AC 210 Exam 1
The annual depreciation taken on a vehicle totals $3,000. The vehicle has been in service for 3 full years and the adjusting entries have been completed for the year. At the end of the 3rd year, the annual financial statements will report Depreciation Expense equal to _____ and accumulated depreciation equal to _____
3000; 9000
Sole Proprietorship
A business owned by one person
Corporation
A business owned by stockholders who share in its profits but are not personally responsible for its debts
income statement
A financial statement showing the revenue and expenses of the accounting period (revenues - expenses = net income)
A company pays wages every two weeks. Wages amount to $100 a day, and the workers work 7 days a week. On March 31, the company pays wages ($1,400 in total) for the two weeks (14 days) ending March 24. Wages for the week of March 31 ($700) will be paid in April at the end of the first week in April. At the end of the month on March 31, the related adjusting journal entry will include a
Debit to wage expense for $700 and a credit to wages payable for $700.
statement of retained earnings
Reports the way net income and distribution of dividends affected the financial position of the company during the accounting period (1. retained earnings 2. add: NI. 3. subtract: dividends.)
Income Statement Equation
Revenues - Expenses = Net Income
the adjusting entry to record depreciation includes
a debit to depreciation expense; credit to accumulated depreciation
if a consumer has not received the cash yet,
accounts receivable (an asset)
Which of the following items on the balance sheet would be classified as assets?
accounts recievable, property, plant and equipment, prepaid rent
expenses
all costs of doing business that are necessary to earn revenues
The adjusting entry to record the amortization of a long-term asset that lacks physical substance includes a debit to ___ and a credit to ____
amortization expense; accumulated amortization
true
any acct name "receivable" is an asset, any containing "payable" is a liability
creditors
anyone who is owed money
Operating Activities
arise directly from running the business to earn profit (i.e. cash collected from customers+, and cash paid to employees -)
why is deferred revenue account reduced during the adjustment process?
as the seller performs its obligations, it is removed from deferred revenue and transferred into a revenue account
Which of the following is true about the adjusting entry to record the revenue for which the seller has performed of its obligations but not yet collected?
assets will increase SE will increase
permanent accounts
assets, liabilities, SE
Bill's paid $3,050 for the June electricity bill and received the July bill for $3,500, which will be paid in August.
assets: -3050 liabilities: -3050 and +3500
Bill's paid $3,400 to plumbers for repairing a broken pipe in the restrooms.
assets: -3400, liabilities: no effect SE: repairs and maintenance expense (+E) -3400
trial balance
balance sheet and income statement
why is it called unadjusted trial balance?
bc several adjustments will need to be made at the end of the accounting period to update the accounts
equation for RE
beginning RE + NI - Dividends = Ending RE
Financing Activities
cash flows from borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders (i.e. signing a note payable, issuing stock + and cash paid for dividends -)
Investing Activities
cash flows that arise from buying and selling productive resources w long lives (such as buildings, land, equipment, and software) (i.e. cash paid to purchase equipment -)
Deferred Revenue is credited when
cash is collected in advance of the revenue
ledger
collection of records that summarizes, for each amount, the effects of transactions entered in the journal
LLC
combine characteristics of corporations and partnerships
directors
company's board of directors
The adjusting entry to record depreciation on equipment includes a
credit to accumulated depreciation; debit to depreciation expense
CRIL
credit, revenue, investments, liabilities
what type of person would use a financial accounting report?
creditors, investors, etc.
current ratio
current assets/ current liabilities
On July 1, 20X2, RBD Inc. received $5,000 in cash from a customer for services to be provided on September 1, 20X2. Which of the following describes how the transaction should be recorded on July 1, 20X2?
debit cash $5,000, credit deferred revenue $5,000
provide website services to acme company for $20,000 on account
debit: accts. rec. credit: service rev.
sell a $1,000 gift certificate
debit: cash credit: deferred rev.
provide website design services to customers for $40,000
debit: cash credit: service revenue
customer redeems $1,000 gift certificate for website design services
debit: deferred rev. credit: service rev.
received $500 bill for January utilities, to be paid in February
debit: utilities exp. credit: accts payable
the seller's adjusting entry to record the revenue earned by fulfilling its obligation to its buyers which had been collected in advance requires a _____ to Deferred Revenue and a _____ to Sales Revenue
debit; credit
on an adjusted/ unadjusted balance, expenses are ________
debited
DEAD
debits, expenses, assets, dividends
A company owes rent at a rate of $6,000 per month. The company pays the rent owed on the first of each month. At the end of each month, what kind of adjustment is required?
deferral adjustment
As of December 31, the unadjusted balance in Deferred Revenue contains $5,600 for unredeemed gift cards. An analysis of the monthly sales indicates that $3,200 gift cards were redeemed during the month but not yet recorded. How will these transactions affect the adjustments at the end of the period?
deferred revenue needs to be decreased by the amount of gift cards redeemed during the month sales revenue needs to be increased by the amount of gift cards redeemed during the month
duality of effects
each transaction has at least 2 effects on the basic accounting equation
revenues
earned by selling goods or services to customers
dividends
earnings distributed to stockholders, reduction in RE
why are adjustments needed?
entries necessary at the END of each accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts
2 sources of financing
equity and debt
investors
existing and potential stockholders
T/F: Adjusting journal entries always include 2 balance sheet accounts
false
cash recieved from issuing stock
financing
cash recieved when signing a note payable
financing
Managerial Accounting Reports
include detailed financial plans and continually updated reports about the operating performance of the company (made visible only by the company's employees)
adjustments include
income statement and balance sheet accounts
4 types of financial statements
income statement, statement of retained earnings, balance sheet, statement of cash flows
What is the effect on the accounting equation of OEM Company if it issues 1,000 shares of stock in exchange for $5,000 cash?
increase assets; increase SE
the accounts receivable account should be _____ when adjusting at the end of the period for any revenues from fulfilling obligations to buyers which has not yet been collected or recorded
increased/ debited
accounting
information system designed by an organization to analyze, record, and summarize the activities affecting its financial condition and performance. often called the "language of business"
unadjusted trial balance
internal report prepared before end-of-period adjustments listing the unadjusted balances of each account to check the equality of total debits and credits
more expenses...
less equity
If the deferred revenue account is not adjusted at the end of the period as needed, what effect will this have on the financial statements?
liabilities will be overstated and net income will be understated
government agencies
look closely at companies' financial statements. (ex. SEC)
what type of person would use a managerial accounting system?
managers, supervisors, etc.
liabilities
measurable amounts the company expects to give up in the future to settle what it presently owes to creditors
more revenue...
more equity
cash collected from customers
operating
financial accounting reports
prepared periodically to provide information to people not employed by the business
Revenue Recognition Principle
recognize revenue in the time period in which it is earned
journal
record of each day's transactions
cash basis
records revenues when cash is RECEIVED and expenses when cash is PAID (can lead to a distorted view of the company's financial performance)
accrual basis
records revenues when they are EARNED and expenses when they are INCURRED, regardless of the timing of cash receipts or payments (could be money you haven't received yet)
statement of cash flows
reports inflows and outflows of cash during the current accounting period in the categories of operating, investing, and financing
balance sheet
reports the amount of assets, liabilities, and SE of an accounting entity at a point in time (ORDER: cash accts receivable supplies equipment software total assets liabilities accts payable notes payable total liabilities SE equity common stock retained earnings total SE total L and SE)
Stockholders' Equity
represents the owners' claims on assets of the business after creditors' claims have been fulfilled
assets
resource the company controls and expects to benefit from in the future
what is the adjustment for deferred revenue at the end of the month?
revenue
revenue recognition principle means...
revenue is reported when the seller performs work promised to the customer in the amount the seller expects to be entitled to receive from the customer
net income
revenues - expenses
temporary accounts
revenues, expenses, dividends
International Financial Reporting Standards (IFRS)
rules used internationally to calculate and report information in the financial statements
Partnership
same as a sole proprietorship, except that 2 or more owners are responsible for profits, taxes, and legal matters
true
the accounting rules in the US are similar to those used elsewhere in the world
what is the difference between an adjusted/ unadjusted trial balance?
the adjusted is prepared AFTER all the adjustments have been posted
How will a company's current ratio be affected by obtaining a note for the purchase of equipment?
the current ratio will remain unchanged. (bc notes are not current)
The following transactions occurred during July: Received $800 cash for services rendered during July. Received $5,000 from issuance of stock to investors. Received $400 from a customer in payment of accounts receivable from the prior month. Billed customers for services performed in July, $3,500. Borrowed $2,500 from the bank, giving a promissory note in exchange. Received $1,000 from a customer for services to be performed next year. What is the amount of Revenue for July?
$4,300
The Statement of Cash Flows for the current year contained the following Cash paid to purchase land $15,000 Cash collected from clients $10,000 Cash received from selling equipment $23,000 Cash paid for dividends $6,000 Cash paid to suppliers $2,000 Cash received from issuing stock $30,000 What is the amount of Cash Flows from Operating Activities?
$8,000
cash paid for dividends
(financing)
cash paid to purchase equipment
(investing)
cash paid to employees
(operating)
Net Profit Margin
Net Income/revenue
income statement misconceptions
- NI = cash - NI = change in value -measurement of Income involves only counting
Creditors are mainly interested in assessing...
1. Is the company generating enough cash to pay what it owes? 2. Does the company have enough assets to cover its liabilities?
On April 30, 2020, a three-year insurance policy was purchased with a cash payment of $18,000. Coverage began immediately. What is the amount to be reported on the balance sheet as Prepaid Insurance on December 31, 2020?
14,000 (18000/36= 500 x 8= 4,000)
The Don't Tread on Me Tire Company had retained earnings at December 31, 2019 of $200,000. During 2020, the company had revenues of $400,000 and expenses of $350,000, and the company declared and paid dividends of $11,000. Retained earnings on the balance sheet as of December 31, 2020 will be:
239,000
Balance Sheet Equation
Assets = Liabilities + Owner's Equity
basic accounting equation
Assets = Liabilities + Stockholders' Equity
Retained Earnings Equation
Ending RE= Beginning RE + NI - dividends
cash account changes formula
Ending cash= beginning cash + CF from operating activities + CF from investing activities
GAAP (Generally Accepted Accounting Principles)
the rules used in the US to calculate and report information in the financial statements
After the adjustments have been recorded, Deferred Revenue on the balance sheet reports the amount of
the sales or services still owed to the customer
How are financial statements used by decision makers?
they are a key source of information when creditors and investors make decisions concerning a company
the usefulness of financial info is enhanced when it is
timely, verifiable, comparable, and understandable
main goal of GAAP and IFRS
to ensure companies produce financial info the is useful to existing and potential investors, lenders, and other creditors
what is the purpose of the closing process?
to get ready for the next accounting period
Two types of closing journal entries are posted to retained earnings at year-end. These are entries to:
transfer net income (or loss) and dividends declared to RE
T/F: Adjusting journal entries never involve cash.
true
T/F: Assets, liabilities, and equity are permanent accounts that track financial results from year to year.
true
T/F: dividends are not expenses. Instead, they are a reduction in retained earnings.
true
T/F: net income does not equal the amount of cash generated by the business
true
T/F: net income does not represent the change in the company's value
true
True or false: The adjusting entry to record depreciation does not directly reduce the long-lived asset accounts, such as Equipment, so that the original cost of the asset remains unchanged
true
When will Accounts Receivable be involved in an adjusting entry?
when revenue is earned but not yet collected or recorded at the end of the period
when will you NOT debit expenses
when you are closing
Accounts Receivable should be increased for
which the seller has performed of its obligations during the period but not yet collected
accrual basis accounting...
would require that a business report all its revenues, expenses, and net income in the period the service occurs (Month 1)