Accounting 2600 Final

Straight-Line Rate

(1 / Useful Life)

what are balance sheet, income statement, retained earnings statement, and statement of cash flows used for?

(B) The balance sheet reports the resources of a company and the claims on the company's assets. (I) The income statement reports the results of the company's operations for a period of time. (RE) Retained earnings are a company's accumulated net income that has not been distributed to owners in the form of dividends. (CF) The cash flow statement describes the company's cash receipts and cash payments for a period of time.

Depreciation Cost per Unit

(cost - residual value) / expected usage of an asset

Straight-Line Depreciation Equation

(cost - residual value) / expected useful life

Declining Balance Rate

(m) x Straight-Line Rate

Because sales transactions can be complicated, the SEC has issued criteria that must be met in order to recognize revenue. These criteria attempt to determine when the revenue is (1) realized or realizable and (2) earned. Calculate Rose's accounts receivable turnover. Round your answer to two decimal places.

12.87

Retained Earnings Statement Parker Company has a balance of $26,000 in retained earnings on January 1, 2013. During 2013, Parker reported revenues of $77,000 and expenses of $54,000. Parker also paid a dividend of $7,000. Required: What is the amount of retained earnings on December 31, 2013?

26000+77000-54000-7000=42000

Declining Balance Depreciation Expense

Declining Balance Rate x Book Value

Units-of-production depreciation expense

Depreciation cost per unit x actual usage of the asset

Net Profit Margin is...

A useful measure of a company's ability to generate profit (sometimes called return on sales)

Declining Balance Depreciation

Accelerates the assignment of an asset's cost to depreciation expense by allocating a larger amount of cost to the early years of an asset's life. Is consistent with a decreasing rate of decline in service potential and a decreasing amount for depreciation expense.

Which principle requires that expenses be recorded and reported in the same period as the revenue that it helped generate?

Expense recognition or matching

Aging Method

Bad debt expense is estimated by determining collectability of the accounts receivable rather than by taking a percentage of total credit sales

Units-of-Production Depreciation

Based on a measure of the asset's use in each period, and the periodic depreciation expense rises and falls with the asset's use. It is based not on a standardized pattern but on a pattern tailored to the individual asset and its use.

The internal audit function is part of what element of the internal control system?

Monitoring

Net Profit Margin equals

Net Income / Sales (or Service) Revenue

For the most recent year, Grant Company reported revenues of $182,300, cost of goods sold of $108,800, inventory of $8,500, salaries expense of $48,600, rent expense of $12,000, and cash of $12,300. What was Grant's net income?

Net Income = Revenue - expenses $12,900

Fixed asset turnover ratio

Net sales / average net fixed assets

Working Capital is...

a measure of liquidity

Temporary Accounts:

Revenues, expenses, and dividends. These accounts are used to collect the activities of only one period.

Allowing only certain employees to order goods and services for the company is an example of what internal control procedure?

Segregation of Duties

At December 31, Pitt Inc. has assets of $12,900 and liabilities of $6,300. What is the stockholders' equity for Pitt at December 31?

Stockholders' Equity = Assets - Liabilities $6,600

At December 31, Marker reported the following items: cash, $7,500; inventory, $3,900; accounts payable, $5,900; accounts receivable, $3,100; common stock, $6,000; property, plant, and equipment, $10,500; interest payable, $1,600; retained earnings, $11,500. What is Marker's stockholders' equity?

Stockholders' equity represents the claims of owners. $17,500

Residual Value

The amount of cash or trade-in consideration that the company expects to receive when an asset is retired from service. Reflects the company's plans for the asset and its expectations about the value of the asset once its expected life with the company is over. EX: a three-year old truck has substantial residual value, whereas a twelve-year old truck has minimal residual value.

Control environment:

The collection of environmental factors that influence the effectiveness of control procedures. Includes the following: philosophy and operating style of management, personnel policies and practices of the business, overall integrity and attitude and awareness and actions of everyone in the business concerning the importance of control.

Amortization

The cost of an intangible asset with a finite life.

"Expenses" are described as:

The cost of resources used to earn revenue

Depreciable Cost

The cost of the asset minus its residual value (the amount that will be depreciated over the asset's useful life

Business Process Risks:

The internal processes of the company--how the company allocates its resources to meet its objectives. Materials acquisition, production, logistics and distribution, branding and marketing, and human resources.

A patent is valued at $30,000, has a useful life of 8 years, and a legal life of 10 years.

amortize patent using useful life

What is the primary role of internal controls in managing a business?

To constrain subordinates' activities in order to prevent employees from deviating from the scope of their responsibilities and encouraging them to act in the best interest of the business.

Internal Control System:

To control employees' activities, management puts in place procedures that collectively are called this. It includes all the policies and procedures established by management and the board to provide reasonable assurance that the company's objectives are being met in three areas: Operations, Reporting, and Compliance

T/F Accrual-basis accounting records both cash and noncash transactions when they occur.

True

T/F Investing activities involve buying the long-term assets that enable a company to generate revenue?

True

T/F Sound internal control practice dictates that cash disbursements should be made by check, unless the disbursement is very small.

True

T/F? The notes to the financial statements are an integral part of the financial statements that clarify and expand on the information presented in the financial statements.

True

The current ration is...

an alternative measure of liquidity that allows comparisons to be made between different companies

When a statement has the word "used," this means the item is known as:

an expense

T/F Financing activities include obtaining the funds necessary to begin and operate a business.

True. Financing activities include obtaining funds. Operating activities are related to earning a profit. Investing activities involve buying and selling assets.

Revenue Recognition Principle:

Used to determine when revenue is recorded and reported. Two conditions need to be met to be this principle: The revenue has been earned and must be recorded in the period in which it is earned; the collection of cash is reasonably assured (usually met when goods have been delivered to a customer or when services have been performed for a customer). Revenue is recorded with these two conditions regardless of when cash was received.

Bank service charges, interest earned on the bank account, and customer's NSF checks returned

are reconciled in the company's books

What accounts are affected when a dividend is declared and paid?

assets and sh. eq

Recording interest rev. at the end of an accounting period produces what effect?

assets and stockholders' equity both increase

Which of the following best describes "current assets"?

assets expected to be changed into cash within one year/operating cycle

An abnormal balance to the account ADA is A business buys land for 300,000.

a debit balance

Internal control systems provide assurance in each of the following areas except

consolidation of departments within the acctg function

Five Components of an internal control system:

control environment, risk assessment, control activities, information and communication, and monitoring activities.

In which form of organization is the debt limited to how much someone invested in the business?

corporation

Under the allowance method, the entry to write off a $2,600 uncollectable account includes a:

credit to accounts receivable for $2,600

How would you find the current ratio?

current assets/current liabilities

buying a building for your company to work in is what kind of activity?

investing

Stating inventory at a value of $40,000 would it could be valued between $40,000 to $42,000

is an example of the conservatism principle

When you recognize money made by the company through operating activities at the time earned

it is an example of the revenue recognition principle

Corporations are:

more complex to organize, have limited liability, and are characterized by double taxation. They can raise money easily and ownership is easily transferred. (It is easier for them to raise large sums of money than it is for the other two.)

Outstanding checks are recorded by

need to be reconciled using the bank statement

An adjusting entry effects the cash account

never

What is effected when a company recognizes rent as earned that a customer had paid in advance?

newt income increases

Would outstanding checks appear on a bank statement for a checking account?

no

Realized means

noncash resources (such as inventory) has been exchanged for cash or near cash (accounts receivable)

Straight-Line Depreciation

produces a constant amount of depreciation expense in each period of the asset's life and is consistent with a constant rate of decline in service potential.

Accrual-basis accounting recognizes revenue when it is

realized and earned

An example of a financing activity would be

receiving a loan from the bank

T/F Goodwill and Research and development are not amortized

true

T/F The rules for recording accounting transactions include assets always equaling liabilities +OE

true

T/F The rules for recording accounting transactions include debits equaling credits?

true

T/F The rules for recording accounting transactions include every transaction affecting at least one financial statement?

true

Direct write-off method

waits until an account is deemed noncollectable before reducing accounts receivable and recording the bad debt expense

channel stuffing

when companies ship more goods to a customer than the customer ordered near the end of a pay period

What does the phrase, "Revenue is recognized when earned" mean?

when goods are sold and delivered to the customer

Revenues are recorded when:

work is completed regardless of cash being received or not

Declining Balance Depreciation Method

An accelerated depreciation method that produces a declining amount of depreciation expense each period by multiplying the declining book value of an asset by a constant depreciation rate. It results in a larger amount of depreciation expense in the early years of an asset's life relative to the straight-line method, and a smaller amount of depreciation expense in the later years of an asset's life. Often used by companies in industries that experience rapid obsolescence.

Allowance for Doubtful Method

An account is established to store the estimate until specific accounts are identified as collectible

Costs that are Capitalized

An operating asset that is reported as long-term with a service potential of greater than one year. If you couldn't capitalize, you would have to write down as an expense and your net income would go down.

Cost of a Fixed Asset

Any expenditure necessary to acquire the asset and to prepare the asset for use

Organizational costs

Are an intangible asset that provides a benefit to the company indefinitely. These costs include legal fees, stock issue stocks, accounting fees, and promotional fees.

If a company's account receivable turnover rate has decreased from 15 to 9, it is most likely

extended credit to more risky customers

T/F Dividends are subtracted from Revenue with Expenses and Losses

false

T/F Expenses are always debited.

false

T/F Revenue expenditures increase the useful life of the asset.

false

T/F The rules for recording accounting transactions include having both sides of the acctg equation being affected

false

T/F Land improvements are capital expenditures.

false

T/F Analysis of control procedures is one of the five components of internal control

false

T/F Collectability is certain is one of the criteria for revenue recognition

false; Because sales transactions can be complicated, the SEC has issued criteria that must be met in order to recognize revenue. These criteria attempt to determine when the revenue is (1) realized or realizable and (2) earned.

To find Expenses from the current year what financial statement would you look at?

income statement

Which financial statement would you analyze to assess a firm's operating performance last year?

income statement

What is the order that the four financial statements are prepared?

income, retained earnings, balance, and cash flow

contra accts:

increase and decrease opposite of the acct it is tied with

This example 2/12, n/20 is used with what contra account?

sales discounts

Having one employee prepare and sign checks relates to which internal control activity?

segregation of duties

Hart Inc. began the year with $315,700 of accounts receivable. During the year, Hart sold a considerable amount of merchandise on credit and collected $2,427,000 of its credit sales. At the end of the year, the accounts receivable balance is $16,800 lower than the beginning balance.

$2,410,200

Jerabek Inc. decided to sell one of its fixed assets that had a cost of $55,000 and accumulated depreciation of $35,000 on July 1, 2013. On that date, Jerabek sold the fixed asset for $15,000. What was the resulting gain or loss from the sale of the asset?

$5,000 loss Book value of asset sold: 55,000-35,000=20,000-15,000=5,000

An analysis of the transactions of Canary Cola Inc. for the year 2013 yields the following information: service revenue, $78,600; supplies expense, $33,800; rent expense, $20,500; and dividends, $7,000. what is the net income

78600-33800-20500=24300

Which of the following statements regarding the income statement is true? a. The income statement provides information about the profitability and growth of a company. b. The income statement shows the results of a company's operations at a specific point in time. c. The income statement consists of assets, expenses, liabilities, and revenues. d. Typical income statement accounts include sales revenue, unearned revenue, and cost of goods sold.

A The income statement reports the results of the company's operations for a period of time. This revolves around the sale of goods or services and the associated costs of operating the company.

Conservation Principle:

Accountants should take care to avoid overstating assets or income when they prepare financial statements.

Accounts Receivable Turnover

Accounts Receivable Turnover = Net Sales / Average Net Accounts Receivable

Contra Accounts:

Accounts that have a balance that is opposite of the balance in a related account. When an asset has a normal debit balance, the contra account has a normal credit balance.

Average age of fixed assets

Accumulated depreciation / depreciation expense

Straight-Line Depreciation Method

Allocates an equal amount of an asset's cost to depreciation expense for each year of the asset's useful life (applies to assets for which an equal amount of service potential is considered to be used each period). It is the most common method because it is simple to apply and is based on a pattern of declining service potential that is reasonable for many fixed assets.

Time-Period Assumption:

Allows companies to artificially divide their operations into time periods so they can satisfy users' demands for information. Ex: FedEx often receives cash from a company to deliver products in one time period, although the actual delivery does not occur until a different time period.

The Fundamental Accounting Equation:

Assets = Liabilities + Stockholders' Equity

Items that appear on the balance sheet

Assets are economic resources of a company. Current assets consist of cash and other assets that are reasonably expected to be converted to cash within one year. Property, plant, and equipment represent tangible, long-lived, productive assets. Intangible assets lack physical substance, but benefit the company for many years. Current liabilities are obligations to be satisfied within one year. Long-term liabilities require payment beyond the operating cycle. Stockholders' equity represents the claims of owners. This arises from two sources: contributed capital and retained earnings. Retained earnings are a company's net earnings from the income statement that are not paid out in dividends.

At December 31, Marker reported the following items: cash, $7,500; inventory, $3,900; accounts payable, $5,900; accounts receivable, $3,100; common stock, $6,000; property, plant, and equipment, $10,500; interest payable, $1,600; retained earnings, $11,500. What is the total of Marker's current assets?

Assets are economic resources of a company. Current assets consist of those assets that are reasonably expected to be converted to cash within one year or one operating cycle, whichever is longer. $14,500

Deferred (prepaid) expenses:

Assets arising from the payment of cash which have not been used or consumed by the end of the period. Companies often acquire goods and services before they are used. These prepayments are recorded as assets.

Permanent Accounts:

Assets, liabilities, and stockholders'. Their balances are carried forward from the current accounting period to future accounting periods.

Steps for closing entries in an adjusted trial balance sheet:

Close revenues in income summary, close expenses in income summary, close income summary (found by subtracting the expenses from the revenues) in retained earnings, and close dividends in retained earnings

Intangible assets are recorded at

Cost

Working Capital Equals:

Current Assets - Current Liabilities

Current Ratio Equals:

Current Assets / Current Liabilities

Which of the following is not a characteristic of useful information? a. Faithful representation b. Comparability c. Timeliness d. Conservatism

D Characteristics of useful information include both fundamental qualitative characteristics that information must possess to be useful as well as enhancing characteristics that are complementary to the fundamental characteristics and help determine the degree of the information's usefulness.

On August 31, 2013, Montana Corporation signed a 4-year contract to provide services for Minefield Company at $30,000 per year. Minefield will pay for each year of services on the first day of each service year, starting with September 1, 2013. Using the accrual basis of accounting, when should Montana recognize revenue?

Equally throughout the year as services are provided

Which of the following best describes the concept of the aging method of receivables?

Estimating the appropriate balance for the allowance for doubtful accounts results in the appropriate value for net accounts receivable on the balance sheet.

Revenue expenditures

Expenditures that do not increase the future economic benefits of the asset

Capital expenditures

Expenditures that extend the life of the asset, expand the productive cap its, increase efficiency, or improve the quality of the product

Sales Returns

Merchandise or goods returned by the customer to the seller.

Income from Operations equals:

Gross Margin - Operating Expenses

Which of the following statements are true? I. Debits represent decreases, and credits represent increases. II. Debits must always equal credits. III. Assets have normal debit balances while liabilities and stockholders' equity have normal credit balances.

II and III

The effects of purchasing inventory on credit are to: (Inventory is considered an asset. The term "on credit" is often referred to as a purchase "on account" which implies that a company has a future obligation to make a cash payment. No expense is recognized until the inventory is sold.)

Increase assets and increase liabilities

Accrual of Interest:

Interest= Principal x Interest Rate x Time

Research and development is an

Internally developed intangible assets EXPENSE the cost of developing the asset as incurred and is normally recorded. It is not itself an intangible asset

What type of questions do the financial statements help to answer?

Is the company better off at the end of the year than at the beginning of the year? What resources does the company have? For what did a company use its cash during the year?

Adjusting Entries:

Journal entries made at the end of an accounting period to record the completed portion of partially completed transactions. These are necessary to apply the revenue recognition and expense recognition (or matching) principles and ensure that a companies financial statements include the proper amount for revenues, expenses, assets, liabilities, and stockholders' equity. This is because timing differences exist between when a revenue expense is recognized and cash is received or paid.

Deferred (unearned) revenues:

Liabilities arising from the receipt of cash for which revenue has not yet been earned. Companies may collect payment for goods or services that it sells before it delivers the goods or services. Transactions in which a company has received cash but has not yet earned the revenue.

Operating Assets

Long-lived assets that are used by the company in the normal course of operations. They are not sold to customers, and instead are used by the company in the normal course of operations to generate revenue. They are held by the company until their service potential has been exhausted. They represent future economic benefits.

Useful Life

Period of time over which the company anticipates deriving benefit from the use of the asset. It reflects both the physical capacities of the asset and the company's plans for its use.

Accrued Expenses:

Previously unrecorded expenses that have been incurred but not yet paid in cash

Accrued Revenues:

Previously unrecorded revenues that have been earned but for which no cash has yet been received

Cash-Basis Accounting:

Revenue is recorded when cash is received, regardless of when it actually incurred, and vice versa with expenses when cash is paid. (May not reflect all of the assets and liabilities of a company at a particular date).

Quantity Discount

Reduction in the selling price granted by the seller because selling costs per unit are less when larger quantities are ordered.

Trade Discount

Reduction in the selling price is granted by the seller to a particular class of customers-- to customers who purchase goods for resale rather than for use

Sarbanes-Oxley Act:

Requires publicly traded corporations to establish formal procedures to receive, retain, and address any information that may affect the company's accounting or auditing. Requires all publicly traded corps to have an internal audit function that reports to the audit committee of the board. Allows companies to outsource the internal audit.

Expense Recognition (Matching) Principle:

Requires that an expense be recorded and reported in the same period as the revenue that it helped generate. May or may not be in the same period that cash is paid.

Historical Cost Principle:

Requires that the activities of a company are initially measured at their cost--the exchange price at the time the activity occurs.

Which of the following is not an intangible asset?

Research and development

Depreciation Expense

Straight-Line Rate * Asset's Depreciable Cost

Control Activities:

The policies and procedures top management establishes to help insure that its objectives are met. Can be identified with one of the following five categories: Clearly defined authority and responsibility, segregation of duties, adequate documents and records, safeguards over assets and records, and checks on recorded amounts.

Strategic Risks:

These are possible threats to the organization's success in accomplishing its objectives and are external to the organization--often classified around forces such as competitors, customers, new competitors, substitute products, and suppliers (Porter's Five Forces) or macro factors such as political, economic, social, and technological (PEST factors).

Bank Reconciliation:

To ensure that the accounting records are consistent with the bank's accounting records, any differences must be "reconciled."

Which of the following best describes the objective of estimating bad debt expense with the percentage of credit sales method?

To estimate bad debt expense based on a percentage of credit sales made during the period. The percentage of credit sales method is an income statement method.

Percentage of Credit Sales Method

Total Credit Sales * Percentage of Credit Sales Estimated to Default = Estimated Bad Debt Expense

Accrual-Basis Accounting:

Transactions are recorded when they occur. Revenue is recognized as it is earned and expenses are recognized when they are incurred.

Sales Allowance

When goods or services arrive late--rendered less valuable--the customer may be induced to accept the goods/services if a price reduction is offered

When is an asset not amortized?

When it has an infinite life. In this case, it is reviewed annually for impairment

When is an accrual adjusting entry necessary?

When revenue is earned

Partnerships have:

access to the skills and resources of all partners. They share control, have tax advantages, have limited life, and all partners have personal liability. Tax advantages.

Which of the following is not a benefit derived from the conceptual framework? a. Supports the development of a consistent set of accounting standards. b. Provides specific guidance on how transactions should be recorded. c. Provides a logical structure to financial accounting. d. Supports the objective of providing information useful for making business and economic decisions.

b. Provides specific guidance on how transactions should be recorded.

A business buys land for 300,000. Appraised for $320,000. Sold and bought by someone for 310000

building should be recorded by buyer for 310,000

Which of the following statements concerning retained earnings is true? a. Retained earnings is the difference between revenues and expenses. b. Retained earnings is increased by dividends and decreased by net income. c. Retained earnings represents accumulation of the income that has not been distributed as dividends. d. Retained earnings is reported as a liability on the balance sheet.

c Retained earnings arise from the earning activities (revenues and expenses) of a company and are reduced by dividends.

Which of the following sentences regarding the statement of cash flows is false? a. The statement of cash flows describes the company's cash receipts and cash payments for a period of time. b. The statement of cash flows reconciles the beginning and ending cash balances shown on the balance sheet. c. The statement of cash flows reports cash flows in three categories: cash flows from business activities, cash flows from investing activities, and cash flows from financing activities. d. The statement of cash flows may be used by creditors to assess the creditworthiness of a company.

c Which of the following sentences regarding the statement of cash flows is false? a. The statement of cash flows describes the company's cash receipts and cash payments for a period of time. b. The statement of cash flows reconciles the beginning and ending cash balances shown on the balance sheet. c. The statement of cash flows reports cash flows in three categories: cash flows from business activities, cash flows from investing activities, and cash flows from financing activities. d. The statement of cash flows may be used by creditors to assess the creditworthiness of a company.

The effects of paying salaries for the current period are to: (The payment of salaries represents the consumption of an asset (cash) as part of a company's normal operations.)

decrease assets and decrease stockholders' equity.

Sole proprietorships are:

easy to form, are controlled by one person, have limited life, income is taxed at individual tax rates, and owners have personal liability. Tax advantages.

The aging method gives you:

ending balance of ADA

How many accounts are affected when a T-shirt company sells shirts they made for cash

four

Gross Margin...

represents the initial profit made from selling a product

to find working capital

subtract current liabilities from current assets

Operating expenses are...

the expenses the business incurs in selling goods or providing services and managing the company