ACC 210 Final Exam Mastery Guide:
Practice Questions & Key Concepts
How does a purchaser classify the return of damaged goods to a seller?
As purchase returns.
In a perpetual inventory system, how is a purchase discount recorded upon payment?
Dr) Accounts Payable
Cr) Merchandise Inventory
Cash
How is the purchase discount amount calculated when defective inventory is returned?
Apply the discount percentage to the net purchase amount (original purchase price - returns).
What does the return on equity measure?
Profitability.
What is liquidity?
A measure of how quickly an asset may be converted into cash.
What is the journal entry for paying an invoice with a discount under the perpetual
system?
Dr) Account payable (full amount)
Cr) Merchandise Inventory (discount)
Cash (net amount paid)
Are temporary accounts included in a post-closing trial balance?
No, temporary accounts (revenues, expenses, dividends) are closed out.
What is the effect of declaring dividends on Retained Earnings?
It decreases Retained Earnings.
What is the effect of Net Income on Retained Earnings?
It increases Retained Earnings.
What does FOB shipping point mean for the purchaser?
The purchaser owns the goods while they are in transit and is responsible for freight costs.
How is freight-in treated in a perpetual inventory system?
It is added to the cost of the inventory (debited to Merchandise Inventory).
What are the components of the closing process?
Closing revenue and expense accounts to Income Summary, then closing Income Summary to
Retained Earnings.
What is the primary purpose of the Income Summary account?
To summarize the net income or loss for the period before transferring it to Retained Earnings.
If a company has $130,000 in current assets and $90,000 in current liabilities, what is its
current ratio?
1.44 ($130,000 / $90,000).
How is the Income Summary balance determined when sales are $180,000 and expenses are
$140,000?
It will have a credit balance of $40,000 (Net Income).
To which account should the dividends account be closed?
Retained earnings
What effect do dividends have on retained earnings?
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,They decrease retained earnings.
In a perpetual inventory system, what account does the buyer credit when returning
merchandise?
Merchandise Inventory
How are net sales calculated?
Sales - sales returns and sales discounts.
What is the operating cycle?
The time span during which cash is paid for goods and services, which are then sold to customers
from whom the business collects cash.
What defines a current asset?
Assets expected to be converted to cash, sold, or used up within 12 months or the normal
operating cycle if longer than a year.
To which account are revenues and expenses transferred before being moved to Retained
Earnings?
Income Summary account.
Which asset is considered the most liquid?
Cash.
In a perpetual inventory system, what is the journal entry for a purchase of inventory on
account?
Dr) Inventory
Cr) Accounts Payable
When recording a sale in a perpetual inventory system, what is the credit to the Inventory
account based on?
The cost of the goods sold.
How should material inventory shrinkage be recorded?
As a Loss from Merchandise Inventory Shrinkage on the income statement.
If an invoice of $450,000 is paid after the discount period, what is the debit to Accounts
Payable?
$450,000
In a perpetual inventory system, what is the journal entry to record sales revenue on
account?
Dr) Accounts Receivable
Cr) Sales Revenue
In a perpetual inventory system, what is the journal entry to record the cost of goods sold?
Dr) COGS
Cr) Merchandise Inventory
When a buyer returns merchandise purchased for cash, what is the entry?
Dr) Cash
Cr) Merchandise Inventory
How is the cost of merchandise sold calculated in a periodic inventory system?
Beginning inventory + Purchases - Ending inventory.
What is the cost of merchandise sold if beginning inventory is $175, purchases are $635,
and ending inventory is $160?
$650
What is the journal entry for collecting a $1,200 account after the discount period has
expired?
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, Dr) Cash $1,200
Cr) Accounts Receivable $1,200
What does the current ratio measure?
A company's ability to pay short-term obligations with current assets.
What is the purpose of closing entries?
To transfer temporary account balances to permanent accounts like Retained Earnings.
What is the difference between perpetual and periodic inventory systems?
Perpetual updates inventory records continuously; periodic updates only at the end of the period.
What does the term '3/15, n/45' mean?
A 3% discount if paid within 15 days, otherwise the net amount is due within 45 days.
What is inventory shrinkage?
The loss of inventory due to theft, damage, or errors.
Are dividends considered an expense on the income statement?
No, they are a distribution of earnings and are closed directly to Retained Earnings.
What is the journal entry for a sale on account in a perpetual system?
Dr) Accounts Receivable
Cr) Sales Revenue
Dr) COGS
Cr) Merchandise Inventory
How are Notes Payable due within two years classified?
As long-term liabilities.
To which account is the balance of the Income Summary account closed?
Retained Earnings.
How is the ending balance of Retained Earnings calculated?
Beginning Retained Earnings + Net Income - Dividends.
Which types of accounts appear on a post-closing trial balance?
Permanent accounts (assets, liabilities, and equity).
What is the formula for the current ratio?
Current Assets / Current Liabilities.
What does a current ratio of 2.00 indicate?
The company has $2 in current assets for every $1 of current liabilities.
How is gross profit calculated?
Net sales revenue - COGS
What is the formula for gross profit?
Sales - (sales discounts and sales returns and allowances) - cost of merchandise sold
What is the primary difference in recording returns between a buyer and a seller?
The buyer adjusts Inventory (perpetual), while the seller adjusts Sales Returns and Allowances.
Which of the following is NOT considered a cash equivalent: 90-day commercial paper, 6-
month Treasury bill, or 75-day CD?
U.S. Treasury bills with an original maturity of 6 months.
What does the balance in the Allowance for Doubtful Accounts represent at the end of the
year?
The total estimated uncollectible accounts.
How is the net realizable value of accounts receivable calculated?
Accounts Receivable balance - Allowance for Doubtful Accounts balance.
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Practice Questions & Key Concepts
How does a purchaser classify the return of damaged goods to a seller?
As purchase returns.
In a perpetual inventory system, how is a purchase discount recorded upon payment?
Dr) Accounts Payable
Cr) Merchandise Inventory
Cash
How is the purchase discount amount calculated when defective inventory is returned?
Apply the discount percentage to the net purchase amount (original purchase price - returns).
What does the return on equity measure?
Profitability.
What is liquidity?
A measure of how quickly an asset may be converted into cash.
What is the journal entry for paying an invoice with a discount under the perpetual
system?
Dr) Account payable (full amount)
Cr) Merchandise Inventory (discount)
Cash (net amount paid)
Are temporary accounts included in a post-closing trial balance?
No, temporary accounts (revenues, expenses, dividends) are closed out.
What is the effect of declaring dividends on Retained Earnings?
It decreases Retained Earnings.
What is the effect of Net Income on Retained Earnings?
It increases Retained Earnings.
What does FOB shipping point mean for the purchaser?
The purchaser owns the goods while they are in transit and is responsible for freight costs.
How is freight-in treated in a perpetual inventory system?
It is added to the cost of the inventory (debited to Merchandise Inventory).
What are the components of the closing process?
Closing revenue and expense accounts to Income Summary, then closing Income Summary to
Retained Earnings.
What is the primary purpose of the Income Summary account?
To summarize the net income or loss for the period before transferring it to Retained Earnings.
If a company has $130,000 in current assets and $90,000 in current liabilities, what is its
current ratio?
1.44 ($130,000 / $90,000).
How is the Income Summary balance determined when sales are $180,000 and expenses are
$140,000?
It will have a credit balance of $40,000 (Net Income).
To which account should the dividends account be closed?
Retained earnings
What effect do dividends have on retained earnings?
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,They decrease retained earnings.
In a perpetual inventory system, what account does the buyer credit when returning
merchandise?
Merchandise Inventory
How are net sales calculated?
Sales - sales returns and sales discounts.
What is the operating cycle?
The time span during which cash is paid for goods and services, which are then sold to customers
from whom the business collects cash.
What defines a current asset?
Assets expected to be converted to cash, sold, or used up within 12 months or the normal
operating cycle if longer than a year.
To which account are revenues and expenses transferred before being moved to Retained
Earnings?
Income Summary account.
Which asset is considered the most liquid?
Cash.
In a perpetual inventory system, what is the journal entry for a purchase of inventory on
account?
Dr) Inventory
Cr) Accounts Payable
When recording a sale in a perpetual inventory system, what is the credit to the Inventory
account based on?
The cost of the goods sold.
How should material inventory shrinkage be recorded?
As a Loss from Merchandise Inventory Shrinkage on the income statement.
If an invoice of $450,000 is paid after the discount period, what is the debit to Accounts
Payable?
$450,000
In a perpetual inventory system, what is the journal entry to record sales revenue on
account?
Dr) Accounts Receivable
Cr) Sales Revenue
In a perpetual inventory system, what is the journal entry to record the cost of goods sold?
Dr) COGS
Cr) Merchandise Inventory
When a buyer returns merchandise purchased for cash, what is the entry?
Dr) Cash
Cr) Merchandise Inventory
How is the cost of merchandise sold calculated in a periodic inventory system?
Beginning inventory + Purchases - Ending inventory.
What is the cost of merchandise sold if beginning inventory is $175, purchases are $635,
and ending inventory is $160?
$650
What is the journal entry for collecting a $1,200 account after the discount period has
expired?
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, Dr) Cash $1,200
Cr) Accounts Receivable $1,200
What does the current ratio measure?
A company's ability to pay short-term obligations with current assets.
What is the purpose of closing entries?
To transfer temporary account balances to permanent accounts like Retained Earnings.
What is the difference between perpetual and periodic inventory systems?
Perpetual updates inventory records continuously; periodic updates only at the end of the period.
What does the term '3/15, n/45' mean?
A 3% discount if paid within 15 days, otherwise the net amount is due within 45 days.
What is inventory shrinkage?
The loss of inventory due to theft, damage, or errors.
Are dividends considered an expense on the income statement?
No, they are a distribution of earnings and are closed directly to Retained Earnings.
What is the journal entry for a sale on account in a perpetual system?
Dr) Accounts Receivable
Cr) Sales Revenue
Dr) COGS
Cr) Merchandise Inventory
How are Notes Payable due within two years classified?
As long-term liabilities.
To which account is the balance of the Income Summary account closed?
Retained Earnings.
How is the ending balance of Retained Earnings calculated?
Beginning Retained Earnings + Net Income - Dividends.
Which types of accounts appear on a post-closing trial balance?
Permanent accounts (assets, liabilities, and equity).
What is the formula for the current ratio?
Current Assets / Current Liabilities.
What does a current ratio of 2.00 indicate?
The company has $2 in current assets for every $1 of current liabilities.
How is gross profit calculated?
Net sales revenue - COGS
What is the formula for gross profit?
Sales - (sales discounts and sales returns and allowances) - cost of merchandise sold
What is the primary difference in recording returns between a buyer and a seller?
The buyer adjusts Inventory (perpetual), while the seller adjusts Sales Returns and Allowances.
Which of the following is NOT considered a cash equivalent: 90-day commercial paper, 6-
month Treasury bill, or 75-day CD?
U.S. Treasury bills with an original maturity of 6 months.
What does the balance in the Allowance for Doubtful Accounts represent at the end of the
year?
The total estimated uncollectible accounts.
How is the net realizable value of accounts receivable calculated?
Accounts Receivable balance - Allowance for Doubtful Accounts balance.
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