Accounting Chapter 12 Homework Longterm Liabilities Obligations Debts That Are Not

Chapter 12

Completion of the Accounting Cycle for a Merchandise Company

Using the Perpetual Inventory Method

Chapter Overview

This chapter contains a review of the worksheet and how it is used to prepare financial statements for a

merchandising company. The income statement for a merchandising company is expanded to include:

cost of goods sold, gross profit, operating expenses, and other income and/or expenses in arriving at net

income. The amount of net income or loss is carried to the statement of owner’s equity and the ending

balance in owner’s equity is carried to the balance sheet. The balance sheet is also expanded to include

several classifications: current assets, plant and equipment, and current liabilities.

Learning Objectives

After studying Chapter 12, your students should gain proficiency in the following:

2. Complete Adjusting Entries, Closing Entries, and a Post-Closing Trial Balance for a Merchandise

Company.

3. Complete Reversing Entries.

Chapter 12 Assignment Grid

Estimated Level

Learning Time in of

Assignment Topic(s) Objective(s) Minutes Difficulty

Discussion, Questions and Critical Thinking/Ethical Case

1 Worksheet 1 5 Easy

2 Cost of Goods Sold 1 5 Easy

3 Operating Expense Categories 1 5 Easy

Concept Checks

1 Calculate Net Sales 1 5 Easy

2 Calculate Gross Profit & Net Income 1 10 Easy

3 Classification of Accounts 1 15 Easy

4 Reversing Entries 3 10 Easy

Exercises (Set A)

Exercises (Set B)

12B-1 Account Classification 1 10 Easy

12B-2 Closing Entries 2 10 Easy

12B-3 Balance Sheet 1 15 Easy

12B-4 Adjusting/Reversing Entries 2, 3 30 Medium

12B-5 Adjusting/Reversing Entries 2, 3 30 Medium

Problems (Set A)

12A-1 Income Statement 1 40 Medium

12A-2 Statement of Owners’ Equity/Balance Sheet 1 90 Medium

12A-3 Worksheet & Financial Statements 1, 2 90 Medium

12A-4 Worksheet, Financial Statements, &

Reversing Entries 1, 2, 3 150 Hard

Problems (Set B)

12B-1 Income Statement 1 40 Medium

12B-2 Statement of Owners’ Equity/Balance Sheet 1 40 Medium

Financial Report Problem

Reading Amazon’s Annual Report 1 5 Easy

Keeping It Real

Suarez Computer Center 1, 2 60 Medium

Mini Practice Set

The Elegant Dress Shop

Computerized Accounting Application

Learning Unit 12–Af1: Financial Statements for Merchandise

Companies Using the Perpetual Inventory Method

Summary: The income statement (Figure 12.1) is prepared from the income statement columns of the

worksheet. On the formal income statement, the inside columns in financial reports are used for

subtotaling, not for debit and credit. The income statement is broken down into several sections: revenue,

cost of goods sold, gross profit, operating expenses, other income and other expenses. Net sales are

the gross amount received less sales returns and allowances and sales discounts. The Cost of goods

sold amount represents the cost of those goods (inventory) that were sold in the period. Gross profit is

Statement of owner’s equity is based on the balance sheet column of the worksheet. The capital account

in the ledger should be checked to see whether any additional investments occurred. You add the net

income from the income statement and deduct the withdrawals to calculate the ending figure for capital.

This ending capital amount is carried over to the balance sheet. A classified balance sheet classifies

assets as current assets or plant and equipment, and groups liabilities as current or long-term liabilities.

The operating cycle is the average time it takes to buy and sell merchandise and then collect accounts

Lecture Outline:

1. The income statement is prepared from information included on the worksheet. The format for the

income statement is: Net Sales

– Less: Cost of Goods Sold

= Equals: Gross Profit

– Less: Operating Expenses

= Equals Net Income from

Operations

+ Plus: Other Income

– Less: Other Expenses

= Equals: Net Income

a. Revenues: Gross sales less sales returns and allowances and less sales discounts equals Net

Sales.

i. Some examples of operating expenses are:

a) Sales salaries expense

b) Delivery expense

ii. Some examples of administrative or general expenses are:

a) Rent expense

b) Office salaries expense

e. Other Income (or Other Revenue):

i. Revenue other than revenue from sales or services and appears in a separate section on

the income statement

ii. Examples are: rental income, storage fees, or interest income

f. Other Expenses:

i. Any expense that does not relate to the main operating activities of the business and

2. Statement of Owner’s Equity is prepared from information on the worksheet and the income

statement. The ending balance is carried to the balance sheet. The statement format is:

3. The Balance Sheet: The classified balance sheet is a balance sheet that categorizes assets as current or

plant and equipment, and groups liabilities as current or long-term.

a. Current Assets are:

i. cash and other assets that will be converted into cash or used up during a normal

operating cycle (generally, one year)

c. Current Liabilities:

i. obligations or debts that will come due within one year or within the operating cycle,

whichever is longer

ii. Examples are: current portions of long-term debt (such as the portion of a mortgage

payable which must be paid in the next year), accounts payable, and accrued liabilities

d. Long-Term Liabilities:

i. obligations (debts) that are not due or payable for more than one operating cycle or a year

whichever is longer

ii. listed in the order the debt was incurred and includes the long-term portion of long-term

debt

iii. Examples: long-term notes payable, long-term portion of a mortgage payable

e. Owner’s Equity (on the balance sheet) is the ending balance carried from the statement of

owner’s equity

Teaching Tips/Strategy: Ask students to provide examples of merchandising businesses that are familiar

to them. Use the Success Coach LU 12-1 to reinforce the concept. The Concept Checks #1, #2, and #3 are

useful for class demonstration to practice section calculations. Practice account classification and

financial statement placement utilizing Exercises 12A-1 or 12B-1. As a final review, assign Problem 12A–

Learning Unit 12-2: Journalizing and Posting Adjusting and Closing

Entries: Preparing the Post-Closing Trial Balance

Summary: Closing entries are prepared to clear all temporary accounts in the ledger to zero and to update

capital in the ledger to its latest balance. The company uses the worksheet to complete the closing

process. Close all balances on the income statement credit column of the worksheet, by debits. Close all

The post-closing trial balance (Figure 12.7) is prepared from the general ledger after all adjusting

and closing entries are posted. All temporary accounts have been closed and are not shown, and the

capital account has been adjusted to the updated balance as of the end of the period.

Key Concepts: None

Lecture Outline:

1. The goals of closing are the same for a merchandise company as they are for a service

company. The goals are

a. to clear all temporary accounts in the ledger to zero

b. to update capital in the ledger to its latest balance

c. The closing steps are:

a) Close all balances on the income statement credit column (revenues)

of the worksheet

b) Close all balances on the income statement debit (expenses) column

of the worksheet

The journal entry to record the closing is:

c) The ending balance of income summary is transferred to the capital

account.

The journal entry is:

(Use when revenues > expenses = net income or the income summary has a

credit balance)

d) The balance of the withdrawals is transferred to the capital account

The journal entry is:

2. After all the adjusting entries (Figure 12.5) and closing entries (Figure 12.6) are journalized

and posted:

3. Post-closing trial balance:

Teaching Tips/Strategy:

After the class discussion, utilize the Accounting Coach LU 12-2 to assess the level of retention of the

material presented in this section. Explain the reasons why all entries presented on the worksheet are not

“official” until journalizing and posting has occurred. Clarify why the net income from the worksheet

might not match the financial statements unless you journalize and post all required adjustments.

Use the “Ten–Minute Quiz” questions #6 and #8 to reinforce learning these concepts.

Learning Unit 12-3: Reversing Entries (Optional Section)

Summary: Reversing entries are an optional bookkeeping technique in which certain adjusting entries

are reversed or switched on the first day of the new accounting period so that transactions in the new

period can be recorded without referring back to prior adjusting entries. Reversing entries are general

journal entries that are the opposite of adjusting entries. Reversing entries help reduce potential errors and

simplify the recordkeeping process.

Key Concepts: Reversing entries

Lecture Outline:

1. Reversing entries:

a. adjusting journal entries are reversed, on the first day of the new accounting period, so

that transactions in the new period can be recorded without referring back to prior

adjusting entries

b. reversing journal entries are general journal entries that are the opposite of adjusting

entries

c. Comparison of the system without the entries

i. Journal entries for the accrual of salaries without using a reversing entry:

If the December entry was:

Salaries Expense (December portion) XX

Salaries Payable XX

ii. Journal entries for the accrual of salaries with reversing entries:

If the December entry was:

Salaries Expense XX

Reversing Entry: (See Fig. 12.10)

Teaching Tips/Strategy: Explain to students that reversing entries are optional. The purpose of

reversing entries is to simplify the adjustment and recording process. To introduce the students to this

topic, use the Concept Checks #4 as a demonstration exercise. At the end of the chapter, you can assign

either problem 12A-4 or 12B-4 that covers and details all the chapter’s objectives.

Use the “Ten-Minute Quiz” questions #9 and #10 to reinforce the concepts.

Name Date Section

CHAPTER 12

TEN-MINUTE QUIZ

Circle the letter of the best response.

1. Current assets include all of the following except:

a. cash b. accounts receivable

c. land d. merchandise inventory

2. Gross profit less operating expenses equals

a. cost of goods available for sale b. net income

c. gross profit d. net income from operations

3. Net sales less cost of goods sold equals

a. cost of goods available for sale b. net income

c. gross profit d. net income from operations

4. A company breaks expenses into selling expenses and administrative expenses. Which of the

following is not a selling expense?

a. advertising expenses b. delivery expense

c. depreciation expense, office equipment d. commission expense

5. A company’s net sales is $120,000; cost of goods sold is $37,000; selling expenses are $25,000;

administrative expenses are $29,000; and interest income is $3,000. How much is net income?

a. $29,000 b. $32,000

c. $83,000 d. $123,000

6. Closing entries are prepared to

a. reduce all permanent account balances to zero

b. reduce all temporary account balances to zero

c. reduce all permanent and temporary account balances to zero

d. reduce net income to zero

7. A company’s net sales is $120,000; cost of goods sold is $37,000; selling expenses are $25,000;

administrative expenses are $29,000; and interest income is $3,000. How much is net income

from operations?

a. $29,000 b. $32,000

c. $83,000 d. $123,000

8. A post-closing trial balance is best prepared from

a. the general ledger b. the general journal

c. the financial statements d. the worksheet

9. If an adjusting entry was made to record the December unpaid portion of salaries expense of

$770, the reversing entry would be

a. debit salaries expense and credit salaries payable

b. debit salaries expense and credit income summary

c. debit salaries payable and credit salaries expense

d. debit income summary and credit salaries expense

10. A reversing entry could be used for

a. adjusting entries for salaries payable b. adjusting entries for prepaid insurance

c. adjusting entries for unrecorded revenue d. adjusting entries for unearned revenue

Answer Key to Chapter 12 Quiz

1. c