Exam 2

Question 1

Recording the 4 closing entries

Answer 1

1. Close credit balances in revenue accounts to income summary
2. Close debit balances in expense accounts to income summary
3. Close income summary account to owner’s capital
4. Close withdrawals to owner’s capital

Question 2

Close credit balances in revenue accounts to income summary

Answer 2

Revenues X
Income summary X

Question 3

The Accounting Cycle

Answer 3

1. Analyze transactions
2. Journalize
3. Post
4. Prepare unadjusted trial balance
5. Adjust
6. Prepare adjusted trial balance
7. Prepare statements
8. Close
9. Prepare post-closing trial balance
10. Reverse (optional)

Question 4

The 4 entries for sales transactions

Answer 4

Cash or accounts receivable x
Sales x
Cost of goods sold x
Merchandise Inventory x

Question 5

Close debit balances in expense accounts to income summary

Answer 5

Income Summary X

Expenses X

Question 6

List of normal balances

Answer 6

Normal + -
Assets dr dr cr
Contras assets cr cr dr
Liabilities cr cr dr
Acct Receivable dr dr cr
Acct Payable cr cr dr
Revenue cr cr dr
Contra Revenue dr dr cr
Expenses dr dr cr
Income Summary n/a

Question 7

Close income summary to owner’s capital

Answer 7

For net income:
Income Summary x
Owner, capital x

For net loss:
Owner, capital x
Income summary x

Question 8

Close withdrawals account to owner’s capital

Answer 8

Owner, capital x
Owner, withdrawals x

Question 9

Closing entries progression equation

Answer 9

Closed revenue - closed expenses= income summary + owner, capital - owner, withdrawals + beginning owner, capital = ending owner, capital

Question 10

Purchase transaction accounts

Answer 10

Balance sheet accounts:
Merchandise Inventory x
Cash x
Accounts payable x

Income sheet accounts:
None

Question 11

Sales transaction accounts

Answer 11

Balance sheet accounts:
Cash x
Accounts Receivable x
Merchandise Inventory X

Income sheet accounts:
Sales discounts X
Sales return and allowances x
Sales x

Question 12

List assets

Answer 12

Current:
Cash
Merchandise inventory
Accounts receivable

Long term:
Plant equipment
Land 
Building
Bonds

Intangible:
Copyrights
Patents

Question 13

Multi-step Income statement

Answer 13

Sales X
Less: Returns X
Discounts X X
Net sales X
Cost of good sold X
Gross profit X
Operating Expenses
Selling expenses
Store related expenses X
Total selling expenses X
General and administrative expenses
Office related expenses X
Total general and administrative expenses X
Total operating expenses X
Income from operation X
Other revenue and gains
Other revenues and expenses X
Total other revenues and expenses X
Net income X
8 9

Question 14

FOB Shipping Point

Answer 14

Ownership transfers when goods passed to carrier
Buyer Merchandise Inventory X
Cash X

Question 15

FOB destination

Answer 15

Ownership transfers when goods passed to buyer
Seller Delivery Expense X
Cash X

Question 16

Sales transaction

Answer 16

Accounts receivable/cash x
Sales x
Costs of goods sold x
Merchandise Inventory x

Question 17

Entry for adjusting for shrinkage (obsolete goods, shoplifting, etc.)

Answer 17

Cost of goods sold x

Merchandise inventory x

Question 18

Single-step income statement

Answer 18

Revenues
List revenues x
Total revenues x
Expenses
List expenses x
Total expenses x
Net Income x

Question 19

Statement of owner’s equity

Answer 19

Owner, beginning capital x
Add: owner investments x
Net income x x
Owner, withdrawals x
Owner, ending capital x

Question 20

Consignee

Answer 20

Store owner

Question 21

Consignor

Answer 21

Seller

Question 22

Tracking inventory cost

Answer 22

Beginning inventory + net purchases = merchandise available for sell
or
Ending inventory + cost of goods sold = merchandise available for sell

Question 23

Inventory cost flow assumption

Answer 23

1. items included in inventory and their costs
2. costing method (specific identification, FIFO, LIFO, or weighted average)
3. inventory system (perpetual or periodic)
4. Use of market values or other estimates

Question 24

FIFO vs LIFO

Answer 24

Cost: Increasing: Decreasing:
Cost of merchandise sold LIFO FIFO
Gross profit FIFO LIFO
Net income FIFO LIFO
Ending merchandise inventory FIFO LIFO

Question 25

Understating ending inventory

Answer 25

Cost of goods: Overstated

Net income: Understated

Question 26

Understating beginning inventory

Answer 26

Costs of goods: understated

Net income: overstated

Question 27

Overstating ending inventory

Answer 27

Costs of goods: understated

Net income: overstated

Question 28

Overstating beginning inventory

Answer 28

Cost of goods: overstated

Net income: understated

Question 29

Fundamental System Principles

Answer 29

1. Control
2. Relevance
3. Compatibility
4. Flexibility
5. Cost benefit

Question 30

Control Principle

Answer 30

Accounting systems must have internal system

Question 31

Relevance principle

Answer 31

Accounting systems should report useful, understandable timely and pertinent info

Question 32

Compatibility principle

Answer 32

Accounting systems should conform with the company’s activities, personnel, and structure

Question 33

Flexibility principle

Answer 33

Accounting systems able to adjust to changes

Question 34

Cost benefit principle

Answer 34

Benefits outweigh the cost

Question 35

Components of accounting systems

Answer 35

Source documents, input device, information processor, information storage, output device

Question 36

Special journals

Answer 36

If cash is involved: 
cash receipts (incoming)
cash disbursement (outgoing)

If not:
sales (credit)
purchase (credit)
general

Question 37

Enterprise Resource Software

Answer 37

ERP: Programs that manage and integrate the company’s vital operations