FINANCIAL ACCOUNTING AND REPORTING

Accounting Process
Contents
DISCUSSION QUESTIONS ......................................................................................... 3
MULTIPLE CHOICE THEORY ................................................................................. 4
Accounting Concepts ................................................................................................. 4
The Accounting Cycle................................................................................................. 5
Accounting Information System ................................................................................ 6
The Accounts ............................................................................................................. 7
Journalizing ................................................................................................................ 9
Posting ..................................................................................................................... 10
Voucher System ....................................................................................................... 12
Rules of Debits and Credits ...................................................................................... 13
Double-entry System ............................................................................................... 15
The Trial Balance...................................................................................................... 16
Adjusting Entries ...................................................................................................... 17
Work Sheet Preparation .......................................................................................... 25
Financial Statements ............................................................................................... 27
Closing Entries ......................................................................................................... 28
Reversing Entries ..................................................................................................... 30
 Accounting Process
DISCUSSION QUESTIONS

1. What are the steps in the accounting cycle?

2. What constitute the accounting records of an entity?
3. What is a journal?
4. What are the special journals and explain the nature of the transactions recorded in
each type?
5. What is a ledger?
6. What is a subsidiary ledger?
7. Explain the three classes of accounts.
8. Distinguish contra accounts from adjunct accounts.
9. What do you understand by the voucher system?
10. What are the elements of a voucher system? Explain fully.
11. What is a trial balance?
12. What are the purposes of a trial balance?
13. Describe the following errors:
14. What are the two methods of recording expenses?
15. What are the two methods of recording income?
16. What are adjusting entries?
17. What are the items that normally require adjusting entries? Indicate the proforma
adjustment.
18. What is a worksheet?
19. What are closing entries?
20. Illustrate the preparation of closing entries in a merchandising or trading entity.
21. Illustrate the preparation of closing entries in a manufacturing entity.
22. What is a post-closing trial balance?
23. What are reversing entries?
24. Explain the principle of debit and credit.

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MULTIPLE CHOICE THEORY

Accounting Concepts
1. Which of the following supports the accrual basis of accounting?
a. revenue recognition and matching concepts
b. revenue recognition concept
c. cash concept
d. matching concept

2. Which of the following concepts relates to separating the reporting of business and
personal economic transactions?
a. Unit of Measure Concept c. Cost Concept
b. Objectivity Concept d. Business Entity Concept

3. When there is a legal claim to the cash associated with a sale, accounting is
recognizing a(n):
a. cash basis expense c. accrual basis revenue
b. accrual basis expense d. cash basis revenue

4. Under accrual-basis accounting

a. cash must be received before revenue is recognized.
b. events that change a company's financial statements are recognized in the
period they occur rather than in the period in which cash is paid or received.
c. a and b are both correct.
d. profit is calculated by matching cash outflows against cash inflows.

5. The rules adopted by the accounting profession as guides in preparing financial

statements are:
a. Comprised of both general and specific principles.
b. Known as generally accepted accounting principles.
c. Abbreviated as GAAP.
d. Intended to make information in financial statements relevant, reliable, and
comparable.
e. All of the above.

6. The accounting equation can be stated as:

a. Assets = Liabilities + Stockholders’ equity
b. Assets = Liabilities - Stockholders’ equity
c. Assets + Stockholders’ equity = Liabilities
d. Assets + Liabilities = Stockholders’ equity
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 Accounting Process
7. If total assets equal P315,000 and total owners' equity equal P90,000, then total
liabilities must equal:
a. P405,000.
b. P225,000.
c. Can not be determined from the information given.
d. Some other amount.

8. On November 1 of the current year, the assets and liabilities of Jim Chu, M.D., are
as follows: Cash, P10,000; Accounts Receivable, P8,200; Supplies, P1,050; Land,
P25,000; Accounts Payable, P6,530. What is the amount of stockholders' equity as
of November 1 of the current year?
a. P37,720 c. P44,430
b. P21,500 d. P50,780

9. If the assets of a business increased by P15,000 during a period of time and its
liabilities increased by P6,000 during the same period, the owner’s equity in the
business must have
a. increased by P9,000 c. decreased by P9,000
b. increased by P21,000 d. decreased by P21,000

The Accounting Cycle

10. The accounting process begins with:
a. Preparation of the trial balance.
b. Preparing financial statements and other reports.
c. Analysis of business transactions and events.
d. Presentation of financial information to decision-makers.
e. Summarizing the recorded effect of business transactions.

11. The accounting process begins with:

a. Summarizing the recorded effect of business transactions.
b. Analysis of business transactions and events.
c. Presentation of financial information to decision-makers.
d. Preparing financial statements and other reports.
e. Preparation of the trial balance.

12. The first step in the accounting cycle is to

a. Record transactions in a journal
b. Adjust the general ledger accounts
c. Analyze transactions from source documents
d. Post journal entries to general ledger accounts
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13. The last step in the accounting cycle is to
a. Prepare financial statements
b. Prepare a post-closing trial balance
c. Journalize and post-closing entries
d. Journalize and post adjusting entries

14. What is the correct order of the following events in the accounting process?
I. Financial statements are prepared.
II. Adjusting entries are recorded.
III. Nominal accounts are closed.
a. I, II, III c. II, III, I
b. II, I, III d. Ill, II, I

15. Which of the following is not among the first five steps in the accounting cycle?
a. Record closing entries
b. Record transactions in journals
c. Adjust the general ledger accounts
d. Post entries to general ledger accounts

16. What is the logical order of the following steps in the accounting cycle?
a. Post the closing entries, take a post-closing trial balance, then journalize the
closing entries.
b. Journalize the closing entries, post the closing entries, and then take a post-
closing trial balance.
c. Post the journal entries to the ledger accounts, prepare a worksheet, and then take
a trial balance.
d. Prepare the earnings statement, prepare the statement of financial position and
then prepare a worksheet.

17. Basic steps in the recording process include all of the following, except
a. Enter the transaction information in a journal.
b. Analyze each transaction for the effect on the accounts.
c. Transfer the journal information to the appropriate account in the statement of
financial position
d. All of the choices are correct regarding the basic steps in the recording process.

Accounting Information System

18. An example of an external event would not include:
a. Purchasing equipment c. Collecting a receivable
b. Paying employees salaries d. Depreciating equipment
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19. The manner in which the accounting records are organized and employed within a
business is referred to as
a. Accounting system c. Special journals
b. Business document d. Voucher system

20. The installation of accounting procedures for the accumulation of financial data is
known as
a. Accounting system c. Electronic data processing
b. Auditing d. Financial accounting

21. Factors that shape an accounting information system include

a. Nature of business
b. Size of the entity and nature of business
c. Volume of data to be handled and size of entity
d. Nature of business, size of entity and volume of data to be handled

22. Electronic data processing is

a. An act preparing a program defined as the complete plan for the solution of a
problem.
b. The systematization of processing operations in a manner that will provide a
rapid and an uninterrupted flow of all information in the conduct of business.
c. A system of processing data performed by mechanical equipment such as general
office machines to increase speed and accuracy of data processing operations.
d. A system of accumulating, assembling and recasting transactions by the use of
electronic devices with the objective of recording, analyzing and reporting their
output data.

23. Anderson Company purchased equipment for P1,800 cash. As a result of this event,
a. total assets increased by P1,800.
b. stockholders' equity decreased by P1,800.
c. Both a and b.
d. total assets remained unchanged.

The Accounts
24. A chart of accounts is
a. A journal
b. A flowchart of all transactions
c. An accounting procedure manual
d. A list of all account titles in the general ledger

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25. Which of the following is a real account?
a. Accounts receivable c. Sales
b. Goodwill d. Both goodwill and accounts receivable

26. Real accounts include all of the following, except

a. Assets c. Equity
b. Dividends d. Liabilities

27. Which of the following types of accounts measure economic flows over a period of
time?
a. Contra accounts c. Nominal accounts
b. Mixed accounts d. Real accounts

28. Which of the following is a nominal account?

a. Inventory c. Salary expense
b. Retained earnings d. Unearned revenue

29. Nominal accounts are also called

a. Mixed accounts c. Real accounts
b. Permanent accounts d. Temporary accounts

30. An example of a nominal and contra account is

a. Freight in c. Sales return
b. Freight out d. Accumulated depreciation

31. Which one of the following is an adjunct account that should not be closed at the end
of every accounting period?
a. Freight in c. Discount on bonds payable
b. Share premium d. Allowance for doubtful accounts

32. Premium on bonds payable is an example of

a. Real and contra account c. Nominal and contra account
b. Real and adjunct account d. Nominal and adjunct account

33. The normal balance of an account is on the

a. Debit side of the account
b. Credit side of the account
c. Side represented by increases in the account balance
d. Side represented by decreases in the account balance

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Journalizing
34. When an item of revenue is collected and recorded in advance, it is normally called
a(n) revenue.
a. accrued c. unearned
b. prepaid d. cash

35. The journal entry to record performing a service on account would include a debit
to:
a. Retained Earnings c. Cash
b. Accounts Receivable d. Revenue

36. Receiving a payment from a customer on account would:

a. increase shareholders’ equity.
b. increase shareholders’ equity.
c. have no effect on total assets.
d. decrease liabilities.

37. The book of original entry is also known as

a. General ledger c. Subsidiary ledger
b. Journal d. Trial balance

38. Which is not considered a book of original entry?

a. General Journal c. Sales Journal
b. General Ledger d. Purchases Journal

39. An accounting record into which the essential facts and figures in connection with all
transactions are initially recorded is called
a. Account c. Ledger
b. Journal d. Trial balance

40. What function do accounting journals serve in the accounting process?

a. Classifying c. Reporting
b. Recording d. Summarizing

41. A general journal

a. Contains only adjusting entries.
b. Lists all the increases and decreases in each account in one place.
c. Contains one record for each of the asset, liability, equity, revenue and expense.
d. Chronologically lists transactions and other events expressed in terms of debit
and credit.
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42. An entity that uses special journals acquired merchandise by giving a note payable.
In which journal would the transaction be recorded?
a. Cash disbursements journal c. Invoice register
b. General journal d. Sales journal

43. If an entity uses special journals, in which journal would the sale of merchandise for
cash be recorded?
a. Cash disbursements journal c. General journal
b. Cash receipts journal d. Sales journal

44. When special journals are used, which of the following is true?
a. A general journal is not used
b. All sales transactions should be recorded in the sales journal
c. All cash receipts should be recorded in the cash receipts journal
d. All purchase transactions should be recorded in the purchases journal

45. When special journals are used, adjusting and closing entries are recorded in the
a. Cash disbursements journal c. General journal
b. Cash receipts journal d. Purchases journal

46. Magazine subscriptions collected in advance are reported as

a. Magazine subscription revenue in the income statement in the period collected.
b. A contra account to magazine subscriptions receivable in the asset section of
the balance sheet.
c. Deferred revenue in the stockholders’ equity section of the balance sheet.
d. Deferred revenue in the liability section of the balance sheet.

47. Not recording the Prepaid Rent used causes:

a. assets to be too high. c. revenue to be too high.
b. expenses to be too high. d. assets to be too low.

Posting
48. A ledger is defined as
a. A collection of transactions
b. A collection of all statement of financial position accounts
c. A collection of all statement of comprehensive income accounts
d. A collection of account titles - asset, liability, equity, revenue and expense
accounts

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49. What function do general ledgers serve in the accounting process?
a. Classifying c. Reporting
b. Recording d. Summarizing

50. A subsidiary ledger is

a. A listing of accounts of a subsidiary
b. A listing of the components of account balances
c. A backup system to protect against record destruction
d. A listing of account balances just before closing entries are prepared

51. During February 2020, its first month of operations, the owner of Rutwing
Enterprises invested cash of P25,000. Rutwing had cash revenues of P4,000 and
paid expenses of P7,000. Assuming no other transactions impacted the cash
account, what is the balance in Cash at February 28?
a. P3,000 credit c. P22,000 debit
b. P29,000 debit d. P18,000 credit

52. During the month of March, Cooley Computer Services made purchases on account
totaling P43,500. Also during the month of March, Cooley was paid P8,000 by a
customer for services to be provided in the future and paid P36,900 of cash on its
accounts payable balance. If the balance in the accounts payable account at the
beginning of March was P77,300, what is the balance in accounts payable at the
end of March?
a. P83,900 d. P4,900
b. P75,900 e. P6,600
c. P91,900

53. Strum Hardware has total assets of P50,000. What are the total assets if new
equipment is purchased for P5,000 cash?
a. P45,000 c. P50,000
b. P55,00 d. P60,000

54. Zed Bennett opened an art gallery and as a dealer completed these transactions:
1. Started the gallery, Artery, by investing P40,000 cash and equipment valued at
P18,000.
2. Purchased P70 of office supplies on credit.
3. Paid P1,200 cash for the receptionist's salary.
4. Sold a painting for an artist and collected a P4,500 cash commission on the
sale.
5. Completed an art appraisal and billed the client P200.
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What was the balance of the cash account after these transactions were posted?
a. P12,230 d. P43,430
b. P12,430 e. P61,430
c. P43,300

55. The Accounts Receivable account has total debit postings of P1,700 and credit
postings of P900. The balance of the account is:
a. P800 debit c. P2,600 credit
b. P800 credit d. P2,600 debit

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

The following transactions occurred during March, the first month of operations for
Lawrence Galleries, Inc.:
• Capital stock was issued to Lawrence Milburn in exchange for P240,000 cash.
• Purchased P120,000 of equipment by making a P50,000 cash down payment and
signing a note payable for the balance.
• Made a P46,000 cash payment on the note payable from the purchase of equipment.
• Sold a piece of equipment for cash of P12,000. The equipment was sold at cost, so
there is no gain or loss on the sale.

56. What is the balance in the Cash account at the end of March?
a. P156,000 c. P206,000
b. P202,000 d. P144,000

Voucher System
57. A voucher system is used in connection with transactions that involve only
a. The receipt of cash c. Revenue and expense
b. The payment of cash d. The purchase and sale of merchandise

58. It is the business paper which is prepared by an entity for every cash payment.
a. Check c. Official receipt
b. Journal d. Voucher

59. All vouchers are recorded in numerical sequence in the

a. Cash disbursements journal c. General journal
b. Check register d. Voucher register

60. After vouchers are recorded, they are filed in an "unpaid vouchers file"
a. Chronologically c. No regular order
b. In the order of payment d. Numerically
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61. A file of unpaid vouchers (choose the incorrect one)
a. May be used to replace the accounts payable subsidiary ledger.
b. Is controlled by the vouchers payable account in the general ledger.
c. Shows only the total amount of outstanding liabilities for merchandise purchased.
d. Shows during the year the total amount of all recorded outstanding liabilities for
goods and services.

Rules of Debits and Credits

62. Which category (or categories) of accounts will never be decreased by debits?
a. assets c. liabilities
b. equity d. Answers a and b are both correct.

63. Debits
a. Decrease assets and expenses and increase liabilities, revenue, and
stockholders' equity.
b. Increase assets and stockholders' equity and decrease liabilities, expenses, and
revenue.
c. Increase assets and decrease expenses, liabilities, revenue, and stockholders'
equity.
d. Increase assets and expenses and decrease liabilities, revenue and stockholders'
equity.

64. The statement that is true is

a. Debits increase assets and increase liabilities.
b. Debits decrease liabilities and decrease assets.
c. Credits decrease assets and decrease liabilities.
d. Credits decrease assets and increase liabilities.

65. Debits are on which side?

a. always on the left side c. sometimes on the left side
b. sometimes on the right side d. always on the right side

66. In recording transactions

a. Assets, expenses, and capital accounts are debited for increases.
b. Assets, expenses, and drawing accounts are debited for increases
c. Liabilities, revenue, and drawing accounts are debited for increases
d. The word "debit" means increase and the word "credit" means decrease

67. Debit always means

a. Decrease c. Right side of an account
b. Increase d. None of these
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68. In an accrual accounting system
a. All accounts have normal debit balances.
b. Revenue is recorded only when cash is received.
c. A debit entry is recorded on the left-hand side of an account.
d. Liability, share capital and dividend all have normal credit balances.

69. Which of the following statements is true regarding debits and credits?
a. Before adjustments, debits will not equal credits in the trial balance.
b. The rules for debit and credit and the normal balance of share capital are the same
as for liabilities.
c. In the income statement, revenue is increased by a debit whereas in the statement
of financial position, retained earnings account is increased by a credit.
d. On the income statement, debits are used to increase account balances, whereas
on the statement of financial position, credits are used to increase account
balances.

70. Which is false concerning the rules of debit and credit?

a. The word "debit" means to increase and the word "credit" means to decrease.
b. The normal balance of any account appears on the side for recording increases
c. The left side of an account is always the debit side and the right side is always
the credit side
d. Increases in assets and expenses are debit entries, and increases in liabilities,
equity and revenue are credit entries

71. A common business transaction that would not affect the amount of equity is
a. Payment of dividends
b. Payment of property taxes
c. Billing of customers for services rendered
d. Signing a note payable to purchase equipment

72. Equity is not affected by all

a. Cash receipts c. Expenses
b. Dividends d. Revenue

73. The Dividends account is increased with a debit because dividends

a. reduce liabilities
b. are declared an asset
c. result in a decrease in equity, so debiting Dividends would have the effect of
decreasing Owners’ Equity
d. are an expense
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Double-entry System
74. Which of the following would cause a liability to be credited and an expense to be
debited?
a. Recording the depreciation of equipment
b. Purchasing equipment
c. Recording the adjustment for the expiration of rent
d. Recording the accrual of salaries incurred

75. Any increase in an asset may be offset by

a. an increase in another asset account.
b. a corresponding decrease in owner’ equity.
c. a corresponding decrease in a liability.
d. a decrease in some other asset account.

76. Which of the following situations increase stockholders’ equity?

a. Utility bill will be paid next month.
b. Services are provided on account.
c. Cash is received from customers.
d. Supplies are purchased on account.

77. The double-entry accounting system means

a. More than one of the above
b. Each transaction is recorded with two journal entries.
c. Each item is recorded in a journal entry and then in a general ledger account.
d. The dual effect of each transaction is recorded with a debit and a credit.

78. A simple journal entry

a. Is a memorandum entry
b. Consists of one debit and one credit
c. Consists of two debits and one credit
d. Consists of one debit and two credits

79. A journal entry that contains more than two accounts is called
a. A compound journal entry c. An adjusting journal entry
b. A posted journal entry d. An erroneous journal entry

80. The accounting equation must remain in balance

a. Only when journal entries are recorded.
b. Only at the time the trial balance is prepared.
c. Throughout each step in the accounting cycle.
d. Only when formal financial statements are prepared.
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The Trial Balance
81. A trial balance that is out of balance indicates that:
a. There is not an equality of debit and credit amounts in the ledger.
b. The number of ledger accounts with debit balances is not equal to the number
of accounts with credit balances.
c. A journal entry has been completely omitted from the posting process.
d. A debit has been posted to the wrong account.

82. The trial balance

a. Can be used to uncover errors in journalizing and posting.
b. Has as the primary purpose of proving that all journal entries were made for the
period.
c. Is used to prepare the statement of financial position while the general ledger is
used to prepare the income statement.
d. Is a listing of all the accounts and their balances in the order the accounts appear
on the statement of financial position.

83. The trial balance

a. Is useful in preparing the statement of financial position.
b. Proves that debits are greater than credits when the entity has net income.
c. Uncovers any errors in journalizing and posting prior to preparation of the
statement of financial position.
d. All of the choices are correct.

84. Which of the following is not a principal purpose of an unadjusted trial balance?
a. It supplies a listing of open accounts and their balances.
b. It is the basis for any adjustments to the account balances.
c. It proves that debits and credits of equal amounts are in the ledger.
d. It proves that debits and credits were properly entered in the ledger accounts.

85. A trial balance may prove that debits and credits are equal but
a. A transaction could have been omitted.
b. A transaction could have been entered twice.
c. An amount could be entered in the wrong account.
d. All of these

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86. Which of the following statements regarding a trial balance is incorrect?
a. A trial balance helps to localize errors within an identifiable time period.
b. A trial balance is a test of the equality of the debit and credit balances in the
ledger.
c. A trial balance is a list of all of the open accounts in the ledger with their balances
as of a given date.
d. A trial balance proves that no errors of any kind have been made in the accounts
during the accounting period.

87. Joe Donaldson deposited P80,000 in a bank account, purchased a company for
P60,000 cash (Building P40,000 and Inventory P20,000), performed services for
clients for P10,000 cash, purchased supplies for P5,000 cash, and paid utilities of
P2,000 cash. What is the amount of credits in the trial balance for the month?
a. P78,000 c. P88,000
b. P80,000 d. P90,000

Adjusting Entries
88. An adjusting entry to accrue wages incurred but not yet paid is an example of
a. Aligning recorded costs with appropriate accounting periods
b. Aligning recorded revenue with appropriate accounting periods
c. Reflecting unrecorded revenue earned during an accounting period
d. Reflecting unrecorded expenses incurred during an accounting period

89. The premium on a 3-year insurance policy expiring on December 31, 2020, was
paid in total on January 1, 2018. Assuming that the original payment was initially
debited to an expense account, and that appropriate adjusting entries have been
recorded on December 31, 2018 and 2019, the balance in the prepaid asset account
on December 31, 2019, would be
a. The same as it would have been if the original payment had been initially
debited to a prepaid asset account.
b. Zero.
c. Lower than the balance on December 31, 2020.
d. The same as the original payment.

90. Adjusting entries are needed:

a. Whenever transactions affect the revenue or expenses of more than one
accounting period.
b. Whenever expenses are not paid in cash.
c. Only to correct errors in the initial recording of business transactions.
d. Whenever revenue is not received in cash.
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91. The adjustment for accrued wages included the entire pay period, some of which
occurs next month. This would:
a. overstate net income. c. overstate the liabilities.
b. understate the liabilities. d. None of these are correct.

92. Adjusting entries are based primarily on the accounting principles of

a. Matching and historical cost c. Revenue realization and matching
b. Matching and monetary unit. d. Revenue realization and materiality

93. The purpose of adjusting entries is to

a. Prepare revenue and expense accounts for recording the transactions of the next
period.
b. Adjust the capital account for the revenue, expense and withdrawal transactions
which occurred during the year.
c. Apply the realization principle and the matching principle to transactions
affecting two or more accounting periods.
d. Adjust daily the balances in asset, liability, revenue and expense accounts for the
effects of business transactions.

94. Why are adjusting entries necessary?

a. To make debits equal credits
b. To close nominal accounts at year-end
c. To correct erroneous balances in accounts
d. Transactions take place over more than one accounting period

95. Adjusting entries involve

a. Only capital accounts c. Only real accounts
b. Only nominal accounts d. One real and one nominal account

96. An adjusting entry should never include

a. A debit to a liability account and a credit to revenue account.
b. A debit to a revenue account and a credit to a liability account.
c. A debit to an expense account and a credit to a liability account.
d. A debit to an expense account and a credit to a revenue account.

97. Which one of the following items least resembles a typical adjusting entry?
a. Debit revenue and credit liability
b. Debit an asset and credit liability
c. Debit an asset and credit revenue
d. Debit an expense and credit liability
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98. Which of the following best defines an accrual?
a. Adjusting entries where cash flow precedes revenue or expense recognition
b. Adjusting entries where revenue or expense recognition precedes cash flow
c. Adjusting entries where cash flow and revenue or expense recognition are
simultaneous
d. Adjusting entries where revenue or expenses are recognized in the absence of
cash flow evidence

99. An adjusting entry in which a revenue is recognized before the related cash receipt
occurs is called
a. Accrual c. Nominal
b. Deferral d. Special item

100. An accrued revenue can best be described as an amount

a. Collected and currently matched with expenses
b. Not collected and currently matched with expenses
c. Collected and not currently matched with expenses
d. Not collected and not currently matched with expenses

101. An accrued expense can best be described as an amount

a. Paid and currently matched with earnings
b. Paid and not currently matched with earnings
c. Not paid and currently matched with earnings
d. Not paid and not currently matched with earnings

102. An adjusting entry to accrue wages incurred but not yet paid is an example of
a. Aligning recorded costs with appropriate accounting periods
b. Aligning recorded revenue with appropriate accounting periods
c. Reflecting unrecorded revenue earned during an accounting period
d. Reflecting unrecorded expenses incurred during an accounting period

103. If during an accounting period an expense item has been incurred but not yet paid,
the adjusting entry would involve
a. A liability account and an asset account.
b. An expense account and a liability account.
c. A receivable account and a revenue account.
d. An asset or contra-asset and an expense account.

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104. If an expense has been incurred but not yet recorded, then the end-of-period
adjusting entry would involve
a. An expense and an asset account
b. A liability account and an asset account
c. A liability account and a revenue account
d. A receivable account and a revenue account

105. Which of the following is an example of an accrued expense?

a. Depreciation expense
b. Property tax incurred during the year to be paid next year
c. Rent earned during the current year to be received at the end of next year
d. Equipment purchased at the beginning of the year and debited to an expense
account

106. Which of the following properly describes a deferral?

a. Cash is paid after expense is incurred.
b. Cash is received after revenue is earned.
c. Cash is received before revenue is earned.
d. Cash is paid at the same time period that an expense is incurred.

107. When an item of expense is paid and recorded in advance, it is normally called
a. Accrued expense c. Estimated expense
b. Cash expense d. Prepaid expense

108. When an item of revenue is collected and recorded in advance, it is normally called
a. Accrued revenue c. Prepaid revenue
b. Cash d. Unearned revenue

109. An unearned revenue can best be described as an amount

a. Collected and currently matched with expenses
b. Collected and not currently matched with expenses
c. Not collected and currently matched with expenses
d. Not collected and not currently matched with expenses

110. Adjusting entries

a. Include both accruals and deferrals.
b. Are necessary to enable the financial statements to conform with Philippine
Financial Reporting Standards.
c. Are often prepared after the statement of financial position date but dated as of
the statement of financial position date.
d. All of the choices are correct regarding adjusting entries.
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111. Which of the following statements is false regarding adjusting entries?
a. Adjusting entries involve accruals or deferrals.
b. Cash is neither debited nor credited as a result of adjusting entries.
c. Each adjusting entry affects one revenue account and one expense account
d. Each adjusting entry affects one statement of financial position account and one
income statement account.

112. Cara, Inc. purchased supplies costing P2,500 on January 1, 2020 and recorded the
transaction by increasing assets. At the end of the year P1,300 of the supplies are
still on hand. How will the adjusting entry impact Cara, Inc.’s statement of financial
position at December 31, 2020?
a. Decrease Assets P1,200. c. Decrease Assets P1,300.
b. Increase Equity P1,300. d. Increase Liabilities P1,200.

113. A situation where the cash has either been received or paid, but the income
statement effect is delayed until a later period is a(n):
a. deferral c. error
b. accrual d. realization

114. Failure to record the expiration of a prepaid asset account will:

a. understate net income
b. understate assets
c. overstate liabilities
d. understate liabilities
e. overstate assets

115. The difference between the cost of a depreciable asset and its related accumulated
depreciation is referred to as the
a. blue book value of the asset.
b. market value of the asset.
c. depreciated difference of the asset.
d. book value of the asset.

116. The failure to properly record an adjusting entry to accrue an expense will result in
an:
a. understatement of expenses and an understatement of liabilities.
b. overstatement of expenses and an understatement of assets.
c. understatement of expenses and an overstatement of assets.
d. understatement of expenses and an overstatement of liabilities.

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117. At the end of the fiscal year, the usual adjusting entry to Prepaid Insurance to record
expired insurance was omitted. Which of the following statements is true?
a. Total assets at the end of the year will be understated.
b. Insurance Expense will be overstated.
c. Net income for the year will be overstated.
d. Stockholders’ equity at the end of the year will be understated.

118. In reviewing a set of journal entries, an auditor encounters an entry composed of a

debit to interest expense and a credit to interest payable. The purpose of this journal
entry is to record
a. A contingent liability. c. An accrued expense.
b. A deferred expense. d. An unexpired cost.

119. A company made no adjusting entry for accrued and unpaid employee salaries of
P9,000 on December 31. Which of the following statements is true?
a. It will understate expenses and overstate net income by P9,000.
b. It will overstate assets and liabilities by P9,000
c. It will understate assets by P9,000.
d. It will understate net income by P9,000.
e. It will have no effect on income.

120. Which of the following is an example of an accrual?

a. revenue collected in advance
b. payment of advertising six months in advance
c. purchase of supplies
d. wages incurred but not yet paid

121. The premium on a two-year insurance policy expiring on June 30, 2022, was paid
in total on July 1, 2020. The original payment was debited to the insurance expense
account. The appropriate journal entry has been recorded on December 31, 2020.
The balance in the prepaid asset account on December 31, 2020, should be
a. higher than if the original payment had been initially debited to an asset
account.
b. the same as it would have been if the original payment had been initially
debited to an asset account.
c. the same as the original payment.
d. lower than if the original payment had been initially debited to an asset account.

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122. Total wages per week are P4,700. You need to accrue P4,000 of wages. The
adjusting entry would include which of the following?
a. Debit Wages Expense, P4,700; credit Wages Payable, P4,700
b. Debit Wages Expense, P4,000; credit Wages Payable, P4,000
c. Credit Wages Expense, P4,000; debit Wages Payable, P4,000
d. Debit Wages Expense, P4,700; credit Cash, P4,700

123. Wave Inn is a resort located in Canada. Wave Inn collects cash when guest make a
reservation. During December 2019, Wave Inn collected P60,000 of cash and
recorded the receipt by recognizing unearned revenue. By the end of the month
Wave Inn had earned one third of this amount, the other two thirds will be earned
during January 2020. The adjusting entry required at December 31, 2019 would
impact the statement of financial position by
a. Decreasing Equity P20,000.
b. Decreasing Liabilities P20,000.
c. Increasing Assets P60,000.
d. Increasing Equity P40,000.

124. A company shows a P600 balance in Prepaid Insurance in the Unadjusted Trial
Balance columns of the work sheet. The Adjustments columns show expired
insurance of P200. This adjusting entry results in:
a. P200 of prepaid insurance.
b. P200 less in net income.
c. An error in the financial statements.
d. P200 more in net income.
e. P200 difference between the debit and credit columns of the Unadjusted Trial
Balance.

125. On June 1, 2020, Nott Corp. loaned Gore P600,000 on a 12% note, payable in five
annual installments of P120,000 beginning January 2, 2021. In connection with this
loan, Gore was required to deposit P6,000 in a noninterest-bearing escrow account.
The amount held in escrow is to be returned to Gore after all principal and interest
payments have been made. Interest on the note is payable on the first day of each
month beginning July 1, 2020. Gore made timely payments through November 1,
2020. On January 2, 2021, Nott received payment of the first principal installment
plus all interest due. At December 31, 2020, Nott's interest receivable on the loan
to Gore should be
a. P0. c. P6,000.
b. P12,000. d. P18,000.

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126. Clark Real Estate signed a four-month note payable in the amount of P8,000 on
September 1. The note requires interest at an annual rate of 9%. The amount of
interest to be accrued at the end of September is
a. P240. c. P60.
b. P720. d. P80.

127. Eve's Embers opened business on January 1, 2019, and paid for two insurance
policies effective that date. The liability policy was P36,000 for eighteen-months,
and the hazard and contents policy was P12,000 for a two-year term. What was the
balance in Eve's prepaid insurance as of December 31, 2019?
a. P 9,000. c. P18,000.
b. P30,000. d. P48,000.

128. On April 30, 2020, a three-year insurance policy was purchased for P18,000 with
coverage to begin immediately. What is the amount of insurance expense that
would appear on the company's income statement for the year ended December 31,
2020?
a. P500. d. P18,000.
b. P14,000. e. P6,000.
c. P4,000.

129. Keypress Company collected P6,500 in May of 2008 for 5 months of service which
would take place from October of 2020 through February of 2021. The revenue
reported from this transaction during 2020 would be
a. P0. c. P3,900.
b. P6,500. d. P2,600.

130. The Cold Storage Company has one delivery truck. It paid P24,000 cash for the
truck on January 1, 200X. Cold Storage estimates that the truck will be worth
P4,000 in five years, at the end of its useful life. Cold Storage will use straight-line
depreciation to recognize the appropriate cost of the truck each income statement
period. Using accrual accounting, the amount of depreciation Cold Storage will
show on its income statement on December 31, 200X, is
a. P24,000 c. P4,000
b. P20,000 d. P4,800

131. On January 1, 2020, E.D. Reardon Inc. purchased equipment for P30,000. The
company is depreciating the equipment at the rate of P400 per month. At January
31, 2021, the balance in Accumulated Depreciation is
a. P400 c. P5,200.
b. P4,800 d. P24,800.
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132. On January 1, 2020, P.T. Oracle Company purchased a computer system for
P3,240. The company expects to use the system for 3 years. The asset has no
salvage value. The book value of the system at December 31, 2021 is
a. P0. c. P2,160.
b. P1,080. d. P3,240.

THE NEXT ITEM(S) IS/ARE BASED ON THE FOLLOWING

Thomas Company had the following transactions during June:
1. The company paid P1,800 for 3 months' rent in advance on June 1.
2. The company received P800 in advance on June 1 from KATCO Company for
services to be performed over the next three months.
3. The company borrowed P20,000 from First City Bank on June 1. The note is for 9
months with all interest due at the end of the note. The bank is charging the company
9% interest.
4. Patton Company, a valued customer, placed an order for P1,500 on June 1. Because
Patton is experiencing financial difficulties, it has been allowed to pay with a three-
month note receivable. The interest rate on the note is 8%.
5. Thomas Company performed services for a client during June valued at P6,000. The
client was billed on July 7.

133. Referring to part (3), what adjusting entry is necessary for Thomas Company on
June 30?
a. Interest expense 150
Interest payable 150
b. Interest expense 150
Notes payable 150
c. Interest expense 200
Interest payable 200
d. Interest expense 200
Notes payable 200
e. Interest expense 1,800
Notes payable 1,800

Work Sheet Preparation

134. The worksheet does not show
a. the ending balance in the retained earnings account.
b. revenue and expense account balances.
c. net income or loss for the period.
d. the trial balance before adjustments.

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135. A document prepared to prove the equality of debits and credits after all
adjustments have been prepared is
a. Adjusted trial balance c. Adjusted financial statements
b. Post-closing trial balance d. Adjusted statement of financial
position

136. The trial balance debit or credit amount of each account is combined with the
amount of any debit or credit adjustment to that account to determine the new
balance of the account. This process is known as
a. Balancing c. Footing
b. Cross footing d. Totaling

137. The worksheet consisted of five pairs of debit and credit columns. The amount of
one item appeared in both the credit column of the income statement section and
the debit column of the statement of financial position section. What is this item?
a. Beginning inventory c. Net income for the period
b. Cost of goods sold d. Net loss for the period

138. In preparing a 10-column worksheet

a. The beginning inventory is extended as a credit in the income statement columns.
b. The beginning inventory is extended as a credit in the statement of financial
position columns.
c. The ending inventory is extended as a debit in the income statement columns and
as a credit in the statement of financial position columns.
d. The ending inventory is extended as a credit in the income statement columns
and as a debit in the statement of financial position columns.

139. The balancing figure in the worksheet is net loss if

a. The total of the credits exceeds the total of the debits in the income statement
columns.
b. The total of the credits is the same as the total of the debits in the income
statement columns.
c. In the statement of financial position columns, the total of the debits exceeds the
total of the credits.
d. In the statement of financial position columns, the total of the credits exceeds the
total of the debits.

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140. In preparing a worksheet and the entity is profitable in the current period, the total
of the statement of financial position credit column will be
a. Larger than the total of the income statement debit column
b. Larger than the total of the income statement credit column
c. Larger than the total of the statement of financial position debit column
d. Smaller than the total of the statement of financial position debit column

141. Which of the following is not true of a worksheet?

a. The worksheet helps facilitate the preparation of financial statements.
b. The worksheet is included as part of the published financial statements.
c. The worksheet provides a balancing mechanism that helps to uncover accounting
errors.
d. The worksheet provides a place where adjusting entries can be made informally
before they are journalized and posted.

142. Which of the following companies would be least likely to use a worksheet to
facilitate the adjustment process?
a. All companies, since worksheets are required under generally accepted
accounting principles
b. Small company with few accounts
c. Small company with numerous accounts
d. Large company with numerous accounts

Financial Statements
143. Which statement is not true?
a. Expenses are a negative factor in the computation of profit.
b. Expenses have normal debit balances.
c. Expenses increase owner's equity.
d. Expenses decrease owner's equity.

144. The stockholders’ equity is

a. added to liabilities and the two are equal to assets
b. added to assets and the two are equal to liabilities
c. subtracted from liabilities and the net amount is equal to assets
d. subtracted from stockholders’ equity and the net amount is equal to net income

145. Accounts receivable would appear on the:

a. balance sheet with the current liabilities
b. income statement with the revenues
c. retained earnings statement with the net income
d. balance sheet with the current assets
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146. Expenses paid and recorded as assets before they are used are called
a. prepaid expenses. c. interim expenses.
b. unearned expenses. d. accrued expenses.

147. Which of the following statements is false?

a. Entities can prepare the statement of cash flows directly from the adjusted trial
balance.
b. The adjusted trial balance proves the equality of total debits and total credits after
all adjustments.
c. Each adjusting entry affects one statement of financial position account and one
income statement account.
d. Entities can prepare the income statement and the statement of financial position
directly from the adjusted trial balance.

148. When preparing the statement of retained earnings, the beginning retained earnings
balance can always be found
a. in the general ledger
b. in the Income Statement columns of the work sheet
c. in the Balance Sheet columns of the work sheet
d. in the statement of cash flows

149. A company usually determines the amount of supplies used during a period by
a. taking the difference between the balance of the Supplies account and the cost
of supplies on hand.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid for
during the period.
d. adding the supplies on hand to the balance of the Supplies account.

Closing Entries
150. Which of the following statements best describes the purpose of closing entries?
a. To facilitate posting and taking a trial balance.
b. To determine the amount of net income or net loss for the period.
c. To complete the record of various transactions that were started in a prior period.
d. To reduce the balances of temporary accounts to zero so that they may be used
to accumulate the revenue, expenses and dividends of the next period.

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151. The closing entries
a. Are posted to the appropriate general ledger accounts.
b. Include closing the dividends account to income summary.
c. Must debit or credit one income statement account and one statement of financial
position account.
d. All of the choices are correct regarding closing entries.

152. The manufacturing summary account

a. Is a substitute for the income summary
b. Summarizes all revenues and expenses
c. Summarizes all accounts that enter into the computation of cost of goods sold
d. Summarizes all accounts that enter into the computation of cost of goods
manufactured

153. Which of the following closing procedures is unique to a corporation?

a. Close each revenue account to the income summary account
b. Close each expense account to the income summary account
c. Close the owner's drawing account to the owner's capital account
d. Close the income summary account to the retained earnings account

154. The income summary account

a. Is used to close the retained earnings account.
b. Summarizes revenue, expense, and net earnings or loss for the accounting period.
c. Summarizes changes in assets, liabilities, and net earnings or loss for the
accounting period.
d. Generally has a credit balance after all the accounts that should be closed have
been closed

155. The account "income summary" is a

a. Capital account c. Nominal account
b. Mixed account d. Real account

156. Which type of account is always debited during the closing process?
a. Dividends c. Retained earnings
b. Expense d. Revenue

157. The credit balance in the income summary account represents

a. Capital c. Net loss
b. Net income d. Liability

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158. The dividends declared account is a nominal account and
a. Closed directly to capital
b. Closed directly to income summary
c. Closed directly to retained earnings
d. Carried forward to the next accounting period

159. For sole proprietorship, the net income for the period is
a. Credited to capital account c. Debited to capital account
b. Credited to drawing account d. Debited to drawing account

160. The postclosing trial balance

a. Consists of statement of financial position accounts only.
b. Shows that the accounting equation is in balance at the end of the accounting
period.
c. Will balance if a transaction is not journalized and posted, or if a transaction is
journalized and posted twice.
d. All of the choices are correct regarding the post-closing trial balance.

Reversing Entries
161. Reversing entries:
a. Are optional.
b. Correct errors in journal entries.
c. Are required by GAAP.
d. Are prepared on the worksheet.
e. Are mandatory.

162. Reversing entries

a. Impact the income statement only.
b. Are not allowed under Philippine Financial Reporting Standards.
c. Impact the statement of financial position and the income statement.
d. Change amounts reported in the financial statements of the preceding period.

163. Reversing entries apply to

a. All accruals c. All closing entries
b. All adjusting entries d. All deferrals

164. Reversing entries apply to all of the following, except

a. Accrued wages c. Prepaid insurance
b. Depreciation d. Unearned revenue

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165. Adjusting entries that should be reversed include
a. All accrued revenue
b. All accrued expenses
c. Those that debit an asset or credit a liability
d. All of these

166. A reversing entry should never be made for an adjusting entry that
a. Accrues unrecorded revenue.
b. Accrues unrecorded expenses.
c. Adjusts expired costs from an asset account to an expense account.
d. Adjusts unexpired costs from an expense account to an asset account.

167. Adjusting entries that should be reversed include those for prepaid or unearned
items that
a. Create an asset or a liability account.
b. Were originally entered in an asset or liability account.
c. Were originally entered in a revenue or expense account.
d. Create an asset or a liability account and were originally entered in a revenue or
expense account.

168. An entity initially records prepayments in real accounts and makes reversing entries
when appropriate. Which of the following year-end adjusting entries should be
reversed?
a. The entry to record depreciation for the period
b. The entry to record supplies used during the period
c. The entry to record service fees earned by year-end but not billed
d. The entry to record the portion of service fees received in advance that is earned
by year-end

169. An entity initially records prepayments in nominal accounts. Which of the

following year-end adjusting entries should be reversed?
a. The entry to record doubtful accounts
b. The entry to record amortization of patent
c. The entry to record inventory at year-end
d. The entry to record the portion of rental received in advance that is unearned at
year-end

***end of handouts***

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