Accounting principles workbook

VIETNAM NATIONAL UNIVERSITY OF AGRICULTURE

Authors: PHI THI DIEM HONG | TRAN THI THUONG

ACCOUNTING PRINCIPLES
WORKBOOK
(Advanced Program)

VIETNAM NATIONAL UNIVERSITY OF AGRICULTURAL PRESS - 2022


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PREFACE
As cross-border among different countries, the globalization that influence on all
business activities, is taking place at an ever more rapid anywhere. The famous business
failures that have been reported in the press in the pass are good realizable evidences to
demonstrate the importance of business activity analysis and proper recording of
transactions. If the financial information, as the financial reports, of a business entity are
to properly represent the results of operations and the financial condition of the
company, the transactions must be analyzed and recorded in the accounts following
generally accepted accounting principles. Therefore, the accounting technics are
important not only to accounting majors but also to anyone entering or engaged in a
business career to become managers because the ultimate effects of these book entries
are reflected in the financial statements. If the assets, liabilities and their related
expenses are excluded from the financial reports, or reported revenues are recognized
prematurely or do not really exist, the financial statements are misleading. The
information in financial statements are only useful and meaningful in case they are fair
and clearly represent the business events of the company.
Accounting and its information are always useful for all enterprises or one who

would like manage or use economic resources or engage in other economic activity to
make business decision. Accounting Principle is a course of study that provides the
principles and techniques that accounts employ in measuring, processing, evaluating
and communicating information about the financial performance and position of a
business. This courses supplies learners the “language of business” or the learners
understand business terms and concepts used in making decisions. If the learners
understand how accounting information is issued, the learners will be in an even
stable position when faced with a management decision based on accounting
information. In order to help the learners as students to develop an understanding of a
range of theoretical and practical techniques used in to participate more effectively,
this book has been issued not only as students‟ workbook but also the training
material. Throughout the book is the questions and exercise examples taken from
everyday life to relate an accounting concept being introduced or discussed to
students' experiences. From this, the aim of book is introducing the fundamental
principles and practices of accounting and developing skills and attitudes useful for
learners in much of dynamic business situations.
This edition contains a total of 10 chapters with most of the contents were
expressed under United States Generally Accepted Accounting principles (US-GAAP)
as purpose of advanced program that does enrich knowledge of learners at least in
comparing with other GAAP (including Vietnam accounting standards). Each chapter of
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first edition has three sections: (i) the brief summary of core terminology and definitions
that allow students to review all major concepts covered to that point; (ii) form of
questions and exercises sample that is one of the most important section of book to
explain how to solve or find the answers of the chapter questions, exercises available;
and (iii) question and exercise practice that is the largest sections of end-of-chapter
questions, exercises, and problems available. All end-of-chapter exercises and questions
have been traced back to the chapter explanation to ensure that nothing is asked of a

student that does not appear in the book with key answers. Each exercise or question
becomes more prominent in the business literature and in practice for learners studying
on accounting law and regulation, assumed, greater responsibility for preventing and
detecting fraud. In especially, this book differs from others in a design of
comprehensive single reference source for understanding current accounting principles
and reporting issues. It is directed to accounting learners, trainers or other preparers and
users of accounting information. Its presentation and format assists strongly the quick
comprehension of complex accounting-related subjects updated for today‟s rapidly
changing business environment.
All of those sources of accounting guidance are prepared and discussed directly
by authority groups, Dr. Phi Thi Diem Hong and Dr. Tran Thi Thuong, who are
working in Financial Accounting Department, Faculty of Accounting and Business
Management. In which, the both of authors have tried their efforts of their fields in
accounting teaching or researching and working, not only normal but also advanced
program in university and enterprises, however, it is difficult to be perfected as willing
as. Therefore, we are so happy to receive the supporting comments from the readers
who are any of our students, colleagues, accounting professors or researchers in the
world in order to do best in next editions.
Acknowledgements: The whole book would not have seen the light of the day
without the help of so many wonderful colleagues in Faculty of Accounting and Business
Management who have helped us to comprise all ideas and content together. We also
wish to place our sincere appreciation of the untiring efforts of commentators for her/his
thorough technical review of the entire manuscript. He/She inviable comments have all
been take into account in writing this book.
Authors
Phi Thi Diem Hong
Tran Thi Thuong

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CONTENTS
Chapter 1. INTRODUCING ACCOUNTING IN BUSINESS .......................................... 1
1.1. ACCOUNTING IN BUSINESS REVIEWS..................................................................... 1
1.1.1. Accounting and Accounting activities ...................................................................... 1
1.1.2. Accounting Principles ............................................................................................... 2
1.1.3. Accounting Equation ................................................................................................ 3
1.1.4. Accepted accounting terminology ............................................................................ 5
1.1.5. Financial Statements ................................................................................................. 5
1.2. MULTI-CHOICE QUESTIONS AND EXERCISES SAMPLE ...................................... 6
1.2.1. Multiple-choice questions sample............................................................................. 6
1.2.2. Exercises sample ....................................................................................................... 8
1.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS....................... 12
1.3.1. Practical Multiple-choice questions ........................................................................ 12
1.3.2. Practical Exercises .................................................................................................. 15
1.3.3. Key answers ............................................................................................................ 22
Chapter 2. ANALYZING AND RECORDING TRANSACTIONS ................................ 28
2.1. ANALYZING AND RECORDING TRANSACTIONS REVIEWS ............................. 28
2.1.1. Analyzing and recording process ............................................................................ 28
2.1.2. Double entry accounts ............................................................................................. 30
2.1.3. Trial balance sheets ................................................................................................. 30
2.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................... 31
2.2.1. Multiple-choice questions sample ........................................................................... 31
2.2.2. Exercises sample ..................................................................................................... 34
2.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS....................... 39
2.3.1. Practical Multiple-choice questions ........................................................................ 39
2.3.2. Practical Exercises .................................................................................................. 43
2.3.3. Key answers ............................................................................................................ 51
Chapter 3. ADJUSTING ACCOUNTS AND
PREPARING FINANCIAL STATEMENTS ................................................ 60

3.1. ADJUSTING ACCOUNTS AND PREPARING FINANCIAL
STATEMENT REVIEWS ..................................................................................................... 60
3.1.1. Accrual Basis of Accounting .................................................................................. 60

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3.1.2. Adjusting entries ..................................................................................................... 60
3.1.3. Preparing Financial statements ............................................................................... 61
3.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................... 63
3.2.1. Multiple-choice questions sample ........................................................................... 63
3.2.2. Exercises sample ..................................................................................................... 66
3.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS....................... 72
3.3.1. Practical Multiple-choice questions ........................................................................ 72
3.3.2. Practical Exercises .................................................................................................. 77
3.3.3. Key answers ............................................................................................................ 83
Chapter 4. ACCOUNTING FOR MERCHANDISING OPERATIONS ......................... 93
4.1. MERCHANDISING OPERATION REVIEWS ............................................................. 93
4.1.1. Merchandising activities ......................................................................................... 93
4.1.2. Accounting for Merchandise ................................................................................... 94
4.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................. 100
4.2.1. Multiple-choice questions sample ......................................................................... 100
4.2.2. Exercises sample ................................................................................................... 103
4.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS..................... 105
4.3.1. Practical Multiple-choice questions ...................................................................... 105
4.3.2. Practical Exercises ................................................................................................ 110
4.3.3. Key answers .......................................................................................................... 114
Chapter 5. INVENTORY AND COST OF GOODS SALES ...................................... 121
5.1. INVENTORY AND COST OF GOODS SALES REVIEWS ...................................... 121
5.1.1. Inventory ............................................................................................................... 121

5.1.2. Cost of Goods sold ................................................................................................ 123
5.1.3. Accounting for Inventory ...................................................................................... 123
5.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................. 123
5.2.1. Multiple-choice questions sample ......................................................................... 123
5.2.2. Exercises sample ................................................................................................... 126
5.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS..................... 129
5.3.1. Practical Multiple-choice questions ...................................................................... 129
5.3.2. Practical Exercises ................................................................................................ 136
5.3.3. Key answers .......................................................................................................... 140

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Chapter 6. ACCOUNTING FOR RECEIVABLE ....................................................... 147
6.1. ACCOUNTING FOR RECEIVABLE REVIEWS ....................................................... 147
6.1.1. Definition .............................................................................................................. 147
6.1.2. Accounting for Receivable.................................................................................... 148
6.1.3. Uncollectible Accounts and Bad Debt .................................................................. 149
6.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................. 152
6.2.1. Multiple-choice questions sample ......................................................................... 152
6.2.2. Exercises sample ................................................................................................... 153
6.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS..................... 157
6.3.1. Practical Multiple-choice questions ...................................................................... 157
6.3.2. Practical Exercises ................................................................................................ 162
6.3.3. Key answers .......................................................................................................... 166
Chapter 7. LONG-TERM ASSETS........................................................................... 173
7.1. LONG-TERM ASSETS REVIEWS ............................................................................. 173
7.1.1. Cost of Long-term Assets ..................................................................................... 173
7.1.2. Computing and Recognition Depreciation ............................................................ 175
7.1.3. Accounting for Disposal of Long-term Assets...................................................... 177

7.1.4. Accounting for Selling Long-term Assets ............................................................ 177
7.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................. 178
7.2.1. Multiple-choice questions sample ......................................................................... 178
7.2.2. Exercises sample ................................................................................................... 181
7.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS..................... 182
7.3.1. Practical Multiple-choice questions ...................................................................... 182
7.3.2. Practical Exercises ................................................................................................ 188
7.3.3. Key answers .......................................................................................................... 192
Chapter 8. CURRENT LIABILITIES ......................................................................... 200
8.1. CURRENT LIABILITIES REVIEWS ......................................................................... 200
8.1.1. Concepts underlying Current Liabilities ............................................................... 200
8.1.2. Accounting for Current Liabilities ........................................................................ 201
8.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................. 202
8.2.1. Multiple-choice questions sample ......................................................................... 202
8.2.2. Exercises sample ................................................................................................... 203

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8.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS..................... 205
8.3.1. Practical Multiple-choice questions ...................................................................... 205
8.3.2. Practical Exercises ................................................................................................ 210
8.3.3. Key answers .......................................................................................................... 212
Chapter 9. LONG-TERM LIABILITIES..................................................................... 217
9.1. LONG-TERM LIABILITIES REVIEWS..................................................................... 217
9.1.1. Concepts underlying long-term liabilities ............................................................. 217
9.1.2. Accounting for long-term liabilities ...................................................................... 218
9.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE .................................. 219
9.2.1. Multiple-choice questions sample ......................................................................... 219
9.2.2. Exercises sample ................................................................................................... 221

9.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS..................... 222
9.3.1. Practical Multiple-choice questions ...................................................................... 222
9.3.2. Practical Exercises ................................................................................................ 226
9.3.3. Key answers .......................................................................................................... 228
Chapter 10. SHAREHOLDER’S EQUITY ................................................................ 232
10.1. SHAREHOLDER‟S EQUITY REVIEWS ................................................................. 232
10.1.1. Shareholder‟s Equity ........................................................................................... 232
10.1.2. Accounting for the shareholder‟s Equity ............................................................ 233
10.2. EXERCISES AND MULTI-CHOICE QUESTIONS SAMPLE ................................ 234
10.2.1. Multiple-choice questions sample ....................................................................... 234
10.2.2. Exercises sample ................................................................................................. 236
10.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS................... 239
10.3.1. Practical Multiple-choice questions .................................................................... 239
10.3.2. Practical Exercises .............................................................................................. 243
10.3.3. Key answers ........................................................................................................ 245
REFERENCES ......................................................................................................... 250

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Chapter 1
INTRODUCING ACCOUNTING IN BUSINESS
1.1. ACCOUNTING IN BUSINESS REVIEWS
1.1.1. Accounting and Accounting activities
Anyone probably will find that of all the business knowledge that have acquired
or will learn, the accounting study will be the most useful. The financial and economic
decisions as not only a student or consumer but also anyone involve accounting
information. For individual situation, relating income tax profile, accounting
information helps determine his/her taxes payable. Understanding the accounting
discipline also can influence many of his/her future occupational decisions. Nobody

cannot stand out of the accounting information effects on his/her personal and
occupational life. Every profit-seeking business organization such as money, inventory,
machinery, and other assets, uses accounting information. For this reason, accounting is
called the language of business. Accounting also serves as the language providing
financial information about not-for-profit organizations such as hospitals, charities,
churches, etc. but this book concentrates on accounting in business.
Accounting in Business is a system that identifies, records and communicates
an financial information of an business entity to a wide range of potential users in
making decisions. In other words, accounting is a link between business activities and
decision makers.
Accounting activities like a cycle following the business cycle as bellowed:
(i) Accounting identifies the business activities by recording and then processed to
become useful information, after that communicated through accounting reports to
decision makers.
(ii) Data about business activities or transactions are the input to the accounting
system, and useful accounting information for decision makers is the output.
Normally, there are following four major decision types that managers can use
accounting information to make sound decisions:
(i) Financial decisions mention to what amounts of capital (funds) are needed to
run the business and whether to keep safety these funds from owners (stockholders)
or creditors. In this sense, the company capital means money used to purchase
resources such as machinery, merchandises, and buildings and to pay expenses of
operating the business.
(ii) Resource allocation decisions relate how the total company capital is to be
invested, for example the amount to be invested in building.
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(iii) Production decisions focus on what kinds of product are to be produced, by
when and what means.

(iv) Marketing decisions are setting prices of selling and budgets of advertising or
the location of a company's markets and how to reach them.
1.1.2. Accounting Principles
Accounting information has been required relevant, reliability and comparable in
order to satisfy being useful for all users. Unfortunately, the accounting information
quality is strongly depended on the accountants‟ ethical. The ethical behavior mentions
more than merely making sure you are not violating a code of ethics. Most people sense
what is right and wrong, but yet get-rich-quick opportunities can tempt many of us. In
fact, the greed won out over their sense of right and wrong. Therefore, it is necessary
setting a principles or general accepted accounting principles (GAAP) for accounting
activities. On the other word, the accounting principles are the important contents to
keep the accounting practical body.
Depending on different condition of nation, each country has different GAAP
body that has been accepted and promulgated in whole domestic area. Some of
developed countries, as United Sated, United Kingdom, Australia, set a principle system
that has been accepted voluntary in other countries. In this book, focusing on the
learners of advanced program, there are three main concepts of GAAP including
International Financial Report Standards (IFRSs); United Sated-General Accepted
Accounting Principles (US-GAAP); and Vietnamese Accounting Standards (VASs) in
table 1.1 as bellows:
Table 1.1. Accounting Principles following IFRSs, US-GAAP and VASs
No.

IFRSs (IAS 01)

US-GAAP

VASs (VAS01)

1

Fair value

Cost principle

Historical cost

2

Comparable

Revenue recognition

Prudence

3

Going-concern

Going-concern

Continuous operation

4

Consistency

Business entity

Consistency

5

Off-setting

Matching

Matching

6

Accrual basis

Monetary unit

Accrual basic

7

Materiality

Full disclosure

Materiality

The table 1.1. shows that there are different entitles of principles in different
countries, but there are many similar points among relevant regulations of three
systems respectively.
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Table 1.2. List of Accounting principles following the US-GAAP and VASs
US-GAAP

VASs

Cost principle means that accounting information is
based on actual cost.

Historical cost means that accounting information is
recognized according to their historical cost

Matching principle prescribes that a company must
record its expenses incurred to generate the
revenue.

Matching prescribes that a revenues is recognized,
and the costs creating such revenue also need to be
recognized

Going-concern means that accounting information
reflects a presumption the business will continue
operating.

Continuous operation as accounting recognition in
assumption that enterprises are operating
continuously and will continue normally in the near
future

Business entity means that a business is accounted Materiality: Information shall be considered as the

for separately from its owner or other business
insufficiency or inaccuracy may affecting users ‘s
entities.
decision making
Revenue recognition principle provides guidance on Prudence means the examination, consideration and
when a company must recognize revenue.
anticipation needed to establish under uncertain
conditions
Full disclosure principle requires an enterprises to
report the details behind financial statements that
would impact users’ decisions.

Consistence: accounting policies and methods
selected by enterprises must be applied consistently
within at least one accounting year

Monetary unit means we can express transactions
in money.

Accrual basis: owners’ equity, revenues, assets,
liabilities, and costs must be recorded in accounting
books at the time they arise

In practical body, the accepted accounting principles normally performs as
bellows:
(i) Principle of recording: Any written or printed evidence of a business
transaction that describes the essential facts of that transaction, such as receipts for
cash paid or received. It means all accounting entries emanate from a source document.
This is the authority for entry into journals (and to the general and subsidiary ledgers).
(ii) Principle of reporting: Accounting information is to be transferred to a person

without accounting knowledge in a clear, logical and understandable form.
(iii) Principle of control: Accountants and bookkeepers must be constantly alert
to keep that the accounting practices minimize the existing error and fraud existing.
(iv) Principle of profit determination: Expenses and revenue from those periods
can be matched to measure whether a profit or loss has been obtained.
(v) Principle of double entry: Each transaction is entered twice in the books of
accounts. For every debit there must be a corresponding credit.
1.1.3. Accounting Equation
Accounting Equation reflects the relationship of the resources a business owns,
and the source of these resource, wherein the business resources are Assets. The source
of assets is Equity. At point of time in one business, total Assets must always be total
Equity as bellowed formula:
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Total Assets = Total Equities

(1)

This balance (1) is called basic form of accounting equation. Normally, the
business Equity comes from the owners, as shareholder‟ equities, and the debts that
owned by business (for example the liabilities by purchasing items on credit).
Therefore, the basic equation has formed
Total Assets = Total Liabilities + Total Stockholders‟ Equity

(2)

Wherein,
Equity = Common Stock – Dividends + Revenue – Expenses
Retained Earnings

Assets = Long-term assets + Short-term assets
Extend the basic equation:
(3) Long-term assets + Short-term assets = Liabilities + Stockholders‟ Equity
(4) Equity = Total Assets – Liability
As a business conducts in economic activity, the monetary amounts and
composition of its assets, liabilities, and stockholders‟ equity change. The accounting
information is only useful in case of reflection all these changes that are the exchange of
assets and asset resources in business transactions. Wherein, the assets were defined as
the things of value owned by the business, or the economic resources of the business.

Figure 1.1. Accounting Equation in Business

In one business, the assets are performed as cash, machines, trucks, and office
equipment and buildings or accounts receivable (amounts due from customers for
services previously rendered). The Liabilities are the debts that business must pay by
certain dates, such as notes payable (amounts owed to banks for) and notes payable
(written promises to pay a specific sum of money). The equities are formed by begging
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owner‟s capitals, for example the money of shareholders at the start up business, the
profit or surplus after one business circle… Notably that‟s, both of business liabilities
and stockholders‟ equity show the sources of an existing group of assets.
An accounting transaction is an event or business activity that causes a
measurable change in the accounting equation (Fig. 1.1).
1.1.4. Accepted accounting terminology
Business entity mentions to a business unit that is deemed to have an existence
separate and apart from its owners, customers, creditors, employees, other interested
parties, and other enterprises, and for which accounting records are maintained.
Business transaction is a business activity or event that causes a measurable

change in the items in the accounting equation.
Stockholders or shareholders are owners or investors who buy shares of stock,
which are units of ownership, in the corporation.
Revenues like the inflows of assets (such as cash) resulting from selling products
or rendering services to customers.
Expenses are the costs incurred to create revenues, measured by the assets
surrendered or consumed in serving customers.
Net income is amount by which the revenues exceed the expenses in the same period.
Net loss is amount by which the expenses exceed the revenues in the same period.
Profitability is ability to generate income.
Retained earnings has been accumulated net income less dividend distributions to
stockholders. On the other word, the retained earnings equal net income minus the
decreasing dividends plus the increasing dividends.
Dividend is a payment (usually of cash) to the owners or shareholders of
a corporation; it is a distribution of income to owners rather than an expense of
running business.
1.1.5. Financial Statements
Financial statements are the primary means of communicating accounting
information about a business to all users who have an interest in the business. These
statements model the business enterprise in financial terms.
Under IFRS system (IAS 10) and US-GAAP system (subtopic 205-10-45-1A), a
complete set of financial statements includes following components: (i) Income
statement (sometimes called the profit and loss account (P&L)); (ii) Statement of
owner‟s equity; (iii) Balance sheet (BS); (iv) Cash flow statement (CFS) and (v) Notes
to the financial statements.
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Balance sheet (BS): lists a company‟s assets, stockholders‟ equity, and liabilities
(including cash amounts) as of a specific moment in time. This is also a component of

financial statement system in business entity.
Statement of owner’s equity: summarizes the changes in owner‟s equity for a
specific period of time.
Income statement: describes the revenues and expenses of an enterprise along
with the resulting net income or loss for a specific period of time. Sometimes called an
earnings statement.
Statement of cash flows: summarizes information about the cash inflows
(receipts) and outflows (payments) for a company over a period of time.
Notes to the financial statements: comprises significant accounting policies and
other explanatory information.
Actually, the expenses (costs) and revenues (income) are reported in the profit and
loss account, whereas assets and liabilities are disclosed in the balance sheet. The profit
and loss account (P&L) presents the business transactions over some past period
(usually a year), whereas the balance sheet (BS) provides a ‘snapshot’ of what the
business owns and owes at a single point in time. Both of these financial statements, the
BS and P&L, are prepared on the accruals basis and are closely linked to each other.
In which, under US-GAAP, the dividends and related per-share amounts are disclosed
either in the statement of changes in equity or in the notes to the financial statements,
especially this points are presented on a separate statement with name of Retained
earnings statement that used to interpret the changes in retained earnings that occurred
between two balance sheet dates.
1.2. MULTI-CHOICE QUESTIONS AND EXERCISES SAMPLE
1.2.1. Multiple-choice questions sample

Type 1: Accounting equation
Example 1:
Which of the following equation is an incorrect form of equation in accounting
sector?
A. Assets + Stockholders‟ equity = Liabilities
B. Assets = Equities

C. Assets – Liabilities = Stockholders‟ equity
D. Assets = Liabilities + Stockholders‟ equity
Explanation and answer:
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Both of business liabilities and stockholders‟ equity show the sources of an
existing group of assets, therefore, the basic accounting equation form must always be
in balance as following:
Assets = Liabilities + Stockholders‟ Equity
From the basic form, it is not difficult to identify the (D) is an incorrect form.
Example 2:
At the end of December 31, 20XX, Quitz Company has the assets of $35,500 and
owner‟s equity of $26,000. What are the Quitz Company‟s liabilities as of the end of
December 31, 20XX?
A. $10,500

B. $9,500

C. $8,500

D. $7,500

Explanation and answer:
A specific moment in time of business, the accounting equation is always in
balance: Assets =
Liabilities + Stockholders‟ Equity. Bases on this equation, the liability for Quitz
Company has been calculated: $35,500 − $26,000 = $9,500. This means the (B) is
correct answer.

Type 2: Assets and equity or the resource of assets
Example 1:
Which of the following is item increases owner‟s equity?
A. Drawings

C. Rent Expense

B. Salaries and Wages Expense

D. Service Revenue

Explanation and answer:
Drawings is owner‟s drawings that decreases owner‟s equity. Rent Expense is an
expense that decreases owner‟s equity. Salaries and Wages Expense is an expense that
decreases owner‟s equity Service Revenue is revenue that increases owner‟s equity. For
all, Service Revenue is item increases owner‟s equity.
Example 2:
When the stockholders invest cash in the business, what is the effect?
A. Both assets and liabilities increase
B. Both assets and stockholders‟ equity increase
C. Liabilities increase and stockholders‟ equity increases
D. None of the above
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Explanation and answer:
Stockholders are owners of a corporation. They buy shares of stock, which are
units of ownership, in the corporation. After the stockholders invest cash in the business
the cash of business (or assets) increase and the stockholders‟ equity also increases.
Thus, the (B) is correct answer.

Type 3: Financial Statements
Example 1:
The ending balance in retained earnings is shown in the:
A. Balance sheet

C. Income statement

B. Statement of retained earnings

D. Both (B) and (C)

Explanation and answer:
Retained earnings is the part of a company‟s surplus in a particular period that it
decides to keep, rather than paying it to shareholders as a dividend. Normally it is shown
in Balance sheet and Statement of retained earnings.
1.2.2. Exercises sample

Type 1: Accounting equation
Example 1:
Using the following abbreviations to classify each of the following as elements of
the accounting equation: A = Assets; L = Liabilities; E = Equity.
A. Land

D. Accounts Payable

B. Owners‟ Investment

E. Accounts Receivable

C. Inventory

F. Note payable

Solution:
Base on the definition of assets, liability and capital: the assets are performed as
cash, machines, trucks, and office equipment and buildings or accounts receivable.
The Liabilities are the debts that business must pay by certain dates, such as amounts
owed to suppliers for previous purchases (accounts payable) and written promises to
pay a specific sum of money (notes payable). The equities are formed by begging
owner‟s capitals. Therefore: Land = Assets; Owners‟ investment = Equity; Inventory
= Assets; Account Payable = Liability; Accounts Receivable = Assets; and Note
Payable = Liability. (A) A; (B) E; (C) A; (D) L; (E) A; (F) L.
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Example 2:
A new company Smartmobile for $25,000 by investing $19,000 in owners‟ capital
and borrowing $6,000 in the name of the corporation from a bank. How explain the
situation of new company following the accounting equation?
Solution:
The equity in the Smartmobile is $19,000, and the bank‟s equity is $6,000. A
borrowing $6,000 from a bank is a liability because you owe the bank $6,000 and
describe $19,000 equity as stockholders‟ equity or interest in the asset. Since the owners
in a corporation are shareholders, the basic accounting equation becomes: Assets =
Liabilities + Stockholders‟ Equity.
We can enter in the amount of its assets, liabilities, and stockholders‟ equity to
express in accounting equation as $25,000 = $19,000 + $6,000.

Type 2: Financial Statements

Exercise 1:
The basic accounting equation is presented as below. Fill correctly the missing
amounts.
Assets

=

Liabilities

+

Owner‟s Equity

(a)

$110,000

$60,000

?

(b)

?

$80,000

$60,000

(c)

$95,000

?

$50,000

Solution:
From the basic form: Assets = Liabilities + Stockholders‟ Equity
(a): ? = $110,000 − $60,000 = $50,000
(b): ? = $80,000 + $60,000 = $140,000
(c): ? = $95,000 − $50,000 = $45,000
Exercise 2:
On December 31/N, Cookies Company, the accounting records showed the
following information:
Accounts Payable

$39,500

Salaries Expense

$70,000

Accounts Receivable

$84,500

Service Revenue

$122,300

Cash

$58,200

Delivery Trucks

$55,500
9


Common Stock

$136,000

Utilities Expense

Dividends

$32,000

Retained Earnings

Machinery

$62,500

Rent Expense

Supplies

$12,500
X
$24,000

$8,500

Required:
1. Classify each account by Account Type (Equity, Asset, Liability, Revenue or
Expense) and what name of its financial statement (Income Statement, Statement of
Retained Earnings, or Balance Sheet) it appears on.
2. Prepare the Income Statement for year ended December 31, N.
3. Calculate the value of X (Retained Earnings beginning of December 31, N).
4. Prepare the Statement of Retained Earnings for December 31, N.
5. Prepare the Balance Sheet for December 31, N.
Solution:
1. Classify each account by Account Type:

10

Accounts Payable

Liability

Balance Sheet

Accounts Receivable

Asset

Balance Sheet

Cash

Asset

Balance Sheet

Common Stock

Equity

Balance Sheet

Dividends

Equity

Statement of Retained Earnings

Machinery

Asset

Balance Sheet

Rent Expense

Expense

Income statement

Salaries Expense

Expense

Income statement

Service Revenue

Revenue

Income statement

Supplies

Asset

Balance Sheet

Trucks

Asset

Balance Sheet

Utilities Expense

Expense

Income statement

Retained Earnings

Equity

Balance Sheet & Statement of
Retained Earnings


2. Prepare the Income Statement for year ended December 31
No.
1

Items

Amount ($)

Revenues

122,300

Service Revenue
2

122,300

Expenses

106,500

2.1

Rent Expense

24,000

2.2

Salaries Expense

70,000

2.3

Utilities Expense

12,500

3

Net income

15,800

3. Calculate the value of X
From the basic equation form:
Total Assets = Total Liability + Total Equity
And the extended form of Equity:
Equity = Common Stock – Dividends + Revenues – Expenses

(1) Total assets = Receivable + Cash + Machinery + Supplies + Trucks
= $84,500+ $58,200 + $55,500 + $62,500 + $8,500 = $269,200
(2) Total liability = Accounts Payable = $39,500
(3) Total (Liability + Equity)
= Accounts Payable + (Common Stock + Retained Earnings – Dividends) +
(Service Revenue − Salaries Expense − Utilities Expense − Rent Expense)
= $39,500 + ($136,000 + X − $32,000) + ($122,300 − $70,000 − $12,500 − $24,000)
= $39,500 + $104,000 + X + $15,800 = X + $159,300
Therefore: $269,200 = $159,300 + X  X = $109,900
4. Prepare the Statement of Retained Earnings for December 31.
Items
Retained Earnings, (Beginning)
Plus: Net income
Less: Dividends
Retained Earnings, Dec. 31

Amount
$109,900
$15,800
$32,000
$93,700

5. Prepare the Balance Sheet for December 31
Assets
Cash
Accounts Receivable
Supplies
Trucks
Machinery
Total

Amount
$58,200
$84,500
$8,500
$55,500
$62,500
$269,200

Liability and Equity
LIABILITIES
Accounts Payable
EQUITY
Common Stock
Retained Earnings
Total

Amount
$39,500
$39,500
$239,700
$136,000
$93,700
$269,200

11


1.3. PRACTICAL EXERCISES AND MULTIPLE-CHOICE QUESTIONS
1.3.1. Practical Multiple-choice questions

1. Who will give the policy decision in a large corporation?
A. Stockholders
B. Members of the board of directors
C. Employees
D. Creditor such as banks, suppliers…
2. _______ is prescribes that a company must record its expenses incurred to generate
the revenue?
A. Matching concept

C. Cost concept

B. Consistency concept

D. Conservatism concept

3. Which concept means that business enterprise is separated from its owner?
A. Going-concern concept

C. Business entity concept

B. Matching concept

D. Consistency concept

4. According to the cost concept, assets are basically recognized at _______ .
A. Fair market value

C. Net realizable value

B. Historical cost

D. Replacement value

5. According to the matching concept, Revenue –? = Profit
A. Expenses

B. Liabilities

C. Losses

D. Assets

6. The cost concept requires the valuation of an asset at __________ .
A. Historical cost.

C. Net realizable value

B. Replacement value

D. Fair market value

7. According to ________ , the comparison of the financial statement of one year with
that of another year is applied in enterprises.
A. Going concern concept

C. Consistency concept

B. Accrual concept

D. Matching concept

8. What is the meaning of the matching concept in accounting?
A. Assets = Equities + Liabilities
B. Transactions recorded at the cost concept
12


C. Anticipate no profit but recognize all losses
D. Expenses should be matched with the revenue of the period
9. Which financial statement in an enterprise is recorded at a point time?
A. Cash flow statement

C. Statement of retained earnings

B. Income Statement

D. Balance sheet

10. Which financial statement mentions the revenues and expenses of an enterprise
during a period of time?
A. Cash flow statement

C. Statement of retained earnings

B. Income Statement

D. Balance sheet

11. What is the main purpose of financial statements in accounting?
A. Organize financial information

B. Provide useful, financial information to outsiders
C. Keep track of company expenses
D. Minimize company taxes
12. According to the basic accounting equation, which below item is not included?
A. Assets

B. Revenue

C. Liabilities

D. Stockholder‟s Equity

13. The expanded accounting equation is used in ______ ?
A. Income Statement

C. Cash Flow Statement

B. Balance Sheet

D. Statement of retained earnings

14. According to the accrual concept, revenues are recorded when they are ______ .
A. Collected

C. Contracted

B. Earned

D. Readily available for use

15. Which of the following accounts is an asset?
A. Unearned Fees

C. Advertising Expense

B. Rent Payable

D. Prepaid Rent

16. Which type of accounting that supplies accounting information to the external users
like investors, creditors and government agencies?
A. Financial accounting

C. Tax accounting

B. Managerial accounting

D. Forensic accounting
13


17. Which type of accounting that supplies accounting information to the internal users
like managers and directors?
A. Tax accounting

C. Managerial or management accounting

B. Auditing

D. International accounting

18. Who are not an external user of financial accounting information?
A. Investors

B. Managers

C. Creditors

D. Customers

19. Which equation is a basic accounting equation?
A. Owner‟s Equity = Liabilities + Assets
B. Liabilities = Assets + Owner‟s Equity
C. Assets = Liabilities + Owner‟s Equity
D. Assets = Owner‟s Equity
20. According to a basic accounting equation, liabilities means the claim of external
creditors against:
A. The profit of the entity

C. The revenue of the entity

B. The assets of the entity

D. The goodwill of the entity

21. Which formula is used to calculate “Current assets“ of an enterprise?
A. Total assets – Non-current assets
B. Liabilities + Owner‟s Equity
C. Total assets – Liabilities
D. Owner‟s Equity – Long-term Assets

22. AB Company has Short-term Assets = $450,000,000; Long-term Assets =
$1,550,000,000, Liabilities = $450,000,000. Calculate value of Owner’s Equity of
AB Company?
A. $1,100,000,000

B. $1,550,000,000

C. $1,850,000,000

D. $1,800,000,000

23. ___ are the properties or rights owned by an entity.
A. Assets

C. Business resources

B. Liabilities

D. Owner‟s Equities

24. ___ a/an is the right or claim to the properties of an entity.

14

A. Asset

C. Business resource

B. Liability

D. Owner‟s Equity


25. The items are converted into cash within one year or one operating cycle are called:
A. Short-term Assets

C. Owner‟s Equity

B. Long-term Assets

D. Short-term Liabilities

26. Which answer is not a correct meanings of the accounting equation?
A. Assets – Liabilities = Owners‟ Equities
B. Assets = Liabilities + Common Stock + Retained Earnings
C. Assets = Liabilities + Owners‟ Equities
D. Liabilities = Assets + Owners‟ Equities
27. GK Corporation borrowed money from the bank in year 20XX. Where this
transaction would be reported on GK’s financial statement in 20XX?
A. Operating activities on GK‟s statement of cash flows
B. Investing activities on GK‟s statement of cash flows
C. Financing activities on GK‟s statement of cash flows
D. It would not be reported on GK‟s statement of cash flows
28. SG Inc. has accounting information: Equities are $730,000 and liabilities are
$322,000, then total assets of SG Inc. equal:
A. $408,000

B. $730,000

C. $322,000

D. $1,052,000

29. Alphal Inc. has accounting information: Short-term assets are $320,000, Long-term
Assets are $1,023,800 and Liabilities are $550,000, then equities equal:
A. $473,800

B. $793,800

C. $870,000

D. $153,800

30. The company has accounting information: Assets are $898,000 and liabilities are
$250,000, then equities equal:
A. $250,000

B. $898,000

C. $648,000

D. $1,148,000

1.3.2. Practical Exercises
Exercise 1:
1. Classify following items of LS Green Corporation to financial information and
non-financial information?
a. _____Cash of $6,900,000
b. _____An equipment that cost $53,970,000
c. _____3,200 employees

d. _____Inventories worth $17,630,000
15


e. _____730 shares of common stock
f. _____ 1,730 trucks
g. _____Sales of $98,750,000
2. Classify following items of LS Green Corporation to an asset, a liability, a
revenue, or an expense?
a. ____ Car
b. ____ Equipment
c. ____ Loan due to the bank
d. ____ Inventory
e. ____ Advertising expense
f. ____ Insurance expense
g. ____ Amounts owed to employees for work done
h. ____ New building
i. ____ Amounts owed to suppliers
j. ____ Sales
3. Classify following items of LS Green Corporation to Income Statement,
Statement of Retained Earnings, and Balance Sheet? Note: some items can be appeared
on more than one statement.
a. _____Sales Revenue
b. _____Cash
c. _____ Gain on sales of equipment
d. _____ Retained earnings
e. _____ Advertising expense
f. _____ Common stock
g. _____ Dividends paid
h. _____ Loss on sales of investment

i. _____ Income tax expense
j. _____ Net income
4. Determine whether the following items should be recorded as an expense or
an asset.
a. On December 31, an enterprise paid $26,000 to rent a building from January to
December next year.
b. On October 1, an enterprise paid $65,000 for insurance that covered the
company‟s equipment for October, November, and December of the year.
16


c. On February 15, an enterprise bought $18,600 in supplies, all of which were
used by December 31.
d. On December 31, an enterprise purchased $7,900 worth of supplies for the
coming month.
Exercise 2:
1. The following relate to Alphal Inc. for the month of September:
Sales Revenue $1,400,000

Advertising Expense $100,000

Gain on the Sales of Building $200,000

Dividends Paid $70,000

Cost of Goods Sold $750,000

Loss on Lawsuit $240,000

Tax Expense (at tax rate 21%) $107,100

a. Determine gross profit of Alphal Inc. in September.
b. Determine net income of Alphal Inc. in September.
c. If the balance of retained earnings on September 1 were $1,750,000, calculate
the value of retained earnings at the end of September?
2. Bern Company has the following account balances at the end of September,
200X. Make Bern‟s balance sheet of Bern Company based on the accounting equation.
Cash $80,000

Retained Earnings $290,000

Common Stock $1,200,000

Buildings $1,500,000

Inventories $160,000

Equipment $200,000

Notes Payable $250,000

Account payable $200,000

Exercise 3:
Based on assumption of each part of the following, calculate the missing balance.
1.

Net Income $80,000
Cost of Goods Sold $450,090
Salary Expense $53,500
Gain on Sales of Building $7,900

Income Tax Expense $50,000
Sales Revenue = ?

2.

Net Income $65,000
Retained Earnings, December 31 $162,000
Dividends $29,000
17