Accounting Cycle of a Merchandising

Business

NAME: Date:
Professor: Section: Score:

QUIZ 1: TRUE OR FALSE

1. Inventory refers to the goods that a merchandising business has

purchased with the main intention of reselling them.

2. The periodic inventory system is commonly used for inventories that

are normally interchangeable, have relatively low value, and have a
fast turnover rate.

3. Under the perpetual inventory system, increases and decreases in

inventory are recorded through the purchases, freight-in, purchase
returns, and purchase discounts accounts.

4. Under the perpetual

when inventory is soldinventory system,
and credited cost
when of is
there goods sold
a sales is debited
return.

5. Purchase returns and discounts are deducted from gross

purchases when computing for net purchases.

6. Ending inventory is added to Total Goods Available for Sale when

computing for Cost of Goods Sold.

7. Under the perpetual inventory system, the business does not maintain
records that show the running balances of inventory on hand and cost
of goods sold as at any given point of time.

8. Under periodic inventory system, all increases and decreases in

inventory, such as purchases, freight-in, purchase returns, purchase
discounts, cost of goods sold, and sales returns are recorded in the
Inventory account.

9. Beginning inventory less Net purchases less Ending inventory

equals Cost of goods sold.

10. No entry is made to recognize cost of goods sold when inventory is

sold under periodic inventory system.

“A fool shows his annoyance at once, but a prudent man overlooks an insult.”
(Proverbs 12:16)

1
KEY ANSWERS TO QUIZ 1:
1. TRUE
2. TRUE
3. FALSE (periodic)
4. TRUE
5. TRUE
6. FALSE (deducted)
7. FALSE (periodic)
8. FALSE (perpetual)
9. FALSE (plus Net purchases)
10. TRUE

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 NAME: Date:
Professor: Section: Score:

QUIZ 2: IDENTIFICATION

1. The account used to record cash discounts availed of on

purchased goods.

2. The account
shipping used
costs under on
incurred thepurchases
periodic system to record the
of inventory.

3. The type of business is that buys and sells goods without

changing their physical form.

4. The account used under periodic system to record

returns of purchased goods to the supplier.

5. The account used to record purchases of inventory under

the periodic system.

6. Under this inventory system, the “Inventory” account is

updated each time a purchase or sale is made.

7. Under this inventory system, the “Inventory” account is

updated only when a physical count is performed.

8. This account is used to recognize the cost of an inventory

that is sold as expense.

9. It is the sum of beginning inventory and net purchases

during the period.

10. It is computed by deducting ending inventory from total

goods available for sale.

“Pride goes before destruction, a haughty spirit before a fall.” (Proverbs 16:18)

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KEY ANSWERS TO QUIZ 2:
1. Purchase discount
2. Freight-in
3. Merchandising business
4. Purchase returns
5. Purchases
6. Perpetual inventory system
7. Periodic inventory system
8. Cost of goods sold (Cost of sales)
9. Total goods available for sale
10. Cost of goods sold (Cost of sales)

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 NAME: Date:
Professor: Section: Score:

QUIZ 3: MULTIPLE CHOICE

1. If debits do not equal credits, the first step to find the error is to
a. call your manager and ask for advice.
b. add the debit and credit columns again.
c. review the journal entries for errors.
d. make correcting entries rather than adjusting entries.

2. Entity A has a beginning inventory of ₱280,000. During the period Entity A

purchased inventories costing ₱890,000. Freight paid on the purchase totaled
₱30,000. If the ending inventory is ₱220,000, how much is the cost of goods sold?

a. 1,360,000
b. 980,000
c. 950,000
d. 920,000

3. Entity A has gross purchases of ₱360,000. Freight paid on the purchases amounted
to ₱50,000. Purchase discounts totaled ₱20,000 while purchase returns totaled
₱15,000. How much is the net purchases?

a. 375,000
b. 390,000
c. 410,000
d. 445,000

4. Entity A has a beginning inventory of ₱340,000. During the period Entity A

purchased inventories costing ₱990,000. Freight paid on the purchase totaled
₱40,000. The ending inventory was ₱360,000. If the net sales were ₱1,200,000, how
much is the gross profit?
a. 1,010,000
b. 1,200,000
c.190,000
d. 260,000

5. Entity A has a beginning inventory of ₱140,000. During the period Entity A

purchased inventories costing ₱790,000. Freight paid on the purchase totaled
₱10,000. The ending inventory was ₱60,000. Gross sales were ₱1,800,000 while
sales returns and discounts totaled ₱220,000. How much is the gross profit?
a. 680,000
b. 700,000
c. 780,000
d. 880,000

“liFprsohme man’s stomach is filled; with the harvest from

his
itshseatfrisufitedo.f”
h(Pirsovmerbosu1t8h:20a)

5
KEY ANSWERS TO QUIZ 3:
1.

2. B 280,000 + 890,000 + 30,000 – 220,000 = 980,000

3. A 360,000 + 50,000 – 20,000 – 15,000 = 375,000

4. C 340,000 + 990,000 + 40,000 – 360,000 = 1,010,000 Cost of goods sold;

1,200,000 – 1,010,000 = 190,000 gross profit
5. B 140,000 + 790,000 + 10,000 – 60,000 = 880,000 Cost of goods sold;
1,800,000 – 220,000 = 1,580,000 Net sales – 880,000 = 700,000 Gross profit

6
 NAME: Date:
Professor: Section: Score:

QUIZ 4: STATEMENT OF COST OF GOODS SOLD AND GROSS PROFIT

The accounts of Entity A on December 31, 20x1 show the following balances:

Gross sales 5,800,000

Sales returns 116,000
Sales discounts 1,160,000
Gross purchases 2,200,000
Freight-in 110,000
Purchase discounts 66,000
Purchase returns 22,000
Inventory, beg. 460,000
Inventory, end. 320,000

Requirement: Prepare a statement of cost of goods sold and gross profit.

“He who obeys instructions guards his life, but he who is contemptuous of
his ways will die.” (Proverbs 19:16)

7
 SOLUTION TO QUIZ 4:

Entity A
tement of Cost of goods sold and Gross profit For the period ended December 31, 20x1

Gross sales ₱ 5,800,000

Less: Sales returns and (116,000)
discounts
Less: Sales discounts (1,160,000)
Net sales 4,524,000
Cost of goods sold:
Inventory, beg. ₱ 460,000
Gross purchases 2,200,000
Freight-in 110,000
Purchase discounts (66,000)
Purchase returns (22,000)
Total goods available for sale 2,682,000
Less: Ending inventory (320,000) (2,362,000)
Gross profit ₱ 2,162,000

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 NAME: Date:
Professor: Section: Score:

QUIZ 5: UNADJUSTED TRIAL BALANCE

Entity A started operations during the period. The following were the transactions:

a. Mr. A, the sole owner of Entity A, invested ₱1,000,000 to the business.

₱
bc . EInqvueinptmoreyntcocostsintingg₱1825,0
0,00 0wwasasacaqcquiurierdedonfocrrceadsiht. Entity A uses the perpetual inventory
system.
d. Inventory costing ₱120,000 was sold for ₱400,000 on credit.
e. Accounts payable of ₱160,000 was settled.
f. Accounts receivable of ₱340,000 was collected.
g. Utilities expense of ₱60,000 was paid.
h. Salaries expense of ₱280,000 was paid.
i. Owner’s drawings during the period totaled ₱70,000.
j. Depreciation expense on the equipment for the period was ₱25,000.

Requirements:
a. Journalize the transactions above. Be sure to provide a brief description for each
journal entry.
b. Post the transactions to the general ledger. Use T-accounts for this purpose.
Arrange your T- accounts in the following order: Assets, Liabilities, Equity, Income
and Expenses.
c. Prepare the unadjusted trial balance of Entity A on December 31, 20x1. Be sure to
provide a
proper heading for the trial balance.

“The fear of the LORD is the beginning of knowledge, but fools despise
wisdom and instruction.” (Proverbs 1:7)
- END -

9
SOLUTIONS TO QUIZ:

Requirement (a): Journal entries

(a) Cash 1,000,000

Owner’s capital 1,000,000
to record the owner’s initial investment to the business
(b) Equipment Cash 250,000
to record the acquisition of equipment
Inventory 250,000
Accounts payable
(c) to record the acquisition of inventory on credit 180,000
180,000

Accounts receivable 400,000

Sale 400,000
to record credit sale
(d) Cost of sale (or Cost of goods sold)
120,000
Inventory
to charge the cost of inventories sold as expense 120,000

(e) Accounts payable 160,000

Cash 160,000
to record the settlement of accounts payable
(f) Cash
340,000
Account receivable
to record the collection of accounts receivable 340,000
Utilities expense Cash
(g) to record the payment for utilities expense 60,000
60,000

(h) Salaries expense 280,000

Cash 280,000
to record the payment for salaries expense
Owner’s drawings
(i) 70,000
Cash
to record the temporary withdrawals of the owner 70,000
Depreciation expense
(j) Accumulated depreciation - Equipment 25,000
to record the depreciation expense for the period 25,000

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Requirement (b): Posting

ASSETS

LIABILITIES

EQUITY

11
INCOME

EXPENSES

12
Requirement (c): Unadjusted Trial Balance

Entity A
Unadjusted Trial
Balance
December 31, 20x1
Dr. Cr.
Cash 520,000

Accounts receivable Inventory 60,000

Equipment 60,000
Accumulated depreciation - equipment Accounts
250,000payable
Owner's capital Owner's drawings Sales 25,000
Cost of sales Utilities expense 20,000
Salaries expense 1,000,000

70,000
400,000
120,000
60,000
280,000

Depreciation expense 25,000

Totals 1,445,000 1,445,000

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 NAME: Date:
Professor: Section: Score:

QUIZ 6: WORKSHEET AND FINANCIAL STATEMENTS

Entity A started operations on November 1, 20x1. The following were the transactions
during the period:

Nov. Transactio ns
₱
1 Provided 100,000 cash as initial investment to the business.
1 Acquired equipment for ₱72,000 cash. The equipment has a useful life of 4
years. Entity A records depreciation expense only at year-end.
1 Paid a one-year insurance premium of ₱24,000. (Use ‘asset method’)
12 Purchased inventory costing ₱30,000 for cash. (Use periodic inventory system)
14 Sold goods for ₱30,000 cash.

Dec. Transactions
1 Sold goods with sale price of ₱24,000 in exchange for a ₱24,000, 10%,
one-year note receivable. Principal and interest are due at maturity.
5 Purchased inventory for ₱4,000 on account.
26 Sold goods for ₱34,000 on account.
27 Paid ₱2,000 account payable.
29 Collected ₱20,000 account receivable.

Additional information:
• There is no beginning inventory. The ending inventory per physical count is ₱21,000.
• Entity A determines at year-end that accounts receivable of ₱2,000 is doubtful of
collection.
• Salaries earned by employees during the period but were not yet paid amounted
to₱20,000.

Requirements:
a. Provide the journal entries for the transactions.
b. Post the entries to the ledger using T-accounts.
c. Prepare the unadjusted trial balance using a worksheet.
d. Prepare the adjusting entries.
e. Complete the worksheet.
f. Prepare the closing entries.
g. Prepare the balance sheet and income statement.
h. Prepare the reversing entries to be recorded in the next accounting period.

“gPiveeasc.eDIo lneaovt eletwyitohuryhouea; rmtsybpe etarocue

bIlegdivaendyoduo. nIodt obenaotfrgaiivde.” to you as the world
(John 14:27)

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SOLUTIONS TO QUIZ 6:

Requirement (a): Journal entries

November transactions:

Nov. 1, Cash 100,000

20x1 Owner’s equity 100,000
to record the owner’s investment to the business
Nov. 1, Equipment 72,000
20x1 Cash 72,000
to record the acquisition of equipment for cash
Nov. 1, Prepaid insurance 24,000
20x1 Cash 24,000
to record the prepayment of insurance
Nov. Purchases 30,000
12,
20x1 Cash 30,000
to record the acquisition of inventory for cash
Nov. Cash 30,000
14, to record cash sales
20x1 Sales 30,000

December transactions:

Dec. 1, Notes receivable 24,000

20x1 Sales 24,000
to record sale in exchange for note
Dec. 5, 20x1
Purchases
4,000
Accounts payable
to record the acquisition of inventory on account 4,000
Accounts receivable Sales
Dec. 26, to record sale on account 34,000
20x1 Accounts payable Cash 34,000
to record the payment of account payable
Cash
Dec. 27, 2,000
Accounts receivable
20x1 to record the collection of account receivable 2,000

Dec. 29, 20,000

20x1 20,000

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Requirement (b): Posting

ASSETS
Cash Inventory, beg.
Nov. 100,000 beg. 0
1 Nov. 1
72,000
Nov. 1
24,000
Nov. 12
30,000 30,000
Nov. Dec. 27
14 20,000 2,000
Dec.
29
Bal. 22,000 Bal. 0

Accounts receivable Notes receivable

Dec. 34,000 20,000 Dec. 29 Dec. 1 24,000
26
Bal. 14,000 Bal. 24,000

Prepaid insurance Equipme

nt
Nov. 24,000 Nov. 1 72,000
1
Bal. 24,000 Bal. 72,000
LIABILITIES
Accounts payable
Dec. 27 2,000 4,000 Dec. 5

2,000 Bal.

EQUITY
Owner’s equity
100,000 Nov.1
100,000 Bal.

INCOME EXPENSES
Sales Purchase
s
30,000 Nov. Nov. 30,000
14 12
24,000 Dec. 1 Dec. 5 4,000
34,000 Dec.
26
88,000 Bal. Bal. 34,000

16
Requirement (c): Unadjusted trial balance

Entity A
Unadjusted Trial Balance December 31, 20x1

Accounts Debit Credit

Cash ₱22,000

Accounts receivable Notes

14,000receivable
Inventory, beg. Prepaid
24,000
insurance Equipment Accounts payable Owner’s equity Sales
Purchases 0
24,000
72,000
₱2,000
100,000
88,000
34,000
₱190,000 ₱190,000

Requirement (d): Adjusting entries

(i) Depreciation expense [(72K ÷ 4 yrs.) x 2/12] 3,000

Accumulated depreciation 3,000
to record the depreciation expense for the year
(ii) Insurance expense (24K x 2/12) 4,000
Prepaid insurance 4,000
to recognize insurance expense
(iii) Interest receivable (24K x 10% x 1/12) 200
Interest income 200
to accrue interest income
(iv) Inventory, end. 21,000
I n c o m e s u m 21,000
to reco g n iz e the en d in g
m a ry
inv en tory 2,000
(v) Bad debts expense
Allowance for bad debts 2,000
to record bad debts expense for
the period
(vi) Salaries expense 20,000
to accrue salaries expense incurred but not yet paid
Salaries payable 20,000

17
Requirement (e): Worksheet

18

Requirement (f): Closing entries

Dec. 31, Income summary 0

20x1 Inventory, beg. 0
to close beginning inventory to income summary
Dec. 31, Sales
88,000
20x1
Interest income 200
Purchases 34,000
Depreciation expense 3,000
Insurance expense 4,000
Bad debts expense 2,000
Salaries expense 20,000
Income summary (‘squeeze’) 25,200
to close income and expense accounts to income summary
Dec. 31, Income summary (see T-account below) 46,200
20x1 Owner’s equity 46,200
to close the income summary to equity
 Income summary

21,000
see AJE (iv) above
25,200
see closing entry above

46,200 Bal.

19

Requirement (g): Balance sheet and Income statement

Entity A Balance Sheet

As of December 31, 20x1

ASSETS
Cash ₱22,000

Accounts receivable 14,000

Allowance for bad debts (2,000)
Interest receivable 200
Note receivable 24,000
Inventory 21,000
Prepaid insurance 20,000
Equipment 72,000
Accumulated depreciation (3,000)
 TOTAL ASSETS ₱168,200

LIABILITIES
Accounts payable ₱2,000

Salaries payable 20,000

TOTAL LIABILITIES 22,000

EQUITY
Owner's equity 146,200

TOTAL LIABILITIES & ₱168,200

EQUITY

20

Entity A Income Statement

For the two months ended December 31, 20x1

Sales 88,000
Cost of goods sold:
Inventory, beg. -
Purchases 34,000
Total Goods Available for 34,000
Sale
Inventory, end. (21,000) (13,000)
GROSS PROFIT 75,000
Interest income 200
Salaries expense (20,000)
Depreciation expense (3,000)
Bad debts expense (2,000)
Insurance expense (4,000)
PROFIT 46,200

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