The Accounting Cycle: Merchandising Business: Test Review

Key facts

Where marks get lost

• ×Calling every business that has a cash register a "merchandiser" — a restaurant that cooks food to order is closer to manufacturing plus service than pure resale. (Service vs. Merchandising vs. Manufacturing)
• ×Forgetting that a manufacturer can also be a merchandiser for goods it does not make itself (a bakery that also resells bottled drinks it did not bake). (Service vs. Merchandising vs. Manufacturing)
• ×Assuming Merchandise Inventory only matters at year-end — it changes with every single purchase and every single sale. (Service vs. Merchandising vs. Manufacturing)
• ×Confusing the operating cycle (buy → sell → collect) with the accounting cycle (journalize → post → adjust → close) — they are different ideas that happen to share the word "cycle." (Service vs. Merchandising vs. Manufacturing)
• ×Subtracting Transportation-in instead of adding it — freight increases the cost of the goods, it does not reduce it. (The Purchases Account)
• ×Calculating the cash discount on the original invoice total instead of the balance remaining after returns. (The Purchases Account)
• ×Debiting Merchandise Inventory instead of Purchases when the business uses the periodic inventory system. (The Purchases Account)
• ×Forgetting that freight the SELLER pays (to ship goods out to customers) is Delivery Expense, not Transportation-in — the two only look alike. (The Purchases Account)
• ×Missing the discount window by a day and still subtracting the discount anyway — after the discount period, the full (net) amount is due. (The Purchases Account)
• ×Crediting Sales Returns and Allowances instead of debiting it — it is a contra-revenue account and normally has a DEBIT balance. (The Sales Account)
• ×Calculating the sales discount on the original invoice amount instead of the balance remaining after any returns. (The Sales Account)
• ×Recording Delivery Expense as part of Cost of Goods Sold — it belongs in operating expenses, since it is the cost of shipping OUT, not the cost of the goods themselves. (The Sales Account)
• ×Mixing up who issues the credit invoice — the SELLER issues it to the buyer; the buyer does not create it. (The Sales Account)
• ×Forgetting that Sales Returns and Allowances and Sales Discounts both reduce Net Sales, not gross Sales on the general ledger balance itself. (The Sales Account)
• ×Thinking a periodic system means a business never counts inventory — it counts LESS OFTEN, but the count is still mandatory (at least once, at year end). (Periodic vs. Perpetual Inventory)
• ×Believing a perpetual system never needs a physical count — shrinkage can only be discovered by actually counting the goods. (Periodic vs. Perpetual Inventory)
• ×Assuming a point-of-sale terminal is only about ringing in sales — its real accounting power is updating Merchandise Inventory automatically. (Periodic vs. Perpetual Inventory)
• ×Debiting Merchandise Inventory for every purchase under a periodic system — that account is untouched until period end under periodic. (Periodic vs. Perpetual Inventory)
• ×Adding Closing Inventory instead of subtracting it — closing inventory is what's LEFT, so it must come OUT of the calculation. (Cost of Goods Sold & Gross Profit)
• ×Forgetting to net Purchases before adding it to Opening Inventory (skipping returns, discounts, or transportation-in). (Cost of Goods Sold & Gross Profit)
• ×Confusing Gross Profit with Net Income — Gross Profit has not yet had operating expenses subtracted. (Cost of Goods Sold & Gross Profit)
• ×Using gross Sales instead of Net Sales when calculating Gross Profit. (Cost of Goods Sold & Gross Profit)
• ×Mixing up which inventory figure is "opening" and which is "closing" when two years of data are given side by side. (Cost of Goods Sold & Gross Profit)
• ×Calculating HST on the wrong base — always calculate 13% of the price BEFORE tax, never of the total that already includes tax. (GST, HST, and PST)
• ×Crediting HST Refundable — it is a contra-liability with a normal DEBIT balance; only HST Payable is credited when tax is collected. (GST, HST, and PST)
• ×Forgetting that Purchases and Sales are always recorded at the price BEFORE tax — HST never touches those two accounts directly. (GST, HST, and PST)
• ×Remitting the full HST Payable balance to the CRA instead of the NET amount after subtracting HST Refundable. (GST, HST, and PST)
• ×Treating the Quick Method's reduced remittance rate as fixed forever — the CRA sets and periodically changes these percentages. (GST, HST, and PST)
• ×Posting a sale to the customer's subsidiary account but forgetting to include it in the control account total, or vice versa — the two must always move together. (Subsidiary Ledgers & Control Accounts)
• ×Confusing a control account with a subsidiary ledger — the control account is ONE general ledger balance; the subsidiary ledger is MANY individual accounts. (Subsidiary Ledgers & Control Accounts)
• ×Thinking a Schedule of Accounts Receivable is a financial statement — it is only an internal proof of accuracy, never shown to outside users. (Subsidiary Ledgers & Control Accounts)
• ×Skipping alphabetical order in the subsidiary ledger, which defeats the purpose of being able to find any one customer quickly. (Subsidiary Ledgers & Control Accounts)
• ×Journalizing every purchase and sale in the General Journal even when a Purchases Journal or Sales Journal exists — that defeats the whole purpose of special journals. (The Special Journal System)
• ×Posting a special journal's column total to the control account every single day instead of once at the end of the period, while ALSO forgetting to post individual lines to the subsidiary ledger daily. (The Special Journal System)
• ×Skipping the matching process and paying an invoice on trust — this is exactly how billing errors and even fraud go undetected. (The Special Journal System)
• ×Confusing a Purchase Requisition (an internal request to buy something) with a Purchase Order (the actual order sent to the supplier). (The Special Journal System)
• ×Miscalculating an extension by adding quantity and price instead of multiplying them. (The Special Journal System)
• ×Letting the same employee both collect cash from customers and post the cash receipts journal — a direct violation of separation of duties. (Cash Control & Petty Cash)
• ×Recording a shortage as a credit and an overage as a debit — it is the opposite: a shortage debits Cash Short and Over (like an expense), an overage credits it (like revenue). (Cash Control & Petty Cash)
• ×Forgetting to require a Petty Cash Voucher for every disbursement, which destroys the audit trail for that spending. (Cash Control & Petty Cash)
• ×Debiting the Petty Cash account itself every time it is replenished — Petty Cash is only debited when the FUND IS FIRST ESTABLISHED or its fixed size is increased; replenishment debits the expenses the vouchers represent. (Cash Control & Petty Cash)
• ×Journalizing outstanding cheques or deposits in transit — these are already correctly recorded in the books and need NO entry; they will simply clear on their own next period. (Bank Reconciliation)
• ×Adding an NSF cheque to Cash instead of subtracting it — an NSF cheque means the money never actually arrived, so it must come OUT of Cash. (Bank Reconciliation)
• ×Forgetting to reinstate Accounts Receivable when an NSF cheque bounces — the customer still owes the money. (Bank Reconciliation)
• ×Mixing up which items adjust the bank side versus the book side, and applying an item to the wrong column entirely. (Bank Reconciliation)
• ×Stopping once both sides don't match, instead of tracing every individual difference until both adjusted totals agree exactly. (Bank Reconciliation)
• ×Forgetting to subtract an existing Allowance balance when using the balance sheet method — only the SHORTFALL to the required balance is expensed. (Bad Debts & the Allowance Method)
• ×Debiting Bad Debts Expense when writing off a specific customer's account — the write-off debits the Allowance account, not the expense, since the expense was already recorded earlier. (Bad Debts & the Allowance Method)
• ×Believing that writing off an account changes Net Realizable Accounts Receivable — it does not, because both Accounts Receivable and the Allowance drop by the same amount. (Bad Debts & the Allowance Method)
• ×Using the income statement method's percentage against total Accounts Receivable instead of Net Sales (or vice versa for the balance sheet method). (Bad Debts & the Allowance Method)
• ×Assuming an age analysis uses one flat percentage for every customer, when its entire purpose is to apply DIFFERENT percentages to different age brackets. (Bad Debts & the Allowance Method)
• ×Recording accrued revenue only when the cash is finally collected, instead of in the period it was actually earned. (Accruals & Deferrals)
• ×Treating unearned revenue as if it were already earned the moment cash is received — it must sit in a liability account until actually earned. (Accruals & Deferrals)
• ×Reversing the accrued expense adjusting entry incorrectly, causing an expense to be recorded twice (once accrued, once again when actually paid). (Accruals & Deferrals)
• ×Forgetting that accrued salaries is really just a common form of accrued expenses, and trying to memorize it as an unrelated, separate rule. (Accruals & Deferrals)
• ×Mixing up which account is debited and which is credited when unearned revenue is finally earned — Unearned Revenue (a liability) is debited DOWN, and Revenue is credited UP. (Accruals & Deferrals)
• ×Lumping selling and administrative expenses together instead of splitting them — the classified income statement specifically separates them. (Merchandising Financial Statements)
• ×Forgetting Cost of Goods Sold is its own section, distinct from operating expenses — it sits between Revenue and Gross Profit, not inside Operating Expenses. (Merchandising Financial Statements)
• ×Calling the balance sheet and the Statement of Financial Position two different reports — they are the exact same statement, just two accepted names for it. (Merchandising Financial Statements)
• ×Assuming interim statements require a special once-a-year process — under a perpetual system, they can be produced at any time because the records are always current. (Merchandising Financial Statements)
• ×Classifying Delivery Expense as Administrative — it is a Selling Expense, since it is a direct cost of completing a sale to a customer. (Merchandising Financial Statements)

Practice test

26 questions from across the unit. Each one shows the lesson it comes from.

Endless drill

Fresh numbers every time, for the calculation questions in this unit.