Financial Accounting Principles
BAF3M (2012): Financial Accounting Principles (2012), Grade 11,
Unit 5: The Merchandise Business
Activity 8: Unit 5 Test – Merchandise Accounting
Instructions:
Complete the following questions and submit the entire document to your teacher.
| Scoring Criteria | Knowledge | Thinking |
Communication |
Application |
| Section 1: GAAPs
1 mark each. |
/11 | |||
| Section 2: Sorting
One mark each |
/14 | |||
| Section 3: Journal Entries
2 marks for each entry: 1 for accounts and 1 for values. |
/20 | |||
| Section 4: Worksheet Questions
Clarity, accuracy, and thoroughness |
/10 | |||
| Section 5: Income Statement
1 mark for each line. Format and construction as well |
/20 | |||
| Section 6: Closing Entries Questions
Clarity, accuracy, and thoroughness |
/10 | |||
| TOTALS | /25 | /10 | /10 | /40 |
- GAAPs
Identify the GAPP for each definition. Use the word list provided.
| GAAP | Definition | GAAPs | |
| 1 | Revenue will be recorded in the books at the time the transaction is completed, not necessarily when cash is received. | Business Entity Concept
Conservatism Consistency Continuing Concern/ Going Concern Cost Principle Full Disclosure Matching Principle Materiality Objectivity Principle Revenue Recognition Time Period Concept
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| 2 | Items are recorded in the books at the price paid by the purchaser, and do not change from their original value. | ||
| 3 | Costs related to income earned must be recorded in the same accounting period as the revenue it generated. | ||
| 4 | All information that affects the interpretation of a company’s financial statements must be included with those statements. Items that do not affect the ledger accounts directly should appear in footnotes to the financial statements. | ||
| 5 | Accounting takes place over specific fiscal periods of fixed length, so as to allow for comparisons and analysis from year to year. | ||
| 6 | Accounting must be done on the basis of objective evidence. Different people looking at the same evidence will arrive at the same values for the transaction if you’ve followed this principle. | ||
| 7 | Accounting for a business should be fair and reasonable, and evaluations, opinions and estimates should be done in such a way that they neither overstate nor understate the affairs of the business. | ||
| 8 | Accounting for a business or organization must be kept separate from the personal affairs of its owner or any other organization. | ||
| 9 | Accountants must use GAAPs except when doing so would be prohibitively expensive, difficult, and would make little significant difference in the final reported results of the business. | ||
| 10 | Accountants must apply the same methods and procedures from period to period. Any changes must be clearly explained on the financial statements. | ||
| 11 | A business will continue to operate unless it is known that such is not the case. |
- Sorting
Below are several Ledger Accounts. Some accounts are used in the Periodic Method of Merchandise accounting, some are used in the Perpetual Method and some are used in both.
Put an X under the heading of the method that the account would be used. Some accounts are used in both methods.
| Ledger Accounts | Periodic Method | Perpetual Method |
| Cost of Goods Sold | ||
| Freight-in | ||
| Freight-out | ||
| Inventory Shortage | ||
| Merchandise Inventory | ||
| Purchase Discounts | ||
| Purchase Returns | ||
| Purchases | ||
| Sales Discounts | ||
| Sales Returns |
- Journal Entries
Record the journal entries for each of the transactions below using BOTH merchandise accounting methods: Periodic and Perpetual. Do not add explanations or PR.
Transactions:
- Your company bought $1,000 (+13% HST) of merchandise for cash.
- Your firm made a payment to an inventory supplier on account. The amount paid was $535, and you took the following terms: 3/10, n30.
- Defective Merchandise that you bought several weeks ago was returned for a cash refund. It was $700 (+13% HST)
- You sold $2,000 (+ 13% HST) of inventory to a customer for cash. The value of the merchandise was $1,200.
- You paid Federal Express to ship one of your recent inventory purchases to yourself. The bill was $200 (+13% HST). You paid it in cash.
| Periodic Method | Perpetual Method | |||||||||
| Date | Particulars | PR | DR | CR | Date | Particulars | PR | DR | CR | |
- The Worksheet
Answer the following questions, which relate to the worksheet.
| i. | Is this worksheet for a Periodic Merchandise business, or a Perpetual one? How do you know for sure?
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| ii. | Why does Merchandise Inventory (an asset) appear in the Income Statement section of the worksheet? Explain clearly and thoroughly.
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- Income Statement
Produce the Income Statement from the Worksheet in question 4.
| J. Boulton | |||
| Income Statement | |||
| For the Month Ending May 31, 2015 | |||
- Closing Entries
Answer the questions below.
| i | Are these the closing entries of a Periodic or Perpetual merchandise business? Explain.
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| ii | If these were the closing entries for the other type of merchandise business, how would they be different? Explain.
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| iii | Has this company made a profit or a loss? Explain how you know from the THIRD closing entry only! Use appropriate accounting terminology.
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