TRUE FALSE

• Cash and other assets that may

• When accounts do not appear on the
reasonably be expected to be realized
unadjusted trial balance but are
in cash, sold, or consumed through
needed to post adjustments, they are
the normal operations of a business,
simply added to the account title
usually longer than one year, are
column.
called current assets.
• Once the adjusted trial balance is in
• The amount of the net income for a
balance, the flow of accounts will now
period appears on both the income
go into the financial statements.
statement and the balance sheet for
• On the income statement,
that period.
miscellaneous expenses are usually
• At the end of the fiscal period,
presented as the last item without
prepaid expenses are reported on the
regard to the peso amount.
Income Statement as expenses.
• Prepaid Insurance is an example of a
• Office Equipment is an example of a
current asset.
current asset account.
• Land is an example of a plant asset.
• Capital and Drawing are reported in
• Liabilities that will be due within one
the owner's equity section of the
year or less and that are to be paid
balance sheet.
out of current assets are called
• Unearned revenues that will be
current liabilities.
earned in a relatively short period of
• Accrued taxes payable are generally
time are listed on the balance sheet
reported on the balance sheet as a
as current assets.
current liability.
• Accrued expenses are ordinarily listed
• Deferred expenses that benefit a
on the balance sheet as current
relatively short period of time are
assets.
listed on the balance sheet as current
• Accrued revenues are ordinarily listed
assets.
on the balance sheet as current
• The income statement is prepared
liabilities.
from the adjusted trial balance or the
• Examples of temporary accounts are
income statement columns on the
supplies and prepaid expenses which
work sheet.
are in the ledger for just a short time
• Accumulated Depreciation is a
before they expire.
permanent account.
• The accumulated depreciation
• The drawing account is a temporary
account is closed to the income
account.
summary account.
• The balance sheet accounts are
• The drawing account is closed to the
referred to as real or permanent
income summary account.
accounts.
• The trial balance prepared after all
• Journalizing and posting the
the closing entries have been posted
adjustments and closing entries
is called a pre-closing trial balance.
updates the ledger for the new
• Entries required to close the
accounting period.
balances of the temporary accounts
• The income summary account is
at the end of the period are called
closed to the owner's capital account. final entries.
• The post-closing trial balance will
generally have fewer accounts than
the trial balance.
• The work sheet is not considered a credit columns is Net Income or Net
part of the formal accounting records. Loss.
• The post-closing trial balance will
generally have fewer accounts than
the trial balance. FALSE
• Assets, liabilities, and owner’s capital
• In a sole proprietorship, a closing
are real accounts and do not get
entry for the drawing account
closed at the end of the period.
may not be necessary.
• The income summary account is also
• Journalizing and posting closing
known as the clearing account.
entries must be completed before
• All income statement accounts will be
financial statements can be prepared.
closed at the end of the period.
• During the closing process, some
• Once an account has been closed for
balance sheet accounts are closed and
the period, inserting a line in the
end the period with a zero balance.
balance columns zero’s out the
• Closing entries are entered directly on
account making it ready for the
to the work sheet.
following period.
• A post-closing trial balance contains
• The last step of the accounting cycle is
only asset and liability accounts.
to prepare a post-closing trial balance.
• A post-closing trial balance should be
• Financial statements should be
prepared before the financial
prepared before the closing entries
statements are prepared.
are journalized and posted.
• Balance Sheet are not considered real
• Any twelve-month accounting period
accounts.
adopted by a company is known as its
• It is not necessary to post the closing
fiscal year.
entries to the general ledger.
• A fiscal year that ends when business
• The accounting cycle begins with
activities have reached their lowest
preparing an unadjusted trial balance.
point is called the natural business
year. • The unadjusted, adjusted, and final
• The work sheet is not considered a trial balances are prepared during the
accounting cycle of a period.
part of the formal accounting records.
• The totals of the Adjusted Trial
• The work sheet is a working paper
Balance columns on a work sheet will
that accountants can use to
always be the sum of the Trial Balance
summarize adjusting entries and the
column totals and the Adjustments
account balances for the financial
column totals.
statements.
• A work sheet heading is dated for a • A net loss is shown on the work sheet
in the credit columns of both the
period of time.
Income Statement columns and the
• On the work sheet, the capital and
Balance Sheet columns.
drawing account balances are
• If the totals of the Income Statement
extended to the Balance Sheet
debit and credit columns of a work
columns.
sheet are P22,750 and P25,000,
• After the account balances have been
respectively, after all account
extended from the Adjusted Trial
balances have been extended, the
Balance columns on the work sheet,
amount of the net loss is P2,250.
the difference between the initial
• The worksheet and the financial
totals of the Balance Sheet debit and
statements both require peso signs.
• After Net Income or Loss is entered
on the work sheet, the debit column
total must equal the credit column
total for the Balance Sheet pair of
columns.
• Net income is shown on the work
sheet in the Income Statement debit
column and the Balance Sheet credit
column.
• Under a periodic inventory system,
the merchandise on hand at the end
of the year is determined by a
physical count of the inventory.
• In the periodic inventory system,
purchases of merchandise for resale
are debited to the Purchases account.
• In a periodic inventory system, the
cost of goods purchased includes the
cost of transportation-in.
• When a merchandising business is
compared to a service business, the
financial statement that
is not affected by that change is the
Statement of Owner's Equity.
• The ending merchandise inventory for
2007 is the same as the beginning
merchandise inventory for 2008.
• The form of the balance sheet in
which assets, liabilities, and owner's
equity are presented in a downward
sequence is called the report form.
• On the income statement in the
single-step form, the total of all
expenses is deducted from the total
of all revenues.
• The single-step income statement is
easier to prepare, but a criticism of
this format is that gross profit and
income from operations are not
readily available.
• Income that cannot be associated
definitely with operations, such as a
gain from the sale of a fixed asset, is
listed as Other Income on the
multiple-step income statement.
• The balance in the capital account on
the worksheet will equal the amount
presented in the balance sheet.
• Since the adjustments are entered on
the work sheet, it is not necessary to
record them in the journal or post
them to the ledger.
• In a merchandise business, sales
minus operating expenses equals net
income.
• Cost of merchandise sold is the
amount that the merchandising
company pays for the merchandise it
intends to sell.
• Merchandise inventory account is
found on the income statement.
• Under the periodic inventory system,
the cost of goods sold is equal to the
beginning merchandise inventory plus
the cost of goods purchased plus the
ending merchandise inventory.
• In a perpetual inventory system, the
Merchandise Inventory account is
only used to reflect the beginning
inventory.
• As we compare a merchandise
business to a service business, the
financial statement that changes the
most is the Balance Sheet.
• In a multi-step income statement the
peso amount for income from
operations is always the same as net
income.
• Net sales is equal to sales minus cost
of merchandise sold.
• Gross profit minus selling expenses
equals net income.
• Transportation In is the amount paid
by the company to deliver
merchandise sold to a customer.
• The cost of merchandise inventory is
limited to the purchase price less any
purchase discounts.
• If payment is due by the end of the
month in which the sale is made, the
invoice terms are expressed as n/30.
• In the Merchandising Income
Statement, sales will be reduced by
sales discounts and sales returns and
allowances to arrive at net sales.
• Other income and expenses are items
that are not related to the primary
operating activity.
• Transportation-in is considered a cost
of purchasing inventory.
• As inventory is sold in many retail
businesses, the largest expense is
created.
• Under the perpetual inventory
system, when a sale is made, both the
retail and cost values are recorded.
• Under the perpetual inventory
system, the cost of merchandise sold
is recorded when sales are made.
• Sales Returns and Allowances is a
contra-revenue account.
• A seller may grant a buyer a reduction
in selling price and this is called a
sales allowance.
• The effect of a sales return and
allowance is a reduction in sales
revenue and a decrease in cash or
accounts receivable.
• Merchandise Inventory normally has a
debit balance.
• In a perpetual inventory system,
merchandise returned to vendors
reduces the merchandise inventory
account.
• When the seller offers a sales
discount, even if borrowing has to be
done, it is generally advantageous for
the buyer to pay within the discount
period.
• When a large quantity of merchandise
is purchased, a reduction allowed on
the sale price is called a trade
discount.
• When the terms of sale are FOB
shipping point, the buyer should pay
the transportation charges.
• When merchandise that was sold is
returned, a credit to sales returns and
allowances is made.
• In a perpetual inventory system, when
merchandise is returned to the seller,
Cost of Merchandise Sold is one of the
accounts debited to record the
transaction.
• Sales Discounts is a revenue account
with a credit balance.
• Retailers record all credit card sales as
charge sales.
• A buyer who acquires merchandise
under credit terms of 1/10, n/30
has 30 days after the invoice date to
take advantage of the cash discount.
• Discounts taken by the buyer for early
payment of an invoice are credited to
Cash Discounts by the buyer.
• Under the perpetual inventory
system, a company purchases
merchandise on terms 2/10, n/30. If
payment is made within 10 days of
the purchase, the entry to record the
payment will include a credit to Cash
and a credit to Purchase Discounts.
• Purchases of merchandise are
typically credited to the merchandise
inventory account under the
perpetual inventory system.
• A deduction allowed to wholesalers
and retailers from the price of
merchandise listed in catalogs is
called cash discounts.
• Sellers and buyers are required to
record trade discounts.
• If the ownership of merchandise
passes to the buyer when the seller
delivers the merchandise for
shipment, the terms are stated as FOB
destination.
• Merchandise is sold for P4,500, terms
FOB destination, 2/10, n/30, with
prepaid transportation costs of
P250. If P800 of the merchandise is
returned prior to payment and the
invoice is paid within the discount
 period, the amount of the sales
discount is P79.
TRUE
• If merchandise costing P2,500, terms
FOB destination, 2/10, n/30, with
prepaid transportation costs of P100,
is paid within 10 days, the amount of
the purchases discount is P50.
• Comparing the merchandise entries
for the seller and the buyer, the seller
is required to record more entries for
the same transactions than the buyer.
• The chart of accounts for a
merchandise business would include
an account called Delivery Expense.
• The seller may prepay the
transportation costs even though the
terms are FOB shipping point.
• Purchased goods in transit should be
included in the ending inventory if the
goods were shipped FOB shipping
point.
• Purchased goods in transit, shipped
FOB destination, should be excluded
from ending inventory.
• If the perpetual inventory system is
used, an account entitled Cost of
Merchandise Sold is included in the
general ledger.
FALSE
• If the buyer bears the transportation
costs related to a purchase, the terms
are said to be FOB destination.
• When companies use a perpetual
inventory system, the recording of the
purchase of inventory will include a
debit to purchases.
• A business using the perpetual
inventory system, with its detailed
subsidiary records, does not need to
take a physical inventory.
• Title to merchandise shipped FOB
shipping point passes to the buyer
upon delivery of the merchandise to
the buyer's place of business.
• Closing entries for a merchandising
business are not similar to those for a
service business.
• The accounts Purchases, Purchases
Returns and Allowances, Purchases
Discounts, and Transportation In are
found on the balance sheet.