AC 210 Exam 1

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The annual depreciation taken on a vehicle totals $3,000. The vehicle has been in service for 3 full years and the adjusting entries have been completed for the year. At the end of the 3rd year, the annual financial statements will report Depreciation Expense equal to _____ and accumulated depreciation equal to _____

3000; 9000

Sole Proprietorship

A business owned by one person

Corporation

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

income statement

A financial statement showing the revenue and expenses of the accounting period (revenues - expenses = net income)

A company pays wages every two weeks. Wages amount to $100 a day, and the workers work 7 days a week. On March 31, the company pays wages ($1,400 in total) for the two weeks (14 days) ending March 24. Wages for the week of March 31 ($700) will be paid in April at the end of the first week in April. At the end of the month on March 31, the related adjusting journal entry will include a

Debit to wage expense for $700 and a credit to wages payable for $700.

statement of retained earnings

Reports the way net income and distribution of dividends affected the financial position of the company during the accounting period (1. retained earnings 2. add: NI. 3. subtract: dividends.)

Income Statement Equation

Revenues - Expenses = Net Income

the adjusting entry to record depreciation includes

a debit to depreciation expense; credit to accumulated depreciation

if a consumer has not received the cash yet,

accounts receivable (an asset)

Which of the following items on the balance sheet would be classified as assets?

accounts recievable, property, plant and equipment, prepaid rent

expenses

all costs of doing business that are necessary to earn revenues

The adjusting entry to record the amortization of a long-term asset that lacks physical substance includes a debit to ___ and a credit to ____

amortization expense; accumulated amortization

true

any acct name "receivable" is an asset, any containing "payable" is a liability

creditors

anyone who is owed money

Operating Activities

arise directly from running the business to earn profit (i.e. cash collected from customers+, and cash paid to employees -)

why is deferred revenue account reduced during the adjustment process?

as the seller performs its obligations, it is removed from deferred revenue and transferred into a revenue account

Which of the following is true about the adjusting entry to record the revenue for which the seller has performed of its obligations but not yet collected?

assets will increase SE will increase

permanent accounts

assets, liabilities, SE

Bill's paid $3,050 for the June electricity bill and received the July bill for $3,500, which will be paid in August.

assets: -3050 liabilities: -3050 and +3500

Bill's paid $3,400 to plumbers for repairing a broken pipe in the restrooms.

assets: -3400, liabilities: no effect SE: repairs and maintenance expense (+E) -3400

trial balance

balance sheet and income statement

why is it called unadjusted trial balance?

bc several adjustments will need to be made at the end of the accounting period to update the accounts

equation for RE

beginning RE + NI - Dividends = Ending RE

Financing Activities

cash flows from borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, or paying dividends to stockholders (i.e. signing a note payable, issuing stock + and cash paid for dividends -)

Investing Activities

cash flows that arise from buying and selling productive resources w long lives (such as buildings, land, equipment, and software) (i.e. cash paid to purchase equipment -)

Deferred Revenue is credited when

cash is collected in advance of the revenue

ledger

collection of records that summarizes, for each amount, the effects of transactions entered in the journal

LLC

combine characteristics of corporations and partnerships

directors

company's board of directors

The adjusting entry to record depreciation on equipment includes a

credit to accumulated depreciation; debit to depreciation expense

CRIL

credit, revenue, investments, liabilities

what type of person would use a financial accounting report?

creditors, investors, etc.

current ratio

current assets/ current liabilities

On July 1, 20X2, RBD Inc. received $5,000 in cash from a customer for services to be provided on September 1, 20X2. Which of the following describes how the transaction should be recorded on July 1, 20X2?

debit cash $5,000, credit deferred revenue $5,000

provide website services to acme company for $20,000 on account

debit: accts. rec. credit: service rev.

sell a $1,000 gift certificate

debit: cash credit: deferred rev.

provide website design services to customers for $40,000

debit: cash credit: service revenue

customer redeems $1,000 gift certificate for website design services

debit: deferred rev. credit: service rev.

received $500 bill for January utilities, to be paid in February

debit: utilities exp. credit: accts payable

the seller's adjusting entry to record the revenue earned by fulfilling its obligation to its buyers which had been collected in advance requires a _____ to Deferred Revenue and a _____ to Sales Revenue

debit; credit

on an adjusted/ unadjusted balance, expenses are ________

debited

DEAD

debits, expenses, assets, dividends

A company owes rent at a rate of $6,000 per month. The company pays the rent owed on the first of each month. At the end of each month, what kind of adjustment is required?

deferral adjustment

As of December 31, the unadjusted balance in Deferred Revenue contains $5,600 for unredeemed gift cards. An analysis of the monthly sales indicates that $3,200 gift cards were redeemed during the month but not yet recorded. How will these transactions affect the adjustments at the end of the period?

deferred revenue needs to be decreased by the amount of gift cards redeemed during the month sales revenue needs to be increased by the amount of gift cards redeemed during the month

duality of effects

each transaction has at least 2 effects on the basic accounting equation

revenues

earned by selling goods or services to customers

dividends

earnings distributed to stockholders, reduction in RE

why are adjustments needed?

entries necessary at the END of each accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts

2 sources of financing

equity and debt

investors

existing and potential stockholders

T/F: Adjusting journal entries always include 2 balance sheet accounts

false

cash recieved from issuing stock

financing

cash recieved when signing a note payable

financing

Managerial Accounting Reports

include detailed financial plans and continually updated reports about the operating performance of the company (made visible only by the company's employees)

adjustments include

income statement and balance sheet accounts

4 types of financial statements

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

What is the effect on the accounting equation of OEM Company if it issues 1,000 shares of stock in exchange for $5,000 cash?

increase assets; increase SE

the accounts receivable account should be _____ when adjusting at the end of the period for any revenues from fulfilling obligations to buyers which has not yet been collected or recorded

increased/ debited

accounting

information system designed by an organization to analyze, record, and summarize the activities affecting its financial condition and performance. often called the "language of business"

unadjusted trial balance

internal report prepared before end-of-period adjustments listing the unadjusted balances of each account to check the equality of total debits and credits

more expenses...

less equity

If the deferred revenue account is not adjusted at the end of the period as needed, what effect will this have on the financial statements?

liabilities will be overstated and net income will be understated

government agencies

look closely at companies' financial statements. (ex. SEC)

what type of person would use a managerial accounting system?

managers, supervisors, etc.

liabilities

measurable amounts the company expects to give up in the future to settle what it presently owes to creditors

more revenue...

more equity

cash collected from customers

operating

financial accounting reports

prepared periodically to provide information to people not employed by the business

Revenue Recognition Principle

recognize revenue in the time period in which it is earned

journal

record of each day's transactions

cash basis

records revenues when cash is RECEIVED and expenses when cash is PAID (can lead to a distorted view of the company's financial performance)

accrual basis

records revenues when they are EARNED and expenses when they are INCURRED, regardless of the timing of cash receipts or payments (could be money you haven't received yet)

statement of cash flows

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

balance sheet

reports the amount of assets, liabilities, and SE of an accounting entity at a point in time (ORDER: cash accts receivable supplies equipment software total assets liabilities accts payable notes payable total liabilities SE equity common stock retained earnings total SE total L and SE)

Stockholders' Equity

represents the owners' claims on assets of the business after creditors' claims have been fulfilled

assets

resource the company controls and expects to benefit from in the future

what is the adjustment for deferred revenue at the end of the month?

revenue

revenue recognition principle means...

revenue is reported when the seller performs work promised to the customer in the amount the seller expects to be entitled to receive from the customer

net income

revenues - expenses

temporary accounts

revenues, expenses, dividends

International Financial Reporting Standards (IFRS)

rules used internationally to calculate and report information in the financial statements

Partnership

same as a sole proprietorship, except that 2 or more owners are responsible for profits, taxes, and legal matters

true

the accounting rules in the US are similar to those used elsewhere in the world

what is the difference between an adjusted/ unadjusted trial balance?

the adjusted is prepared AFTER all the adjustments have been posted

How will a company's current ratio be affected by obtaining a note for the purchase of equipment?

the current ratio will remain unchanged. (bc notes are not current)

The following transactions occurred during July: Received $800 cash for services rendered during July. Received $5,000 from issuance of stock to investors. Received $400 from a customer in payment of accounts receivable from the prior month. Billed customers for services performed in July, $3,500. Borrowed $2,500 from the bank, giving a promissory note in exchange. Received $1,000 from a customer for services to be performed next year. What is the amount of Revenue for July?

$4,300

The Statement of Cash Flows for the current year contained the following Cash paid to purchase land $15,000 Cash collected from clients $10,000 Cash received from selling equipment $23,000 Cash paid for dividends $6,000 Cash paid to suppliers $2,000 Cash received from issuing stock $30,000 What is the amount of Cash Flows from Operating Activities?

$8,000

cash paid for dividends

(financing)

cash paid to purchase equipment

(investing)

cash paid to employees

(operating)

Net Profit Margin

Net Income/revenue

income statement misconceptions

- NI = cash - NI = change in value -measurement of Income involves only counting

Creditors are mainly interested in assessing...

1. Is the company generating enough cash to pay what it owes? 2. Does the company have enough assets to cover its liabilities?

On April 30, 2020, a three-year insurance policy was purchased with a cash payment of $18,000. Coverage began immediately. What is the amount to be reported on the balance sheet as Prepaid Insurance on December 31, 2020?

14,000 (18000/36= 500 x 8= 4,000)

The Don't Tread on Me Tire Company had retained earnings at December 31, 2019 of $200,000. During 2020, the company had revenues of $400,000 and expenses of $350,000, and the company declared and paid dividends of $11,000. Retained earnings on the balance sheet as of December 31, 2020 will be:

239,000

Balance Sheet Equation

Assets = Liabilities + Owner's Equity

basic accounting equation

Assets = Liabilities + Stockholders' Equity

Retained Earnings Equation

Ending RE= Beginning RE + NI - dividends

cash account changes formula

Ending cash= beginning cash + CF from operating activities + CF from investing activities

GAAP (Generally Accepted Accounting Principles)

the rules used in the US to calculate and report information in the financial statements

After the adjustments have been recorded, Deferred Revenue on the balance sheet reports the amount of

the sales or services still owed to the customer

How are financial statements used by decision makers?

they are a key source of information when creditors and investors make decisions concerning a company

the usefulness of financial info is enhanced when it is

timely, verifiable, comparable, and understandable

main goal of GAAP and IFRS

to ensure companies produce financial info the is useful to existing and potential investors, lenders, and other creditors

what is the purpose of the closing process?

to get ready for the next accounting period

Two types of closing journal entries are posted to retained earnings at year-end. These are entries to:

transfer net income (or loss) and dividends declared to RE

T/F: Adjusting journal entries never involve cash.

true

T/F: Assets, liabilities, and equity are permanent accounts that track financial results from year to year.

true

T/F: dividends are not expenses. Instead, they are a reduction in retained earnings.

true

T/F: net income does not equal the amount of cash generated by the business

true

T/F: net income does not represent the change in the company's value

true

True or false: The adjusting entry to record depreciation does not directly reduce the long-lived asset accounts, such as Equipment, so that the original cost of the asset remains unchanged

true

When will Accounts Receivable be involved in an adjusting entry?

when revenue is earned but not yet collected or recorded at the end of the period

when will you NOT debit expenses

when you are closing

Accounts Receivable should be increased for

which the seller has performed of its obligations during the period but not yet collected

accrual basis accounting...

would require that a business report all its revenues, expenses, and net income in the period the service occurs (Month 1)


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