Accounting Cycle for Service and Merchandising Businesses
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Questions and Answers

What is the primary purpose of a Statement of Financial Position (Balance Sheet)?

  • To report the firm’s profits or losses for a specific period
  • To summarize the changes in the owner's capital over a period
  • To show the value of a business in terms of its assets, liabilities, and owner's equity (correct)
  • To report the firm's receipt and disbursement of cash

    • A partnership agreement can be either oral or written.

    True (A)

    What are the three main categories of activities reported on a Statement of Cash Flows?

    Operating, Investing, Financing

    The ______ is a written agreement among partners that outlines the terms and conditions of the partnership.

    <p>Articles of Co-Partnership</p> Signup and view all the answers

    Match the financial statement with its corresponding purpose:

    <p>Statement of Profit and Loss (Income Statement) = Shows the value of a business in terms of its assets, liabilities, and owner's equity. Statement of Cash Flows = Reports the firm's receipt and disbursement of cash Statement of Changes in Equity = Summarizes the changes in the owner's capital during a specific period Statement of Financial Position (Balance Sheet) = Reports the firm’s profits or losses for a specific period</p> Signup and view all the answers

    Which of the following is NOT a factor considered in deciding the scheme of profit and loss sharing in a partnership?

    <p>Number of years the partner has been with the firm (A)</p> Signup and view all the answers

    The average capital is the most equitable basis for computing profit-sharing ratios because it recognizes the effects of changes in capital throughout the accounting period.

    <p>True (A)</p> Signup and view all the answers

    What are the two methods of computing average capital?

    <p>The two methods are:</p> <ol> <li>Beginning Capital + Ending Capital / 2</li> <li>Peso Month Average</li> </ol> Signup and view all the answers

    Partner salaries and allowances are usually treated as ______ of net income.

    <p>distributions</p> Signup and view all the answers

    Match the following terms with their corresponding descriptions:

    <p>Interest on capital = Compensation for the amount of capital invested by a partner Salary = Compensation for personal services rendered by a partner Bonus = Additional compensation for a partner based on the partnership's performance Beginning capital = The amount of capital invested at the start of the accounting period Ending capital = The amount of capital invested at the end of the accounting period</p> Signup and view all the answers

    Which of the following is NOT a characteristic of a partnership?

    <p>Centralized management structure (B)</p> Signup and view all the answers

    A partnership can be formed through either a written or an oral agreement.

    <p>True (A)</p> Signup and view all the answers

    What is the primary reason for forming a partnership?

    <p>To pool resources and expertise to achieve a common goal, typically profit generation.</p> Signup and view all the answers

    The legal document outlining the terms of a partnership is called the [BLANK].

    <p>Article of Co-Partnership</p> Signup and view all the answers

    Match the types of partners with their corresponding descriptions:

    <p>General Partner = Has limited liability and is not involved in the management of the firm Limited Partner = Has unlimited liability and is actively involved in the management of the firm Silent Partner = Has limited liability and is not actively involved in the management of the firm Dormant Partner = Has unlimited liability and is not actively involved in the management of the firm Ostensible Partner = Has unlimited liability and is actively involved in the management of the firm</p> Signup and view all the answers

    What type of partnership involves limited partners who are liable only to the extent of their capital contribution?

    <p>Limited Partnership (B)</p> Signup and view all the answers

    A partnership's income tax rate is always fixed at 25% regardless of its assets and taxable income.

    <p>False (B)</p> Signup and view all the answers

    List three types of contributions that can be made to a partnership.

    <p>Money, property (PPE), and industry (labor, skills, or services).</p> Signup and view all the answers

    A partnership that specializes in rendering ______s to clients is known as a [BLANK] partnership.

    <p>service</p> Signup and view all the answers

    Match the types of partnerships with their corresponding durations:

    <p>Partnership at Will = A specific term is agreed upon for the partnership's existence Partnership with a Fixed Term = The partnership can be dissolved at any time by mutual agreement or by operation of law.</p> Signup and view all the answers

    What type of partner contributes only capital and does not participate in the management of the business?

    <p>Silent Partner (A)</p> Signup and view all the answers

    A dormant partner is actively involved in the business but is not known to the public.

    <p>False (B)</p> Signup and view all the answers

    Name one advantage and one disadvantage of the partnership form of business organization.

    <p>Advantages: Pooling resources and expertise. Disadvantages: Unlimited liability for general partners.</p> Signup and view all the answers

    The process of dissolving a partnership is known as [BLANK].

    <p>dissolution</p> Signup and view all the answers

    Which of these is NOT a potential reason for the dissolution of a partnership?

    <p>Increased profitability of the partnership (D)</p> Signup and view all the answers

    Which of the following is NOT an advantage of a partnership?

    <p>Partnerships are always profitable and provide high returns on investment. (B)</p> Signup and view all the answers

    A partnership can be dissolved easily and inexpensively.

    <p>True (A)</p> Signup and view all the answers

    What is one factor that makes a partnership less attractive than a corporation in terms of raising capital?

    <p>Limited Liability</p> Signup and view all the answers

    The ______ of a general partner makes it reliable from the point of view of creditors.

    <p>unlimited liability</p> Signup and view all the answers

    What is the primary reason for a written agreement in a partnership?

    <p>To avoid misunderstandings and disputes among partners. (C)</p> Signup and view all the answers

    An Article of Co-partnership is required for all partnerships, regardless of capital amount.

    <p>False (B)</p> Signup and view all the answers

    Describe the relationship between the Capital Account and Drawing Account.

    <p>The Capital Account reflects the partner's net investment in the business, while the Drawing Account tracks the partner's withdrawal of profits or share of the partnership's net income or loss.</p> Signup and view all the answers

    A partner's equity can be increased due to their ______, ______, or ______.

    <p>Initial Investment; Additional Investment; Share in Net Income</p> Signup and view all the answers

    Which of the following is NOT a method of dividing profits and losses among partners?

    <p>According to the wishes of the creditors (C)</p> Signup and view all the answers

    In the absence of a specific agreement, profits and losses are divided equally among partners.

    <p>False (B)</p> Signup and view all the answers

    Explain how the concept of 'interest on investment' affects profit and loss sharing in a partnership.

    <p>Interest on investment is a way to compensate partners for their capital contributions, and it is usually paid before any profits are distributed. This means that the partners with larger capital contributions will receive a higher interest payment, potentially affecting the final distribution of profits.</p> Signup and view all the answers

    When no agreement exists regarding profit and loss distribution, the share of an industrial partner in the profits is determined by what is considered ______ and ______ under the circumstances.

    <p>just; equitable</p> Signup and view all the answers

    Which of the following is an example of a situation that would increase a partner's capital account?

    <p>Paying off partnership liabilities using personal funds. (A)</p> Signup and view all the answers

    The Drawing Account is a temporary account that is closed at the end of each accounting period.

    <p>True (A)</p> Signup and view all the answers

    What is the primary difference between a partnership's Capital Account and its Drawing Account?

    <p>The Capital Account represents the partner's permanent investment in the business. The Drawing Account reflects the temporary withdrawals made by the partner for personal use or for sharing of profits.</p> Signup and view all the answers

    Match the following accounting terms with their respective accounts:

    <p>Partner's Investment = Capital Account Partner's Loan to the Partnership = Loans Payable to Partner Partnership Loan to the Partner = Receivable from Partner Partner's Share of Profit = Drawing Account</p> Signup and view all the answers

    Study Notes

    Chapter 1: Accounting Cycle for Service and Merchandising Businesses

    • Journalizing: Recording business transactions.
    • T-accounts: Analyzing transactions using visual representations.
    • Trial Balance: Summarizing accounts balances.
    • Worksheet (Optional): Prepares statements prior to financial statement preparation.
    • Adjusting Entries: Making changes in accounts to match accounting period.
    • Financial Statement Preparation:
      • Statement of Profit and Loss (Income Statement): Summarizes profit or loss over a period.
      • Statement of Comprehensive Income: Reports comprehensive income items.
      • Statement of Changes in Equity: Shows changes in owner's capital.
      • Statement of Financial Position (Balance Sheet): Shows assets, liabilities, and owner's equity.
      • Statement of Cash Flows: Reports cash inflows and outflows categorized by operation, investment, and financing activities.
    • Closing Entries: Resetting income and expense account balances to zero.
    • Post-Closing Trial Balance: Verifying after closing entries.
    • Reversing Entries: (Optional) Used to simplify accounting processes for some transactions.

    Chapter 2: Nature and Formation of Partnership

    • Partnership: Two or more individuals join to operate a business for profit. Agreements may be oral or written.
    • Articles of Co-Partnership: Formal written agreement outlining partnership terms.
      • Key Elements: Partnership name, partner details, business purpose, capital contributions, rights/duties, profit/loss distribution, withdrawal procedures, accounting methods, dispute resolution.
    • Business Organizations:
      • Sole Proprietorship: One owner.
      • Partnership: Two or more owners.
      • Corporation: Legally distinct entity from owners (stockholders).
      • Cooperative: Member-owned and democratically run.
    • Partnership Characteristics:
      • Contractual Basis: Formed by agreement.
      • Voluntary Association: Parties join willingly.
      • Mutual Agency: Partners can act on behalf of the partnership.
      • Limited Life: Dissolution if partner leaves or dies.
      • Unlimited Liability (General Partners): Personal assets at risk to satisfy debts.
      • Co-ownership of Property: Partnership, not individual, owns assets.
      • Co-ownership of Profit: Profits shared based on agreed ratios.
      • Legal Entity: Separate legal identity from partners.
      • Income Tax: Partnership taxed differently than individual income.
    • Partnership Contributions: Money, property, or labor.
    • Partnership Purposes: Profit, service, social good.
    • Partner Classification (by Liability):
      • General: Unlimited liability.
      • Limited: Liability limited to investment.
    • Partner Classification (by Activity): Service, merchandising, manufacturing.
    • Partner Classification (by Object): Universal (all assets), particular (specific assets).
    • Partner Classification (by Duration): At will, fixed term.
    • Partner Classification (by Contribution): Capitalist, industrial, capitalist-industrial.
    • Partner Classification (by Liability): General, Limited (involves both general and limited partners).
    • Partner Classification (by Management): Managing, silent, nominal, secret, dormant, ostensible.
    • Partnership Advantages: Simplicity, higher capital, more flexibility, combined expertise.
    • Partnership Disadvantages: Limited longevity, restricted capital flow, liability risks, disputes, difficulty transferring ownership.
    • Articles of Co-partnership:
    • Partner's Equity:
      • Multiple capital and drawing accounts (one per partner).
      • Partner loans (credit Partner, Loan).
      • Partner borrowings (debit from partner).
      • Partner salaries (debit to Partner, Drawing).

    Chapter 3: Partnership Operation

    • Financial Statement Differences (Partnership vs. Sole Proprietorship):
      • Multiple capital accounts.
      • Statement of changes in partners' equity.
    • Partner's Capital Account: Represents investment; increases with initial/additional investments, payments of partnership liabilities using personal funds, and share in the net income.
      • Decreases with withdrawals and share in net loss.
    • Partner's Drawing Account: Reflects partner withdrawals.
    • Profit/Loss Distribution Methods:
    • By agreement; equally, fractionally, proportionally to capital, interest on capital plus remainder.
      • In absence of agreement, proportional to contributions. (Industrial partners get equitable share.)
    • Considering Profit/Loss Scheme Factors: Capital investment, services rendered, entrepreneurial ability.
    • Average Capital: A more reliable basis than beginning or ending capital; reflects changes during the period.
    • Calculating Average Capital: (Beginning Capital + Ending Capital)/2.
    • Partner Salaries: Allowances recognized as distributions of net income or net loss.
    • Partner Bonuses: Recognition for special management contributions based on firm’s earnings.
    • Journalizing Profit/Loss Distribution: Entries transfer income/loss to partner drawing accounts.

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    Description

    This quiz covers Chapter 1 of Accounting, focusing on the cycle for service and merchandising businesses. It includes key concepts like journalizing, trial balances, and the preparation of financial statements such as profit and loss statements and balance sheets. Test your knowledge of these fundamental accounting processes.

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