CHAPTER 1

Questions for Review & Discussions

1. Accounting provides all the financial information required by management to effectively run the business. It is the language of business. 2. A business is the exchange of goods or services that results in mutual benefit for both parties involved. 3. The 3 kinds of business are the following: a. Trading or Merchandising Examples Bookstores, Groceries, Hardware stores b Manufacturing Examples Philippine Refining Company - manufacturer of household products Unilever - manufacturer of drugs Toyota - manufacturer of car c. Servicing . Examples Repair Shops, Movie Houses, Educational Institutions 4. Businesses are classified as to ownership as follows: a. Sole or Single Proprietorship a business owned and managed by only one person called proprietor. b. Partnership a business owned by two or more persons called partners. c. Corporation a business owned by several persons called shareholders or stockholders. d. Cooperative a business owned by several persons called members.

5. Unlimited liability of the owner or partners means that if the business becomes bankrupt or insolvent, the creditors can still collect from the owner or partners from their personal assets. 6. A internal user refers to management while an external user refers to any other interested party outside the business. 7. The nature of accounting is information provider or communicator. 8. Accounting is the art of recording, classifying, summarizing, in a significant manner, and in terms of money, transactions and events, which are in part at least of a financial character and interpreting the results thereof.

9. The four functions of accounting are, RECORDING, CLASSIFYING, SUMMARIZING and INTERPRETING. The interpreting function is the most important function in the sense that all the information provided by the accountant will be meaningless if the reader or user can not understand or use them. 10. The branches of accounting are as follows: a. Financial Accounting deals with the reporting of past activities of the business and is intended primarily for the external users. b. Cost Accounting deals with the determination of the cost of goods manufactured and sold including the determination of the profitability of the business and inventory valuation. c. Management Accounting deals with the provision of information which is useful to management. d. Government Accounting deals with the reporting of the past activities or transactions of the government. e. Auditing deals with the verification of the fairness of the accounting reports

prepared by the accountant and to find out whether the reports are in accordance with generally accepted accounting principles. f. Taxation deals with the correct determination of the different taxes imposed upon the business by the government. 11. The principal financial statements prepared at the end of an accounting period are the Income Statement, Balance Sheet, Statement of Changes in Owners Equity, and the Statement of Cash Flows 12. Generally accepted accounting principles are principles and accounting procedures which have gained wide acceptance in the business world and by the accountancy profession because their application will result in a fair presentation of the financial statements of a business. These are principles which will guide the accountants in the practice of accountancy. 13. The three (3) fields of accounting are Private Accounting, Government Accounting and Public Accounting. 14. The following are the qualifications required: a. Is a Filipino citizen. b. Is of good moral character. c. Is a holder of the degree of Bachelor of Science in Accountancy d. Has not yet been convicted of any criminal offense involving moral turpitude. 15. There are seven (7) subjects covered in the CPA licensure examination. They are Practical Accounting Problems 1 (P1), Practical Accounting Problems 2 (P2), Management Advisory Services (MAS), Theory of Accounts (TOA), Auditing Theory (AT), Auditing Problems (AP), and Business Law and Taxation (BLT)>

EXERCISE 1
1.1 TRUE OR FALSE 1. 2. 3. 4. 5. 6. 7. 8. 9. False - Accounting is useful to everybody. False - The primary objective of a business is to make profits. True False - A managing partner is usually appointed by the partners. However a partner can participate in the management of the business being a partner. False - Management is vested in the board of directors.. True False - They are still liable up to the extent of their personal assets. True False The most important function is the interpreting function. The first three functions are merely routinary and can be easily performed by a bookkeeper. or even a computer. The accounting reports are meaningless if they can not be correctly interpreted and used by the reader. False - It is the most important function. The last is not necessarily the least. False - It shows the results of operations. False - It shows the financial condition of the business. True False - These are principles widely used and accepted in the business world and the accountancy profession. These are merely pronouncements of the the different accounting bodies or associations and have gained acceptance/ True True False - To analyze means to develop financial ratios while to interpret means to explain the significance of the financial ratios developed, False - It means that the business has a separate personality from the owner/s. True

10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

20. False - Income is recognized when earned whether collected ort not and expenses are recognized when incurred whether paid or not., 1.2 MULTIPLE CHOICES 1. B 2. C 3. C 4. C 5. C 1.3 IDENTIFICATION 1. Professional Regulation Commission (PRC) 2. Board of Accountancy (BOA) 3. Financial Reporting Standards Council (FRSC) 4. Securities & Exchange Commission (SEC) 5. Cooperative Development Authority CDA) 6. Bureau of Internal Revenue (BIR) 7. Bangko Sentral ng Pilipinas (BSP) 6. D 7. C 8. C 9. A 10. C

8. Philippine Institute of Certified Public Accountants (PICPA) 9. Association of Certified Public Accountants in Education (ACPAE) 10. Government Association of Certified Public Accountants (GACPA) 11. Association of Certified Public Accountants in Commerce & Industry (ACPACI) 12. Association of Certified Public Accountants in Public Practice (ACPAPP) 13. Philippine Accountancy Act of 2004 14. Frater Luca Bartolomes Pacioli 15. American Institute of Certified Public Accountants (AICPA) 1.4 MATCHING TYPE 1 . 2. H 3. K 4. A 5. G 7. E 8. I 9. C 10. D J 6. L

CHAPTER 2
Questions for Review & Discussions
1. The accounting values are as follows: a. Assets - are resources or properties owned by the business. b. Liabilities are amounts owed by the business. c. Capital (Owners Equity) the owners interest or claim in the assets of the business. d. Drawing the withdrawal made by the owner e. Income the revenue earned by the business. f. Expenses the costs incurred to run the business or to generate the revenue. 2. Tangible assets are assets with physical appearance while intangible assets do not have physical appearance. 3. The accounting equation is: Assets = Liabilities + Capital or Assets : The accounting equation simply means that there are only parties which have financial claim or equity in the assets of the business. They are the creditors equity represented by the liabilities and the owners equity represented by the capital. The liabilities come first before the capital to signify that the creditors have preference in the assets of the business over the owner/s in the event of liquidation. 4. A T account is an accounting device used to summarize the changes in a particular item or account. - Liabilities = Capital

5. The net profit or loss is simply computed by subtracting from the revenue earned all the cost and expenses incurred in generating such revenue. 6. An account is a name or title assigned to a particular item for recording purposes. It can also refer to any of the accounting elements or values. 7. A chart of accounts is a list of account titles or names to be used in recording the business transactions. 8. A business transaction an economic activity that directly changes a business Enterprises financial condition or the results of the business operations. It takes place when a business exchanges a thing or things of value for another.

9. The two books of accounts are the: a. Book of original entry the book where the transactions are first recorded b. Book of final entry the book where the transactions are last recorded. 10. Journalizing is the process of recording in the book of original entry while posting is the process of recording in the book of final entry. 11. Business transactions are recorded in terms of debit and credit in the journal and ledger. 12. Under the double entry method of bookkeeping, transactions are recorded in terms of debit and credit representing the two-fold effects of the transaction while under the single entry method of bookkeeping, the transactions are recorded informally without a debit and credit and the recording is not in conformity with the generally accepted accounting procedures and principles.

13. The rule is to add on the same side and subtract on the opposite side of the account or accounting element. 14. Debit the value/s received or paid for and credit the value/s given up or parted with. 15. The purpose is to check the accuracy of posting or to prove the equality of the debit and credit. 16. The kinds of trial balance are the following: a. Trial balance of balances - only accounts with balances (debit or credit balance) will appear in this trial balance. b. Trial balance of totals - The total debit and credit of all the accounts will be shown in this trial balance instead of the only the balances. c. Preliminary trial balance the trial balance before the adjusting entries are prepared. c. Adjusted trial balance - the trial balance after the adjusting entries are incorporated. d. Post-closing trial balance the trial balance after the closing entries are prepared and posted. Only the real accounts will appear n this trial balance. 17. a. Error of transposition \ Example = P 2,100 is erroneously recorded as P 1,200. b. Error of transplacement Example - P 4,000 is erroneously recorded as P 400.

EXERCISE 2
2.1 TRUE OR FALSE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. False True True True True False True False False - All assets have values.

- There is a net income if the revenue is greater than the expenses.

- Even the effects of fortuitous events in the business are recorded. - Generally, the bookkeeper is the one responsible for recording the business transactions. False - There are special journals such as combination journal, sales journal, etc. False - There is a subsidiary ledger. False - Recording of the transaction in the general journal is on a day to day basis. False - There are errors which a trial balance cannot detect such as unrecorded transaction. False- Although the trial balance is balanced (the debit is equal to the credit) It does not follow that it is error free. An error in the classification of the account will not affect the equality of the trial balance. True

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CHAPTER 3
Questions for Review & Discussions
1. Financial Statements are usually prepared at the end of the accounting period (one year) although interim financial statements (quarterly) may be prepared for BIR purposes. 2. Income Statements - shows the revenue and expenses. Balance Sheet - shows the assets, liabilities & owners equity. Statement of Changes in Owners Equity shows the increases or decreases in the owners equity. Statement of Cash Flows shows the sources and uses of cash. 3. Calendar Year a 12-month period ending December 31. Fiscal Year a 12-month period not ending December 31. Natural Business Year a 12-month period which ends in the month business activities are at their lowest. 4. a. Current assets are assets convertible into cash within one year while non-current assets are convertible beyond one year. b. Current liabilities are liabilities payable within one year while non-current liabilities are payable for more than a year. 5. a. Operating activities activities which will affect net income. b. Investing activities activities which will affect non-operating current assets and non-current assets. c. Financing activities activities which will affect non-operating current liabilities and non-current liabilities and owners equity.

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6. a. Depreciation: Depreciation Accumulated Depreciation b. Bad debts Impairment Loss Allow. Impairment Loss c. Unused supplies Unused Supplies Supplies Expense d. Expense not yet incurred but already paid Prepaid Expense Expense

xx xx xx xx xx xx xx xx

e. Expense not yet paid Expense Expense Payable

xx xx

f. Income not yet earned but already collected. Income xx Unearned Income g. Income not yet collected Income Receivable Income xx

xx

xx

7. The primary purpose of adjusting entries is to update the books for transactions not yet recorded at the end f the accounting period so that there will be proper matching of costs against revenue.

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8. The two methods are the Expense Method and the Asset Method. Under the expense method, an expense account is debited on the date of payment while under asset method, an asset account is debited. 9. The two methods are the Income Method and the Liability Method. Under the income method, and income account is credited on the date of collection while under the liability method, a liability account is credited. 10. Net realizable value applies to accounts receivable. It is the accounts receivable less the allowance for impairment loss. The carrying amount is applicable to a fixed asset. It is the cost of the fixed asset less the accumulated depreciation. 11. Interim financial statements are statements prepared before the end of the accounting period. 12. A worksheet is a columnar working paper with money columns which is used to facilitate the preparation of the financial statements. 13. A preliminary trial balance is the trial balance before adjusting entries while an adjusted trial balance is the trial balance after the adjusting entries.

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EXERCISE 3
3.1 IDENTIFICATION 1. 2. 3. 4. 5. 3.5 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Accrued Expenses 6. Unearned Income 7. Prepaid Expenses 8. Accrued Income 9. Depreciation 10. Impairment Loss Interim Statements Accounting Period Current Assets Non-Current Liabilities 11. 12. 13. 14. 15. Non-Current Assets Current Liabilities Fiscal Year Natural Business Year Calendar Year

MULTIPLE CHOICES B B D A D C A B C D A C C B B

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CHAPTER 4
Questions for Review & Discussions
1. The steps in the accounting cycle are the following: a. b. c. d. e. f. g. h. i. j. Jounalizing recording the transactions in the book of original entry. Posting recording the transactions in the book of final entry. Preliminary Trial Balance proving the equality of the debit and credit. Adjusting entries entries to update the books or to record unrecorded items at the end of the accounting period. Worksheet summarizing all the account balances including the adjustments in this columnar working paper to facilitate the preparation of the financial statements. This is however optional. Preparation of the financial statements (Income Statement, Balance Sheet, Statement of Changes in Owners Equity and Statement of Cash Flows). Closing entries closing all nominal accounts. Post-closing Trial Balance a list of all real accounts with balances.. Opening entry the entry to transfer the beginning balances to the new book. Reversing Entries the entries in the new book to reverse some adjusting entries.

2. Preliminary Trial Balance the trial balance before adjusting entries. Adjusted Trial Balance the trial balance after adjusting entries. Post-closing Trial Balance the trial balance after the closing entries. 3. Journalizing is the process of recording in the journal while posting is the process of recording in the ledger. 4. The uses of the worksheet are the following: a. Facilitate the preparation of the financial statements. b. It will serve as the basis for preparing the closing entries. c. It will serve as the basis for preparing the post-closing-trial balance. d. It will serve as the basis for preparing the opening entry. 5. Only the nominal accounts are closed by means of closing entries. They are closed by reversing the position using the Income & Expense Summary account as the balancing account. 6. Ruling the ledger simply means getting the total of the debit and credit then putting double lines under the totals. 7. The purpose of the opening entry is to transfer the ending balances of the real accounts as per the post-closing trial balance to the new book (general journal).

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8. All accruals, expenses paid in advance if the expense method is used, and income collected in advance if the income method is used. . Reversing entries are prepared for consistency in the recording of income and expenses. 9. Dec. 1 Paid two months rent in advance, P 10,000. EXPENSE METHOD Rent Expense Cash 10,000 10,000 ASSET METHOD Prepaid Rent Cash 10,000 10,000

10. Dec. 1 Collected two months rental in advance P 10,000. INCOME METHOD Cash Rental Income 10,000 10,000 LIABILITY METHOD Cash 10,000 Unearned Rental Income 10,000

11. The effects of the reversing entries may be summarized as follows: a. b. c. d. The accrued expenses payable will be closed. The accrued income receivable will be closed. The prepaid expense will be charged to expense in the following period. The pre-collected income will be recognized as income of the following period.

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Exercise 4
4.1 TRUE OR FALSE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. False - There are special journals. False - There is a subsidiary ledger. False - Only accounts with balances are shown in the trial balance. False - Adjusting entries are prepared prior to the preparation of the financial statements which is usually at the end of the accounting period or the interim financial statements which is usually at the end of the quarter. False - It is only optional. False - Only nominal accounts are closed by means of closing entries. False - Ruling the ledger means that after getting the totals of the debit and credit, a DOUBLE LINE will be placed under the total. False - The post-closing trial balance will show only the real accounts with balances. False - It can only be done away with if a computerized accounting is employed. True False - Adjusting entries are prepared to record the unrecorded items at the end of the accounting period while correcting entry is prepared to correct mistakes committed in the recording. True False - Estimated bad debts are recorded although not allowed by the BIR. True False - It is accumulated in the account Accumulated Depreciation.

4.2 MULTIPLE CHOICES 1. C 2. D 3. A 4. D 5. B 6. B 7. D 8. C 9. A 10. C

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CHAPTER 5
Questions for Review & Discussions
1. A merchandising business buys goods and sells them at their original form at a price higher than the purchase cost. 2. The common terms of purchases or sales are either COD cash on delivery or on account. 3. Trade discount is the discount given on the date of purchase while the purchase discount is given on the date of payment. Trade discount is not recorded while purchase discount is recorded. 4. a. FOB Shipping Point Freight Collect The freight will be shouldered by the buyer and the buyer will pay for the freight upon receipt of the goods ordered. b. FOB Shipping Point Freight Prepaid The freight will be shouldered by the buyer but the seller will advance the payment of the freight to be added to the account of the buyer. c. FOB Destination Freight Collect The freight will be shouldered by the seller but the buyer will pay for the freight upon receipt of the goods ordered which will be subtracted from his liability. d. FOB Destination Freight Prepaid The freight will be shouldered and paid by the seller. 5. Under the periodic inventory method, the account Purchases is used when buying The merchandise but under the perpetual inventory method, an asset account Merchandise Inventory is used to record the purchase. Upon the sale of the Merchandise, the only required is to record the revenue but under the perpetual inventory method, in addition to the entry to record the income, another entry is prepared to record the cost of sales. 6. A credit memo is a document issued by the seller acknowledging the returns made by the buyer. 7. Freight in is applicable to purchases while freight out is applicable to sales.

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13. Ruling the ledger simply refers to closing the books. a. For nominal accounts, because of the closing entries, the total of the debit and credit of all the accounts are already equal hence what is needed only is to get the total and then double line or double rule the total b. For real accounts, get the balance of each account and write the balance on the opposite side to make the debit and credit equal after which write the total and put a double line under the total. .

EXERCISE 5
5.1 IDENTIFICATION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Sales Discount Trade Discount FOB-Shipping Point Freight Prepaid FOB Destination - Freight Collect FOB Destination Freight Prepaid FOB Shipping Point Freight Collect Freight Out Sales Invoice Credit Memo Gross Profit or Gross Margin Functional Format Natural Format Freight In Ending Inventory Financing Costs

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CHAPTER 6
Questions for Review & Discussions
1. VAT means Value-added tax which is an indirect tax levied on the buyer of goods or services, or on the transferee or lessee of properties.. 2. VAT Input refers to the value added tax due on the purchase or lease of taxable goods, properties or services by a person or business entity which is registered with the BIR as VAT registrant while VAT Output is the value added tax on the sale or lease of taxable goods, or properties or services by a business entity which is registered with the BIR as VAT registrant. 3. VAT is payable monthly and quarterly. The deadline is 20 days after the end of the month. 4. Items not subject to VAT include the following: a. Agricultural products b. Books c. Newspaper and other publications d. Marine products e. Products sold at their original form. . 5. If the annual gross sales are P 1,500,000 or less, the business entity has the option to the 12% VAT or pay a percentage tax of 3% of the gross sales in the case of the sale of goods or gross receipts in the case of services.

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CHAPTER 7
Questions for Review & Discussions
1. The most common special journals are the following: a. Sales Journal b. Purchases Journal c. Cash Receipts Journal d. Cash Payments Journal The voucher register and combination journal are not widely used. 2. The advantages of using special journals are the following: a. It will facilitate the recording of the transactions. b. Commission of errors will be limited. c. It will facilitate the tracing of the errors if any. d. Responsibility can be identified. e. Entries in the general journal will be limited only to few transactions 3. If the VAT Input is greater than the VAT Output, the difference is the VAT receivable which will be offset against the VAT Payable. If the VAT Output is greater than the VAT Input, the difference represents the VAT Payable. 4. a. b. c. d. e. Sales Invoice Official Receipts Check Vouchers Petty Cash Vouchers Journal Vouchers

5. A subsidiary ledger is a 3-column journal used to record the accounts of the customers and suppliers. Controlling account is the account used for the total accounts receivable or accounts payable. 6. It is in the Vouchers where the supporting documents of the transactions are attached. The vouchers are also used for verification and audit purposes. 7. Under the Imprest Cash System, a checking account will be opened. All payments will be made by checks except small payments which will be paid out of the petty cash fund created for this purpose. All collections are deposited in tact the following business day. 8. Some of control measures to safeguard cash include the following: a. The use of cash register and cash vault. b. The cashier must not have access to the accounting records. c. All the cashiers must be bonded. d. The number of persons handling cash must be limited.

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CHAPTER 8
Questions for Review & Discussions
1. A current account also known as checking account is a bank account that allows a bank customer to deposit cash and to write checks against the account balance. 2. The advantages include the following: a. For safekeeping purposes b. For convenience in making payments c. Will provide additional record for all cash transactions. 3. A drawer is the one issuing the check and ordering the bank to make payment while the drawee is the bank on which the check is drawn. 4. The payee is the person or the entity the check is payable. 5. A check is a negotiable instrument signed by the depositor ordering the bank to pay a sum of money to a person or entity. 6. Cancelled checks are checks issued by the depositor already paid by the bank while outstanding checks are checks not yet presented to the bank for payment. 7. A bank debit memo is a form issued by the bank notifying the depositor that his account has been debited (a certain amount is subtracted) representing service and other charges. A bank credit memo is the opposite. The bank is notifying the depositor that his account is being credited (a certain amount is added) representing bank collections and or interest earned by the deposit. 8. The following are the reconciling items: a. Deposit in transit b. Outstanding checks c. Bank Collections d. DAIF (Drawn against insufficient funds) e. Interest Earned f. Bank service and other charges g. Bank error h. Book error

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EXERCISE 8
8.1 TRUE OR FALSE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. False False False True False True False True False True True True True False False It is prepared at the end of each month. It is the bank which make the adjustment. Right after the bank reconciliation, adjusting entries should be prepared. small expenses are paid out of the petty cash fund. Current account now earns interest. It is negotiable.

There is no banking law to this effect. It is added to the bank balance to get the correct cash balance.

8.2 IDENTIFICATION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Certified check Stale check Dishonored check Cancelled check Outstanding check Post-dated check Check Checkbook Debit memo Cross check 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Credit memo Drawee Payee Check stub Bank statement Deposit in transit Bank charges Deposit slip Signature card Bank reconciliation

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CHAPTER 9
Questions for Review & Discussions
1. The primary objective of analyzing and interpreting the financial statements is to evaluate the over-all performance of the business as a basis for making future plans and decisions. 2. To analyze means to develop financial ratios while to interpret means to explain the significance of the financial ratios developed. 3. Time-series analysis compares the financial ratios of the present with the past while cross sectional analysis compares the companys financial ratios with the ratios of a similar company. 4. The kinds of financial ratios are: a. Income statement ratio - the ratio of an item in the income statement to another item in the same income statement. b. Balance sheet ratio - the ratio of an item in the balance sheet to another item in the same balance sheet. c. Inter statement ratio - the ratio of an item in the income statement to an item in the balance sheet. d. Trend ratio the ratio of an item to the same item. 5. The uses of the financial ratios are the following: a. To determine the financial strengths and weaknesses of the business. b. The ratios can be used for making plans for the future. c. The ratios can be used for evaluating the performance of the business as a whole as well the performance of the different managers. 6. a. Liquidity the ability to convert non-cash current assets into cash. b. Short-term solvency the ability to pay maturing current liabilities on time. c. Long-term solvency - the ability to pay principal on long-term obligations together with the interest. d. Stability the ability to survive in the event of financial reverses or when there is financial crisis. e. Profitability the ability to earn adequate profits or earn satisfactory return to the owner/s.

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7. The standard financial ratios: a. Liquidity ratios i. Inventory Turnover = Cost of sales/Ave. Inventory ii. Age of Inventory = No.of Business Days/Inventory turnover iii. Accounts Receivable Turnover = Net Credit Sales/Ave. Accts. Recble iv. Age of Accounts Receivable = No.of Business Days/ Recble Turnover v. Operating Cycle = Age of Inventory + Age of Accts. Receivable vi. Ratio of Current Assets to Total Assets b. Short-Term Solvency ratios i. ii. iii. iv. Net Working Capital = Current Assets Current Liabilities. Current Ratio = Current Assets/Current liabilities Net Monetary Assets = Quick Assets Current Liabilities Quick ratio - Quick assets/Current Liabilities

c. Long-Term Solvency ratios i. Times Interest Earned ratio = Net profit before interest/Interest Expense ii. Debt-Service Coverage ratio = Net profit before interest Principal + Interest Exp. d. Stability ratios i. ii. iii. iv. Debt ratio = Total Liabilities/Total Assets Equity ratio = Owners Equity/Total Assets Debt-Equity ratio = Total Liabilities/Owners Equity Equity-Debt ratio = Owners Equity/Total Liabilities

e. Profitability ratios i. Gross Profit rate = Gross Profit/Net Sales or Gross Profit/Cost of Sales ii. Operating ratio = Cost of Sales + Cash Expenses Net Sales iii. Return on Sales = Net Profit/Net Sales iv. Return on Assets = Net Profit/Ave. Total Assets v. Return on Equity = Net Profit/Ave Owners Equity

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8. a. Horizontal Analysis - Under this technique, item by item in the Income Statement and Balance Sheet, compare the present amount with the past amount and get the difference. The peso change difference, to be more significant or meaningful, is expressed as a percentage. If there is a decrease, an asterisk is placed before the peso change or percentage change. b. Vertical Analysis Under this technique, each item in the Income Statement is related to the net sales. The ratio of each item to net sales is expressed in percentage. In the Balance Sheet, each item is related to the total assets. The ratio of each item to the total assets is expressed in percentage. 9. There are cardinal rules to be followed when analyzing and interpreting financial Statements. Failure to follow these rules might lead into a wrong conclusion or interpretation. a. Develop not only one ratio but a group of related ratios. b. Make comparison either with the past or with a similar company or both. c. Be aware of the limitations of the financial statements. The results of the analysis will depend on the reliability, accuracy and fairness of the financial statements.

EXERCISE 9
9.1 TRUE OR FALSE 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. True False - current ratio will increase. False - the difference might be in the number of business days. False - current ratio will decrease. True True False - it measures the ability to pay the interest. False - It measures the relationship between an item in the income statement to another item in the balance sheet of the same company. False - If there are no inventories and prepaid expenses, the current ratio will be the same as the quick ratio. True False - cash is the most liquid. False - It is the reverse. False - It is the quick ratio. True True

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16. True 17. False - To analyze is to develop ratios while to interpret means to explain the significance. 18. True 19. True 20. True 9.2 MULTIPLE CHOICES (THEORY) 1. D 2. C 3. D 4. C 5. D 6. C 7. C 8. C 9. C 10. C 11. A 12. C or D 13. A 14. B 15. C

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