Accounting Reversing Entries and Closing Books

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Questions and Answers

What is contained in a subsidiary ledger?

Inventory reports

Supporting details of general ledger accounts (correct)

Calculations for tax returns

Summary of the financial statements

Which of the following is NOT classified as an adjusting journal entry?

Estimates

Deferrals

Expenditures (correct)

Accruals

What is recorded as an accrued expense?

Unearned income

Depreciation expense

Prepaid rent

Salaries payable (correct)

What is the main purpose of preparing an adjusted trial balance?

To ensure total debits equal total credits (D) Signup and view all the answers

What does a total debit greater than total credits under the income statement column indicate?

Net Loss (B) Signup and view all the answers

In the preparation of a post-closing trial balance, which accounts are included?

Real accounts only (C) Signup and view all the answers

Which of the following actions involves closing drawings/dividend accounts?

Transferring to equity accounts (A) Signup and view all the answers

What is the output of preparing a worksheet?

Adjusting Trial Balance (B) Signup and view all the answers

What is the main purpose of reversing entries in accounting?

To simplify the recording of certain transactions (B) Signup and view all the answers

Which of the following financial statements is NOT included in the preparation of financial statements?

Income Summary Statement (ISS) (A) Signup and view all the answers

What is the primary role of the FSRSC in the Philippines?

To prepare and approve interpretations of PFRS (A) Signup and view all the answers

Which organization succeeded the International Accounting Standards Council (IASC)?

International Accounting Standards Board (IASB) (A) Signup and view all the answers

What must happen before a standard can be approved by the FSRSC?

A majority of FSRSC members must approve it (B), An exposure draft must be issued for comment (D) Signup and view all the answers

Which method is used for recording deferred income?

Prepayment method (C) Signup and view all the answers

What does cash and cash equivalents refer to in accounting?

Money readily available for unrestricted use (D) Signup and view all the answers

What is the first step in the standard setting process by the FSRSC?

Consideration of IASB pronouncements (A) Signup and view all the answers

What is the primary purpose of performing inventory estimation methods?

To provide an estimation for insurance purposes. (C), To ensure correct financial reporting in interim statements. (D) Signup and view all the answers

Which of the following is true concerning noncancellable purchase commitments?

Entities have an obligation to perform under the contract. (A) Signup and view all the answers

What is the implication of net realizable value being calculated for finished goods?

It can lead to recognizing impairment if it falls below historical cost. (A) Signup and view all the answers

When can gains from inventory losses be recovered under the principle of conservatism?

Up to the extent of the loss incurred. (A) Signup and view all the answers

What does the Gross Profit Method assume regarding Gross Profit Ratio (GPR)?

It remains constant from period to period. (B) Signup and view all the answers

What is a distinguishing factor of cancellable purchase commitments?

They can usually be canceled without repercussions. (C) Signup and view all the answers

What costs are deducted when calculating the net realizable value of raw materials?

Cost to complete and cost to sell. (C) Signup and view all the answers

Why is inventory impairment considered only for finished goods?

Impairment assessment is not applicable to raw materials and WIP. (A) Signup and view all the answers

What is considered a loss in the derecognition of receivables?

Difference between net proceeds and book value (D) Signup and view all the answers

Which of the following is NOT included in the cost of inventories according to IAS 2?

Selling costs (B) Signup and view all the answers

How should long-term receivables be presented in financial statements?

As long-term investments or non-current assets (C) Signup and view all the answers

What occurs during the write-down process for inventories?

Cost is greater than net realizable value (C) Signup and view all the answers

What type of risk must be disclosed regarding receivables?

Credit risk exposures without considering collaterals (B) Signup and view all the answers

Which of the following is included in the measurement of inventories under IAS 2?

Costs incurred to complete production (B) Signup and view all the answers

What must be estimated when measuring inventories for net realizable value?

Estimated selling price minus costs to sell (C) Signup and view all the answers

In the initial measurement of inventories, which of the following is excluded?

Storage costs (D) Signup and view all the answers

What does the retail method help to measure in the retail industry?

Large quantities of inventories (B) Signup and view all the answers

Which of the following types of investments represents a creditor relationship?

Corporate bonds (B) Signup and view all the answers

Which factor is NOT included in the estimation of net sales?

Freight costs (C) Signup and view all the answers

Which feature is commonly associated with debt securities?

Maturity value (D) Signup and view all the answers

What determines whether a security is classified as equity or debt?

The substance of the security (A) Signup and view all the answers

In the context of inventory, which of the following does NOT decrease the physical flow of inventories?

Employee discounts (B) Signup and view all the answers

What is included under equity investments?

Preference shares (D) Signup and view all the answers

Which of the following best describes 'COGAS'?

Total cost of goods available for sale (D) Signup and view all the answers

Which of the following is an example of a debt security?

Commercial papers (B) Signup and view all the answers

What is the significance of the cost-to-retail ratio in inventory estimation?

Estimates cost of unsold inventory (D) Signup and view all the answers

Study Notes

Reversing Entries

A step in the preparation of financial statements that simplifies the recording of certain transactions
Used when an adjustment entered in a previous period increases an asset account on the SFP, such as accrued expenses, prepaid expenses, accrued income, deferred income, and depreciations
For example, an entry for prepaid expenses would be reversed because it would increase an asset account; the original debit would be reversed to create a credit

Closing the Books

Process of preparing the financial statements
The standard of uniformity requires that all temporary accounts are brought to zero at the end of the period
Nominal accounts are closed to the income summary account
The steps in the closing process are:
- First, close all income accounts
- Second, close all expense accounts
- Third, close the balance of the IS account to the drawing/dividends accounts
- Fourth, close the drawing/dividends account to the equity account

The Standard (IFRS and GAAP)

PFRS are guiding principles, not laws
Paragraphs and pronouncements in bold and plain have equal authority
Bold pronouncements dictate principles, while plain text provides supporting principles
The FSRSC is currently the setting body in the Philippines
The FSRSC’s main function is to prepare interpretations of PFRS for approval by PIC
The IASB is the successor of the IASC
The chairman and members of the IASB are appointed by the PRC upon BOA and the APO
The standard-setting process includes:
- Consideration of IASB pronouncements
- Formulation of a task force to advise the FRSC
- Issuance for comment on exposure drafts
- Consideration of all comments received within the comment period
- Approval of a standard or an interpretation by a majority of FSRSC members

Cash and Cash Equivalents

Refers to money, readily available for unrestricted use
Used as a medium of exchange
Consists of cash on hand and undeposited collections
Undeposited collections include both currencies and deposits

Inventory Estimation Methods

Used to estimate the value of inventory when a physical count is impossible
Reasons for using inventory estimation methods include:
- Preparing interim financial statements
- Proving the accuracy and reasonableness of a physical count
- Estimating inventory lost in a disaster (e.g., fire)
Some common methods include:
- Gross Profit Method: Assumes that the gross profit ratio remains relatively consistent across periods
- Retail Method: Used for the large quantities of rapidly changing goods that are commonly found in the retail industry

Investment in Equity Securities

Represents a share in a company's ownership
Includes common stock, preferred stock, rights, and options to acquire shares
The substance of a security is more important than its legal form in classifying it as equity or debt

Debt Securities

Represents a creditor relationship with an entity
Features include:
- Maturity Value
- Interest Payments
- Date of Maturity
Includes:
- Corporate bonds
- BSP Treasury shares
- Government securities
- Commercial papers
- Redeemable preference shares
The substance of a security, not its legal form or structure, determines whether it will be classified as equity or debt

Valuation Adjustments

Adjusting journal entries are used to adjust accounts to reflect the correct balances at the end of the period
Adjusting journal entries can be classified into:
- Accruals: Reflects the actual amount of expense or income that has accrued during the period even if it has not yet been paid or received
- Deferrals: Reflects the actual amount of expense or income that has been paid but not recorded for the period
- Estimates: Reflects the estimated expenses or income that are likely to be incurred during the period. such as depreciation or bad debts

Worksheet/Adjusted Trial Balance

Used for preparing the adjusted trial balance before preparing the financial statements
Includes the adjusted account balances and helps to ensure that the accounts are in balance
The worksheet is a 10-column document, but it is not a formal accounting record
The worksheet's output is the adjusted trial balance

Inventory (IAS 2)

Includes:
- Goods held for sale in the ordinary course of business
- Goods in the process of production for such sale
- Materials and supplies
Initial Measurement:
- Include all costs associated with getting the inventory ready for sale
- Costs incurred in the acquisition, conversion, and other costs directly related to bringing the inventory to its present location and condition are included
- Costs not included in the cost of inventory include:
  - Abnormal waste
  - Selling costs
  - Administrative costs
  - Storage costs
Subsequent Measurement (Lower of Cost and Net Realizable Value - LCNRV):
- Inventory is recorded at the lower of its cost or its net realizable value
- NRV is the estimated selling price less the estimated costs of completion, disposal, and other costs to make the sale
Write-downs:
- A loss is recognized when the cost of an item exceeds its NRV. This loss can be direct or indirect
- Direct Loss: Recognized when the cost exceeds NRV.
- Indirect Loss: Recognized separately, creating an allowance and a separate loss on inventory

Purchase Commitments

Follow the conservatism principle and NRV recognition
Accounts payable is fixed, but purchases can go down but never go above the contract terms.
Gains can be recovered up to the extent of a loss.
Purchase commitments can be cancellable or noncancellable:
- Cancellable Purchase Commitments: Can be canceled, no journal entries are needed
- Noncancellable Purchase Commitments: Entity is obligated to perform the Purchase Commitment

Derecognition of Trade Receivables

A trade receivable is derecognized when:
- Contractual rights to receive cash expires
- The financial asset is transferred, and the company is no longer responsible for the transfer
Gain or loss = Net proceeds – Book value

Presentation of Receivables

Presented as one line item for Trade and Other Receivables under current assets
Long-term receivables are reported as Long-term investments or non-current assets

Disclosures for Receivables

Nature of receivables
Credit risk exposures
Information regarding interest rate risk exposures
Receivable financing terms and conditions
Fair values, interest income, accrued interest, and impairment losses

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Description

This quiz covers the essential concepts of reversing entries and the process of closing the books in accounting. It explains how reversing entries simplify financial statement preparation and outlines the steps necessary for closing temporary accounts. Test your understanding of these crucial accounting procedures.