Accounting Exam 1

Rent collected in advance is a(n): revenue on the income statement. asset account in the balance sheet. liability account in the balance sheet. shareholders' equity account in the balance sheet.

liability account in the balance sheet.

Benefits of debt financing

quick access to funds low interest rates are available when collateral is present interest payments are tax deductible ownership is retained

What is equity

remaining claim against the assets of a business after liabilities have been satisfied.

profit

revenue-expenses everything make minus what it took to make it

how do we use the current ratio?

we compare it to our historical ratio and our competitors

how does the income statement relate to the balance sheet?

your revneues and expenses are found on the income statement which make up your net income which makes up your retained earnings, which is found under equity on the balance sheet

What is depreciation?

A systematic expensing of an asset based on the asset's estimated life

what does AR stand for?

Accounts receivable

T-Bird Auto Parts took out a 5 year loan. How will this loan be reflected in the balance sheet at the end of the first year of the loan?

As long-term debt: The loan has an original maturity of more than a year, so it is classified as long-term debt.

A, L, or E? Accounts Receivable

Asset

A, L, or E? Cash

Asset

A, L, or E? Inventory

Asset

A, L, or E? Investments

Asset

Balance Sheet accounting equation

Assets = Liabilities + Equity

Composition of the balance sheet

Assets: Current Assets, Non-Current Assets (Property, plant, and equiptment PPE AND intangible assets) Liabilities + Equity: Current liabilities (accounts payable, utilities payable, wages payable), non-current liabilities (long-term debt), contributed capital (investors buy stock and have ownership), earned capital (retained earnings) (earnings from net income and then distribute some through dividends)

What are the four financial statements?

Balance sheet, income statement, statement of cash flow, and statement of equity

What are examples of equity?

Common stock, preferred stock, retained earnings, treasury stock, contributed capital, etc

A, L, or E? Common stock

Equity

A, L, or E? Retained earnings

Equity

A, L, or E? Additional paid in capital

Equity grouped in with common stock, they are both contributed capital

What are the four valuation models?

Fair value, historical cost, amortized cost, and net-realizable value Amortized Cost: Definition: Amortized cost is the cost of an asset or the carrying amount of a liability, adjusted for any amortization, depreciation, or impairment. It is used when an asset's value is systematically reduced over its useful life or when a liability's value changes over time. Use: Amortized cost is often used for long-term assets like loans or bonds. It reflects the asset's book value as it is gradually written down to its estimated residual value, or it represents the liability as it is adjusted for changes in its carrying amount. Net Realizable Value (NRV): Definition: Net realizable value is the estimated selling price of an asset in the ordinary course of business, minus the estimated costs necessary to make the sale. For inventory, NRV represents the expected selling price minus any selling costs and costs to complete or dispose of the inventory. Use: Net realizable value is commonly applied to assets like inventory or accounts receivable. It ensures that these assets are valued at their expected recoverable amount, considering potential reductions in value due to damage, obsolescence, or uncollectibility.

Financial accounting and reporting standards in the United States are established primarily by the: U.S. Congress. International Accounting Standards Board. Financial Accounting Standards Board. Securities and Exchange Commission.

Financial Accounting Standards Board. The SEC is the governing body for financial reporting but has delegated the standard setting to the FASB (Financial Accounting Standards Board)

Which ONE of the following statements BEST describes INVENTORY? Goods due from customers who have purchased on account Goods purchased and held for resale Goods owned or controlled by a company Goods used by company employees on a daily basis

Goods purchased and held for resale By definition, inventory are goods purchased by the business that are held for resale to customers. Other goods and supplies purchased by the business not intended for resale are not considered inventory.

Which of the following is generally NOT considered to be an operating expense? Rent Expense Income Tax Expense Selling and Administrative Expense Employee Compensation Expense

Income Tax Expense Operating Expenses are expenses that a business incurs through its normal course of business. Interest expense and income tax expense are reported below operating expenses on the income statement.

what are investment securities?

Investment of temporarily idle cash usually composed of publicly traded stocks and bonds. If company plans to sell them withing a year, the securities are classified as current assets.

Which asset is generally measured using the fair value valuation model? PPE Intangible assets Investments Accounts receviable Inventory

Investments

Is a prepaid expense an asset or a liability?

It's an asset. It's always an asset. The word "prepaid" trumps the word "expense"

A, L, or E? Accruals/Payables

Liability

A, L, or E? Debt

Liability

A, L, or E? Deferred revenue

Liability

Which of the following is a shareholders' equity account in the balance sheet? Investments Retained earnings Deferred revenue Service revenue

Retained earnings Service revenue is a revenue account on the income statement. The balance sheet reports assets, liability and equity accounts. Investments is an asset account. Retained earnings is an equity account. Deferred revenue is a liability account.

what are SG&A expenses

Selling, General, and Administrative expenses, are a category of operating expenses that a company incurs as part of its day-to-day business operations

what is an operating item

it's an item that relates to operating activities of the business revenue COGS SG&A Expenses Operating expenses: wage, depreciation, rent, utilities, etc

for when is a balance sheet

a moment in time

What is an asset

a present right of an entity to an economic benefit. Generally results in cash inflow. they are the resources of a company

what are the two contra-assets we need to know for the test?

accumulated depreciation and accounting for bad debt

what are accrued liabilities? *accrued = liability *payable = liability

accumulation of an amount over time

what is a non-operating item?

activities related to investing and financing (interest income/expense) If I am panda express and I invest in another company, that's not my business, it's my side-hustle

Where does accumulated depreciation go?

balance sheet (it just keeps adding up)

what is a non-operating item

items that relate to financing and investing activities of the business interest gains/losses on sale of PPE taxes

what are these considered? total common stock, preferred stock, and additional paid in capital

contributed capital within equity on the balance sheet these are what the stockholders have contributed since the beginning

office supplies is under what on the balance sheet?

current assets Offices supplies include pens, paper clips, and printer ink. They are expected to be used within a year, and they are considered current assets.

current ratio equation

current assets/current liabilities

What are examples of historical cost?

land, inventory, intangibles with an infinite useful life

revenue

everything you make

what valuation model would be used for investment securities?

fair value, it's an investment

for when is an income statement

for a period of time (someone knocks on the door, COME IN FOR A PERIOD OF TIME not just a moment)

accrued liabilities

for things unrelated to inventory

Which of the following is not considered an operating expense? research and development expense bad debt expense depreciation expense interest expense

interest expense Interest expense is the non-operating expense, which means this expense is not directly related to core operating activities.

what does the current ratio show us?

it shows us if we are able to pay our short-term obligations most common measure of liquidity

allowances for bad debt

it's a contra-asset account. It is what they expect NOT to receive from people who paid on credit AR Net = AR Gross - allowances for bad debt

what are retained earnings?

it's a measurement of how much money we've made in the company since we started it just keeps going up every year Retained earnings (beginning) + net income (or - net loss) - dividends = retained earnings (ending)

valuation method

net realizable value. we have the gross amount (total amount of accounts receivable of the money that we are entitled to receive) and then we have allowances for bad debt: THIS IS A CONTRA ASSET ACCOUNT! it is what they do NOT expect to receive AR Net = AR Gross - allowances for bad debt

benefits of equity financing

no need to repay contributed funds dividend payments are optional no collateral is pledged no debt covenants no risk of bankruptcy

cons of equity financing

no quick access to funds - slow growth the process of raising equity capital takes time and resources dividends are not tax deductible a portion of ownership in the business is given up

are accounts payable an accrued liability?

no, because it's the amount owed to suppliers for inventory and accrued liabilities are UNRELATED to inventory

where does depreciation go?

on the income statement

The measure of profit reported on an income statement that represents the primary-revenue generating activities of the company is: pretax income. net income. gross profit. operating income.

operating income. Primary revenue-generating activities are operating activities, and the cost of operating activities is called operating expenses. The measure of the profit is called Operating Income. Operating Income tells us whether revenues are sufficient to cover the costs of all operating expenses during the period.

What is a liability

present obligation of the company to provide an economic benefit

income statement overview

sales revenue (cost of goods sold) gross profit (operating expenses) operating income (non-operating income and expenses) pretax income (income tax expense) net income

how to remember the income statement overview (with the story)

sally cooks great omlets in nonstick pans in november

What is accounts receivable?

services or goods that we have provided that we haven't yet been paid for they bought it on credit so they haven't paid for it yet

what is operating income?

tells us whether revenues are sufficient to cover the costs of all operating expenses (not just costs related to inventory) - selling, general, and administrative expenses (SG&A)

Cons of debt financing

the borrowed funds must be repaid interest payments are required on an inflexible schedule you can lose collateral debt covenants can be restrictive risk of bankruptcy

deferred revenue

the money OUR ORGANIZATION RECEIVES so it's a liabilities because we still have to give them their good