Accounting Exam Review PDF

Accounting Exam Review Part 1: True or False /40 Income Statement - Merchandising Business: Gross Profit -> Revenue - Cost of Goods Sold Accounting Cycle -> the complete sequence of accounting activities which occur during the fiscal period. 1- Identify Transaction 2- Record Transaction 3- Post to...

Accounting Exam Review Part 1: True or False /40 Income Statement - Merchandising Business: Gross Profit -> Revenue - Cost of Goods Sold Accounting Cycle -> the complete sequence of accounting activities which occur during the fiscal period. 1- Identify Transaction 2- Record Transaction 3- Post to the General Ledger 4- Calculate Unadjusted Trial Balance 5- Make Adjusting Entries 6- Creat Adjusted Trial Balance 7-Create Financial Statments 8- Make Closing Entries Cost of Goods Sold -> The largest single cost for a merchandising firm. = Starting Inventory + Purchases - Ending Inventory Perpetual Inventory System -> Business keep an ongoing and specific record of inventory as items are purchased and sold. A physical count still needs to be done at year end to compare book and actual values.In a perpetual system cost of goods sold is not something that is calculated at the year end. Rather cost of goods sold is an account in the ledger. When a sale is made under the perpetual system, two entries in the books of the business must be completed. The first entry identifies the sale at the selling price. A second entry shows the merchandise going out of the business and the inventory account decreasing by the cost price of the goods (the price the business paid for the merchandise). Periodic Inventory System -> The value of the inventory is calculated only at the end of the fiscal period. A physical count of the merchandise inventory is taken.This inventory of product provides the dollar value for the ending inventory for the fiscal period. The ending inventory from one fiscal period is also the beginning inventory for the next fiscal period.The income statement for a merchandising company has an additional section called the Cost of Goods Sold.On the worksheet, the beginning inventory figure appears in the debit column of the trial balance and the debit column of the income statement. The ending inventory appears in the credit column of the income statement and debit column of the balance sheet. When merchandise is purchased in a periodic system, it is recorded in the purchases account at cost price, not in the merchandise inventory account like it would be under the perpetual inventory system. merchandise inventory account is only updated at the end of the fiscal period Matching Principle -> Under the accrual basis of accounting, expenses should be recorded in the same fiscal period as the revenues they helped to earn (i.e., when expenses were incurred and/or the bill is received) and not necessarily when payment is ultimately delivered. FIFO -> goods that are purchased first are sold first. F.O.B Destination -> Free On Board Destination, term used in shipping agreements that defines when the ownership and responsibility of goods transfer from the seller to the buyer. Under FOB destination terms: 1.​ The seller retains ownership and responsibility for the goods until they are delivered to the buyer's specified location 2.​ The seller is responsible for freight charges and any damage or loss that occurs during transit 3.​ The buyer does not record inventory or related liabilities until the goods are received, which can affect their working capital and cash flow management 4.​ The seller can only recognize revenue once the goods reach the buyer's specified location and the title transfers 5.​ The seller typically records shipping costs as part of the cost of sales until the point of delivery Worksheet for Merchandising Inventory System -> On the worksheet for a merchandising firm, you will have both beginning and ending inventory figures. The beginning inventory figure appears in the debit column of the trial balance and the debit column of the income statement. The ending inventory appears in the credit column of the income statement and debit column of the balance sheet. Freight-In -> The cost of having goods or materials delivered to a business for manufacture or resale. Merchandise Inventory -> The goods that a business buys and then re-sells to its customers Merchandise Inventory - Closing Process -> To close the revenue accounts, debit each revenue account to bring the account balance to zero and credit the Revenue and Expense Summary account. To close the expense accounts, debit the Revenue and Expense Summary account and credit each expense account to bring the balance in each account to zero. To close the Revenue and Expense Summary account, you will debit Revenue and Expense Summary (assuming we had a net income for the fiscal period) and credit the Capital account. To close the Drawings account we need to debit the Capital account and credit the Drawings account. Inventory Valuation - Consistency Principle -> from year to year, inventory valuation should use the same method. However, if the nature of the business changes and the inventory system is no longer suitable, any changes made should be disclosed in the notes to the financial statements. Concurrent Use of Inventory Costing Methods -> 1.​ First In, First Out (FIFO): Assumes the first items purchased are the first ones sold. 2.​ Last In, First Out (LIFO): Assumes the most recently purchased items are sold first. 3.​ Weighted Average Cost (WAC): Averages the costs of inventory and sales over a period. 4.​ Specific Identification (SI): Tracks individual items and their costs precisely.  5.​ First Expired, First Out (FEFO): Prioritizes selling items with the earliest expiration dates. Net Purchases -> Represents the total value of inventory purchased by a company after accounting for various purchase-related adjustments. LIFO and Taxation -> Goods that are purchased last are sold first.LIFO is not allowed because of income tax regulations, but is occasionally used for business analysis Internal Control: NSF Cheques -> Non-Sufficient Funds Cheque is a check that cannot be processed because the account holder does not have enough money in their bank account to cover the check's amount. Deposit Ticket (Slip) -> Official bank document used to record and process monetary deposits into a bank account Cash Control Measures -> 1- Only designated personnel should be authorized to handle or have access to cash receipts. 2- Cash should be stored in safes and bank vaults. 3-Access to storage areas should be limited to authorized personnel. 4-Cash registers should be used in executing over-the-counter receipts. 5-Daily cash counts and daily comparisons of total receipts should be made 6-All personnel who handle cash receipts should be bonded and required to take vacations. 7-Cash registers that are visible to customers are an important tool in control of over-the-counter receipts Internal Control Measures -> 1-Payments made by the business should be by cheque rather than cash, except for petty cash transactions. 2-Only specified individuals should be authorized to sign cheques. 3-Different departments or individuals should be assigned the duties of approving an item for payment and paying it. 4-Prenumbered cheques should be used, and each cheque should be supported by an approved invoice or other document. 5-Blank cheques should be stored in a safe and access should be restricted to authorized personnel. 6-A cheque writing machine should be used to imprint the amount on the cheque in indelible ink. 7-Each cheque should be compared with the approved invoice before it is issued. 8-Following payment, the approved invoice should be stamped PAID. Cash Registers - Point of Sale Terminals -> Cash registers are traditional devices primarily used for: 1.​ Processing sales transactions 2.​ Storing cash securely 3.​ Calculating change POS terminals are more advanced systems that combine hardware and software to offer a wide range of functionalities: 1.​ Transaction processing for multiple payment methods (cash, credit cards, mobile payments) 2.​ Inventory management and tracking 3.​ Sales analytics and reporting 4.​ Customer data collection 5.​ Integration with online sales channels Petty Cash Fund -> Small amount of money kept on hand by a company to pay for minor, everyday business expenses. Classified under current assets in the balance sheet due to its high liquidity. Bebit your Petty Cash account and credit your Cash account. Separation of Duties -> The person who looks after assets should not also maintain the records for those assets. The work of one employee should provide a reliable basis for evaluating the work of another employee. There should be ways to cross-check this work. Asset and Liabilities: GST - Value Added Tax ->Goods and Sales Tax. Tax managed and added at each stage of the buying and selling process. Notes Payable -> liability account that represents written promises to repay borrowed money with interest within a specified time frame. typically include both principal and interest components Notes Receivable -> amounts owed that accumulate interest. Usually they are short-term, 30 to 90 days and owed by customers—also called a trade receivable. source document used in these transactions is a promissory note. current asset account. No interest is reported until it is earned. Accounts Receivable -> amounts owed by customers on account. Allowance Method of Uncollectible Accounts -> accounting technique used to estimate and account for potential bad debts or uncollectible receivables. This method follows the Generally Accepted Accounting Principles (GAAP) and adheres to the matching principle by recognizing bad debt expenses in the same period as the related sales Net Realizable Value -> Method to evaluate an asset value for inventory accounting (selling price - cost of sale) Factor Purchase -> A financial intermediary purchase receivable - pays them off, less commission and fees Aging Schedule ->a report that categorizes accounts receivable based on the length of time they have been outstanding. It provides a detailed breakdown of unpaid invoices, organized by customer and grouped into specific time intervals Supporting Notes on Terms/Concepts: Deposit Ticket -> A list of currency and cheques provided by bank Factor Purchases -> A financial intermediary purchase receivable - pays them off, less commission and fees Net Receivable Value -> Method to evaluate an asset value for inventory accounting (selling price - cost of sale) GST -> Value-added tax (in-class explanation) Petty Cash Fund -> (in-class explanation and grade 11 review) Part 2: Multiple Choice /40 Merchandising Business: 2 Types of Expenses -> Operating and Non operating expenses Physical Inventory -> A physical inventory is the process of manually counting and verifying the stock or inventory held by a business. I Perpetual Inventory System -> Above section^^ Closing Entries -> Closing entries are journal entries made at the end of an accounting period to reset temporary accounts (such as revenues, expenses, and dividends) to zero. Credit Memo -> A credit memo is a document issued by a seller to a buyer that reduces the amount owed by the buyer. It is typically used to account for adjustments, such as returned goods, overcharges, or other billing errors. Sales Returns and Allowances -> Sales Returns and Allowances is a contra-revenue account in a company's income statement. It is used to record the value of merchandise that customers have returned or the allowances (discounts or partial refunds) granted to customers for damaged or defective goods. FIFO -> Above ^^ Periodic Inventory System -> Above ^^ Purchase Returns and Allowances -> Purchase Returns and Allowances is a contra-expense account used to record the value of goods returned to suppliers or allowances (credits or reductions) granted by suppliers due to defective, damaged, or incorrect merchandise. It reduces the total purchases reported during an accounting period. Classified Balance Sheet -> A classified balance sheet organizes assets, liabilities, and equity into specific categories, providing a clear and structured view of a company’s financial position. This format groups similar accounts together, making it easier for stakeholders to analyze financial health and performance. Returned Inventory -> Returned inventory refers to goods that a buyer sends back to the seller, often due to issues like defects, damage, incorrect items shipped, or buyer’s remorse. These returns can occur at either the purchase level (the company returns items to its supplier) or the sales level (customers return items to the company). Specific Identification Method -> The Specific Identification Method is an inventory valuation method in which the actual cost of each individual item is specifically identified and directly assigned to cost of goods sold (COGS) or ending inventory. Goods Available for Sale -> Cost of goods sold + Ending inventory (also = Beginning inventory + Purchases) Lower of Cost and Market -> an accounting principle used to value inventory. It requires that inventory be reported at the lower of its original cost or its current market value. This conservative approach ensures that inventory is not overstated on the balance sheet and that potential losses are recognized promptly. Internal Controls: Remittance Advice -> A remittance advice is a document or a note sent by a customer to a supplier or vendor to inform them about the details of a payment made. It serves as a reference for the supplier to reconcile the payment with the invoice issued. Cash Control Measures -> Above ^^ Bank Reconciliation -> Bank reconciliation is the process of comparing and matching the cash balance on a company’s balance sheet with the corresponding amount on its bank statement. This process helps identify discrepancies, such as outstanding checks, deposits in transit, bank fees, or errors, and ensures that the company’s financial records align with the actual bank account balance. Adjusting Entries -> Adjusting entries are journal entries made at the end of an accounting period to update the financial records for revenues, expenses, assets, or liabilities that have not yet been fully recorded. They are necessary to: adjust those account balances that are incorrect because of the passage of time, match revenues and expenses in the correct time period and, record transactions for the period for which the source document is received after year end. Bank Errors -> Bank errors refer to mistakes made by the bank while processing transactions. These errors can cause discrepancies between the company's cash balance in its accounting records and the balance shown on the bank statement. When performing a bank reconciliation, it's important to identify and correct any errors made by the bank. Petty Cash Fund -> Above ^^ Credit Instruments: Notes Receivable -> Above ^^ Account Receivable -> Above ^^ Sales (Perpetual Inventory) -> When a sale is made under the perpetual system, two entries in the books of the business must be completed. The first entry identifies the sale at the selling price. A second entry shows the merchandise going out of the business and the inventory account decreasing by the cost price of the goods (the price the business paid for the merchandise). Bad Debts Expense -> Bad debt expense refers to the amount of accounts receivable (money owed by customers) that a business does not expect to collect. Credit Card -> 2 Forms: Bank credit cards including Visa and MasterCard or Non-bank credit cards such as Sears, Petro Canada, and American Express. The credit card issuer is the third party in the transaction. The role of the card issuer is to assume the responsibility for collecting the amount receivable. They assume the risk of non-payment and incur the costs associated with issuing cards, maintaining accounts, and collecting payments. Therefore businesses pay the credit card issuer a fee which is usually expressed as a percentage of sales. Journal entries examples: Bank Credit Cards: Example 1: Debit: Bank (Amount Paid) Debit: Credit Card Expense (% extra for using credit card) Credit: Sales (Total Amount of Bank + Credit Card Expense) Non-Bank Credit Cards:​ Debit: Account Receivable- American Express (Amount Paid) Debit: Credit Card Expense (% extra for using credit card) Credit: Sales (Total Amount of Bank + Credit Card Expense) When the Company Receives the Payment… Debit: Bank Credit: Accounts Receivable- American Express Debit Card -> Debit cards allow consumers to spend only what is in their bank account, while credit cards allow consumers to spend money today and pay later. Banks and other credit card issuers usually charge consumers fees for the use of debit and credit cards in addition to the fees charged to the merchants. When a debit card is used, the amount is immediately transferred from the customer's bank account to the retailer's bank account. Journal entries examples: Example 1: Debit: Bank (Amount Paid) Debit: Debit Card Expense (% extra for using Debit card) Credit: Sales (Total Amount of Bank + Debit Card Expense) Allowance Method for Uncollectible Accounts -> Above ^^ Quantity Discounts -> Provide discounts for purchasers to encourage increased volume of purchases Supporting Notes on Terms/Concepts Remittance Advice -> A letter sent by a customer to a supplier to inform the supplier that their invoice has been paid Quantity Discount -> Provide discounts for purchasers to encourage increased volume of purchases Lower of Cost and Market -> Lower of historical cost and market cost of the inventory Part 3: Procedural Exercises /40 Perpetual Merchandise Inventory: /8 -> Journal Entries Inventory Valuation - Periodic Inventory Method: /8 -> LIFO, FIFO, Average Cost Aging of Accounts Receivable Method: /8 -> Adjusting Entries Allowance Method of Estimating Uncollectible Accounts: /8 -> Journal Entries Promissory Notes:/8 -> Journal Entries Supporting Notes: Loss due to Inventory Shortage Account -> Additional Definitions: Unit 1: Assets -> items of value owned by the business. Debit = Increase, Credit = Decrease Liabilities -> claims of creditors on the assets of the business. Debit = Decrease, Credit = Increase Owners Equity -> the owner's claim on the assets of the business. Debit = Decrease, Credit = Increase Drawings -> assets withdrawn from the business by the owner for his or her personal use Debit = Increase, Credit = Decrease Revenue -> inflow of assets to the business resulting from the sale of a good or service. Debit = Decrease, Credit = Increase Expenses -> outflow of assets from the business relating to the payment of a cost associated with running the business and earning revenue. Debit = Increase, Credit = Decrease HST Recoverable -> This is a contra-liability account where businesses record the HST they paid. HST Payable -> This is a current liability account where the business records the HST it has charged its customers. Sole proprietorship -> Business owned by one person Partnership -> Allows for two or more individuals to share their expertise when opening a business. Corporation or limited company -> Allows for the selling of shares and can raise more capital. Service business -> Provides a service to its clients or customers. Merchandising business -> A company which buys goods and resells them to customers. Manufacturing business -> A business which buys product (raw material), assembles or changes it and then resells it again.