accounting exam 2

The closing process involves separate entries to close (1) expenses, (2) drawings, (3) revenues, and (4) income summary. The correct sequencing of the entries is

(3), (1), (4), (2)

Multi-Step Income Statement

Distinguishes between operating and non operating activities key items: net sales, gross profit, operating expenses, non-operating, net income

Operating expenses

Freight costs incurred by the seller are an operating expense.

An account that will have a zero balance after closing entries have been journalized and posted is

Service Revenue.

Single-Step Income Statement

Subtract total expenses from total revenues Two reasons for using single-step format: Company does not realize any profit until total revenues exceed total expenses Format is simpler and easier to read

A company determines the cost of goods sold each time a sale occurs in

a perpetual inventory system only.

FOB shipping point means that the

buyer pays the freight costs.

When a net loss has occurred, Income Summary is

credited and Owner's Capital is debited.

Know that inventory is reported as a ??? on a classified balance sheet.

current asset

Income Summary has a credit balance of $12,000 after closing revenues and expenses. The entry to close Income Summary is

debit Income Summary $12,000, credit the owner's capital account $12,000.

Rider Company is in the process of preparing it closing entries. It first closes its revenue accounts by crediting the Income Summary account for $68,000 and then, closes its expense accounts by debiting the Income Summary account for $45,000. The entry to then close the Income Summary is

debit Income Summary, $23,000, and credit Owner's Capital, $23,000.

Know the definition of COGS

is the total cost of merchandise sold during the period.

FOB shipping point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

FOB destination

ownership of the goods remains with the seller until the goods reach the buyer

Perpetual System vs. Periodic System

perpetual: Maintain detailed records of cost of each inventory purchase and sale, Company determines cost of goods sold each time a sale occurs periodic: no detailed records, COGS sold determined by count at end of accounting period

Closing entries are necessary for

temporary accounts only.