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PART I: REVIEW
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND BUSINESS
1.1. Nature of Business and Accounting

Inputs Business Outputs Customers

Profits

1.1.1. Types of Businesses

- Three types of businesses operated for profit include:
 Service businesses: provide services rather than products to customers.
 Merchandising businesses: sell products they purchase from other businesses to
customers.
 Manufacturing businesses: change basic inputs into products that are sold to
customers.
1.1.2. The Role of Accounting in Business
- Accounting, the language of business, is an information system that provides reports to
users about the economic activities and condition of a business.

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- The process by which accounting provides information to users is as follows:

1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’ needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
- There are two types of users:
 Internal users: Managers, employees, …  Managerial accounting/ Management
accounting.
 External users: Customers, creditors, investors, government, …  Financial
accounting.
1.2. GAAP Principles
- In the U.S, Generally Accepted Accounting Principles – GAAP (published by Financial
Accounting Standards Board – FASB); Staff Accounting Bulletins (issued by Securities and
Exchange Commission – SEC).
- Outside the U.S, International Financial Reporting Standards - IFRSs (published by
International Accounting Standards Board – IASB).
1.2.1. Business Entity Concept
- Under the business entity concept, the activities of a business are recorded separately
from the activities of its owners, creditors, or other businesses.
- Forms of Business Ownership:
Form of
Characteristics
Business Entity
 Generally owned by one person.
 Often small service-type businesses.
Proprietorship
 Easy and cheap to organize.
 Resources are limited to those of the owner.

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 Owner receives any profits, suffers any losses, and is personally

liable for all debts.
 Owned by two or more persons.
 Often retail and service-type businesses.
Partnership
 Generally unlimited personal liability.
 Partnership agreement.
 Ownership divided into shares of stock.
 Separate legal entity organized under state corporation law.
Corporation
 Limited liability.
 Used by large business.
 Often used as an alternative to a partnership.
Limited liability
 Has tax and legal liability advantages for owners.
company (LLC)
 Combines the attributes of a partnership and a corporation.
1.2.2. The Cost Concept
- Under the cost concept, amounts are initially recorded in the accounting records at their
cost or purchase price.
- The objectivity concept requires that the amounts recorded in the accounting records be
based on objective evidence.
- The unit of measure concept requires that economic data be recorded in dollars.
1.3. The Accounting Equation
𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
- All business transactions can be stated in terms of changes in the elements of the
accounting equation.
- The effect of every transaction is an increase or a decrease in one or more of the
accounting equation elements.
- The two sides of the accounting equation are always equal.
- There are at least two accounts that are affected in each transaction.

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1.4. Financial Statements

Order Financial
Description of Statement Interrelationship
Prepared Statement
- A specific period of time - Net income  increase
Income
1. (month/year) owner’s equity
statement
- Revenues and expenses - Net loss  decrease
- A specific period of time owner’s equity
Statement of (month/year)
2.
owner’s equity - Changes in the owner’s Owner’s capital at the
equity end of the period is
- A specific date (dd/mm/yy) reported on both the
- Assets, liabilities, and statement of owner’s

3. Balance sheet owner’s equity equity and the balance

sheet
The cash reported on the
balance sheet is also
- A specific period of time
reported as the end of
(month/year)
period cash on the
- Cash inflows and cash
Statement of statement of cash flows
4. outflows from:
cash flows
+ Operating activities
+ Investing activities
+ Financing activities

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CHAPTER 2: ANALYZING TRANSACTIONS

2.1. Using Accounts to Record Transactions
- An account, in its simplest form, has 3 parts:  A title  Increase amount  Decrease
amount.
- Amounts entered on the left side of an account are debits, and amounts entered on the
right side of an account are credits.
- T account:
Title
Opening balance XXX XXX
Increase/Decrease Debit (Dr.) Credit (Cr.)
amount
Ending balance XXX XXX
- Types of accounts:
 Assets are resources owned by the business entity, they can be physical items or
intangibles that have value.
 Liabilities are debts owed to outsiders (creditors). They are often identified on the
balance sheet by titles that include payable.
 Owner’s equity is the owner’s right to the assets of the business after all liabilities
have been paid.
+ Capital/Drawing account: proprietorship
+ Common stock/Dividends account: corporation
 Revenues are increases in owner’s equity as a result of selling services or products
to customers.
 Expenses result from using up assets or consuming services in the process of
generating revenues.
2.2. Double-Entry Accounting System
- The double-entry accounting system is based on the accounting equation and requires that
every business transaction be recorded in at least two accounts.

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- In addition, it requires that the total debits recorded for each transaction equal the total
credits recorded and following the rules below:
Asset Accounts Liability Accounts
Increases (+) Decreases (-) Decreases (-) Increases (+)
Balance Balance
Owner’s equity Accounts Revenue Accounts
Decreases (-) Increases (+) Decreases (-) Increases (+)
Balance Balance
Owner’s Drawing/Dividend Accounts Expense Accounts
Increases (+) Decreases (-) Increases (+) Decreases (-)
Balance Balance
- The normal balance of an account is either a debit or credit depending on whether
increases in the account are recorded as debits or credits. In short, the normal balance is
always on increase side.
2.3. Journalizing
 Read the transaction carefully to determine whether an asset, a liability, an owner’s
equity, … account is affected.
 Determine whether the affected account increases or decrease.
 Following the rules of debit and credit shown in 2.2.
 Record the transaction using a journal entry.
2.4. Trial Balance
 List the name of the company, the title of trial balance, and the date (mm/dd/yy) the trial
is prepared.
 List the accounts and enter their debit or credit balance in the Debit or Credit column.
 Total the Debit and Credit columns.
 Verify that Debit = Credit.
* The trial balance may balance even when
1. A transaction is not journalized,

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2. A correct journal entry is not posted,

3. A journal entry is posted twice,
4. Incorrect accounts are used in journalizing or posting, or offsetting errors are made in
recording the amount of a transaction.

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CHAPTER 3: THE ADJUSTING PROCESS

3.1. Nature of the Adjusting Process
- The accounting period concept requires that revenues and expenses be reported in the
proper period.
- The accrual basis of accounting vs. the cash basis accounting:
+ The accrual basis of accounting:
 Revenues are reported in the period in which they are earned.
 Expenses are reported in the same period as the revenues to which they relate.
+ The cash basis of accounting: revenues and expenses are reported in which cash is
received or paid.
- The matching concept supports reporting revenues and related expenses in the same
period.
- The adjusting process is required for the following reasons:
+ Some expenses are not recorded daily.
+ Some revenues and expenses are incurred as time passes rather than as separate
transactions.
+ Some revenues and expenses may be unrecorded.
- All adjusting entries affect at least one income statement account and one balance sheet
account.
3.2. Recording Adjusting Entries
Types of accounts Description Recording
Deferrals – Cash first
The advance payment of
Dr. Expense accounts
Prepaid expenses future expenses and recorded
Cr. Prepaid accounts
as assets when cash is paid.
The advance receipt of future Dr. Unearned Revenue accounts
Unearned revenues
revenues and recorded as Cr. Revenue accounts

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liabilities when cash is

received.
Accruals – Cash last
Unrecorded revenues that
Dr. Accounts Receivable
Accrued revenues have been earned, but cash
Cr. Revenue accounts
has yet to be received.
Unrecorded expenses that
Dr. Expense accounts
Accrued expenses have been incurred, but cash
Cr. Accounts payable
has yet to be paid.
Non-cash Expense
- The decrease in usefulness
of a fixed asset.
- Accumulated depreciation
Dr. Depreciation Expense
Depreciation expense accounts are called contra
Cr. Accumulated Depreciation
asset account because its
journalizing is opposite to
asset accounts
Dr. Supplies expense
Cr. Supplies
Supplies on hand…. Opening balance of supplies –
Ending balance of supplies =
Supplies
Supplies used in the period
Dr. Supplies expense
Supplies used in this
Cr. Supplies
period….
Just copy the data as given

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CHAPTER 4: COMPLETING THE ACCOUNTING CYCLE

4.1. Flow of Accounting Information
1. The revenue and expense accounts are extended into the Income Statement columns.
2. At the bottom of the Income Statement columns, the net income or net loss for the period
is identified. (Total revenues – Total expenses).
3. The assets, liabilities, owner’s capital, and drawing accounts are extended to the Balance
Sheet columns.
4.2. Financial Statements
Name of the company
Income Statement
Specific period of time (month/year)

Revenues:
…
Expenses:
…
Net income/Net loss

Name of the company

Statement of Owner’s Equity
Specific period of time (month/year)

Opening balance of owner’s equity

Investment during the period
Net income/Net loss
Less withdrawals
Increase/Decrease in owner’s equity
Ending balance of owner’s equity

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Name of the company

Balance Sheet
Specific date mm/dd/yyy
Assets Liabilities
Current assets: Current liabilities:
… …
Total current assets: Long-term liabilities:
Property, plant, and equipment: …
… Total liabilities:
Less accumulated depreciation: Owner’s equity
Total Property, plant, and equipment: Owner’s capital
Total assets: Total liabilities and owner’s equity:
4.3. Closing Entries
- Permanent accounts/ real accounts: Cash, Accounts Receivable, Equipment, … These
accounts are carried forward from year to year.
- Temporary accounts: Revenue, Expense, Drawing. These accounts report amounts for
only one period. They are also excluded in Post-Closing Trial Balance.
- Closing entries transfer the balances of temporary accounts to the owner’s capital
account.
- Income Summary, a temporary account, is only used during the closing process. The
Income Summary account does not appear on the financial statements. Its opening balance
and ending balance are zero.
- The closing process involves the following four steps:

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 Revenue account balances are transferred to Income Summary.

 Debit each revenue account for its balance and credit Income Summary for the total
revenue as below:
Dr. Revenue accounts
Cr. Income Summary
 Expense account balances are transferred to Income Summary.
 Credit each expense account for its balance and debit Income Summary for the total
expenses as below:
Dr. Income Summary
Cr. Expense accounts
 The balance of Income Summary (Net income/Net loss) is transferred to the owner’s
capital account.
- Total revenues (the right side of Income Summary) – R.
- Total expenses (the left side of Income Summary) – E.
 R – E > 0  Net income:
Dr. Income Summary
Cr. Owner’s capital accounts
 R – E < 0  Net loss:

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Dr. Owner’s capital accounts

Cr. Income Summary
 The balance of the owner’s drawing account is transferred to the owner’s capital account.
 Debit the owner’s capital account for the balance of the drawing account and credit the
drawing account as below:
Dr. Owner’s capital accounts
Cr. Drawing
4.4. Accounting Cycle
 Analyzing and recording transactions in the journal.
 Posting transactions to the ledger.
 Preparing an Unadjusted Trial Balance.
 Assembling and analyzing adjustment data.
 Preparing an Optional end-of-period Spreadsheet (Work Sheet).
 Journalizing and posting adjusting entries.
 Preparing an Adjusted Trial Balance.
 Preparing the Financial Statements.
 Journalizing and posting Closing entries.
 Preparing a Post-Closing Trial Balance.
4.5. Fiscal Year
Fiscal years begin with the first day of the month selected and end on the last day of
the following twelfth month. The period most commonly used is the calendar year, which is
from 1/1 to 31/12. Other periods are not unusual. They may be up to corporations. For
example, from 1/5/2016 to 30/4/2017. A corporation may adopt a fiscal year that ends when
business activities have reached the lowest point in its annual operating cycle.

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CHAPTER 6: ACCOUNTING FOR MERCHANDISING BUSINESSES

6.1. Nature of Merchandising Businesses
𝑆𝑎𝑙𝑒𝑠 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑀𝑒𝑟𝑐ℎ𝑎𝑛𝑑𝑖𝑠𝑒 𝑆𝑜𝑙𝑑 = 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 − 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒

6.2. Financial Statement for a Merchandise Business

6.2.1. Multiple-Step Income Statement
Name of the company
Income Statement
Specific period of time (month/year)
Revenue from sales:
Sales
Less: Sales returns and allowances
Sales discounts
Net sales
Cost of merchandise sold
Gross profit
Operating expenses:
Selling expenses: …

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Administrative expenses: …
Total operating expenses
Income from operations
Other income and expense: …
Net Income
6.2.2. Periodic vs. perpetual inventory system
- Periodic inventory system: Under the periodic inventory system, the inventory records do
not show the amount available for sale or the amount sold during the period.
- Perpetual inventory system: Under the perpetual inventory system, each purchase and sale
of merchandise is recorded in the inventory and the cost of merchandise sold accounts.
6.2.3. Single-Step Income Statement
Name of the company
Income Statement
Specific period of time (month/year)
Revenue:
…
Expenses:
…
Net Income
6.2.4. Statement of Owner’s Equity & Balance Sheet
Take a look at 4.1/Page 8 – 9.
6.3. Merchandising Transactions
The Seller The Buyer
Sales Transactions Purchase Transactions
 Dr. Cash Dr. Merchandise Inventory
Cr. Sales Cr. Cash
Cash
 Dr. Cost of Merchandise Sold * In case of using MasterCard/VISA,
Cr. Merchandise Inventory at the end of period, the company

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* If customers use credit cards such must pay an administrative expense

as MasterCard, Visa – recording as to issuing bank or the clearing house
cash. as below:
Dr. Credit Card Expense
Cr. Cash
 Dr. Accounts Receivable Dr. Merchandise Inventory
Cr. Sales Cr. Accounts Payable
On Account
 Dr. Cost of Merchandise Sold
Cr. Merchandise Inventory
Example of a credit term: 2/10, n/30 Dr. Accounts Payable
 2% discount if paid within 10 Cr. Cash
days, net amount due within 30 Cr. Merchandise Inventory
Discounts
days
- a contra
In case of n/eom: net amount due by
account to
the end of the month
Sales
Dr. Cash
Dr. Sales Discounts
Cr. Accounts Receivable
 Dr. Sales Returns and Dr. Accounts Payable
Allowances Cr. Merchandise Inventory
Cr. Accounts * The buyer, in this case, sends the
Receivable/Cash seller a debit memo.
Returns &
 Dr. Merchandise Inventory
Allowances
Cr. Cost of Merchandise Sold
* The seller, in this case, issues a
credit memo to the buyer or a cash
refund if the buyer requests.

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The Seller The Buyer

Freight, Sales Taxes, and Trade Discounts
The seller bears the freight costs if The buyer bears the freight costs if the
the shipping terms are FOB shipping terms are FOB shipping
Freight destination point
Dr. Delivery Expense Dr. Merchandise Inventory
Cr. Cash Cr. Cash
 Dr. Accounts Receivable
Cr. Sales
Sales Taxes Cr. Sales Tax Payable
 Dr. Sales Tax Payable
Cr. Cash
Wholesalers often offer special
Trade discounts to government agencies or
Discounts businesses that order large
quantities.
6.4. The Adjusting and Closing Process
6.4.1. Adjusting Entry for Inventory Shrinkage
The physical inventory on hand at the end of the accounting period usually less than
the balance of Merchandise Inventory (due to shoplifting, employee theft, errors, …) 
Inventory shrinkage.
Dr. Cost of Merchandise Sold
Cr. Merchandise Inventory
 Inventory shrinkage = Account balance of Merchandise Inventory – Physical MI on hand.
6.4.2. Closing Entries
- Look back Chapter 4.

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CHAPTER II: TYPES OF EXERCISES

1. Journalizing transactions
Follow 2.3. step by step.
There are several ways to present journalizing:
 Dr. Cash 3,000 
Debit Credit
Cr. Equipment 3,000
Cash 3,000
 Cash 3,000
Equipment 3,000
Equipment 3,000
2. Posting to T-Accounts
 Draw a T-account, fulfill the title of account.
 Enter the opening balance to T-account in proper side (follow debit, credit rules).
 Enter the changes of account (increase or decrease amount).
 Calculate the ending balance, following the rule:
Ending balance = Opening balance + amount of increase - amount of decrease.
3. Prepare unadjusted/adjusted trial balance
Follow 2.4. step by step. A sample of trial balance as below:
Luxor Company
Trial Balance
November 30, 2010
Debit Credit
Cash
Accounts Receivable
Supplies
Prepaid Insurance
Assets
Equipment
Accumulated Depreciation – Equipment
Automobiles
Accumulated Depreciation – Automobiles

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Accounts Payable
Salaries Payable
Liabilities Unearned Service Fees
Amy Busby, Capital Capital
Amy Busby, Drawing Drawings
Service Fees Earned
Revenues
Salary Expense
Rent Expense
Supplies Expense
Owner’s Depreciation Expense – Equipment
equity Depreciation Expense – Automobiles Expenses
Utilities Expense
Taxes Expense
Insurance Expense
Miscellaneous Expense
Total XXX XXX

4. Prepare adjusting entries

Follow 3.2.
5. Prepare financial statements
Financial statements include Income Statement, Statement of Owner’s equity, and
Balance Sheet. Follow 4.2.
6. Closing entries
 Journalize closing entries. Follow 4.3.
 Prepare a post-closing trial balance. It’s the same as a trial balance but you remove all
revenue accounts, expense accounts, and drawing account.

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7. Rules of debit and credit

Follow the rules of credit and debit in 2.2. to determine a transaction is debit (dr) or
credit (cr).
For ex: An increase in Salary Expense …………….. (CR/DR)
8. Accounting equation
Analyze a transaction using accounting equation, plus sign (+), minus sign (-).
For ex:
Assets = Liabilities + Owner's Equity
Received cash for services rendered. __+____ _______ ___+_____
9. Fill in blanks
Fill in blanks of an Income Statement, a Statement of owner’s equity, or a Balance
Sheet. Remember all necessary equations.
10. Accounting for Merchandise – Cost of merchandise sold & gross profit
Follow Chapter 6.

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PART III: MID-TERM TEST

I. Multiple Choices (30 marks)
Chapter 1  Chapter 6
II. Writing (70 marks)
1. Journalize transactions.
2. T-accounts.
3. Prepare Unadjusted Trial Balance.
4. Journalize Adjusting Entries.
5. Prepare Adjusted Trial Balance
6. Prepare Income Statement, Balance Sheet, Statement of Owner’s equity.
7. Accounting for Merchandise Business.
8. Closing entries and Post-Closing Trial Balance.

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PART IV: MULTIPLE CHOICES AND EXERCISES

I. MULTIPLE CHOICES
1. A company’s ability to attract and hold investment capital ultimately depends on its
A. profitability.
B. budgeting.
C. new product development.
D. planning.
2. A primary user of accounting information with a direct financial interest in the business is a
A. Creditor.
B. Tax authority.
C. Regulatory agency.
D. Labor union.
3. The separate entity concept requires that
A. Tax records be kept separate from financial reporting records.
B. The personal assets and liabilities of an owner not be shown on the business’s
financial statements.
C. Transactions that involve an exchange of value be kept separate from those that do not.
D. A separate set of books be established for each segment of a business.
4. Which of the following is a characteristic of a corporation?
A. Not a separate economic unit.
B. Unlimited liability of owners.
C. Separate legal entity.
D. Dissolved when ownership changes.
5. Which of the following has primary responsibility for developing and issuing rules on
accounting practice?
A. AICPA B. SEC D. IRS D. FASB
6. Generally accepted accounting (GAAP) principles:
A. are rules formulated by the IRS.

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B. are sound in theory, but rarely used in practice.

C. are changing continually.
D. have eliminated all the weakness in accounting practice.
7. Two primary objectives of management are to achieve profitability and liquidity.
A. True. B. False.
8. Companies whose securities are sold to the public must adhere to standards established by
the SEC.
A. True. B. False.
9. Stockholder’s equity is affected by the
A. collection of accounts receivable.
B. payment of dividends.
C. purchase of an asset.
D. payment of a liability.
10. The collection of an account receivable
A. increases assets and increases stockholder’s equity.
B. increases assets and decreases assets.
C. decreases assets and decreases stockholder’s equity.
D. decreases assets and increases liabilities.
11. Which of the following financial statements is concerned with the enterprise at a point in time?
A. Cash flow statement.
B. Income statement.
C. Statement of retained earnings.
D. Balance sheet.
12. The recognition issue concerns
A. where to record a business transaction.
B. how to classify a business transaction.
C. when to record a business transaction.
D. assigning a dollar amount to a business transaction.

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13. Which of the following accounts is an asset?

A. Unearned Insurance Fees.
B. Insurance Payable.
C. Insurance Expense.
D. Prepaid Insurance.
14. A company that rents an office (i.e., a lessee or tenant) would never have an entry to
which account for that particular lease?
A. Prepaid Rent.
B. Unearned Rent.
C. Rent Payable.
D. Rent Expense.
15. Suhoza Company accepts an advance fee of $200 for services Suhoza is to provide next
year. Suhoza’s entry to record this transaction would include a
A. credit to Cash.
B. debit to Accounts Receivable.
C. credit to Unearned Service Fees.
D. credit to Service Fees Earned.
16. Which of the following would not cause the trial balance to be out of balance?
A. An error being made in carrying the account balance to the trial balance.
B. The balance of an account being incorrectly computed.
C. A debit to Utilities Expense being posted as a debit to Rent Expense.
D. An account with a debit balance being recorded as a credit or vice versa.
17. Which of the following is not a proper step in preparing a trial balance?
A. List each ledger account that has a balance, listing debit balances and credit balances
in the left and right columns, respectively.
B. List the accounts in alphabetical order.
C. Add each column.
D. Compare the totals of each column.
18. Posting is performed by transferring information from the

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A. source documents to the journal.

B. ledger to the journal.
C. source documents to the ledger.
D. Journal to the ledger.
19. The cost of goods and services used in the process of generating revenue are called.
A. expenses. B. assets. C. profits D. liabilities.
20. The difficulties of income measurement are caused by all of the following except the
A. accounting period issue.
B. recognition issue.
C. continuity issue.
D. matching issue.
21. Which of the following us an example of an accrual?
A. A commission earned but not yet recorded.
B. A commission collected but not yet earned.
C. Depreciation of an asset.
D. Recording a cash sale.
22. Adjusting entries must be made at the end of the accounting period for all of the following
situations except when
A. there are unrecorded expenses.
B. there are unrecorded revenues.
C. revenues have been recorded that must be apportioned between two or more
accounting periods.
D. there are errors to be corrected.
23. Failure to record depreciation at the end of the year will result in an
A. Overstatement of total liabilities.
B. Overstatement of total assets.
C. Understatement of net income.
D. Understatement of total liabilities.
24. As time passes, the accumulated depreciation and the carrying value related to a plant asset

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A. both decrease.
B. both increase.
C. increase and decrease, respectively.
D. decrease and increase, respectively.
25. The order of preparing the financial statements from the adjusted trial balance is
A. Balance sheet, statement of retained earnings, income statement.
B. Income statement, statement of retained earnings, balance sheet.
C. Statement of retained earnings, income statement, balance sheet.
D. Income statement, balance sheet, statement of retained earnings.
26. Which of the following accounts could appear on the adjusted trial balance but not on
the trial balance?
A. Cash. B. Accumulated Depreciation.
C. Depreciation Expense. D. Retained Earnings.
27. Wages Payable were $350 at the end of October and $280 at the end of November. Wages
Expense for November was $1,800. How much cash was paid for wages during November?
A. $1,870. B. $2,430. C. $1,730. D. $1,170.
28. The steps in the accounting cycle that could be completed with the aid of the work sheet are
A. analyze, record, post. B. appropriate, enter, record.
C. allocate, close, reverse. D. adjust, prepare, close.
29. Closing entries
A. are optional.
B. bring all permanent (real) accounts to a zero balance.
C. transfer net income or loss into the Retained Earnings account.
D. are prepared at the beginning of the new accounting period.
30. Which of the following accounts is not closed during the closing procedure?
A. Retained Earnings. B. Income Summary.
C. Rent Expense. D. Interest Income.
31. Which of the following accounts is a nominal account?
A. Accounts Receivable. B. Wages Payable.

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C. Retained Earnings. D. Wages Expense.

32. The post-closing trial balance includes which of the following?
A. Nominal accounts only. B. Real accounts only.
C. All accounts listed in the chart of accounts. D. Both A and B.
33. Which of the following is true about reversing entries?
A. They are required.
B. All adjusting entries need to be reversed.
C. They are the exact reverse of an adjusting entry.
D. Deferrals always need to be reversed.
34. Which of the following is not a line item on the completed work sheet?
A. Accumulated Depreciation. B. Net income.
C. Ending stockholder’s equity. D. Dividends.
35. Which of the following work sheet columns shows a dollar amount for every account
listed on the work sheet?
A. Adjustments. B. Adjusted Trial Balance.
C. Income Statement. D. Balance Sheet.
36. Which of the following is not true about the preparation of financial statements?
A. They do not need to be prepared separately if a work sheet is used.
B. Their numbers may come from the work sheet.
C. They are prepared before the post-closing trial balance is prepared.
D. The column totals on the work sheet are different from the totals on the actual
statements.
37. The periodic inventory system is used more commonly by companies that sell
A. low-priced, high-volume merchandise.
B. low-priced, low-volume merchandise.
C. high-priced, low-volume merchandise.
D. high-priced, high-volume merchandise.
38. Losses of inventory are most easily identified using
A. the periodic inventory system.

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B. the perpetual inventory system.

C. either of them.
D. neither of them.
39. A merchandise business
A. earns income by buying and selling goods and services.
B. can be either a wholesale or retail business.
C. Both A and B are true.
D. Both A and B are false.
40. The financing period is
A. also referred to as the cash gap.
B. the period before cash is paid for merchandise inventory and after cash is received
from the sale of that inventory.
C. Both of these.
D. Neither of these.
41. A company can help its cash flow by
A. purchasing merchandise from suppliers with longer payment terms.
B. reducing credit terms for sales.
C. reducing its financing period.
D. doing all of these.
42. The difference between gross sales and net sales is equal to
A. sales discounts.
B. sales returns and allowances.
C. the sum of sales discounts and returns and allowances.
D. the difference between sales discounts and returns and allowances.
43. Operating expenses include all of the following except
A. selling expenses B. delivery expense.
C. cost of goods sold. D. none of these.
44. Lexel Company sold goods for $1,000, term 2/10, n/30. How much would Lexel receive
if the account were paid within the discount period?

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A. $1,000 B. $882 C. $980 D. $900

45. Under the perpetual inventory system, in addition to making the entry to record a sale, a
company would
A. Dr. Merchandise Inventory and Cr. Cost of Goods Sold.
B. Dr. Cost of Goods Sold and Cr. Purchases.
C. Dr. Cost of Goods Sold and Cr. Merchandise Inventory.
D. make no additional entry until the end of the period.
46. On April 1, 201x, merchandise was purchased on credit from a wholesaler for $855. On
April 9, 201x, $325 of damaged merchandise was returned. Assuming the perpetual
inventory system is used, the entry to record the return of damaged merchandise is
A. Dr. Purchases Returns and Allowances, $325/Cr. Accounts Payable, $325.
B. Dr. Merchandise Inventory, $325/Cr. Accounts Payable, $325.
C. Dr. Accounts Payable, $325/Cr. Purchases Returns and Allowances, $325.
D. Dr. Accounts Payable, $325/Cr. Merchandise Inventory, $325.
47. When using the perpetual inventory system, which of the following accounts is
continuously updated during the accounting period?
A. The Merchandise Inventory account only.
B. The Purchases account only.
C. The Purchases and Cost of Goods Sold accounts.
D. The Merchandise Inventory and Cost of Goods Sold Accounts.
48. Under the perpetual inventory system, which account is used to record purchases of
merchandise?
A. Cost of Goods Sold.
B. Purchases.
C. Merchandise Inventory
D. Accounts Payable.
49. Freight in costs
A. are included in the cost of goods sold section of the income statement.
B. are included in the cost of each inventory item.

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C. appear as an operating expense on the income statement.

D. None of above.
50. Del Sol Company, which uses the perpetual inventory system, purchased merchandise
on credit for $5,000. The entry to record this transaction is
A. Dr. Purchases, $5,000/Cr. Accounts Payable, $5,000.
B. Dr. Purchases, $5,000/Cr. Cost of Goods Sold, $5,000.
C. Dr. Merchandise Inventory, $5,000/Cr. Accounts Payable, $5,000.
D. Cr. Merchandise Inventory, $5,000/Cr. Cost of Goods Sold, $5,000.
II. EXERCISES
1. Effects of Transactions on the Accounting Equation
The total assets and liabilities at the beginning and end of the year for the Company are listed
below. Determine Company’s net income or loss for the year under each of the following
alternatives:
Assets Liabilities
Beginning of the year $130,000 $45,000
End of the year 210,000 120,000
1. The stockholders made no investments in the business and no dividends were paid during
the year.
2. The stockholders made no investments in the business but dividends of $12,000 were paid
during the year.
3. The stockholders made investments of $3,000, but no dividends were paid during the year.
4. The stockholders made investments of $10,000 in the business and dividends of $2,000
were paid during the year.

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2. Completion of Financial Statements

Complete the following independent sets of financial statements by determining the amounts
that correspond to the letters (assume no new investments by the stockholder.)
A B C
Income Statement
Revenues 510 (g)… 150
Expenses (a)… 2,600 (m)…
Net income (b)… (h)… 60
Statement of Retained Earnings
Beginning balance 1,300 7,800 130
Net income (c)… 800 (n)…
Dividends (100) (i)… (o)…
Ending balance 1,400 (j)… (p)…
Balance Sheet
Total Assets (d)… 10,400 (q)…
Liabilities 700 2,500 (r)…
Owner’s equity
Common Stock 1,700 5,000 120
Retained Earnings (e)… (k)… 90
Total liabilities & Owner’s equity (f)…. (l)… 250
3. Recording transactions in general journal, posting to T accounts, and preparing a Trial
Balance
D&A opened a Repair Services, Inc., the following transactions during August 201x:
a. Dora invested $4,500 in cash and $1,800 in repair equipment, in return for 6,300
shares of the company’s $1 par value common stock.
b. Paid $800 for the current month’s rent.
c. Purchased repair supplies on credit, $900.
d. Paid $600 of amount purchased on credit in (c).

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e. Purchased additional repair equipment for cash, $700.

f. Declared and paid a dividend of $800.
g. Paid salary to the helper, $800.
h. Accepted cash for repairs completed, $3,100.
Required: Journalize and post to T accounts the transactions for August 201x. Prepare a trial
balance for the Repair Service, as of August 31, 201x.
4. Adjusting entries
1. Office supplies had a balance of $92 on July 1. Purchases debited to Office Supplies during
the year amount to $414. A year-end inventory reveals supplies of $82 on hand.
2. Depreciation of office equipment is estimated to be $2,200 for the year.
3. Property taxes for six months, estimated at $700, have accrued but have not been recorded.
4. Unrecorded interest receivable on U.S. government bond is $810.
5. Unearned Revenue has a balance of $980. Services for $320 received in advance have
now been performed.
6. Services total $720 have been performed; the customer has not been billed.
5. Determining adjusting entries, posting to T accounts, preparing an adjusted trial
balance
The trial balance for Smythe Financial Services, Inc., on December 31 is presented below.
Smythe Financial Service, Inc.
Trial Balance
December 31, 201x
Cash $9,250
Accounts Receivable 5,125
Office Supplies 2,331
Prepaid Rent 1,660
Office Equipment 5,620
Accumulated Depreciation – Office Equipment $1,770
Accounts Payable 3,970

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Notes Payable 6,500

Unearned Fees 2,485
Common Stock 8,000
Retained Earnings 8,001
Dividends 11,000
Fees Revenue 37,300
Salaries Expense 24,700
Rent Expense 2,200
Utilities Expense 2,140
Total $68,026 $68,026
The following information is also available:
a. Ending inventory of office supplies, $832.
b. Prepaid rent expired, $720.
c. Depreciation of office equipment for the period, $830.
d. Accrued interest expense at the end of the period, $775.
e. Accrued salaries at the end of the period, $665.
f. Fees still unearned at the end of the period, $983.
g. Fees earned but unrecorded, $1,600.
h. Estimated income taxes for the period, $2,500.
Required: Journalize the adjusting entries and post them to the T accounts. Prepare an
Adjusted Trial Balance, an Income Statement, a Statement of Retained Earnings and a
Balance Sheet.
6. Record the transactions, perpetual inventory system, closing entries and income
summary
DC Company, which uses the perpetual inventory system, engaged in the following
transactions:
Dec 1. Sold merchandise to DA on credit, term 2/10, n/30, $50,000. Cost of goods sold,
$45,000.
2. Purchased merchandise on credit from RC, term 2/10, n/30, $2,000.

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2. Paid $50 for freight charges on merchandise received.

11. Receive full payment from DA.
12. Paid RC for purchase of Dec. 2.
16. Sold merchandise for cash $30,000, cost of merchandise sold $18,000.
Required: Journalize these transactions above.

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PART V: ANSWER KEYS

I. MULTIPLE CHOICES
1. A 2. A 3. B 4. C 5. D 6. C 7. A 8. A 9. B 10. B
11. D 12. C 13. D 14. B 15. C 16. C 17. B 18. D 19. A 20. B
21. A 22. D 23. B 24. C 25. B 26. C 27. A 28. D 29. C 30. A
31. D 32. B 33. C 34. C 35. B 36. A 37. A 38. B 39. C 40. D
41. D 42. C 43. D 44. D 45. C 46. D 47. D 48. C 49. A 50. C

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