Interworld Colleges Foundation Inc.
Burgos St, Paniqui,Tarlac
COLLEGE OF BUSINESS AND ACCOUNTANCY
Chapter 10
Accounting Cycle of a Merchandising Business
NAME: Date:
Professor: Section: Score:
ACTIVITY 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 the 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.
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“A fool shows his annoyance at once, but a prudent man overlooks an insult.”
(Proverbs 12:16)
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NAME: Date:
Professor: Section: Score:
ACTIVITY 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 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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4
NAME: Date:
Professor: Section: Score:
ACTIVITY 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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NAME: Date:
Professor: Section: Score:
ACTIVITY 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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NAME: Date:
Professor: Section: Score:
ACTIVITY 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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NAME: Date:
Professor: Section: Score:
ACTIVITY 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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