Accounting 201 Midterm 1

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Property, Plant, & Equipment

Assets that last longer than the year and are used in operations of business (Accumulated depreciation)

Current Liabilities (what we owe within 1 year)

Bank Loan, Wages Payable, Notes Payable, Rent Payable, Accounts Payable, Unearned Revenue

Long-Term Liabilities (Pay longer than 1 year)

Bank loan, Leases payable, pension obligations, mortgage payable, bonds

Current Assets

Cash, Inventory, Supplies, Short-Term Investments, Accounts Receivable, Prepaid Insurance, Notes Receivable

Decrease in Asset

Credit

Decrease in Dividends

Credit

Decrease in Expenses

Credit

Increase in CC / CS

Credit

Increase in Liabilities

Credit

Increase in Retained Earnings

Credit

Increase in Revenue

Credit

Working Capital (equation)

Current Assets - Current Liabilities

Current Ration (equation)

Current Assets / Current Liabilities

Decrease in CC / CS

Debit

Decrease in Liabilities

Debit

Decrease in Retained Earnings

Debit

Decrease in Revenue

Debit

Increase in Dividends

Debit

Increase in Expenses

Debit

Increase in asset

Debit

Rules for Double - Entry Accounting

Debit = Credit, each transaction must have 1 debit and 1 credit

Accounting Equation - Equity

Equity = Contributed Capital + Retained Earnings

A credit to an asset account means that asset account has been increased.

False

A different set of financial statements usually is prepared for each user.

False

A journal entry is a notation that consists of either a single debit or a single credit that is recorded in the general ledger.

False

All expenses incurred by a business are paid immediately in cash.

False

Classified balance sheets list accounts in alphabetical order.

False

Entering transactions into the journal is called posting.

False

For accounting purposes, a business and its owner are considered the same entity.

False

In a journal entry, debits are always indented.

False

In practice, accounting information is quite simple and precise.

False

Net income results when expenses exceed revenues.

False

Profitability means having enough cash on hand to pay bills when they become due.

False

Revenue is produced when accounts receivable are collected.

False

The Retained Earnings portion of a corporation represents the initial contribution of capital to the business.

False

The heading for a balance sheet might include the line "For the Month Ended December 31, 20--."

False

The matching rule is most closely related to the cash basis of accounting.

False

Revenues have the effect of increasing stockholders' equity.

True

The intentional preparation of misleading financial statements is referred to as fraudulent financial reporting.

True

The main difference between intangible assets and property, plant, and equipment is physical substance.

True

The statement of cash flows discloses significant events related to the operating, investing, and financing activities of a business.

True

To understand accounting information, users must be familiar with the accounting conventions, or rules of thumb, used in preparing financial statements.

True

When a company pays an employee for work performed, it is considered an economic event that is recorded as a transaction.

True

When a company receives a product previously ordered, a recordable transaction has occurred.

True

Rules of Adjusted Journal Entry

1) Was the transaction already recorded? 2) Every entry must have 1 balance sheet and 1 income statement, 3) NEVER CASH!!!!

Accounting Equation - Balance Sheet

Assets = Liabilities + Equity

Accounts Receivable

Money that people owe to you (income you receive)

Accounts Payable

Money that you owe to others

Return on Assets (equation)

Net Income / Average Total Assets

Profit Margin (equation)

Net Income / Total Sales

Accounting Equation - Income Statement

Net Income = Revenues - Expenses

Two Financial Goals of Business

Profitability = able to make money in business, and Liquidity = ability to pay off debt

Asset Turnover (equation)

Revenues / Average Total Assets

Debt to Equity Ration (equation)

Total Liabilities / Stockholder's Equity

A corporation is an economic unit that is legally separate from its owners.

True

A journal entry is a notation that records a single transaction in the chronological accounting record known as the book of original entry.

True

A material item is one that is likely to affect a user's decision.

True

A transaction should be recorded when title to merchandise passes from the supplier to the purchaser and creates an obligation to pay.

True

Accountants focus on the needs for financial information by both internal and external decision makers.

True

Accounting information contains numerous estimates, classifications, summarizations, judgments, and allocations.

True

Accrual accounting is an application of the matching rule.

True

Adjusting entries are useful in allocating costs among two or more accounting periods.

True

Almost every revenue or expense account on the income statement has one or more related accounts on the balance sheet.

True

An adjusted trial balance proves the balance of the ledger accounts after the adjusting entries have been posted.

True

An adjusting entry includes at least one balance sheet account and at least one income statement account.

True

Business transactions are economic events that should be recorded in the accounting records.

True

Corporate governance is the oversight of a company's management performance and ethics by its board of directors.

True

Equity is increased when net income exceeds dividend distributions.

True

Even when no errors have been made, accounting is never 100 percent accurate because of the extensive use of estimates.

True

Financial position may be assessed by referring to a balance sheet

True

Investors and creditors use financial statements to evaluate a company's ability to pay dividends and interest.

True

Net assets equal stockholders' equity.

True

Purchasing office supplies on account is an example of one way a company can take advantage of deferring a cash payment.

True

Recording incurred but unpaid expenses is an example of an accrual.

True

Investment

assets that you are holding for sale and are not part of your operations

Accounting Equation - Retained Earnings

eR/E = bR/E/ + Net Income - Dividends

Return on Equity (equation)

net income / average stockholders equity


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