Drills on Accounting Concepts and Principles:

I. True or False
1. Accounting concepts and principles, the basic sense, are guidelines that accountants
follow when recording and communicating accounting information.
2. The application of the separate entity concept is necessary so that the financial position
and performance of a business can measured objectively.
3. The opposite of going concern is coming concern.
4. According to the accrual basis of accounting, a business should record a sale only when
the sale price is collected.
5. Financial statements are prepared at least annually because of the matching concept.
6. A reporting or accounting period that starts on July 1 of the current year and ends on
June 30 of the following year is called a calendar year period.
7. The government ordered the shutting down of Entity A’s factories because of non
compliance with regulations. Entity A is a going concern.
8. The accounting standards used in the Philippines are the same as the standards used
internationally.
9. The Conceptual Framework is a standard.
10. According to the materiality concept, an item that is considered material by one
business is considered material by all other businesses.

II. True or False

1. Entity B is going out of business because its business owner lost all the money in the
casino. Entity B is a going concern.
2. A purpose of the separate entity concept is to report a true and fair picture of business
financial affairs.
3. The accountant of Entity A, a big corporation, rounded off amounts in the financial
statements into nearest millions. This is an acceptable method of reporting because of
the concept of materiality.
4. Consistency means like transactions must be accounted for in like manner.
5. The cost of processing and communicating financial information should exceed the
expected benefits to be derived from its use.
6. Information is considered material if its omission or misstatement could influence the
decisions of financial statement users.
7. When reporting information in its financial statements, Entity A strives for a balance
between detail and conciseness – having in mind that neither too much detail nor too
little information helps users make good decisions. This is an application of the accrual
basis of accounting.
8. After becoming an accountant, 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.
9. The process of establishing international accounting standards (on which the accounting
standards used in the Philippines are based) is a democratic process in that a majority of
practicing accountants around the world must agree with a standard before it becomes
implemented.
10. Information that does not affect decision making of users are considered irrelevant and
immaterial. Accordingly, that information is not reported in the financial statements.

III. Application of the Basic Accounting Concepts:

1. During the year, you started a business of selling personalized mugs and T-shirts. You
opened a separate bank account for the business and deposited your initial investment
of P250,000 to the account. ( ? )
2. The business acquired a printing machine. The regular selling price is P100,000;
however, you were able to acquire it at a discounted price of P90,000. You will record
the machine at its acquisition cost of P90,000 rather than at the regular selling price.( ? )
3. The business acquired initial inventory of mugs and T-shirts for a total cost of P50,000.
You will record the cost as an asset (i.e., inventory) rather than as expense. ( ? )
4. All the inventory was sold on credit for P300,000. You will immediately record the credit
sales as accounts receivable rather than waiting for them to be collected. ( ? )
5. Also, (continuation of item 4 ) you will now record the P50,000 cost of the inventory as
expense. ( ? )
6. You collected P290,000 out of the P300,000 total credit sales. You will deposit the
collections to the bank account of the business rather than to your personal account.(?)
7. The debtor for the remaining P10,000 ( related to item 6 ) is in financial difficulty. This
has raised doubt on whether he can his account. You will immediately recognize the
doubtful account as expense. ( ? )
8. You withdrew cash of P80,000 from the business for your personal use. You will record
this transaction as a withdrawal of your investment from the business rather than a
business expense. ( ? )
9. At the end of the year, you prepared the financial statements of your business to
determine ( among other things ) whether the business has earned profit. ( ? )
10. When preparing the financial statements, you discovered that the business has $10
(dollars.) You will translate this to Philippine peso using the current exchange rate. That
amount that you will report in the financial statements is the translated amount. ( ? )
11. Also, you have found out that the regular selling price of a new printing machine
increased from P100,000 to P120,000. You will ignore this information ( A ? ) and
will report the printing machine at its acquisition cost of P90,000 in the financial
statements ( B ? ). This is because you don’t intend or expect to close your business
in the foreseeable time ( C ? ).
12. During the year, the business bought a trash bin for P80. You expect to use this over
several years. However, because you deemed the cost as immaterial, you will record
this as an expense rather an asset. ( ? )
13. Moreover, when you prepared the financial statements, you decided to include the cost
of the trash bin in a “Miscellaneous Expenses” account together with other immaterial
expenses. You don’t expect users of the financial statements to benefit from reporting
the immaterial cost separately. ( ? )
14. You will make a brief description of the “Miscellaneous Expenses” account in the notes
to financial statements, sufficient for users to understand the nature of this account.( ? )
15. You then adopted an accounting policy of expensing outright all acquisitions of
equipment costing P5,000 and below. You will apply this policy consistently in the
future periods. ( ? )
Answers:
I. True or False:
1. True
2. True
3. False – liquidating concern
4. False – after the sales takes place
5. False – time period
6. False – fiscal
7. False – liquidating
8. True
9. False – General frame of reference in the application or development of standards
10. False – materiality is “entity specific “

II. True or False:

1. False – liquidating
2. True
3. True
4. True
5. False – benefits should exceed the cost
6. True
7. False – full disclosure principle
8. False – same accounting standards
9. True
10. True

III. Application of the Basic Accounting Concepts

1. Separate entity concept 15. Consistency
2. Historical cost concept
3. Matching concept
4. Accrual basis
5. Matching concept
6. Separate entity concept
7. Prudence or Conservatism
8. Separate entity concept
9. Time period
10. Stable monetary unit
11. A. Stable monetary unit
B. Historical cost
C. Going concern
12. Materiality
13. Cost benefit
14. Full disclosure