Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Closing Entries

Financial Accounting

3. Accrual Accounting Concepts

Closing Entries

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Multiple Choice

Which of the following statements regarding closing out overapplied or underapplied overhead is correct?

Overapplied overhead increases the balance of Cost of Goods Sold when closed.

Underapplied overhead is always carried forward to the next accounting period.

Overapplied overhead is typically closed to Cost of Goods Sold, reducing its balance.

Both overapplied and underapplied overhead are closed directly to retained earnings.

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Verified step by step guidance

Understand the concept of overapplied and underapplied overhead: Overapplied overhead occurs when the allocated overhead costs exceed the actual overhead costs incurred, while underapplied overhead occurs when the allocated overhead costs are less than the actual overhead costs incurred.

Recognize the typical treatment of overapplied and underapplied overhead: These amounts are usually adjusted at the end of the accounting period to ensure accurate financial reporting. They are not carried forward to the next period but are closed to specific accounts.

Analyze the impact on Cost of Goods Sold (COGS): Overapplied overhead reduces the balance of COGS when closed because it represents an excess allocation that needs to be subtracted. Conversely, underapplied overhead increases the balance of COGS because it represents a shortfall that needs to be added.

Understand why these adjustments are made: Closing overapplied or underapplied overhead to COGS ensures that the financial statements reflect the actual costs incurred during the period, providing a more accurate representation of profitability.

Clarify the incorrect statements: Overapplied and underapplied overhead are not carried forward to the next accounting period, nor are they closed directly to retained earnings. Instead, they are typically closed to Cost of Goods Sold or allocated between COGS, inventory, and other accounts depending on the company's policy.