Operating Cycle and Account Classification

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Questions and Answers

What formula correctly calculates Net Sales?

Sales + Sales Discount - Sales Returns

Sales - Sales Discount - Sales Returns and Allowances (correct)

Sales - Sales Returns + Sales Discount

Sales - COGS - Total Expenses

Which of the following is NOT a step in the accounting cycle?

Analyzing business transactions

Preparing the trial balance

Transferring profits to temporary accounts (correct)

Preparing the financial statements

Which entry is correct when closing the Revenue Account?

Credit Revenue, Debit Income Summary

Credit Income Summary, Debit Expenses

Debit Revenue, Credit Owner's Equity

Debit Income Summary, Credit Revenue (correct)

What type of accounts are listed in the Post-Closing Trial Balance?

Only permanent accounts (B) Signup and view all the answers

What is the purpose of reversing journal entries?

To prevent double counting of revenues or expenses (B) Signup and view all the answers

What is the primary purpose of a Special Journal?

To record frequently occurring transactions in a specific amount (A) Signup and view all the answers

Which of the following accurately describes the General Journal?

It serves as a book of final entry for all business transactions not recorded elsewhere. (B) Signup and view all the answers

What is the role of posting in accounting?

To transfer entries from journals to specific ledger accounts. (C) Signup and view all the answers

Which journal would you use to record cash payments made by a business?

Cash Disbursement Journal (A) Signup and view all the answers

What principle dictates that revenue is recognized when services are rendered?

Accrual Principle (D) Signup and view all the answers

What is the total current liabilities reported for Interoil Corporation?

P1,050,000 (B) Signup and view all the answers

Which item is included as a non-current asset on the balance sheet?

Property, Plant and Equipment (A) Signup and view all the answers

What is the net capital of N. Bautista after accounting for the net income and drawings?

P406,000 (A), P406,000 (B), P406,000 (D) Signup and view all the answers

What is the total assets value for Interoil Corporation?

P2,500,000 (C) Signup and view all the answers

What is the total liabilities for Interoil Corporation?

P1,500,000 (D) Signup and view all the answers

What is the owner's equity reported for J. Tiu as of December 31, 2024?

P1,000,000 (A) Signup and view all the answers

Which of the following is an accurate depiction of the overall financial position of Interoil Corporation?

Total assets equal total liabilities and owner’s equity. (A) Signup and view all the answers

What is the appropriate accounting treatment for prepayments?

Debit Prepaid Expenses, Credit Expenses (A) Signup and view all the answers

How is deferred income recognized in accounting records?

Debit Unearned Income, Credit Income (D) Signup and view all the answers

What entry is made for accrued expenses?

Debit Expense, Credit Expense Payable (B) Signup and view all the answers

In the case of accrued income, which accounts are affected?

Debit Receivable, Credit Income (A) Signup and view all the answers

Which accounting entry is used for recording bad debts?

Debit Bad Debts Expense, Credit Allowance for Bad Debts (A) Signup and view all the answers

What is the formula used to calculate annual depreciation?

(Cost - Salvage Value) / Estimated Useful Life (C) Signup and view all the answers

Which account would appear under Noncurrent Assets on a trial balance?

Property (B) Signup and view all the answers

In an income statement, which of the following accounts is considered an expense?

Salary Expenses (B) Signup and view all the answers

What is a key characteristic of permanent accounts?

They include assets, liabilities, and equity. (B) Signup and view all the answers

Which financial statement primarily focuses on the company's revenues and expenses?

Statement of Financial Performance (C) Signup and view all the answers

What is the purpose of the Trial Balance?

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

How should account titles be organized in a trial balance?

By type: Revenue, Assets, Expenses, Liabilities (B) Signup and view all the answers

What is the double entry for recording depreciation expense?

Debit to Depreciation Expense and Credit to Accumulated Depreciation (C) Signup and view all the answers

What should be done with total debits and total credits in accounting records?

Total debits must equal total credits. (B) Signup and view all the answers

Which method would show unused supplies as an asset on the balance sheet?

Asset Method (D) Signup and view all the answers

What is the primary function of a sales invoice?

To provide information regarding the sale transaction. (B) Signup and view all the answers

What does the term 'Contra Account' refer to in accounting?

An account with an opposite normal balance to its related account. (A) Signup and view all the answers

Which inventory system updates the inventory account every time there are changes?

Perpetual Inventory System (D) Signup and view all the answers

What information does a validated deposit slip provide?

Confirmation of amount deposited into an account. (C) Signup and view all the answers

In which phase of accounting does the accounting journal play a key role?

Recording (A) Signup and view all the answers

How is Cost of Goods Sold (COGS) calculated?

Beginning Inventory + Purchases - Ending Inventory. (A) Signup and view all the answers

What is included in Net Purchases?

Purchases - Purchase Discounts + Freight In. (B) Signup and view all the answers

What type of transaction relates specifically to business operations?

Transactions recorded in financial records. (C) Signup and view all the answers

What does a purchase requisition slip serve to do?

List merchandise needed to be purchased by a department. (B) Signup and view all the answers

What is the purpose of a receiving report?

To verify the goods received from a vendor. (C) Signup and view all the answers

Which class of accounts typically has a normal balance of credit?

Owner's Equity (B), Liabilities (D) Signup and view all the answers

What happens when a sales discount is applied?

Cash received decreases and sales revenue decreases. (B) Signup and view all the answers

Which document is used for a written order of payment by the depositor?

Check (B) Signup and view all the answers

What is the primary difference between a perpetual and periodic inventory system?

Periodic systems update inventory accounts at physical counts. (A) Signup and view all the answers

Study Notes

Operating Cycle of Merchandising Businesses

Businesses buy goods, store them as inventory, sell them, and receive payment from customers.
Key documents include sales invoices (detailing the transaction), bills of lading (shipment details), statements of accounts (detor's debts), official receipts (proof of payment), validated deposit slips (cash proof), checks (payment orders), purchase requisitions (needed items), purchase orders (requests for goods), receiving reports (confirming delivery), and credit memorandums (returns/allowances).

Account Classification

Assets: Items owned by the company. (Normal balance is debit)
Liabilities: Debts owed by the company. (Normal balance is credit)
Owner's Equity: Owners' stake in the business. (Normal balance is credit)
Revenue/Income: Money earned by the company. (Normal balance is credit)
Expenses: Costs incurred in generating revenue. (Normal balance is debit)

Inventory Systems

Perpetual Inventory System: Updates inventory records whenever there's a change in quantity (e.g., high-value, low-volume products).
Periodic Inventory System: Updates inventory only after a physical count is performed (e.g., low-value, high-volume products).

Journaling Purchases of Inventory

Perpetual: Records purchases by debiting Inventory and crediting Cash/Accounts Payable.
Periodic: Records purchases by debiting Purchases and crediting Cash/Accounts Payable.

Journaling Sales Revenue

Perpetual: Records sales by debiting cash/accounts receivable and crediting sales. Goods available for sale are recorded by debiting sales and crediting cash/accounts receivable (cash sale) or crediting Accounts Receivable (credit sale). Cost of goods sold (COGS) is calculated.
Periodic: Records sales by debiting cash/accounts receivable and crediting sales. Goods available for sale are recorded by debiting inventory and crediting Purchases. COGS is calculated.

Transportation Costs

FOB Shipping Point: Buyer pays the freight cost (if purchased from a vendor).
FOB Destination: Seller pays the freight cost (if sold to a customer).

Cost of Goods Sold (COGS)

COGS is calculated as beginning inventory plus net purchases plus freight-in, less ending inventory.

Accounting Principles

Accrual Principle: Revenue is recognized when earned (not when cash is received). Expenses are recognized when incurred (regardless of when cash is paid). Examples include Prepayment, Deferrals, Accrued Expense, Accrued Income, Bad Debts/Doubtful Accounts, and Depreciation Expense.
Depreciation Expense: Allocating the cost of a plant asset over its useful life.
Contra Account: An account with an opposite normal balance (e.g., accumulated depreciation).

Journal

Used initially to record transactions chronologically in a systematic way (general and special journals).
Special journals are used for frequently occurring transactions (cash receipts, cash disbursements).
General journals are used for all other transactions.

Ledger

Final entry point for transactions that affect individual accounts.
Posting summarizes journal entry effects on accounts.

Adjusting Entries

Entries made before financial statements are prepared to update accounts (i.e., prepaid expenses, etc.).

Financial Statements

Written records of a company's activities and performance. Three main types:
- Income Statement: Summarizes revenues and expenses over a period.
- Statement of Changes in Equity: Tracks changes in owner equity over a period.
- Statement of Financial Position/Balance Sheet: Reports company assets, liabilities, and equity at a specific point in time.

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Description

This quiz covers the operating cycle of merchandising businesses and the classification of accounts. You'll explore key concepts such as assets, liabilities, owner's equity, revenue, and expenses, along with important documentation involved in the merchandising process. Test your understanding and get ready to ace your accounting knowledge!