Accounting 205 3T Exam 1 Study Set

What is verifiability?

Information is verifiable if different knowledgeable and independent observers can reach similar conclusions.

What is understandability?

Informed users can understand the significance of the information.

What are the two groups that are users of accounting information?

Internal and external users

what is the IASB and what do they do?

International Accounting Standards Board -their purpose is to eliminate differences in accounting standards across the world

What is investing?

Investing is using savings to earn more money for future financial security.

What are current liabilities?

Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer, and which will be met through the transfer of a current asset or the creation of another current liability Examples: Salaries and wages payable, interest payable, unearned service revenue, accounts payable

Disadvantages of a corporation

-double taxation -cost of setup and report filing

What are the four closing entries?

1) Close all revenue accounts to the income summary account 2) Close all expense accounts to the income summary account 3) Close the income summary account to retained earnings 4) Close the Dividends Declared account to Retained Earnings

Match the following advantages with the correct organization: 1. Easier to raise funds 2. Simple to establish 3. No personal legal liability 4. Tax advantages 5. Easier to transfer ownership

1. Corporation 2. Sole proprietorship and partnership 3. Corporation 4. Sole proprietorship and partnership 5. Corporation

Pamela Quinn started her own consulting firm, Quinn Consulting, on May 1, 2021. The trial balance at June 30 is as shown below. QUINN CONSULTING Trial Balance June 30, 2021 Debit Credit Cash $ 7,500 Accounts Receivable 3,000 Prepaid Insurance 3,600 Supplies 2,500 Equipment 12,000 Accounts Payable $ 3,500 Unearned Service Revenue 4,000 Common Stock 19,100 Service Revenue 7,500 Salaries and Wages Expense 4,000 Rent Expense 1,500 $ 34,100 $ 34,100 In addition to those accounts listed on the trial balance, the chart of accounts for Quinn Consulting also contains the following accounts: Accumulated Depreciation—Equipment, Salaries and Wages Payable, Depreciation Expense, Insurance Expense, Utilities Expense, and Supplies Expense. Other data: 1. $750 of supplies were used as of June 30. 2. Utility costs incurred but not paid are $260. 3. The insurance policy is for 2 years. 4. $1,500 of the balance in the Unearned Service Revenue account remains unearned at the end of the month. 5. The equipment has a 5-year life with no salvage value and is being depreciated at $200 per month for 60 months. Instructions Prepare the adjusting entries on June 30. Assume no other adjusting entries have been made.

1. Debit: Supplies Expense $750 Credit: Supplies $750 2. Debit: Utility Expense $260 Credit: Accounts Payable: $260 3. Debit: Insurance Payable $150 Credit: Prepaid Insurance $150 4. Debit: Unearned Service Revenue $2,500 Credit: Service Revenue $2,500 5. Debit: Depreciation Expense $200 Credit: Accumulated Depreciation- Equipment $200

Identify the following items as an asset, liability, common stock, revenue, or expense, and match them with the correct business activity: 1. Renting property 2. Purchase truck 3. Notes payable 4. Issuing shares of ownership 5. Money earned from performing a service 6. Amount owed to suppliers

1. Expense; Operating 2. Asset; Investing 3. Liability; Financing 4. Common stock; Financing 5. Revenue; Operating 6. Liability; Operating

Three types of business activities

1. Financing 2. Investing 3. Operating

What are the measurement principles in financial reporting?

1. Historical Cost Principle 2. Fair Value Principle 3. Full Disclosure Principle

What are the assumptions in financial reporting?

1. Monetary Unit Assumption 2. Economic Entity Assumption 3. Periodicity Assumption 4. Going Concern Assumption

Use the following accounts and information to prepare, in good form, an income statement and a retained earnings statement, for the month of August and a balance sheet at August 31, 2018 for Pierce Industries. Accounts payable $ 3,100 Dividends $ 3,000 Accounts receivable 5,400 Insurance expense 1,200 Buildings 63,000 Supplies 1,400 Cash 18,600 Notes payable 3,300 Service revenue 25,700 Rent expense 3,400 Common stock 52,000 Salaries and wages expense 12,000 Retained earnings (beginning) 25,900 Repairs Expense 2,000

1. Pierce Industries Income Statement for the month ending 8/31/18 Revenue Service Revenue: $25,700 Expenses Insurance Expense: $1,200 Rent Expense: $3,400 Salaries and Wages Expense: $12,000 Repairs Expense: $2,000 Total Expenses: $18,600 Net income: $7,100 2. Pierce Industries Statement of Retained Earnings for the month ending 8/31/18 Beginning Bal. $25,900 Net Income: $7,100 Dividends: $3,000 Ending Bal. $30,000 3. Pierce Industries Balance Sheet as of 8/31/18 Assets Accounts Receivable: $5,400 Buildings: $63,000 Cash: $18,600 Supplies: $1,400 Total Assets: $88,400 Liabilities Accounts Payable: $3,100 Notes Payable: $3,300 Total Liabilities: $6,400 Stockholders' Equity Common Stock: $52,000 Retained Earnings: $30,000 Total Stockholders' Equity: $82,000 Total Liabilities and Stockholders' Equity: $88,400

Three forms of business organizations

1. Sole Proprietorship 2. Partnership 3. Corporation

Identify the following statements as true or false: 1. Accounting is the information system that identifies, records, and communicates economic events to interested users. 2. Accounting data is prepared for two broad groups of users, owners and management. 3. Investors and creditors are examples of internal users of accounting information.

1. True 2. False 3. False

What is a corporation?

A business owned by stockholders who share in its profits but are not personally responsible for its debts

What is book value?

A depreciable asset's cost minus accumulated depreciation.

What is the retained earnings statement?

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.

What is the income statement?

A report of net income or loss over an accounting period

What are accounts

A standardized format that organizations use to accumulate the dollar effects of transactions on each financial statement item.

What is a double entry system?

A system that records the two-sided effect of each transaction in appropriate accounts.

What is a trial balance?

A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.

What are liabilities?

Amounts owed to creditors

contra accounts (or contra asset accounts)

An account offset against another account.

T account

An accounting device used to analyze transactions

What is the Financial Accounting Standards Board?

An agency that creates US standards

Balance Sheet Equation

Assets = Liabilities + Stockholders' Equity

What happens to the use of data analytics to support decisions as data access and analytical software improves?

Becomes more common.

Retained Earnings Equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Statement of Cash Flows Equation

Cash flows from operating activities + cash flows from investing activities + cash flows from financing activities = change in cash

What are some examples of assets?

Cash, Accounts Recievables, Inventory, Equipment

What are the enhancing qualities?

Comparability, verifiability, timeliness, and understandability

April 30th: paid $1,000 of the balance owed to Supplies Depot for the supplies purchased on account on April 23rd.

Debit: Accounts Payable $1,000 Credit: Cash $1,000

April 30th: Paid $400 of the balance owed for the advertising purchased on account on April 8th.

Debit: Accounts Payable $400 Credit: Cash $400

March 30th: Paid Tahoe Company in full for equipment purchased on March 10

Debit: Accounts Payable $5,500 Credit: Cash $5,500

March 5th: Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,200 cash.

Debit: Advertising Expense $1,200 Credit: Cash $1,200

April 8th: Purchased advertising in local newspaper for $2,200 on account.

Debit: Advertising Expense $2,200 Credit: Accounts Payable $2,200

March 18th: Received golf fees of $1,600 in cash from customers for golf services performed.

Debit: Cash $1,600 Credit: Service Revenue $1,600

April 2nd: Borrowed $160,000 from Bank of Non-Cents

Debit: Cash $160,000 Credit: Notes Payable $160,000

March 19th: Sold 100 coupon books for $25 each in cash. Each book contains 10 coupons that enable the holder to play one round of miniature golf or hit one bucket of golf balls. (Hint: The revenue should not be recognized until customers use the coupons.)

Debit: Cash $2,500 Credit: Unearned service Revenue $2,500

April 1st: Stockholders invested $40,000 cash in the business in exchange for common stock.

Debit: Cash $40,000 Credit: Common Stock $40,000

March 1st: Stockholders invested $50,000 cash in the business in exchange for common stock of the corporation

Debit: Cash $50,000 Credit: Common Stock $50,000

April 20th: Received $6,000 in cash from customers for admission fees

Debit: Cash $6,000 Credit: Service Revenue $6,000

April 25th: Sold 1000 coupon books for $90 each. Each book contains ten coupons that entitle the holder to one admission to the park. (Hints: The revenue should not be recognized until the coupons are used.)

Debit: Cash $9,000 Credit: Unearned Service Revenue $9,000

April 30th: Received $9,900 in cash from customers for admission fees.

Debit: Cash $9,900 Credit: Service Revenue $9,900

March 31st: Received $900 in cash from customers for golf services performed.

Debit: Cash $900 Credit: Service Revenue $900

March 25th: Paid a $500 cash dividend.

Debit: Dividends $500 Credit: Cash $500

April 17th: Paid $600 cash dividends

Debit: Dividends $600 Credit: Cash $600

March 10th: Purchased golf clubs and other equipment for $5,500 from Tahoe Company, payable in 30 days.

Debit: Equipment $5,500 Credit: Accounts Payable $5,500

April 4th: Purchased land costing $150,000 for cash

Debit: Land $150,000 Credit: Cash $150,000

March 3rd: Purchased Snead's Golf Land for $38,000 cash. The price consists of land $23,000, building $9,000, and equipment $6,000. Record this in a single entry.

Debit: Land $23,000 Debit: Building $9,000 Debit: Equipment $6,000 Credit: $38,000

March 6th: Paid cash $2,400 for a 1-year insurance policy

Debit: Prepaid Insurance $2,400 Credit: Cash $2,400

April 11th: Paid salaries to employees of $5,700

Debit: Salaries and Wages Expense $5,700 Credit: Cash $5,700

March 30th: Paid salaries of $800.

Debit: Salaries and Wages Expense $800 Credit: Cash $800

April 23rd: Purchased $1,000 worth of supplies on account from Supplies Depot.

Debit: Supplies $1,000 Credit: Accounts Payable $1,000

April 14th: Purchased $550 worth of supplies for cash

Debit: Supplies $550 Credit: Cash $550

What are dividends?

Dividends are distributions of a corporations profits to its stockholders.

Advantages of Partnership

Ease of start-up Availability of capital and credit Personal interest Combined business skills and knowledge Retention of profits No special taxes

What are closing entries?

Entries made by a business to transfer the ending balances from its temporary revenue and expense account into its permanent account for owner's capital.

What are prepaid expenses?

Expenses paid in cash and recorded as assets before they are used or consumed Overstated as asset and understated as expense

What is a classified balance sheet?

Groups companies assets into current and long-term assets and liabilities

These items are taken from the financial statements of Marsh, Inc. Prepaid Insurance $1,400 Land held for Investment 30,000 Equipment 37,000 Salaries and Wages Expense 36,000 Utilities Expense 2,100 Accumulated depreciation - equipment 8,600 Accounts Payable 8,200 Debt Investments (long-term) 12,000 Cash 5,100 Accounts Receivable 4,900 Salaries and wages payable 2,000 Common stock 28,000 Depreciation expense 4,300 Retained earnings (beginning) 101,000 Dividends 2,600 Service revenue 53,000 Accumulated depreciation - building 15,000 Supplies 3,000 Notes payable (long-term) 33,000 Maintenance and repairs expense 2,600 Land 22,000 Building 90,000 Unearned service revenue 6,000 Insurance expense 1,800 Instructions: Prepare an income statement, a retained earnings statement for the year, and a classified balance sheet as of December 31, 2017.

Marsh, Inc. Income Statement For the year ending 12/31/17 Revenue Service Revenue: $53,000 Total Revenue: $53,000 Expenses Salaries and Wages Expense: $36,000 Utilities Expense: $2,100 Depreciation Expense: $4,300 Maintenance and Repairs Expense: $2,600 Insurance Expense: $1,800 Total Expense: $46,800 Net Income: $6,200 Marsh, Inc. Statement of Retained Earnings For the year ending 12/31/17 Beginning Bal.: $101,000 Add: Net Income: $6,200 $107,200 Less: Dividends: $2,600 Ending Bal.: $104,600 Marsh, Inc. Balance Sheet As of 12/31/17 Assets Current Assets Prepaid Insurance: $1,400 Cash: $5,100 Accounts Receivable: $4,900 Supplies: $3,000 Total current assets: $14,400 Long-Term Investments Land held for Investment: $30,000 Debt Investments (long-term): $12,000 Total Long-Term investments: $42,000 Property, Plant, and Equipment Equipment: $37,000 Less: Accumulated Depreciation - Equip.: $8,600 Net Equipment: $28,400 Land: $22,000 Building: $90,000 Less: Accumulated Depreciation - Building: $15,000 Net Building: $75,000 Total PPE: $125,400 Total Assets: $181,800 Liabilities Current Liabilities Accounts Payable: $8,200 Salaries and Wages Payable: $2,000 Unearned Service Revenue: $6,000 Total Current Liabilities: $16,200 Long-Term Liabilities Notes Payable (long-term): $33,000 Total Long-Term Liabilities: $33,000 Stockholders' Equity Common Stock: $28,000 Retained Earnings: $104,600 Total Stockholders' Equity: $132,600 Total Liabilities and Stockholders' Equity: $181,800

April 12th: Hired park manager at a salary of $3,600 per month, effective May 1st

No transaction entry needed.

What are intangible assets?

Provides exclusive rights and privileges. NO physical substance but are very valuable. Examples: Patents, accumulated amortization, trademarks, goodwill

What are the fundamental qualities of useful information?

Relevance and faithful representation

What is cash basis accounting?

Reporting income when the cash is received and expenses when the cash is paid.

Income Statement Equation

Revenues - Expenses = Net Income

What are the most common sources of revenue?

Sales revenue, service revenue, and interest revenue

What happens when revenues exceed expenses?

Shows net income

What happens when expenses exceed revenues?

Shows net loss

What is depreciation?

The allocation of the cost of an asset to a number of years.

What are deferrals?

The deferral of revenues or expenses to a future period.

What are transactions?

The economic events of a business that are recorded by accountants.

What is a general journal?

The first place where data is recorded

What is a general ledger?

The general ledger provides in a single location the list of transactions affecting each account and the account's balance.

What is accounting?

The information system that identifies, records, and communicates the economic events of an organization to interested users.

transcation analysis

The process of identifying the specific effects of economic events on the accounting equation

What is an accounting information system?

The system of collecting and processing transaction data and communicating financial information to decision-makers.

What is an adjusted trial balance?

This shows the ending account balances for all ledger accounts once the adjusted entries have been completed

What is accrual basis accounting?

Transactions recorded in the periods in which the events occur. Companies recognize revenues when they perform services (rather than when they receive cash). Expenses are recognized when incurred (rather than when paid).

What are the Generally Accepted Accounting Principles?

US accounting standards

Disadvantages of Partnership

Unlimited liability Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership

What are external users?

Users that are external to business and used to make choices.

What is a journal?

a chronological record of transactions

What is equity?

a condition in which people receive from a relationship in proportion to what they give to it

What is a balance sheet?

a statement of the financial condition of a business on a specific date.

Liabilities are generally classified on a balance sheet as a. current liabilities and long-term liabilities. b. present liabilities and future liabilities. c. small liabilities and large liabilities. d. tangible liabilities and intangible liabilities.

a. current liabilities and long-term liabilities.

A current asset is a. expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer. b. the last asset purchased by a business. c. usually found as a separate classification in the income statement. d. an asset which is currently being used to produce a product or service.

a. expected to be converted to cash or used in the business within one year or one operating cycle, whichever is longer.

What is relevance?

accounting information has relevance if it would make a difference in a business decision

What are some examples of liabilities?

accounts payable, notes payable, wages payable

What is the expense recognition principle?

aka Matching Principle Recognize expenses in the same period as revenue earned, if they are directly related

What are permanent accounts?

all balance sheet accounts which remain at the end of each accounting period and the balances carried forward to the next accounting period.

What are temporary accounts?

all revenue accounts, all expense accounts, dividend accounts that are closed and amounts ultimately transferred to retained earnings at the end of each accounting period

What is the Securities and Exchange Commission?

an independent agency of the government that regulates financial markets and investment companies

What is equity financing?

arranging funding by selling ownership shares in the company, publicly or privately

What is property, plant, and equipment?

assets with relatively long useful lives that are currently used in operating the business Examples: Land, buildings, equipment

In 2022, Sheffield Corp. had cash receipts of $ 37100, including additional owner investments of $10,000, and cash disbursements of $ 21200. Sheffield Corp. purchased equipment of $12,000 on account. Sheffield's cash balance at December 31, 2022 was $ 68900. What was Sheffield's January 1, 2022 cash balance? a. $ 63600 b. $ 53000 c. $ 84800 d. $ 90100

b. $ 53000

Sheffield Corp. began the year with retained earnings of $393000. During the year, the company recorded revenues of $485000, expenses of $377000, and paid dividends of $38500. What was Sheffield's retained earnings balance at the end of the year? a. $823500 b. $462500 c. $485000 d. $523500

b. $462500

Which of the following describes the classification and normal balance of the Unearned Rent Revenue account? a. Asset, debit b. Liability, credit c. Expense, debit d. Revenues, credit

b. Liability, credit

Net income results when a. Revenues < Expenses. b. Revenues > Expenses. c. Revenues = Expenses. d. Assets > Liabilities.

b. Revenues > Expenses.

Which of the following describes the classification and normal balance of the Retained Earnings account? a. Expense, debit b. Stockholders' equity, credit c. Asset, debit d. Revenues, credit

b. Stockholders' equity, credit

The basic form of a journal entry has the a. credit account entered first at the extreme left margin. b. debit account entered first at the extreme left margin. c. debit account entered first and indented. d. credit account entered first and indented.

b. debit account entered first at the extreme left margin.

Accounting information should be verifiable in order to enhance a. comparability. b. faithful representation. c. consistency. d. relevance.

b. faithful representation.

What is debt financing?

borrowing money and not giving up ownership

What is a sole proprietorship?

business owned and operated by one person

What is a partnership?

business owned by 2 or more people

Which of the following statements is true? a. Amounts received from issuing stock are revenues. b. Amounts paid out as dividends are reported on the income statement. c. Amounts paid out as dividends are not expenses. d. Amounts received from issued stock are reported on the income statement.

c. Amounts paid out as dividends are not expenses.

Which one of the following represents the expanded basic accounting equation? a. Assets - Liabilities - Dividends = Common Stock + Revenues - Expenses b. Assets = Revenues + Expenses - Liabilities c. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues d. Assets = Liabilities + Common Stock + Dividends - Revenue - Expenses

c. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues

Accumulated Depreciation is a(n): a. stockholders' equity account. b. liability account. c. contra asset account. d. expense account.

c. contra asset account.

Before adjusting entries, unearned revenues are: a. recognized as revenue and recorded as liabilities before they are received. b. recognized as revenue but not yet received or recorded. c. received and recorded as liabilities before they are recognized as revenue. d. recognized as revenue and already received and recorded.

c. received and recorded as liabilities before they are recognized as revenue.

What are unearned revenues?

cash received before services are performed Overstated as liability and understated as revenue

What are some examples of equity?

common stock and retained earnings

What are the most common sources of expenses?

cost of goods sold, wages, advertising expenses, and rent expenses

Marigold Corp. began the year with retained earnings of $103000. During 2022, the company issued $83000 of common stock for cash. The company recorded revenues of $785000, expenses of $638000, and paid dividends of $42000. What was Marigold's net income for the year 2022? a. $188000 b. $230000 c. $105000 d. $147000

d. $147000

Which of the following accounts is increased with a debit? a. Common Stock b. Interest payable c. Service Revenue d. Dividends

d. Dividends

Dividends paid a. increase assets. b. increase expenses. c. decrease revenues. d. decrease retained earnings.

d. decrease retained earnings.

The assumption that requires only those things that can be expressed in money are included in the accounting records is the a. economic entity assumption. b. periodicity assumption. c. going concern assumption. d. monetary unit assumption.

d. monetary unit assumption.

The preparation of adjusting entries is: a. straightforward because the accounts that need adjustment will be out of balance. b. optional when financial statements are prepared. c. only required for accounts that do not have a normal balance. d. needed to ensure that the expense recognition principle is followed.

d. needed to ensure that the expense recognition principle is followed.

Accrued revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and already received and recorded. c. recognized and recorded as liabilities before they are received. d. performed but not yet received or recorded.

d. performed but not yet received or recorded.

An asset-expense relationship exists with: a. accrued expense adjusting entries. b. liability accounts. c. revenue accounts. d. prepaid expense adjusting entries.

d. prepaid expense adjusting entries.

What are the two types of adjusting entries?

deferrals and accruals

What is the historical cost principle?

dictates that companies record assets at their cost

Advantages of Sole Proprietorship

ease of formation, retention of control, pride of ownership, retention of profits, possible tax advantage

What is the economic entity assumption?

every economic entity can be separately identified and accounted for

What are accrued expenses?

expenses incurred but not yet paid in cash or recorded Understated as both an expense and liability

What is financing?

getting the money that is necessary for setting up and running a business

What is timeliness?

having information available to decision-makers before it loses its capacity to influence decisions

What is operating activity?

includes net income and changes in most current accounts

The four financial statements

income statement, retained earnings statement, balance sheet, statement of cash flows

What is the fair value principle?

indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

relevant information

information that can influence a decision; it is timely and has predictive and/or feedback value

What are long-term investments?

investments in stocks and bonds of other corporations that are held for more than one year Examples: Investment in real estate, land held for investment, debt investments (long-term)

What is common stock?

investments of assets into the business by the stockholders

What are some examples of external users?

investors and creditors

What are current assets?

items that the business will own, but are likely to change value during the course of 1 year, eg cash in the bank Examples: Short-term debt investments, prepaid insurance, accounts receivable, inventory, cash, supplies

What are adjusting entries?

journal entries recorded to update general ledger accounts at the end of a fiscal period They are required every time a company prepares financial statements and will include one balance sheet account and one income statement account.

Advantages of a corporation

limited liability, ability to raise capital and transfer ownership

What is a chart of accounts?

list of accounts used by a company

What are internal users?

managers who plan, organize, and run a business

What are some examples of internal users?

marketing managers, production supervisors, finance directors, and company officers

What are long-term liabilities?

obligations a company expects to pay after one year Examples: Mortgage payable (3 years), notes payable (long-term)

What is the purpose of financial information?

provide inputs for decision making

What is the statement of cash flows?

reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing

What is the full disclosure principle?

requires that companies disclose all circumstances and events that would make a difference to financial statement users

What is the revenue recognition principle?

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

What is the monetary unit assumption?

requires that only those things that can be expressed in money are included in the accounting records

What is faithful representation?

requires that the information be complete, neutral, and free from error

What are assets?

resources owned by a business

What are accruals?

revenue earned, not yet received; expense incurred, not yet paid

What are accrued revenues?

revenues earned in a period that are both unrecorded and not yet received in cash (or other assets) Understated as both an asset and revenue

What is the periodicity assumption?

states that the life of a business can be divided into artificial time periods

When DR < CR, then

the account has a credit balance

When DR > CR, then

the account has a debit balance

What is normal balance?

the balance that appears on the increase side of an account

What is the going concern assumption?

the business will remain in operation for the foreseeable future

What are expenses?

the costs of operating a business

What is stockholder's equity?

the difference between a bank's total assets and total liabilities Examples: Common stock and retained earnings

What is liquidity?

the ease with which an asset can be converted into the economy's medium of exchange

What is a ledger?

the entire group of accounts maintained by a company

What is revenue?

the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business

What is posting?

the process of transferring the information in the journal to the appropriate ledger accounts

What is accumulated depreciation?

total amount of depreciation expensed thus far in the asset's life

Disadvantages of Sole Proprietorship

unlimited personal liability, limited access to resources, lack of permanence

What is comparability?

when different companies use the same accounting principles