accounting exam 2

steps of accounting cycle

1. business transaction occurs 2. review GAAP 3. select accounts 4. record journal entries 5. post to general ledger 6. prepare un adjusted trial balance 7. record adjusting journal entry 8. post adjusting journal entry 9. prepare adjusted trial balance 10. income statement 11. statement of SE 12. balance sheet 13. stmnt of cash flow 14. closing entry

two purposes of adjustment process

1. measure income 2. update balance sheet

Of the following six accounts, which ones have temporary balances: (1) Service Revenue (2) Dividends (3) Salaries Expense (4) Common Stock (5) Retained Earnings (6) Cash answer options: A. (1), (2), and (3). B. (4), (5), and (6). C. (2), (4), and (5). D. (1), (3), and (5).

A.

post closing trial balance

List of permanent accounts and their balances.

deferred revenue

Receive cash in the current period that will be recorded as a revenue in a future period.

On 11/1, Violet's Bagel Shop purchased a building using a 24 month loan in the amount of $120,000 with an annual interest rate of 10%. Interest is due quarterly and principal is due upon maturity. As of 12/31, no interest had been paid. How much interest must be accrued as an adjusting entry before the completing the financial statements? Fill in the blank ____________

$2,000 - ($120,000 principal * 10% annual interest rate * 2/12 time)

calculating depreciation expense

(original cost)/(useful life) = yearly depreciation amount.

"on account" term

**no cash actually exchanged - either acc receivable (if we provide service to customer and will receive cash in future) OR - accounts payable (if we owe someone and promise to pay in the future) *depends on who is paying who

no adjustment necessary

1. for transactions that do not involve revenue or expense activities and (2) for transactions that result in revenues or expenses being recorded at the same time as the cash flow.

2 broad categories and 4 sub categories of adjusting entries are:

1. prepayments 2. accruals 1. prepaid exp 2. def rev 3. accrued exp 4. accrued rev

Accrual-basis expense

A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in June.

cash basis expense

A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in May.

Accrual-basis revenue

A company receives cash from customers in May and performs services in June. The revenue is recorded in June

Cash basis revenue

A company receives cash from customers in May and performs services in June. The revenue is recorded in May.

contra account

An account with a balance that is opposite, or "contra," to that of its related accounts.

When a company makes an end-of-period adjusting entry, which includes a debit to Supplies Expense, the usual credit entry is made to: A. Accounts Payable. B. Supplies. C . Cash. D. Retained Earnings.

B.

Permanent accounts would not include: A. Accounts Payable. B. Office Supplies. C. Utilities Expense. C. Common Stock.

C.

During the year, Cheng Company paid salaries of $24,000. In addition, $8,000 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following? A. Debit to Salaries Expense for $32,000. B. Credit to Salaries Expense of $8,000. C. Debit to Salaries Payable for $24,000. D. Credit to Salaries Payable for $8,000.

D.

Permanent accounts would not include: E. Interest Expense. F. Salaries Payable. G. Prepaid Rent. H. Deferred Revenues.

E.

closing entries

Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained Earnings account

Which accounting principle states that a company should "record revenues when they provide goods and services to customers?" E. Matching. F. Revenue recognition. G. Conservatism. H. Materiality.

F

At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry? E. Debit Cash $4,200, credit Supplies $4,200. F. Debit Supplies $4,200, credit Supplies Expense $4,200. G. Debit Supplies Expense $4,200, credit Supplies $4,200. H. Debit Cash $800, credit Supplies $800.

G. formula: Beginning supplies ($2,000) + purchases ($3,000) − ending supplies ($800) = $4,200.

key points

LO3-1 Understand when revenues and expenses are recorded. The revenue recognition principle states that we record revenue in the period in which we provide goods and services to customers, not necessarily in the period in which we receive cash. Most expenses are recorded in the same period as the revenues they help to generate. Other expenses indirectly related to producing revenues are recorded in the period they occur. LO3-2 Distinguish between accrual-basis and cash-basis accounting. The difference between accrual-basis accounting and cash-basis accounting is timing. Under accrual-basis accounting, we record revenues when we provide goods and services to customers, and we record expenses with the revenue they help to generate. Under cash-basis accounting, we record revenues when we receive cash, and we record expenses when we pay cash. Cash-basis accounting is not allowed for financial reporting purposes for most major companies. LO3-3 Demonstrate the purposes and recording of adjusting entries. Adjusting entries are a necessary part of accrual-basis accounting. They help to update the balances of assets, liabilities, revenues, and expenses at the end of the accounting period for transactions that have occurred but have not yet been recorded. Adjusting entries are needed when cash flows or obligations occur before the earnings-related activity (prepayment) or when cash flows occur after the earnings-related activity (accrual). Adjusting entries are unnecessary in two cases: (1) for transactions that do not involve revenue or expense activities and (2) for transactions that result in revenues or expenses being recorded at the same time as the cash flow. LO3-4 Post adjusting entries and prepare an adjusted trial balance. We post adjusting entries to the general ledger to update the account balances. An adjusted trial balance is a list of all accounts and their balances at a particular date, after we have updated account balances for adjusting entries. LO3-5 Prepare financial statements using the adjusted trial balance. We prepare the income statement, statement of stockholders' equity, and balance sheet from the adjusted trial balance. The income statement provides a measure of net income (profitability), calculated as revenues minus expenses. The balance sheet demonstrates that assets equal liabilities plus stockholders' equity (the basic accounting equation). LO3-6 Demonstrate the purposes and recording of closing entries. Closing entries serve two purposes: (1) to transfer the balances of temporary accounts (revenues, expenses, and dividends) to the Retained Earnings account, and (2) to reduce the balances of these temporary accounts to zero to prepare them for measuring activity in the next period. Closing entries increase retained earnings by the amount of revenues for the period and decrease retained earnings by the amount of expenses and dividends for the period. LO3-7 Post closing entries and prepare a post-closing trial balance. After we post the closing entries to the general ledger, the balance of Retained Earnings equals the amount shown in the balance sheet. The balances of all revenue, expense, and dividend accounts are zero at that point.

Prepaid expenses

Pay cash (or have an obligation to pay cash) in the current period that will be recorded as an expense in a future period.

Suppose Hoosiers, a specialty clothing store, rents space at a local mall for one year, paying $18,000 ($1,500/month) in advance on October 1. Q1 - they want 10/1 and 12/31 journal entries Q2 - Calculate the year-end adjusted balances of prepaid rent and rent expense (assuming the balance of Prepaid Rent at the beginning of the year is $0).

Q1 10/1 debit prepaid rent (18,000) credit cash (18,000) 12/31 debit rent expense (4500) credit prepaid rent (4500) Q2 ending balances: prepaid rent $13,5000 rent expense $4500

Suppose a customer rents a vehicle for three months from Commodores Rental on November 1, paying $5,250 ($1,750/month). Q1 journal entries Q2 ending balances

Q1 11/1 debit cash 5250 credit def rev 5250 12/31 debit def rev 3500 credit service rev 3500 Q2 ENDING balances Deferred revenue $1,750 Service revenue $3,500

Beaver Construction purchases new equipment for $34,560 cash on April 1, 2018. At the time of purchase, the equipment is expected to be used in operations for six years (72 months) and have no resale or scrap value at the end. Beaver depreciates equipment evenly over the 72 months ($480/month). Q1 - journal entries Q2 - ending balances

Q1 Apr 01 - debit Equipment 34,560 credit Cash - 34,560 Dec 31 - debit Depreciation expense 4,320 credit Accumulated depreciation 4,320 Q2 ending balances acc dep 4320 dep exp 4320

At the beginning of May, Golden Gopher Company reports a balance in Supplies of $320. On May 15, Golden Gopher purchases an additional $1,500 of supplies for cash. By the end of May, only $120 of supplies remains. Q1 - what are journal entries Q2 - Calculate the balances after adjustment on May 31 of Supplies and Supplies Expense.

Q1 may 15 debit supplies (1500) credit cash (1500) may 31 debit supplies expense (1700) credit supplies (1700) Q2 ending balances: supplies $120 supplies exp $1700

Accrued revenue

Record a revenue in the current period that will be collected in cash in a future period.

Accrued expenses

Record an expense in the current period that will be paid in cash in a future period.

revenue recognition principle

Record revenue in the period in which it's earned

Classified

The distinction between current and long-term activities.

At the end of the accounting period, after the financial statements have been prepared, what account is debited and what account is credited in the closing journal entry to close out the salary expense account? (Select ALL that apply) a. Debit Retained Earnings b. Credit Retained Earnings c. Debit Stockholders' Equity d. Credit Stockholders' Equity e. Debit Salary Expense f. Credit Salary Expense

a & f

Mel's Roofing Service paid employee salaries in the amount of $2,500 on 12/15. What account is debited and what account is credited in the journal entry required on 12/15? (SelectALL that apply) a. Debit Salary Expense b. Credit Salary Expense c, Debit Salary Payable d. Credit Salary Payable e. Debit Accounts Payable f. Credit Accounts Payable g. Debit Cash h. Credit Cash

a & h

adjusted trial balance

a list of all accounts and their balances after the completion of adjusting entries, showing total debits and credits

Consider the following list of accounts: Account Name: - Supplies Expense - Notes Payable - Common Stock How many of the above accounts are temporary? a. 1 b. 2 c. 3 d. none

a. (supplies expense)

current liabilities order

acc payable salary payable utility payable def rev interest pay

"FEB 21 - BVM purchases $2000 of additional inventory ON ACCOUNT, agreeing to PAY in 30 days"

accounts payable

"FEB 28TH - BVM sells $500 of inventory to the bicycle club ON ACCOUNT, agreeing to RECEIVE PAYMENT 30 days later" what is this an example of?

accounts receivable

permanent accounts

balance sheet accounts whose balances are carried forward to the next accounting period

On 11/1, Ace Ventura Exterminating Service receives $24,000 in advance to provide exterminating services to a client over the next 6 months. What account is debited and what account is credited in the journal entry required on 11/1? (SelectALL that apply) a. Debit Service Revenue b. Credit Service Revenue c. Debit Cash d. Credit Cash e. Debit Deferred (Unearned) Revenue f. Credit Deferred (Unearned) Revenue g. Credit Accrued Liabilities h. Debit Accrued Liabilities

c & f

On 1/1, Jeff's Unwhole Foods purchased equipment for $24,000 by signing a 10-year note payable. If Jeff's uses straight line depreciation to calculate depreciation expense and the equipment has a useful of 10 years, what account is debited and what account is credited in the adjusting journal entry required on 12/31 before the financial statements are prepared? (Select ALL that apply) a. Debit Building for $24,000 b. Credit Building for $2,400 c. Debit Depreciation Expense for $2,400 d. Credit Depreciation Expense for $2,400 e. Debit Accumulated Depreciation for $24,000 f. Credit Accumulated Depreciation for $2,400 g. Debit Notes Payable for $2,400 h. Credit Notes Payable for $24,000

c & f ($24,000 cost /10 years = $2,400 depreciation expense per year)

The cumulative amount of depreciation expensed against a particular long-term asset, such as a vehicle is known as which of the following: a. Book Valueb. b. Depreciation Expense c. Accumulated Depreciationd. d. Contra Asset Account e. Equipment

c.

what is never part of end/period adjustment process

cash

current assets order

cash acc recievable supplies prepaid rent

accumulated depreciation

cumulative amount of depreciation expensed against a particular asset, such as a vehicle. major category: asset financial statement: balance sheet normal balance: credit

long term asset order

equipment less: accumulated depression intangible assets

book value

historical cost of an asset, such as equipment, less the accumulated depreciation.

order of liquidy

how quickly it can be converted to cash (cash is the most liquid of all assets)

gift card

not recognized as revenue until card is redeemed and customer purchases something debit: def rev credit: rev

long term liabilities order

notes payable

rev recognition principle: calvin books a cruise w carnival, he makes reservations and pays for the cruise in november. but the cruise is not scheduled to sail until april the following year. when would carnival record revenue from the ticket sale?

november: carnival has FUTURE OBLIGATION debit - cash credit - def rev april: cruise service has been provided debit - def rev credit - revenue

matching principle

recognizing expenses in the same period as the revenues they help generate

cash basis accounting

record revenue at time when cash is received and expenses at time cash is paid

Accrual Basis Accounting

record revenue when we provide goods/services to customers and record expenses with related revenues, regardless of when cash is received/paid

temporary accounts

revenues, expenses, and dividends are closed out at the end of each accounting period and transferred to Retained Earnings so that the new period begins with a zero (0) balance for these accounts.

depreciation expense

the process of allocating the cost of an asset, such as equipment, to expense over the useful life of the asset. major category: expense financial statement: income statement normal balance: debit

rev recognition principle: suppose that, anticipating the cruise, calvin buys an e-reader with his best buy gift card (instead of cash) on account when does best buy recognize the revenue?

time of sale: did BB provide the product/service? yes, calvin is walking away with e reader time of sale: debit - acc receivable credit - revenue future when card transfers the money debit - acc receivable credit - cash

difference between cash-basis and accrual basis is _____

timing, the timing of when we record revenue and expenses cash basis is NOT accepted in GAAP

adjusting entries

to record events that have occurred but that have not been recorded. such as recording insurance expense at end of the month from a prepaid policy