Accounting Exam Review - Part 1

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.

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.