Accounting Exam Review - Part 1
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Questions and Answers

Which inventory valuation method assumes the most recently purchased items are the first ones sold?

  • First In, First Out (FIFO)
  • Specific Identification (SI)
  • Last In, First Out (LIFO) (correct)
  • Weighted Average Cost (WAC)

    • What does the consistency principle in inventory valuation require?

  • Inventory values must be assessed quarterly.
  • The same method should be used from year to year. (correct)
  • Only the FIFO method should be used.
  • A different method should be used each year for comparison.

    • What does the term 'Net Purchases' represent in the context of inventory management?

  • Total cost of goods sold.
  • Total value of inventory purchased after adjustments. (correct)
  • Total revenue from sales.
  • Value of inventory at the end of a period.

    • Which of these best describes what an NSF cheque is?

    <p>A cheque that cannot be processed due to an account lacking sufficient funds.</p> Signup and view all the answers

    While LIFO can be used for business analysis, why is it generally not allowed for income tax regulations?

    <p>It often results in lower tax payments during times of rising costs.</p> Signup and view all the answers

    A business uses a non-bank credit card for a transaction. Which of the following entries correctly reflects the journal entry?

    <p>Debit: Accounts Receivable- Credit Card Issuer (Amount Paid) Debit: Credit Card Expense (% extra for using credit card) Credit: Sales (Total Amount of Bank + Credit Card Expense)</p> Signup and view all the answers

    What is a remittance advice?

    <p>A document sent by a customer to inform a supplier that their invoice has been paid.</p> Signup and view all the answers

    Which of the following is not a characteristic of a debit card transaction?

    <p>The customer is allowed to spend money they don't have in their bank account.</p> Signup and view all the answers

    What is the main purpose of the 'Lower of Cost and Market' method?

    <p>To determine the value of assets for financial reporting purposes.</p> Signup and view all the answers

    Which inventory valuation method assumes that the most recently purchased inventory is sold first?

    <p>Last-In, First-Out (LIFO) method</p> Signup and view all the answers

    What is the purpose of an allowance for uncollectible accounts?

    <p>To estimate the amount of accounts receivable that are likely to be uncollectible.</p> Signup and view all the answers

    What is the main difference between a debit card and a credit card?

    <p>Debit cards allow consumers to spend only what is in their bank account, while credit cards provide a line of credit.</p> Signup and view all the answers

    What is the purpose of a quantity discount?

    <p>To encourage increased volume of purchases from customers.</p> Signup and view all the answers

    What does a debit entry do to the owner's equity account?

    <p>Decreases the owner's claim on assets</p> Signup and view all the answers

    Which of the following statements about drawings is accurate?

    <p>Drawings represent assets taken for personal use</p> Signup and view all the answers

    Which accounting method is used to estimate and account for potential bad debts, aligning with the matching principle by recognizing bad debt expenses in the same period as the related sales?

    <p>Allowance Method of Uncollectible Accounts</p> Signup and view all the answers

    What is the primary purpose of an aging schedule in accounting?

    <p>To categorize accounts receivable based on the length of time they have been outstanding.</p> Signup and view all the answers

    Which account would show an increase with a credit entry?

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

    What type of account is 'Notes Payable' considered in accounting?

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

    What type of business is defined as one that buys raw materials, assembles or changes them, and resells the final product?

    <p>Manufacturing business</p> Signup and view all the answers

    What is the primary function of an HST payable account?

    <p>To manage HST charged to customers</p> Signup and view all the answers

    How is the 'Net Realizable Value' method primarily used to evaluate an asset?

    <p>To evaluate inventory based on its expected selling price less costs of sale.</p> Signup and view all the answers

    Which of the following best describes the nature of a 'Notes Receivable'?

    <p>An amount owed to a company by its customers, typically with interest.</p> Signup and view all the answers

    What does the term 'Factor Purchase' refer to in the context of accounting and finance?

    <p>A financial intermediary purchasing receivables at a discount.</p> Signup and view all the answers

    In a merchandising business, what are the two main types of expenses typically classified?

    <p>Operating and Non-operating Expenses</p> Signup and view all the answers

    What is the process of 'Physical Inventory' primarily focused on in a merchandising operation?

    <p>Manually counting and verifying the existing stock.</p> Signup and view all the answers

    Under which of the following conditions does the seller retain ownership of goods during transit?

    <p>F.O.B. Destination</p> Signup and view all the answers

    What is the journal entry to close the expense accounts at the end of a fiscal period?

    <p>Debit the Income Summary account, credit each expense account</p> Signup and view all the answers

    When does a buyer record inventory and related liabilities under F.O.B. destination terms?

    <p>When the goods are received</p> Signup and view all the answers

    What is the effect of freight-in costs on a merchandising firm?

    <p>They are added to the cost of goods sold.</p> Signup and view all the answers

    In a merchandising system, when is the merchandise inventory account typically updated?

    <p>At the end of the fiscal period</p> Signup and view all the answers

    According to the matching principle, when should expenses be recorded?

    <p>When they are incurred or when the bill is received</p> Signup and view all the answers

    On a worksheet for a merchandising firm, where does the beginning inventory figure appear?

    <p>Debit column of the trial balance and the debit column of the income statement</p> Signup and view all the answers

    Under FIFO, which goods are assumed to be sold first?

    <p>The goods that were bought first</p> Signup and view all the answers

    What is the primary purpose of a remittance advice?

    <p>To inform suppliers about payment details</p> Signup and view all the answers

    Which of the following is NOT a component of bank reconciliation?

    <p>Recording adjusting entries</p> Signup and view all the answers

    What is the significance of adjusting entries?

    <p>They ensure the matching of revenues and expenses</p> Signup and view all the answers

    How does a bank error affect a company's financial records?

    <p>It can create discrepancies between cash balances</p> Signup and view all the answers

    What must be entered into the books when a sale is made under the perpetual inventory system?

    <p>The selling price and the reduction of inventory</p> Signup and view all the answers

    Which of the following statements about bad debt expense is correct?

    <p>It is the amount of accounts receivable that will not be collected</p> Signup and view all the answers

    Which type of credit card does NOT fall under bank credit cards?

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

    What role does the credit card issuer play in a transaction?

    <p>They assume responsibility for collecting the amount receivable</p> Signup and view all the answers

    Study Notes

    Accounting Exam Review - Part 1

    • Income Statement (Merchandising Business): Gross Profit is calculated as Revenue minus Cost of Goods Sold.
    • Accounting Cycle: This refers to the complete sequence of accounting activities within a fiscal period.
    • Key Activities in the Accounting Cycle: Identifying transactions, recording transactions, posting to the general ledger, calculating the unadjusted trial balance, making adjusting entries, creating an adjusted trial balance, creating financial statements, and creating closing entries.

    Cost of Goods Sold (COGS)

    • Definition: The largest expense for a merchandising firm.
    • Calculation: Starting Inventory + Purchases - Ending Inventory.
    • Perpetual Inventory System: This system tracks inventory continuously as items are bought and sold. A physical count is required at year-end to verify the recorded values. Cost of Goods Sold is recorded in the ledger as sales occur, not at year-end.
    • Periodic Inventory System: Ending inventory and COGS calculations are done at the end of a fiscal period. A physical count is required to determine the value of ending inventory, which is then used for COGS calculation.

    Inventory Systems

    • Perpetual Inventory System: Businesses use this to track and record inventory on an ongoing basis, updating the inventory and cost of goods sold accounts as inventory is purchased and sold.
    • Periodic Inventory System: Inventory is only counted and valued at the end of the reporting period.

    Accounting Principles

    • Matching Principle: Expenses are recorded in the same period as the revenues they helped to generate, regardless of when payment is made.

    Accounting Cycle - Merchandising Business

    • Income Statement Section (Cost of Goods Sold): Merchandising businesses have an extra section on their income statements to calculate Cost of Goods Sold.

    Additional Concepts

    • Matching Principle: Expenses are matched (recorded) with the periods to which the associated revenue belongs.
    • FIFO: First-In, First-Out. Assumes the first items purchased are the first ones sold.
    • LIFO: Last-In, First-Out. Assumes the most recently purchased items are sold first.
    • Weighted Average Cost (WAC): Averages the costs of inventory and sales over a period.
    • First Expired, First Out (FEFO): Prioritizes selling items with the earliest expiration dates.
    • Specific Identification (SI): Tracks individual items and their costs precisely.

    Accounting Cycle - Merchandising Business (Part 2 - Multiple Choice)

    • Physical Inventory: Physically counting and verifying inventory.
    • Perpetual Inventory System (Continued): Key details about this system are repeated elsewhere
    • Closing Entries: Entries made at the end of an accounting period to reset temporary accounts (revenues, expenses) to zero.
    • Credit Memos: Documents reducing the amount owed by a buyer.
    • Sales Returns and Allowances: Part of the income statement, that account for returned goods or discounts on sales.
    • Purchase Returns and Allowances: A contra-expense account to record returns to suppliers or discounts on merchandise.
    • Classified Balance Sheet: Organizes accounts into categories (assets, liabilities, equity) to provide a clearer picture of financial position.
    • Inventory Valuation Methods: These are FIFO, LIFO, WAC, and Specific Identification. The details of these are summarized elsewhere.

    Internal Controls and Cash Management

    • NSF Cheques: Checks that cannot be cashed due to insufficient funds in the account.
    • Deposit Ticket: An official bank record for processed deposits.
    • Internal Control Measures: Procedures and policies to safeguard assets and financial records. Key elements are personnel authorization for handling cash, secure storage of cash, and daily reconciliation of cash counts.
    • Payments by Cheque: Preferred method over cash, except for petty cash, for security reasons.
    • Prenumbered Cheques: Cheques with unique numbers for tracking and preventing fraud.
    • Cheque Writing Machine / Indelible Ink: Enhances security by printing amounts in indelible ink; prevents alterations.
    • Comparison of Cheques and Invoices: A step to prevent errors in payments.
    • Stamping 'Paid': Verifies that an invoice has been paid.

    Additional Accounting Concepts (Part 2 - Multiple Choice)

    • Net Purchases: The total value of inventory purchased after adjusting for returns and allowances.
    • Remittance Advice: A document that informs the vendor about a payment being made.
    • Bank Reconciliation: Aligns a company's cash records with its bank statement to identify and resolve discrepancies.
    • Adjusting Entries: Update financial records for items not yet recorded due to the passage of time; important to correctly match revenues and expenses to the periods to which they belong.
    • Bank Errors: Mistakes by the bank that must be corrected during the reconciliation process.
    • Petty Cash Fund: A small amount of cash kept on hand for minor everyday expenses.
    • Credit Instruments (Notes Receivable): These are promises to repay money (representing claims) and are a type of account receivable.

    Procedural Exercises (Part 3)

    • Perpetual Merchandise Inventory: An ongoing inventory tracking system.
    • Periodic Inventory: An inventory system valued at the end of the period.
    • Inventory Valuation Methods: FIFO, LIFO, Average cost, and specific identification.
    • Aging of Accounts Receivable: Method for estimating uncollectible accounts based on how long outstanding amounts are held.
    • Allowance Method: Technique to account for the possibility of some account receivables not being collected.
    • Journal Entries: Written records of transactions in the accounting system.
    • Promissory Notes: Written promises to pay future amounts.

    Additional Accounting Definitions

    • Assets: Resources owned by the business; increase with debits, decrease with credits.
    • Liabilities: Obligations owed by the business; increase with credits, decrease with debits.
    • Owners' Equity: The residual interest in the assets of the business after deducting liabilities; increase with credits, decrease with debits
    • Drawings: Assets withdrawn from the business by the owner; increase with debits, decrease with credits.
    • Revenues: Inflows of assets resulting from sale/service; increase with credits, decrease with debits
    • Expenses: Decreases in assets from operating the business; increase with debits, decrease with credits.
    • HST Recoverable / HST Payable: Items related to the tax collected/owed from customers/suppliers.

    Merchandising vs Manufacturing Businesses

    • Merchandising Business: Buys and resells goods.
    • Manufacturing Business: Buys raw materials, processes them, and then resells the finished goods.

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    Accounting Exam Review PDF

    Description

    Prepare for your accounting exam with this comprehensive review focused on the income statement and the accounting cycle. Understand key concepts such as gross profit and the cost of goods sold (COGS) to excel in your studies. This quiz covers critical activities and definitions in merchandising accounting.

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