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VCE Accounting Units 3&4 > Unit 3 Acc Chapter 09 Review Questions > Flashcards

Unit 3 Acc Chapter 09 Review Questions Flashcards

1
Q 
RQ 9.1 // Determining Profit or Loss
Q1. Define the following terms: 
- revenues 
- expenses
- profit
A
  • revenues – inflows of economic benefits (or savings in outflows), in the form of increases in assets or reductions in liabilities, that lead to an increase in owner’s equity
  • expenses – outflows or consumptions of economic benefits (or reductions in inflows), in the form of decreases in assets or increases in liabilities, that lead to a decrease in owner’s equity
  • profit – what is left over after expenses incurred are deducted from revenues earned.
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2
Q

RQ 9.1 // Determining Profit or Loss

Q2. Explain how the Reporting Period principle assists in the calculation of profit.

A

The Reporting Period allows businesses to divide the life of the business into arbitrary periods in order to determine profit.

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3
Q

RQ 9.1 // Determining Profit or Loss

Q3. Explain how the Reporting Period principle leads to Relevance in accounting reports.

A

Once the length of the Reporting Period is determined, it is important that the calculation of profit includes only revenues and expenses, and only those revenues and expenses that have occurred during the current Reporting Period.

This ensures that the reports contain only information that is useful for decision-making and exclude information that is not useful for decision-making.

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4
Q

RQ 9.2 // Closing the Ledger

Q1. Explain the process of closing the ledger.

A

Closing the ledger involves transferring balances from revenue and expense ledger accounts to the Profit and Loss Summary account so that profit can be calculated.

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5
Q

RQ 9.2 // Closing the Ledger

Q2. Explain two reasons for closing the ledger.

A

● Transfer revenues and expenses to the Profit and Loss Summary account in order to calculate profit for the current Reporting Period.

● Reset revenue and expense accounts to zero in preparation for the next Reporting Period.

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6
Q

RQ 9.2 // Closing the Ledger

Q3. Explain why asset and liability accounts are not closed.

A

Assets and liabilities will exist into the future. That is, the Balance Sheet items involve a future benefit or future sacrifice and so should not be reset to zero, but their balances should carry forward into the next Reporting Period.

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7
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q1. Identify the three entries that will be recorded in the Profit and Loss Summary account.

A

● total revenues
● total expenses
● net profit/loss figure

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8
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q2. Referring to revenues and expenses, explain why the cross-references in the Profit and Loss Summary account are not ledger account names.

A

Instead of listing every account names, the cross-reference is simplified to ‘revenues’ or ‘expenses’ to indicate that there are a number of revenue and expense accounts linked to these total figures.

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9
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q3. Explain how the Profit and Loss Summary account would be classified in the Balance Sheet. (Beware!)

A

The Profit and Loss Summary account is a temporary account that opens (when the revenues and expenses are transferred in) and closes (when the profit or loss is transferred out) on the same day.
It’s function is simply to facilitate the calculation of profit and therefore is not entered in the Balance Sheet.

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10
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q5. Part A: Show the General Journal entries necessary to close:
● revenue accounts to the Profit and Loss Summary account

A

SIDES:

SALES REVENUE:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

STOCK GAIN:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

DISCOUNT REVENUE

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

PROFIT & LOSS SUMMARY

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Closing Revenue Accounts to P&L Summary Account

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11
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q5. Part B: Show the General Journal entries necessary to close:
● expense accounts to the Profit and Loss Summary account

A

SIDES:

PROFIT & LOSS SUMMARY:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

COST OF SALES:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

WAGES:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

ADVERTISING:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

DISCOUNT EXPENSE:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

RENT EXPENSE:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Closing expense accounts to P&L Summary account

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12
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q5. Part A: Show the General Journal entries necessary to close:
● revenue accounts to the Profit and Loss Summary account

A

SIDES:

SALES REVENUE:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

STOCK GAIN:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

DISCOUNT REVENUE

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

PROFIT & LOSS SUMMARY

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Closing Revenue Accounts to P&L Summary Account

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13
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q5. Part B: Show the General Journal entries necessary to close:
● expense accounts to the Profit and Loss Summary account

A

SIDES:

PROFIT & LOSS SUMMARY:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

COST OF SALES:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

WAGES:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

ADVERTISING:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

DISCOUNT EXPENSE:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

RENT EXPENSE:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Closing expense accounts to P&L Summary account

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14
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q5. Part C: Show the General Journal entries necessary to close:

● The Profit and Loss Summary account to the Capital account

A

SIDES:

PROFIT & LOSS SUMMARY:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

CAPITAL - (name of owner)

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Transfer of Net Profit from P&L Summary Account to Capital account.

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15
Q

RQ 9.3 // Closing Entries & the Profit & Loss Summary Account
Q5. Part C: Show the General Journal entries necessary to close:

● The Profit and Loss Summary account to the Capital account

A

SIDES:

PROFIT & LOSS SUMMARY:

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

CAPITAL - (name of owner)

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Transfer of Net Profit from P&L Summary Account to Capital account.

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16
Q

RQ 9.4 // Transferring Drawings
Q1. State one reason why transactions with the owner are recorded separately in the Drawings account (rather than directly in the Capital account).

A

It is recorded separately so that the owner’s transactions for a particular Reporting Period can be isolated.
This is useful for decision-making so that the owner can assess the level of drawings.

17
Q

RQ 9.4 // Transferring Drawings

Q2. State one reason why the Drawings account is closed to the Capital account.

A

The Drawings account is closed to the Capital account so that the Capital account can reflect the net effect of all transactions with the owner.

18
Q

RQ 9.4 // Transferring Drawings
Q3. Referring to the definition of an expense, explain why the Drawings account is not closed to the Profit and Loss Summary account.

A

Although Drawings is an outflow of economic benefits in the form of a decrease in assets that reduces owner’s equity, it is expressly excluded from the definition of an expense, as it is a transaction with the owner.

19
Q

RQ 9.4 // Transferring Drawings

Q4. Referring to one qualitative characteristic, explain why Drawings are not included in the calculation of profit.

A

Drawings is a transaction with the owner.
Thus, to include drawings in the calculation of profit would be a direct breach of relevance.

Relevance states that the accounting reports must contain all information that is useful for business decision-making; to include Drawings is to include information that is not useful for business decision-making.

20
Q

RQ 9.4 // Transferring Drawings

Q5. Show the General Journal entries necessary to close the Drawings account to the Capital account.

A

SIDES:

CAPITAL - (name of owner)

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

DRAWINGS:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Transfer of drawings account to Capital account.

21
Q

RQ 9.4 // Transferring Drawings

Q5. Show the General Journal entries necessary to close the Drawings account to the Capital account.

A

SIDES:

CAPITAL - (name of owner)

  • General Ledger // Debit
  • Subsidiary Ledger // nothing

DRAWINGS:

  • General Ledger // nothing
  • Subsidiary Ledger // Credit

Narration:
Transfer of drawings account to Capital account.

22
Q

RQ 9.5 // The Income Statement

Q1. Explain why it is necessary to prepare an Income Statement even when the profit figure is known.

A

The Income Statement details the revenues earned and expenses incurred during the Reporting Period and, in the process, shows both Gross Profit and Net Profit.

It shows the reasons why that profit/loss occurred, giving the owner far more information on which to base his or her decisions.

23
Q

RQ 9.5 // The Income Statement

Q2. Explain the relationship between the Profit and Loss Summary account and the Income Statement.

A

The Net Profit reported in the Income Statement should be the same figure determined in the Profit and Loss Summary account.
This is because both will deduct expenses incurred from revenues earned for a particular Reporting Period.

24
Q

RQ 9.5 // The Income Statement

Q3. Explain why the Income Statement is titled for the period rather than as at a particular date.

A

The information it reports is not confined to a single day, but covers a period of time.

25
Q

RQ 9.5 // The Income Statement

Q4. Explain the difference between Cost of Sales and Cost of Goods Sold.

A

Cost of Goods Sold is a heading referring to all costs incurred in getting goods into a condition and location ready for sale, with Cost of Sales simply one of the items that may be reported under this heading.

26
Q

RQ 9.5 // The Income Statement

Q5. Identify two revenues that would be classified as ‘Other Revenue’.

A

● Discount Revenue
● Interest Revenue
● Commission Revenue**???

27
Q

RQ 9.5 // Uses of the Income Statement

Q1. Explain the purpose of preparing an Income Statement.

A

The purpose is to detail individual revenue and expense items, and to identify Gross Profit and Net Profit, thus making the report more useful as a decision-making tool.

28
Q

RQ 9.5 // Uses of the Income Statement

Q2. Explain how the preparation of an Income Statement can assist decision-making.

A

It allows the owner to assess:

● the firm’s ability to earn revenue so decisions can be made about the types of stock that are held for sale, the level and/or type of advertising, or the level of selling prices

● the adequacy of the firm’s mark-up so decisions can be made about adjusting selling prices or controlling cost prices

● the firm’s ability to control its expenses so decisions can be made about managing staff wages, protecting stock from stock loss, or operating more efficiently to control operating costs.

29
Q

RQ 9.5 // Uses of the Income Statement

Q3. Explain how the preparation of an Income Statement can assist planning for the future.

A

By providing a basis for the next budget, the Income Statement will aid in the setting of targets for the future.
This may include stock levels, staffing requirements or advertising expenditure.

VCE Accounting Units 3&4 (41 decks)

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