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 inventory system, cost of goods sold is debited when
inventory is sold and credited when there is a sales 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)

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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 used under the periodic system to record the shipping
costs incurred on purchases 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

“From the fruit of his mouth a man’s stomach is filled; with the harvest from his
lips he is satisfied.” (Proverbs 18:20)

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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

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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)

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SOLUTION TO QUIZ 4:

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

Gross sales ₱5,800,000

Less: Sales returns and discounts (116,000)
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.

b. Equipment costing ₱250,000 was acquired for cash.
c. Inventory costing ₱180,000 was acquired on credit. 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)
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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 250,000
Cash 250,000
to record the acquisition of equipment
(c) Inventory 180,000
Accounts payable 180,000
to record the acquisition of inventory on credit

Accounts receivable 400,000

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

(e) Accounts payable 160,000

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

(h) Salaries expense 280,000

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

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Requirement (b): Posting

ASSETS

LIABILITIES

EQUITY

11
INCOME

EXPENSES

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Requirement (c): Unadjusted Trial Balance

Entity A
Unadjusted Trial Balance
December 31, 20x1
Dr. Cr.
Cash 520,000
Accounts receivable 60,000
Inventory 60,000
Equipment 250,000
Accumulated depreciation - equipment 25,000
Accounts payable 20,000
Owner's capital 1,000,000
Owner's drawings 70,000
Sales 400,000
Cost of sales 120,000
Utilities expense 60,000
Salaries expense 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. Transactions
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.

“Peace I leave with you; my peace I give you. I do not give to you as the world
gives. Do not let your hearts be troubled and do not be afraid.”
(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. 12, Purchases 30,000
20x1 Cash 30,000
to record the acquisition of inventory for cash
Nov. 14, Cash 30,000
20x1 Sales 30,000
to record cash sales

December transactions:

Dec. 1, Notes receivable 24,000

20x1 Sales 24,000
to record sale in exchange for note
Dec. 5, Purchases 4,000
20x1 Accounts payable 4,000
to record the acquisition of inventory on account
Dec. 26, Accounts receivable 34,000
20x1 Sales 34,000
to record sale on account
Dec. 27, Accounts payable 2,000
20x1 Cash 2,000
to record the payment of account payable
Dec. 29, Cash 20,000
20x1 Accounts receivable 20,000
to record the collection of account receivable

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Requirement (b): Posting

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

Accounts receivable Notes receivable

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

Prepaid insurance Equipment

Nov. 1 24,000 Nov. 1 72,000
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 Purchases
30,000 Nov. 14 Nov. 12 30,000
24,000 Dec. 1 Dec. 5 4,000
34,000 Dec. 26
88,000 Bal. Bal. 34,000

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Requirement (c): Unadjusted trial balance

Entity A
Unadjusted Trial Balance
December 31, 20x1

Accounts Debit Credit

Cash ₱22,000
Accounts receivable 14,000
Notes receivable 24,000
Inventory, beg. 0
Prepaid insurance 24,000
Equipment 72,000
Accounts payable ₱2,000
Owner’s equity 100,000
Sales 88,000
Purchases 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
Income summary 21,000
to recognize the ending inventory
(v) Bad debts expense 2,000
Allowance for bad debts 2,000
to record bad debts expense for the period
(vi) Salaries expense 20,000
Salaries payable 20,000
to accrue salaries expense incurred but not yet paid

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Requirement (e): Worksheet

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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.

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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 & EQUITY ₱168,200

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 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 Sale 34,000
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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