + EQUITY
a. ₱16 ₱16 ₱0
b. ₱16 0 ₱16
c. ₱0 ₱16 (₱16)
d. 0 0 0
CHAPTER 4
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 debits of ₱80 and total credits of ₱20. 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 #3 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 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 ₱17 for ₱20.
Mr. Monkey recognizes a gain of ₱3 on this transaction rather than
revenue.

PROBLEM 3: MULTIPLE CHOICE

The Account
1. Account is the basic storage of information in accounting. An account
may be depicted through a ‘T-account’. Which of the following is
not one of the parts of a T-account?
a. Account title
b. Left side or debit side
c. Right side or credit side
d. Upside down or bottoms up
The Five Major Accounts
2. Which of the following is not one of the five major accounts?
a. Assets
b. Income
c. Equity
d. Losses
3. Which of the following is not one of balance sheet (statement of
financial position) accounts?
a. Assets
b. Liabilities
c. Equity
d. Income
Chart of Accounts
4. It is a list of all the accounts used by a business.
a. Trial balance
b. Contact list
c. Chart of accounts
d. Organizational chart
5. An account with the following account numbering ‘2100’ is most likely
to be a (an)
a. asset account.
b. liability account.
c. equity account.
d. expense account.

Common Account Titles

6. The money held by a business, including the increases or decreases
thereto, is recorded in this account.
a. Cash
b. Accounts receivable
c. Owner’s equity
d. Sales
7. Receivables that are supported only by oral or informal promises to
pay.
a. Cash
b. Accounts receivable
c. Accounts payable
d. Notes receivable
8. Contributions by the business owner to the business and profits or
losses of the business are recorded in this account.
a. Owner’s equity
b. Owner’s drawings
c. Sales
d. Salaries expense
9. Revenues earned from the sale of goods are recorded in this account.
a. Inventory income
b. Goods income
c. Sales
d. Service fees
10. This represents the value of inventories that have been sold, and
consequently charged as expense, during the accounting period.
a. Inventory
b. Cost of sales (Cost of goods sold)
c. Supplies expense
d. Freight-out

PROBLEM 4: IDENTIFICATION
Instruction: Indicate the classifications of the accounts listed below
as either an ASSET, LIABILITY, EQUITY, INCOME or EXPENSE account under
COLUMN A and as either BALANCE SHEET account or an INCOME STATEMENT
account under COLUMN B.
Account Titles COLUMN A COLUMN B
1. Accounts receivable
2. Bad debt expense
3. Building
4. Notes payable
5. Rent expense
6. Owner’s equity
7. Interest income
8. Cash
9. Gain
10. Computer equipment
11. Depreciation
12. Utilities payable
13. Freight-out
14. Rent income
15. Unearned income
PROBLEM 5: IDENTIFICATION
Instruction: Same as PROBLEM 4 above
Account titles COLUMN A COLUMN B
1. Taxes and licenses
2. Furniture & fixtures
3. Supplies expense
4. Interest expense
5. Inventory
6. Land
7. Accounts payable
8. Notes receivable
9. Prepaid insurance
10. Loss
11. Prepaid supplies
12. Rent payable
13. Sales
14. Interest receivable
15. Transportation equipment

PROBLEM 6: IDENTIFICATION
Instruction: Identify the account title/accounting term referred to in
each of the statements below.
1. Increases in assets or decreases in liabilities resulting in
increases in equity, other than those relating to transactions with
the business owner.
2. These represent claims for cash that are supported by oral or
informal promises to pay by a customer.
3. This represents the goods that are held for sale by a business.
4. This account is used to record the costs incurred in marketing or
promoting the products or services of a business.
5. The financial statement that presents the assets, liabilities and
equity of business.
6. The expense account used to record the uncollectible portion of
accounts receivable.
7. The revenue earned from the sale of goods is recorded in this
account.
8. The cost of inventories sold is charged as expense using this
account.
9. This is used to record the cost of supplies used during the period.
10. This account pertains to obligations supported by written or formal
promises to pay by the debtor.
PROBLEM 7: IDENTIFICATION
Instruction: Same as PROBLEM 6 above.
1. The financial statement that presents the income and expenses, and
consequently the profit or loss, of a business.
2. Transport costs of delivering goods to customers are recorded in
this account.
3. Obligations supported by oral or informal promises to pay.
4. This account is used to record the cost of unused supplies.
5. It is a liability account that is used to record amounts received
from customers in advance of providing goods or services.
6. This represents various small expenditures that do not warrant
separate presentation.
7. This account may be used to describe expenses for water, electricity,
internet, telephone, and the like.
8. This represents the aggregate amount of estimated losses from
uncollectible accounts receivable.
9. This represents the portion of the cost of a depreciable asset (e.g.,
building or equipment) that has been charged as expense in the
current accounting period.
10. The aggregate cost of a depreciable asset that has been charged as
expenses since the asset was made available for use.

PROBLEM 8: MULTIPLE CHOICE

1. Receivables that are supported by written or formal promises to pay
in the form of promissory notes.
a. Inventory
b. Accounts receivable
c. Notes payable
d. Notes receivable
2. Goods that are held for sale by a business.
a. Cash
b. Accounts receivable
c. Accounts payable
d. Inventory
3. The unused portion of rent paid in advance.
a. Prepaid rent
b. Rent expense
c. Cash
d. Inventory
4. Salaries earned by employees but not yet paid.
a. Salaries expense
b. Salaries payable
c. Employee points
d. Employee credits
5. Salaries earned by employees, whether paid or not.
a. Salaries expense
b. Salaries payable
c. Employee points
d. Employee credits
6. Temporary withdrawals of the owner from the business during the
period are recorded in this account.
a. Owner’s equity
b. Owner’s drawings
c. Withdrawal expense
d. Salaries expense
7. Income collected in advance but not yet earned.
a. Unearned income
b. Early income
c. Sales
d. Service fees

8. Obligations supported by oral or informal promises to pay by the

debtor.
a. Cash
b. Accounts receivable
c. Accounts payable
d. Notes payable
9. The cost of inventories that have been sold during the period.
a. Cost of sales
b. Cost of inventories
c. Inventory
d. Selling expense
10. The amount of estimated losses from uncollectible accounts
receivable during the period.
a. Good expense
b. Bad expense
c. Ugly expense
d. Bad debts expense
PROBLEM 9: MULTIPLE CHOICE
1. A merchandising or manufacturing business uses this account to
record revenues earned from primary business activities.
a. Sales
b. Service fees
c. Gains
d. Seals
2. Obligations supported by written or formal promises to pay by the
debtor in the form of promissory notes.
a. Notes receivable
b. Accounts receivable
c. Accounts payable
d. Notes payable
3. The structure owned and being used by a business in its operations.
a. Building
b. Base
c. Castle
d. Kingdom

4. The portion of the cost of a building that is already recognized as

expenses since the building was acquired and made available for use.
a. Accumulated depreciation – building
b. Upkeep
c. Accumulated upkeep
d. Repairs and maintenance expense
5. The cost of unused office and other supplies.
a. Prepaid rent
b. Prepaid supplies
c. Cash
d. Accounts receivable
6. Interest incurred by a borrower but not yet paid.
a. Interest payable
b. Interest expense
c. Notes payable
d. Notes receivable
7. Interest incurred by a borrower, whether paid or not.
a. Interest payable
b. Interest expense
c. Notes payable
d. Notes receivable
8. The seller’s cost of delivering goods to customers.
a. Freight-out
b. Freight-in
c. Freight-good
d. Freight-bad
9. The cost of promotional or marketing activities during the period.
a. Market expense
b. Advertising expense
c. Groceries
d. Insurance expense
10. The cost of gasoline, hotel accommodation, taxi fare, and similar
expenditures.
a. Transportation and travel expense
b. Interest expense
c. Taxi expense
d. Gas expense
PROBLEM 10: MULTIPLE CHOICE
1. The cost of the lot on which the building of a business has been
constructed is recorded in an account describe as
a. Realm.
b. Ground.
c. Land.
d. Earth.
2. Entity A sells an asset that is not an inventory for ₱100. The
carrying amount of the asset is ₱180. The ₱80 difference represents
a
a. gain.
b. loss.
c. revenue.
d. interest income.
3. Interest earned by a lender but not yet collected.
a. Interest receivable
b. Interest income
c. Notes payable
d. Notes receivable
4. Interest earned b a lender, whether collected or not.
a. Interest receivable
b. Interest income
c. Notes payable
d. Notes receivable
5. Revenues earned from rendering services.
a. Unearned income
b. Rendering income
c. Sales
d. Service fees
6. The cost of supplies used in an accounting period.
a. Prepaid supplies
b. Supplies cost
c. Supplies expense
d. Surprise expense
7. The portion of the cost of a building or equipment that has been
charged as expense in the current accounting period.
a. Accumulated deduction
b. Deduction expense
c. Accumulated depreciation
d. Depreciation expense
8. You opened up a business. Your initial investment to the business
will be recorded in which of the following accounts?
a. Owner’s payable
b. Owner’s equity
c. Notes payable
d. Accounts payable
9. In conjunction with #8 above, which of the following would most
likely be your first expense?
a. Equipment
b. Inventory
c. Taxes and licenses
d. Utilities expenses
10. You purchased goods that will be held for sale in the ordinary course
of your business activities. You will record the goods as
a. Expense.
b. Income.
c. Accounts receivable.
d. Inventory.
PROBLEM 11: MULTIPLE CHOICE
1. You are business owner. Your business needed additional capital so
you obtained a loan from a bank. The bank made you sign a contract
promising to repay the loan after a year. Which of the following
accounts is increased by this transaction?
a. Accounts payable
b. Notes payable
c. Accounts receivable
d. Notes receivable
2. From the point of view of the bank who lent you the loan in #1
above, which of the following accounts is increased?
a. Accounts payable
b. Notes payable
c. Accounts receivable
d. Notes receivable
3. A customer bought goods from your business, on credit. The customer
orally promised to pay the sale price next week. Which of the
following accounts is increased by this transaction?
a. Accounts payable
b. Notes payable
c. Accounts receivable
d. Notes receivable
4. From the point of view of the customer who bought goods from your
business in #3 above, which of the following accounts is increased?
a. Accounts payable
b. Notes payable
c. Accounts receivable
d. Notes receivable
5. When you collected the dues of the customer in #3 above, which of
the following accounts is increased?
a. Accounts payable
b. Cash
c. Accounts receivable
d. Notes receivable
6. From the point of view of the customer who paid you in #5 above,
which of the following accounts is decreased?
a. Inventory
b. Cash
c. Accounts receivable
d. Notes receivable
7. You purchased a computer for ₱100,000. Which of the following
accounts is increased by this transaction?
a. Cash
b. Owner’s capital
c. Computer equipment
d. Inventory
8. You expect to use the computer in #7 above over the next 5 years.
How much is the depreciation expense per year?
a. 10,000
b. 20,000
c. 7,143
d. 100,000
9. After using the computer in #’s 7 and 8 above for three years, how
much is the balance of the “Accumulated depreciation – Computer
equipment” account?
a. 60,000
b. 30,000
c. 20,000
d. 90,000
10. At the end of Year 2, how much is the carrying amount of the computer
equipment in #’s 7 and 8 above?
a. 50,000
b. 40,000
c. 60,000
d. 0
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 ₱12M. This information is
most likely to have been taken from the General Journal.
5. Of Entity A’s total accounts receivable of ₱12M, ₱4.8M 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 OF 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 ₱10M. 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 ₱4M, the loan from Bank B must
be ₱8M.
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 ₱100. During the day, you collected
accounts receivable of ₱20 from your friend and you spent ₱70 for
transportation, meals and utilities expenses. The ending balance of
your cash is ₱190.
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.
PROBLEM 3: FOR CLASROOM DISCUSSION
The Books of Accounts
Instruction for numbers 1 to 6: Indicate the type of book of account
that is most relevant to the items described below:
Example: A business sells goods on credit.
Answer: Sales journal
1. A business purchases goods on account.
2. A business sells goods on cash basis.
3. A business purchases goods in exchange for notes payable.
4. A business purchases equipment for cash.
5. A business wants to know the total amount that it owes to all of
its suppliers.
6. A business wants to know how much it owes to each supplier.
Normal Balances of Accounts
Instruction for numbers 7 to 16: In COLUMN A, indicate whether the
account is ASSET, LIABILITY, EQUITY, INCOME or EXPENSE. If the account
is a CONTRA or ADJUNCT account, indicate that as well (e.g., CONTRA
ASSET). In COLUMN B, indicate the normal balance of the account, i.e.,
DEBIT or CREDIT.
ACCOUNTS COLUMN A COLUMN B
7. Cash
8. Owner’s equity
9. Accounts receivable
10. Prepaid supplies
11. Accounts payable
12. Salaries payable
13. Accumulated depreciation
14. Sales
15. Cost of sales
16. Depreciation
Rules of Debits and Credits
Instruction for numbers 17 to 20: Indicate how each of the accounts
listed below are increased (i.e., DEBIT or CREDIT)
17. Accounts receivable
18. Allowance for bad debts
19. Owner’s equity
20. Service fees

Ending Balance of an Account

21. At the beginning of the period, Addy had a cash balance of ₱20,000
and a notes payable of ₱15,000. During the period, Addy collected
₱11,000 accounts receivable, paid ₱8,000 notes payable, and issued
additional notes payable of ₱5,000 in exchange for cash. How much
are the ending balances of cash and notes payable, respectively?
Cash Notes payable
a. 17,000 20,000
b. 20,000 12,000
c. 28,000 12,000
d. 36,000 20,000
PROBLEM 4: IDENTIFICATION (BOOKS OF ACCOUNTS)
Instruction: Indicate the type of book account that is most relevant to
the items described below.
Example: Sale on cash basis
Answer: cash receipts journal
1. Sale on account
2. Purchases on account
3. Collection of accounts receivable
4. Payment of accounts payable
5. Purchases of inventory on cash basis
6. Collection of interest income
7. Acquisition of land on cash basis
8. This book of account shows the balances of controlling accounts.
9. The breakdown of each controlling account is shown in this book of
account.
10. It is called the “book of original entries” because transactions
are first recorded here.

PROBLEM 5: IDENTIFICATION (TYPES OF ACCOUNTS)

Instruction:
➢ In COLUMN A, indicate whether the account is ASSET, LIABILITY,
EQUITY, INCOME or EXPENSE. If the account is a CONTRA or ADJUNCT
account, indicate that as well (e.g., CONTRA ASSET).
➢ In COLUMN B, indicate the normal balance of the account, i.e., DEBIT
or CREDIT.
ACCOUNTS COLUMN A COLUMN B
1. Notes receivable
2. Salaries expense
3. Owner’s drawings
4. Building
5. Service fees
6. Advances from customers
7. Gains
8. Interest expense
9. Unearned income
10. Equipment
11. Interest receivable
12. Owner’s capital
13. Equipment
14. Freight-out
15. Losses
16. Service fees
17. Allowance for bad debts
18. Inventory
19. Depreciation
20. Utilities payable

PROBLEM 6: IDENTIFICATION (RULES OF DEBIT/CREDIT)

Instruction: Indicate how the accounts listed below are increased, i.e.,
DEBIT or CREDIT
Accounts Titles INCREASED BY A
1. Cash
2. Sales
3. Accumulated depreciation
4. Depreciation
5. Inventory
6. Owner’s capital
7. Rent expense
8. Rent income
9. Interest receivable
10. Interest expense
11. Prepaid rent
12. Owner’s drawings
13. Accounts payable
14. Unearned income
15. Cost of sales
16. Equipment
17. Notes payable
18. Insurance expense
19. Prepaid insurance
20. Gains
21. Notes receivable
22. Land
23. Building
24. Furniture and fixtures
25. Freight out
PROBLEM 7: MULTIPLE CHOICE
Fact pattern:
You have a business.
1. Your business will have which of the following books of accounts?
a. Journal
b. Ledger
c. Scratchpad
d. a and b
2. When recording business transactions, you will record them first
a. in the Ledger.
b. in the Journal.
c. on your phone’s reminder app.
d. on a scrap paper.
3. You have various credit customers, including Ms. Oh Tang and Mr.
Pah Lista. If you want to know how much Ms. Oh Tang owes you, you
will refer to the
a. General ledger.
b. Subsidiary ledger.
c. Special journal
d. Reminder app.
4. If you want to know the total amount that your credit customers owe
you, you will refer to the
a. General ledger.
b. Subsidiary ledger.
c. General journal
d. Google.
5. Your business purchases inventory and issues a promissory note to
pay for the purchase price after 30 days. This transaction is most
likely to be recorded in the
a. Purchases journal.
b. Sales journal.
c. Notes journal.
d. General journal.
6. You will record each business transaction
a. in at least two parts – debit and credit.
b. in equal amounts of debit and credit.
c. using at least two accounts.
d. all of these
7. If you want to increase an asset account, what should you do?
a. Debit that account
b. Credit that account
c. Double that account
d. any of these
8. Your bookkeeper is confused on the rules of debits and credits.
Which one of the following would you advise him/her?
a. Assets, liabilities and equity have normal debit balances.
b. To combine a credit amount with another credit amount means you
subtract.
c. The normal balance of an account determines the side in which
the account is decreased.
d. The normal balance of a contra account is the opposite of its
related account.
9. Mr. Cell, a supplier, has an account receivable from your business.
This means that your business
a. has an account payable to Mr. Cell.
b. has a note payable to Mr. Cell.
c. sells goods to Mr. Cell.
d. likes Mr. Cell.
10. Your business sells goods to Ms. Vai, on account. If Ms. Vai
subsequently pays her account, you will record this transaction in
the
a. Sales journal.
b. Purchases journal.
c. Cash disbursements journal.
d. Cash receipts journal
PROBLEM 8: MULTIPLE CHOICE
1. Which of the following is not one of the essential parts of a general
journal?
a. Date column
b. Account titles column
c. Debit and credit columns
d. Running balance column
2. Debit and credit equals
a. debit.
b. credit.
c. kupit.
d. the difference between the two amounts.
Use the following for the next five questions:
Imagine facing a mirror with both your arms raised sideways to shoulder
level.
3. Your left arm is
a. debit.
b. credit.
c. clean and bright.
d. good to see.
4. If you were an asset, how would you be increased?
a. through my left arm
b. through my right arm
c. through my toes
d. through my forehead

5. If you were a liability, how would you be decreased?

a. through my left arm
b. through my right arm
c. by bending my knees
d. by sitting down
6. If you kick your right foot to touch your right hand, what happens?
a. Addition
b. Subtraction
c. Multiplication
d. Sorry, I can’t.
7. If you clap your hands, what happens?
a. Addition
b. Subtraction
c. Division
d. There would be sound.
8. An account title with the word “receivable” or “prepaid” in it is
most likely to be
a. an asset account.
b. a liability account.
c. an income account.
d. an expense account.
9. If you debit this account, its balance will be decreased.
a. Cash
b. Account receivable
c. Accounts payable
d. Owner’s drawings
10. All of the following accounts are increased by a debit except
a. Accounts receivable
b. Owner’s drawings
c. Bad debts expense
d. Accumulated depreciation

PROBLEM 9: MULTIPLE CHOICE

1. You are selling “puto.” Your classmate told you, “Friend, can I buy
one? I will pay you tomorrow.” You said, “Sure, catch!” Which of
the following accounts is increased, and how is that account
increased?
Account Increased by
a. Accounts receivable Debit
b. Notes receivable Debit
c. Cash Debit
d. Accounts receivable Credit
2. Assuming your “puto” business uses special journals, where will you
record the transaction in #1?
a. Sales journal
b. Cash receipts journal
c. General journal
d. On my palm
3. Your accounts payable ledger shows the following amounts:
₱1,000 (beg. bal., Cr.); ₱800 (Cr.); ₱200 (Dr.); and ₱100 (Dr.).
How much is ending balance of your accounts payable?
a. 2,100
b. 1,800
c. 1,500
d. 0
4. It’s the mid-term exams. However, you were not able to sell enough
“puto” to pay your tuition fee. Your school required you to write a
promissory note so that you can obtain an exam permit. In your
personal accounting records, which of the following accounts is
increased, and how is that account increased?
Account Increased by
a. Notes payable Debit
b. Notes receivable Credit
c. Cash Debit
d. Notes payable Credit
5. Before the final exams, the government awarded you a procurement
contract of ₱100B worth of “putos.” You are now big time. You are
even planning to put up your own school! One sunny day, your
classmate told you, “Friend, can I borrow ₱100K? I will pay you
after we graduate in college.” You said, “Sure, here you go, kaching!” Which of the following
correctly relates to the transaction
with your friend?
Account increased Type of Account Transaction recorded in
a. Cash Asset Sales journal
b. Receivable Asset Cash receipts journal
c. Payable Liability Cash disbursements
journal
d. Receivable Asset Cash disbursements
journal
6. The effects on the accounts of a recorded transaction are classified
in the
a. Journal.
b. Ledger.
c. Log book.
d. Financial statements.
7. Which of the following accounts is increased through debit?
a. Accumulated depreciation
b. Owner’s equity
c. Cash
d. Accounts payable
8. Accounts receivable is decreased through a
a. debit.
b. credit.
c. calculator.
d. strict diet and exercise.
9. What is the normal balance of the “Owner’s drawings” account?
a. debit.
b. credit
c. a little bit leaning to the right.
d. zero.
10. The right side of an account is called
a. debit.
b. credit.
c. the correct side.
d. the wrong side.

PROBLEM 10: MULTIPLE CHOICE

1. To credit an account means
a. to increase that account.
b. to decrease that account.
c. either a or b depending on the normal balance of the account.
d. any of these depending on the accountant’s mood.
2. Which of the following accounts has an abnormal balance?
a. Cash ₱1,000 (Dr.)
b. Accounts payable ₱3,000 (Cr.)
c. Accounts receivable ₱5,000 (Cr.)
d. All these accounts look fine to me
3. Your “Equipment” account has a balance of ₱100,000 and the related
“Accumulated depreciation – Equipment” account has a balance of
₱40,000. The equipment’s carrying amount in the financial statements
is
a. ₱40,000.
b. ₱60,000.
c. ₱80,000.
d. ₱100,000.
4. You opened up a business. You provided ₱10M cash to your business
as the initial capital. To record this transaction, which of the
following accounts will you credit?
a. Cash
b. Owner’s equity
c. Accounts receivable
d. Accounts payable
5. To record the transaction in #4 above, which of the following
accounts will you debit?
a. Cash
b. Owner’s equity
c. Accounts receivable
d. Accounts payable
6. Your business purchased goods that will be held for sale in the
ordinary course of business activities, on cash basis. To record
this transaction, which of the following accounts will you debit?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory
7. To record the transaction in #6 above, which of the following
accounts will you credit?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory
8. What if the purchase in #6 above was made on account, rather than
on cash basis, what account will you credit?
a. Cash
b. Owner’s equity
c. Accounts payable
d. Inventory
9. Your business sells goods on account. To record this transaction,
which of the following accounts will you debit?
a. Cash
b. Sales
c. Accounts receivable
d. Accounts payable
10. Your business subsequently collects the sale price in #9 above. To
record the collection, which of the following accounts will you
credit?
a. Cash
b. Sales
c. Accounts receivable
d. Accounts payable