ACC 210 Exam 1
When the Trial Balance is prepared and found to be in balance we can conclude that:
The General Ledger is in balance.
Duke, Inc. purchased $25,000 of office supplies throughout 2021. They had $5,000 of office supplies on hand at January 1, 2021 and a physical count of the office supplies inventory at December 31 found $8,000 of supplies remaining. If Duke only prepares adjusting journal entries on December 31 each year, what amount of Supplies Expense will appear on the 2021 Income Statement?
$22,000 Duke had $30,000 of office supplies available to use and still has $8,000 at year-end. hence, they must have used $22,000. That would be the expense to recognize on the Income Statement.
WP, Inc. pays $18,000 for an annual insurance policy on March 1, 2021. They initially debit Prepaid Insurance for that amount. If WP only prepares adjusting journal entries at the end of the year (12/31), how much Prepaid Insurance will appear on the December 31, 2021 Balance Sheet as a result of this transaction?
$3,000 After 10 months (March - December), WP will have consumed $15,000 of the insurance ($18,000 x 10/12). $3,000 will remain as an asset to be reported on the 12/31/2021 Balance Sheet.
TH Corp. borrowed $60,000 from NoleBank on June 1, 2021. The loan must be repaid in nine months (from June 1). The interest rate is 9%. If TH only prepares adjusting journal entries on December 31 each year, how much Interest Expense will they record on December 31, 2021?
$3,150 Interest Expense = $60,000 x .09 x 7/12 = $3,150. June 1 - December 31 is seven months. Also recall that interest rates are expressed as annual rates.
recording process
1. Analyze each transaction in terms of its effect on the accounts. 2. Enter the transaction information in a journal. 3. Transfer the journal information to the appropriate accounts in the ledger.
A closing journal entry should be prepared at what point in the accounting cycle?
Immediately after preparation of the financial statements.
the accounting equation
Assets = Liabilities + Owner's Equity
predictive value
Consistently increasing income helps forecast the company's ability to generate future cash.
adjusting entries
Entries made at the end of an accounting period used to update balances of revenues and expenses that have occurred during the period but that we have. not yet recorded
True or False: Assuming a company has been in business several years, the retained earnings balance which should appear on its adjusted trial balance will be the ending retained earnings balance as opposed to the beginning retained earnings balance.
False
True or False: Dividends return back to the owners of a corporation a portion of their original contributions.
False
The four financial statements published to provide information to external users include:
Income Statement Balance Sheet Statement of Stockholders' Equity Statement of Cash Flows
How is the Chart of Accounts organized?
It is organized in the same manner as the General Ledger: Assets first, followed by liabilities, stockholders' equity accounts, dividends, revenues and expenses.
All else being equal, as a company's expenses increase, what will be the effect on the company's net income?
Net income will decrease.
the three most common forms of business organization:
Partnership Corporation Sole proprietorship
confirmatory value
Positive income is consistent with effectiveness of management.
accrual-basis accounting
Record revenues when goods and services are provided to customers, and record expenses with related revenues
cash-basis accounting
Reporting income when the cash is received and expenses when the cash is paid. not a part of GAAP
journal entry
The form of recording a transaction in a journal.
The heading of an income statement should include:
The name of the business The title of the financial statement The accounting period covered by the statement
True or False: An amount is considered to be material if its omission from or misstatement in a company's financial statements could influence a user's decision about the company.
True
True or False: Under the accrual-basis of accounting, costs incurred to help generate revenues should be recorded as expenses in the same accounting period as those revenues.
True
The overriding objective of financial reporting is to provide information that is:
Useful in decision-making.
double taxation
a corporation pays income taxes on its earnings, and when dividends are distributed to stockholders, the stockholders pay taxes a second time on the corporate dividends they receive
adjusted trial balance
a list of accounts and their balances after all adjusting entries have been made
In accounting, to "close" an account means to:
adjust the account balance to zero.
Which financial statement is prepared as of a particular date as opposed to providing information covering a specific time period?
balance sheet
posting
collecting all transactions per account in one location, transferring info from the journal to individual accounts in the general ledger
aspects of faithful representation:
completeness, neutrality, free from error
After the adjusting entries have been completed, the balance in the Rent Expense account represents the:
cost of rent for the accounting period
Securities Exchange Act of 1934
created the Securities and Exchange Commission (SEC) which has power to require companies that publicly trade stock to prepare periodic offerings of stocks and bonds
Accounts with a normal debit balance
dividends, assets, expenses
periodicity
divides economic life into artificial time periods for reporting
GAAP underlying assumptions
economic entity, monetary unit, periodicity, going concern
net loss
expenses > revenue
common stock
external source of shareholders' equity
cost constraint
financial accounting information is provided only when the benefits of doing so outweigh the costs
Which financial statement should be prepared first?
income statement
retained earnings
internal source of shareholders' equity. revenue-expenses-dividends
prepayment
involve cash flows occurring before revenues and expenses are recognized
accrued expenses
occur when a company has used costs in the current period but has not paid cash for those costs. and adjusting entry is needed to: 1. record the liability to be paid 2. recognize the cost as an expense
accrued revenues
occur when a company provides products or services but hasn't received cash. an adjusting entry is needed to: 1. record an asset for the amount expected to be received 2. recognize revenue
note disclosures
offer additional information either to explain the information presented in the financial statements or to provide information not included in the financial statements
Assets are listed by:
order of liquidity; cash, accounts receivable, prepaid expenses
revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied
net gain
revenue > expenses
Assume a company has been in business for several years. Which "Retained Earnings" account balance should appear on its post-closing trial balance?
the Retained Earnings account balance at the end of the year
assets
total resources of a company
external transactions
transactions the firm conducts with a separate economic entity
closing entries
transfer the balances of all temporary accounts to the balance of the retained earnings account
monetary unit
unit/scale of measurement to measure financial statement elements
temporary accounts
we transfer each balance at the end of the year to the retained earnings account; revenues, expenses, dividends
financial accounting should provide information that:
1. Is useful to investors and creditors in making decisions 2. Helps to predict cash flows 3. Tells about economic resources, claims to resources, and changed in resources and claims
steps to measuring external transactions
1. Use source documents to identify accounts affected by an external transaction 2. Analyze the impact of the transaction on the accounting equation 3. Assess whether the transaction results in a debit or credit to account balances 4. Record the transaction in a journal using debits and credits 5. Post the transaction to the general ledger 6. Prepare a trial balance
closing entries to zero out each account:
1. debit revenue and credit income summary (to close revenue account) 2. debit income summary and credit expense accounts (to close expense accounts) 3. debit income summary and credit retained earnings (to close net income to retained earnings) 4. debit retained earnings and credit dividends (to close dividends to retained earnings)
statement of cash flows
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.
faithful representation
Accounting information that is complete, neutral, and free from error
relevance
Accounting information that possesses confirmatory value and/or predictive value
Financial Accounting Standards Board (FASB)
An independent, private sector body with full time voting members and support staff that has primary responsibility for the establishment of GAAP in the United States
True or False: Technical accounting skills represent the only skills required of accounting professionals
False
Double-entry bookkeeping means that:
We record a change in at least two account balances when we prepare a journal entry.
deferred revenue
a liability resulting from the receipt of cash before the recognition of revenue. an adjusting entry. is needed to: 1. decrease the liability to its remaining amount owed 2. recognize revenue
trial balance
a list of accounts and their balances at a given time, for internal purposes only
post-closing trial balance
a list of all accounts and their balances at a particular date after we have updated account balances for closing entries. does not include temporary accounts since their balances are now zero
auditor
a qualified accountant who inspects the accounting records and practices of a business or other organization; adds credibility to a company's financial statements
management discussion and analysis (MD&A)
a section of a company's annual report which includes management's views on significant events pertaining to the company's operations and resources
T-account
a simplified form of a general ledger account
managerial accounting
accounting information provided for internal users (managers)
financial accounting
accounting information provided to external users. functions are to measure business activities of a company and then to communicate those measurements to external parties for decision making purposes
Sarbanes-Oxley Act
aims to protect investors by making corporate disclosures more reliable and accurate
economic entity
all economic events can be identified with a particular economic entity
liabilities
amounts owed to creditors
contra account
an account with a balance that is opposite that of a related account
prepaid expenses
arise when a company pays cash to acquire an asset that is not used until a later period; an adjusting entry is needed to: 1. decrease the asset's balance to its remaining balance 2. recognize an expense for the cost of the asset used
Prepaid insurance is a(n):
asset in the balance sheet
going concern
assume business will continue indefinitely into the future
operating cycle
average time it takes to provide a service to a customer and collect cash payment
accounting cycle
full set of procedures used to accomplish the measurement/communication process of financial accounting
International Accounting Standards Board (IASB)
global counterpart to FASB
Public Company Accounting Oversight Board (PCAOB)
government entity established in 2002 that ensures auditors follow guidelines when conducting audits
classified balance sheet
groups a company's asset and liability accounts into current and long-term categories
When determining the account balance for a particular account in order to prepare a trial balance, the best place to find the balance would be:
in the general ledger
financing activities
include cash transactions with investors and creditors, such as issuing stock and borrowing money
investing activities
include transactions involving the purchase and sale of resources that are expected to benefit the company for several years, such as the purchase of equipment
operating activities
includes transactions relating to primary operations, such. as providing products and services to customers and the associated costs of doing so
Information that best explains companies' stock price performance is reported on the:
income statement
Klick's journal shows a debit to cash and a credit to common stock. This journal entry indicates that Klick:
issued shares to stockholders
Accounts with a normal credit balance
liabilities, owners' equity, revenues
Dow Jones Industrial Average
major stock market index in the US that bottomed out after the Great Depression
The impact of financial accounting information on investors' and creditors' decisions is closely related to the concept of:
materiality
In addition to the financial statements, what must be included in the annual reports?
notes disclosures and management discussion and analysis.
The statement of cash flows classifies items as:
operating, investing, and financing.
stockholders' equity
owners' claims to resources
aspects of relevance:
predictive value, confirmatory value, materiality
If an adjusting entry's debit is to an expense account, then the credit must be to:
prepaid expense or liability
limited liability
prevents stockholders from being held personally responsible for the financial obligations of the corporation
public accounting firms
professional service firms focused on auditing, tax preparation/planning, and business consulting
journal
provides a chronological record of all transactions affecting a firm
general ledger
provides each account with its individual transactions and resulting account balance
accrual
recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded, involve cash flows occurring after the revenues and expenses are recognized
ethics
refers to a code or moral system that provides criteria for evaluating right and wrong behavior
materiality
reflects the impact of financial accounting information on investors' and creditors' decisions
The hierarchy of qualitative characteristics of financial information require that, in order to be useful for decision making, information should possess the fundamental characteristics of:
relevance and faithful representation
net income
revenues - expenses
1933 Securities Act
set forth accounting and disclosure requirements for initial offerings of securities (stocks and bonds)
The purpose of an income statement is to:
summarize the profit-generating activities that occurred during a particular reporting period
comparibility
the ability of users to see similarities and differences between two business activities
In any given year, the ending balance of retained earnings represents:
the cumulative total of net income - dividends over the life of the company
depreciation
the process of allocating the cost of an asset to expense over its useful life; we reduce the asset indirectly by crediting Accumulated Depreciation, a contra asset account. an adjusting entry will debit depreciation expense (expense account) and credit accumulated depreciation (asset account)