Exercise 1-2 True or False.

On the space provided before each number, write the word TRUE if the statement is correct or FALSE if
the statement is incorrect.
_______ 1. Accounting deals primarily with the step-by-step accomplishments of the
accounting cycle.
_______ 2. Bookkeeping is often described as the “language of business” because it is the
medium of communication between a business firm and other parties.
_______ 3. Luca Pacioli was the author of the first known description of double-entry
bookkeeping.
_______ 4. External financial statement users are those who are directly involved in the
business organization.
_______ 5. Accounting provides a vital source in supplying information to decision-makers
who will make decisions for the conduct of business and its various economic
activities.
_______ 6. A merchandising business is engaged in the processing of products that are
intended for sale.
_______ 7. Partnership is the more popular form of business organization today.
_______ 8. Public accountants are those who serve the general public and collect professional
fees for their work.
_______ 9. The Board of Accountancy issues licenses to successful examinees of the CPA
licensure examination.
______ 10. The Financial Reporting Standards Council (FRSC) is the body that formulates
the Philippine Accounting Standards.
Exercise 2-1 Identification.
On the space provided before each number, write the word(s) that best describe(s) the given statement.
________ 1. The report that shows the worth of a business in terms of resources,
debts and the investment of the owner.
________ 2. A statement of financial position form that lists the assets on the left
side and the liabilities and proprietorship on the right side.
________ 3. The traditional accounting term used to record owner’s investment.
________ 4. The standard basic accounting equation.
________ 5. The total amount owed by the business for purchases of
merchandise, supplies, and services and due within one year from
the statement of financial position date.
________ 6. Short-term investments in stocks or bonds of other business.
________ 7. A debt that is secured by a collateral in the form of business property
such as land, buildings, or equipment.
________ 8. Resources or things owned by a business.
________ 9. The amount invested in the business by the owner as of statement of
financial position date.
________10. The concept requiring that at least two accounts are affected by each
business transaction.
Exercise 2–2 Assets

Match the statements below with the accounting terms in the table. Write your answers in CAPITAL
letters.

A Cash F Office Furniture

B Accounts Receivable G Office Equipment
C Investment in Trading H Transportation Equipment
Securities
D Office Supplies I Land
E Prepaid Insurance J Buildings

______ 1. Insurance premium acquired and paid in advance.

______ 2. Real estate owned by the business and used in business operations. This
asset increases in value with the passage of time.

______ 3. Coins, currencies and other similar cash items that are readily available
for use in business operations.
______ 4. Amounts to be collected in the future from clients or customers.
______ 5. Any immovable structure constructed or acquired for business use.
______ 6. Items on hand like paper, pens and folders that are ready for use in
business operations.
______ 7. Short-term stocks and bonds of other companies acquired by a firm for
resale within the current period.
______ 8. Includes trucks, cars, jeeps, motorcycles, bicycles and other vehicles
used for transportation purposes by the business.
______ 9. Includes tables, chairs, counters, cabinets and similar items that are used
in the office.
______ 10. Includes computers, cash registers, calculators, adding machines,
photocopying machines, facsimile machines, air-conditioning units and
other similar items that are used in the office.
Exercise 2–4 Liabilities

Match the statements below with the accounting terms in the table. Write your answers in CAPITAL
letters.

A Accounts Payable
B Notes Payable (short-term)
C Interest Payable
D Unearned Service Income
E Taxes Payable
F Mortgage Payable
G Bonds Payable
H Salaries Payable
I Utilities Payable
J Accrued Expenses

______ 1. Refers to long-term obligations which are supported by collateral on real

property.
______ 2. Interest due on a promissory note.
______ 3. Debts or obligations with trade creditors arising from the acquisition of
goods or services in ordinary trade transactions.
______ 4. Obligation of a business to pay for services rendered by its employees.
______ 5. Promissory notes issued by a business that will become due and payable
within one year.
______ 6. Refers to long-term obligations which are evidenced by bonds issued to
investors.
______ 7. Obligation of a business to pay for taxes.
______ 8. Advance payments from clients for services to be rendered in the future.
______ 9. Obligation of a business to pay for utilities.
______ 10. Obligation of a business to pay for expenses that remain unpaid at the end
of a period.
Exercise 2-5 Liability Classifications

Exercise 2-10 True or False

On the space provided before each number, write the word TRUE if the statement is correct or FALSE if
the statement is incorrect.
_______ 1. The three elements that report the financial status of an entity are assets,
liabilities, and equity.
_______ 2. The relationship among assets, liabilities and equity is expressed by the
accounting equation: ASSETS = LIABILITIES + EQUITY.
_______ 3. Any two elements of the basic accounting equation may be rearranged
algebraically to determine the peso amount of the missing (third) element.
_______ 4. The increase in assets provided by an individual in exchange for an
ownership interest is reported as capital.
_______ 5. Every transaction can be analyzed and recorded in terms of increases or
decreases in the accounts that make up the accounting equation.
_______ 6. When an owner withdraws cash from the business, the assets decrease
and the owner’s equity increases.
_______ 7. Accounts Payable is an example of a long-term liability.
_______ 8. Increase in an asset always results in an increase in a particular liability
account.
_______ 9. Buying supplies on a cash basis will increase the asset Supplies and
increase the asset Cash.
_______ 10. Prepaid expenses are expenses incurred during the current accounting
period but have not been paid yet.
Exercise 3-1 Matching

Match the statements with the accounting principles in the table. Write your answers in capital letters.

A Time period F Conservatism

B Revenue realization G Disclosure
C Matching H Objectivity
D Accrual I Monetary
E Consistency J Going concern

______
1. Users of financial information are informed of
any facts necessary for the proper interpretation
of the statements.
______ 2.
Money is used as a unit of measure.
______ 3.
Revenue should be offset by all the expenses
incurred in producing the revenue.
______ 4.
Net income is measured for relatively short
accounting periods of equal length.
______ 5.
The accounting treatment to be applied must
result in a lower net income.
______ 6.
It is the policy of recognizing revenue in the
accounting records when it is earned.
______ 7.
A business should generally use the same
accounting methods from one period to the
next.
______ 8.
It is the policy of recognizing expenses when
the related goods or services are used.
______ 9.
Transactions must be supported by business
documents.
______ 10.
This concept assumes that the business will
continue to operate indefinitely.
Exercise 3-2 Identification
On the space provided before each number, write the accounting principles or word/s that best describe
the following statements.
_______ 1. Accountants generally choose a method or procedure that will yield a
lower amount of income and asset value.
_______ 2. It requires that all relevant information affecting the user’s understanding
and assessment of the accounting entity be included in the financial
statements.
_______ 3. Accounting records and statements are based on the most reliable data
available in order to make it accurate.
_______ 4. This principle states that acquired assets should be recorded at their actual
or historical value.
_______ 5. It assumes that the business is to continue its operations indefinitely,
justifying cost and ignoring liquidation values.
_______ 6. The firm should use the same accounting method from period to period to
achieve comparability over time within a single enterprise.
_______ 7. Financial reporting is concerned only with information that is significant
enough to affect valuations and decisions.
_______ 8. Under this concept, money is used as the unit of measure in preparing the
various financial reports of the company.
_______ 9. It divides the life of the business into regular intervals (usually one year),
at the end of which financial statements are prepared.
_______ 10. The business is regarded as having a separate and distinct personality from
its owner.
Exercise 3-3 Application of Accounting Concepts

Identify the accounting principle(s) most associated with in the following cases.

__________ 1. Cash of P1,000 received from a customer for services to be rendered in

the next accounting period is not taken up as revenue.
__________ 2. Expenses incurred amounting to P10,000 are offset against revenue of
P15,000 earned in the same period.
__________ 3. The financial performance of a business are measured every end of a
12-month period.
__________ 4. A statement of account is received from PLDT for communication
services. This bill is recorded as expense although payment is to be
made the next accounting period.
__________ 5. A loss of P2,000 is estimated and is highly probable to occur. This loss
is shown in the income statement.
__________ 6. Method A is used to estimate an expense. This method is used from
one accounting period to another.
__________ 7. Supplies of P500 are used up in the performance of services. This
amount is recorded as expense.
__________ 8. Services rendered amounting to P4,000 is taken up as revenue even if
this amount is to be collected in the next accounting period.
__________ 9. The income statement includes notes to financial statements which
show breakdown of aggregated amounts.
_________ 10. Method A results in a net income of P12,000. Method B results in a net
income of P11,500. Method B is used.
Exercise 3-4 Matching Type
Match the following statements with the accounting term(s) given below. Write the LETTER of your
choice on the space provided before each number.
A. Natural form income H. Functional form income statement
statement
B. Salaries Expense I. Transportation Expense
C Service Income J. Manufacture goods
D. Business transactions K. Other income
E. Debit balance L. Miscellaneous Expense
F. Expenses M. Profit
G. Net income N. Credit balance
_______ 1. The cost of services rendered by the employees and/or laborers of a company.
_______ 2. Decreases in owner’s equity that occur in the course of delivering goods and
services to customers.
_______ 3. An activity that involves the exchange of values.
_______ 4. An income statement presentation that clearly shows specific sections of income,
costs and expenses in a series of arithmetic operations.
_______ 5. This represents the inflow of cash or non-cash assets arising from services
rendered.
_______ 6. The account used for costs of operations that are not significant enough to merit
separate classification.
_______ 7. Normal balance of all expense accounts.
_______ 8. The purpose of a business other than rendering services.
_______ 9. Cost incurred by office employees when commuting from the office to the place
of business of clients.
_______10. Income from sources other than the principal line of activity of the business.
Exercise 3-5 Identification

Identify if the following statements describe revenue or expense. Write R for revenue, E for expense and
N for neither.

_______ 1. Cost of electricity used in business operations.

_______ 2. Professional fees collected by a doctor from patients for
services rendered.
_______ 3. Interest earned in a bank deposit account.
_______ 4. Cost of supplies used in rendering services.
_______ 5. Cash collected from customers for services to be rendered
in the future.
_______ 6. Telephone bill for communication services incurred in
business operations.
_______ 7. Dividends earned on investment placements.
_______ 8. Cash paid for advance payment of insurance premium.
_______ 9. Cost of advertising the services offered by the business.
_______10. Cost of furniture used in the business.
Exercise 3 -6 Revenue Accounts.
Match the statements with the accounting terms in the table.
Write your answers in CAPITAL letters.

A Service Income F Management Fees

B Professional Fees G Consultancy Fees
C Medical Fees H Tuition Fees
D Dental Fees I Legal Fees
E Accounting Fees J Other Income

______1. Refers to income received from rendering medical services.

______2. Refers to income received from rendering legal services.
______3. Refers to income received from rendering accounting services.
______4. Refers to income received from rendering dental services.
______5. Refers to income received from rendering professional services without indicating the specific
nature of professional services rendered.
______6. Refers to income received from rendering management services.
______7. Refers to income received from students by schools.
______8. Refers generally to any kind of income received from services rendered.
______9. Refers to income received from sources other than the principal line of activity of the business.
_____10. Refers to income received from rendering consultancy services.
Exercise 3-7 Expense Accounts

Match the statements with the accounting terms in the table. Write your answers in capital letters.

A Salary Expense F Transportation Expense

B Rent Expense G Gas and Oil Expense
C Office Supplies Expense H Representation Expense
D Utilities Expense I Advertising Expense
E Taxes and Licenses J Miscellaneous Expenses
Expense
______1. Costs incurred when entertaining clients or prospective clients.
______2. Costs of business operations that are not signi- ficant in amount to merit separate
classification.
______3. Cost of office space used by a business in its operations.
______4. Costs of light and water consumed in business operations as well as the cost of
communication services.
______5. Costs of services rendered by the employees of a business firm.
______6. Costs of office stationery, paper, computer ink, envelopes, pencils, ball pens and other
office supply items consumed in business operations.
______7. Costs of promoting the services offered by the business.
______8. Costs incurred by employees when commuting from the office to the place of business of
clients or to any place on official business.
______9. Payments to BIR and City Hall for business taxes and permits.
______10. Cost of gasoline and oil consumed by transporta-tion vehicles used in official business
trips.
Prepare the statement of changes in owner’s equity for the year ended, December 31, 2010 from the data
taken from the records of Nicholas Company, owned and managed by Nicholas De La Cruz:
Capital, January 1 P 80,000+
Net income during the year 30,000+
Additional investments by the owner 10,000+
Withdrawals by the owner 12,000-
Answer P108,000

2. Prepare the statement of changes in owner’s equity for the year ended December 31, 2010 from the
data taken from the records of Arianne Company, owned and managed by Arianne Navarro:
Capital, December 31 (end) P 160,000 +
Additional investments 20,000-
Withdrawals 36,000+
Total Expenses 58,000+
Total Revenues 43,000-
Answer P191,000

Exercise 5-1 Identification

Identify whether the following cash flow is an operating activity, investing activity, or financing activity.

______________IA________1. Purchase of motor vehicle.

_______________FA_______2. Additional investment of owner.

_______________OA_______3. Interest earned on bank account.

________________ OA ______4. Collection from customers for services rendered.

_________________ OA _____5. Payment of salaries and wages.

_______________ FA _______6 Withdrawal of the owner.

_________________ OA _____7. Payment of interest on a bank loan.

_________________ FA _____ 8. Payment of principal of bank loan.

________________ IA ______9. Sale of furniture.

________________ OA _____10. Purchase of office supplies.

Exercise 5–2. Statement of Cash Flows

The following summary transactions occurred during 2010 for Carlo Buendia Service Company:

Cash received from:

Customers P 120,000 OA
Interest on investments 7,000 OA
Sale of furniture 25,000IA
Discounting own note with Pasay 100,000 IA
Bank
Additional investment from Carlo
Buendia 80,000 FA

Cash paid for:

Purchase of equipment P 40,000 IA
Operating expenses 60,000 OA
Partial payment to Pasay Bank 30,000 FA
Withdrawal of Carlo Buendia 10,000 FA

The balance of the Cash account at the beginning of 2010 was P17,000.

Answer the following questions:

a. How much is the net cash flow from operating activities? P67,000
b. How much is the net cash flow from investing activities? (P15,000)
c. How much is the net cash flow from financing activities? P140,000
d. What is the ending cash balance? P209,000

49
Exercise 5–3 Statement of Cash Flows

The following summary transactions occurred during 2011 for Miguel Miranda Plumbing Services:

Cash received from:

Customers P380,000 OA A
Interest on note receivable 6,000 OA
Principal on note receivable 50,000 OA
Sale of equipment 30,000 IA
Proceeds from note payable (bank loan) 100,000 FA

Cash paid for:

Purchase of delivery van P160,000 IA A
Interest on note payable 5,000 OA
Purchase of furniture 35,000 IA
Salaries of employees 90,000 OA
Principal on note payable (bank loan) 25,000 FA
Withdrawal of Miguel Miranda 20,000 FA

The balance of the Cash account at the beginning of 2011 was P34,000.
Answer the following questions:
a. How much is the net cash flow from operating activities? P341,000
b. How much is the net cash flow from investing activities? (P165,000)
c. How much is the net cash flow from financing activities? P55,000
d. What is the ending cash balance? P265,000
Exercise 6-1 Steps in the Accounting Cycle
Arrange the following steps in the accounting cycle. Write the appropriate number from 1-10.

Balancing the accounts and preparing trial balance.

Preparing a worksheet.

Posting journal entries to the ledger.

Journalizing and posting adjusting entries.

Preparing financial statements.

Balancing the accounts and preparing a post-closing trial balance.

Analyzing the business documents.

Journalizing and posting reversing entries.

Journalizing and posting closing entries.

Journalizing transactions.
Classify the following items below by writing the letter of the following type of adjusting entries:

A. Prepaid Expense
B. Unearned Revenue
C. Accrued Expense
D. Accrued Revenue

Subscriptions received in advance by a magazine company.

_______ 1.
Supplies on hand.
_______ 2.
A three-year premium paid on a fire insurance policy
_______ 3.
Advertising brochures on hand.
_______ 4.
Re-insurance premiums received by an insurance company.
_______ 5.
Bills received from MERALCO and PLDT.
_______ 6.
Salaries owed to employees.
_______ 7.
Interest earned on note receivable but not yet received.
_______ 8.
Interest received on note receivable but not yet earned.
_______ 9.
Professional fees earned but not yet billed at the end of the
_______ 10.
period.

Exercise 8 - 8 Adjusting Entries – Accrued Expense, Accrued Income, Prepaid

Expenses, and Unearned Income.

Prepare the necessary adjusting entries at December 31, 2008:

1. The land owned by the Ayala Park Co. has been rented out as a parking space for a
monthly rent of P12,000. Rent for the fourth quarter has not yet been collected.
2. Salaries of the employees of Simone Company for the second half of the month
amounting to P26,750 are paid on the 5th of the following month.

3. On August 1, Apricot Publishing Company received P156,000 in advance

representing subscriptions for six months. The Subscriptions Revenue account
was credited upon receipt.

4. Pear Company had Prepaid Interest of P1,800 which represents interest payment
in advance for a P90,000 60-day note dated November 18 at 12%.

5. Chico Company debited Advertising Expense account for P5,400 representing 6-

month advertising paid on April 1, 2008.

6. Grape Company’s Unearned Rent Revenue account on January 1, 2008 was

P18,000. On June 1, 2008, an additional P48,000 was received to cover the rent
through May 31, 2009. This amount was credited to a liability account.

7. On July 31, 2008, the land owned by Patrice Realty was mortgaged in the bank for
P400,000. Term of mortgage: annual interest rate of 15% and the amount is
payable for five years every July 31.
8. A 120-day 17% note for P24,000 was received from a customer for services
rendered. It will mature on March 5 of the following year.

9. The Interest Revenue account has a credit balance of P6,800 representing the
interest paid in advance by a customer on his 12% two-year noted dated May 31,
2009.

10. The Unearned Subscriptions of Francine Co. showed a balance of P144,000.

This amount represents the total balance of subscriptions for the following:

One-year subscriptions beginning October 1, 2009 P24,000

Two-year subscriptions beginning July 15,2008 48,000
Three-year subscriptions beginning August 1,2009 72,000
Exercise 3-1. Modified True or False.

On the space before each number, write True if the statement is correct. Otherwise, change the
underlined word(s) to make the false statement correct.

________1. Sales revenue is a representation of the inflow of assets from the

sale of a product.
________2. The source document for recording the sale of merchandise is the
sales order.
________3. When defective merchandise is returned, the seller issues a credit
memo to the buyer.
________4. Under the periodic inventory system, purchases of merchandise
will be debited to Merchandise Inventory.
________5. Trade discount is a discount provided to customers to encourage
prompt payment.
________6. Merchandise inventory includes the goods purchase for the
principal purpose of reselling them in the ordinary course of
operations.
________7. Sales discount is a contra account that reduces revenue because of
defective items sold.
________8. Perpetual inventory system is a system of maintaining inventory
where there is always a running balance for all items being sold.
________9. Expenses incurred directly in the sale of merchandise are called
distribution expenses
_______10. Purchase Discount is the account used in a periodic inventory
system to record acquisition of merchandise.
 ACCOUNTING FOR FREIGHT
Exercise 3-7. Identification.

Identify the accounting term/s being described in the following statements. Write your answer on
the space provided after the statement.

1. The term of shipment which indicates that the seller shoulders the cost of freight.
_____________________________________

2. An account used for recording the freight charges on merchandise purchased or held for resale.
__________________________
3. The shipping term which means that the seller advances payment of the freight to the

shipping company in behalf of the buyer.

___________________________________________

4. The freight term which means that the ownership of the goods is vested on the buyer

upon receipt of the goods thereof.

____________________________________________________
5. The account title debited in the buyer’s book if the freight term is FOB Destination, collect

and the goods purchased was on account. ___________________________

6. The account title debited when the seller pays the expenses of transporting the goods sold.

__________________________

7. The shipping term which means that the shipping charges are debited to Freight out.
_____________________________

8. The shipping term that makes the buyer the rightful owner of the merchandise even if

the goods are still in transit.

____________________________________________________
9. The account title debited for the purchase of merchandise if the freight term is FOB destination-
prepaid.
___________________________________________________
10. The party liable for the cost of freight under the terms FOB shipping point prepaid.
____________________________________________________
Exercise 3-49. True or False

On the space provided before each number, write the word TRUE if the statement is correct and FALSE
if the statement is incorrect.

________ 1. The worksheet facilitates the preparation of the company’s financial

statements.
________ 2. The financial statements show the financial performance and the financial
position of the firm.
________ 3. The statement of financial position is considered an expansion of basic
accounting equation.
________ 4. The amount of capital reflected in the statement of financial position is
the owner’s beginning capital.
________ 5. Cash flow preparation is one way to assess the ability of the firm to pay its
maturing obligations.
________ 6. An income summary account has a normal balance of credit.
________ 7. When the closing process is complete, all temporary accounts in the ledger
will have a zero balance.
________ 8. The post-closing trial balance is made up of real accounts.
________ 9. The merchandise inventory in the post-closing trial balance is the
beginning inventory in the next accounting period.
________ 10. Reversing entries may or may not be prepared at the start of the
accounting period.

PROBLEM SOLVING
A. Luke Company uses periodic inventory system. The following data were gathered for the
year 2000:

Purchases P 270,000
Purchases returns & Allowance 6,750
Freight out 2,000
Freight in 5,000
Purchase discount 8,500
Ending inventory 86,250
Cost goods sold 334,750

1. What is the amount of beginning inventory?

B. Mark Company reported total revenues of P168, 000 for 2002 as well as:

Total liabilities as of 12/31/02 P280,000

Net Loss for the year 2002 36,000
Total cash payments for the year 2002 148,000

2. What is the company’s total expenses for the year 2002?

C. On January 1, 2000, the capital of John Company was P1,700,000 and on December 31,
2000, the capital was P2,400,000. During the year John withdrew merchandise costing
P100,000 and with a sales value of P180,000, and paid a P1,000,000 note payable issued by
John with interest of 12% for six months with a check drawn on personal checking account.

3. What is the net income or net loss for the year?

D. On July 31, the company bought merchandise for P105,000 on terms 15% down, balance
2/10,n/30,FOB Shipping point Prepaid, P400. After three days, the company returned defective
goods worth, P800. Partial payment of P22,500 was paid on August 5. If the account was
settled within the discount period, compute for the amount of cash paid by the firm.

E. The following data were taken from the ledger: Sales , P750,000; Sales returns and
allowances,P12,000; Purchases, P374,000; purchase returns and allowances, P2,500; purchase
discounts, P5,000 and transportation in, P1,3000. Merchandise inventory at the beginning
of the year was P210,000, and at the end of the year was P250,000. What was the cost of
merchandise purchased ?

F.The following information were presented for Rosanna Company at December 31, 2000:

Purchases P 150,000
Purchase discounts 20,000
Purchase returns and
Allowances 5,000
Freight in 4,000
Merchandise Inventory, end 45,000
Cost of goods sold 250,000

What is the amount of Merchandise Inventory, beginning?

G. On March 13,Jose Company sold merchandise to Amalia Company for P100,000 less 2-2-2. Terms of
payment: P20,000 down payment, balance on account 2/10, n/30. As agreed upon, freight shall be
FOB SP, prepaid for P1,000. On March 16, Amalia company returned P5,000 worth of defective
merchandise and two days after, paid ¼ of the outstanding account.

If Amalia Company paid the account on March 23, what amount should
Jose Company is expected to receive?

H. Green Company has the following available information for December 31, 2000, as follows:

Sales P 900,000
Sales discounts 20,000
Sales returns and allowances 15,000
Selling Expenses 95,000
General and administrative
Expenses 115,000
Interest Income 5,000
Loss from sale of old
Equipment 7,000

What is the amount of net income or net loss assuming the cost of goods sold
is equal to 600% of the selling expenses?

I.On March 3, 2000, Jun Company purchased merchandise from Tony Trading for P50,000 less
2-3. Terms of payment: P20,000 down, balance on account 3/5, n/30. Freight was FOB SP,
prepaid. Three days after, P500 worth of defective goods were returned and subsequently paid
one half (1/2) of the outstanding account.

If the account was full settled on June 10, what amount should June
Company paid to Tony Trading?