Accounting Exam 1

Place these items in the order in which they appear on the statement of cash flows. 1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities

1 2 3; operating, investing, then financing.

Which of these would be reported in the financing activities section of the statement of cash flows? A. Cash borrowed from the bank B. Cash paid to reduce the principal borrowed from banks C. Cash dividends paid to stockholders D. Cash paid to buy computers E. Cash paid to buy land

A B C

Separate Entity Assumption

Accounts for a business separate from its owners

How is accrual basis accounting different from cash basis accounting?

Accrual basis you record revenue when earned and expenses when used. Cash basis you record revenue and expenses when cash is received or paid.

Which of the following are users of financial statements? GAAP, Stockholders, Customers, Government agencies, Suppliers

All except GAAP. GAAP are rules not users

___: Legal liability is the responsibility of two or more owners

Partnerships

___: Owners have unlimited liability

Partnerships and sole proprietorships

Managerial accounting reports are used by the company's

employees

Permanent Accounts

ending balance from one year becomes its beginning balance for the following year. (ex. Retained earnings and all other balance sheet accounts)

The order in which assets are reported on the balance sheet is based on when the asset is

expected to be turned into cash or consumed

The underlying rules of accounting in the US are called

generally accepted accounting principles (GAAP)

Contra-Asset Account

goes against the account

Deferral adjustments

involves ONE ASSET and ONE EXPENSE; ONE LIABILITY and ONE REVENUE

Accrual adjustments

involves ONE ASSET and ONE REVENUE; ONE LIABILITY and ONE REVENUE

Borrowed $26,000 from the bank. Interest rate (annually) is 6%. You want to find the interest you accumulated over one month. You then

multiply the principle amount borrowed with the interest rate in decimals and also with the time in months. So, I = $26,000 x .06 x 1/12 = $130

Cost principle

requires that assets be recorded at the amount exchanged for them at the time of purchase

The unit-of-measure assumption states that ___

results of business activities should be reported in an appropriate monetary unit

Matching Principle - Expense Recognition

Record expenses in the same period as the revenues with which they can be reasonably associated

The line item "net income" appears on the ____. (Check all that apply) Income statement, statement of retained earnings, balance sheet

Income statement and the statement of retained earnings

Match the definition. 1. Assets 2. Liabilities 3. Stockholders' Equity 4. Revenues 5. Expenses A. Amounts used to generate profits B. Owners' claims to economic resources C. Creditor's claims to economic resources D. Amounts earned by selling goods and services E. Economic resources that will provide future benefit

1E 2C 3B 4D 5A

How is the income statement affected when costs are recorded as assets rather than expenses? A. Net income is overstated B. Net income is understated C. Revenues are higher than expenses D. Assets are overstated

A

If your company needs to record the use of a resource during the current period but will not pay for it until a later period, you should record A. An accrual adjusting journal entry B. A deferral adjusting journal entry C. A debit to an expense and a credit to an asset D. A debit to a liability and a credit to an expense

A

At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expire to an expense account is omitted. Which account will be incorrectly stated, because of the error, on the income statement for March. A. Prepaid insurance B. Insurance Expense C. Net Income D. Stockholders' Equity

B

What does it mean when a company capitalizes a cost? A. The cost is recorded as an expense. B. The cost is recorded as an asset. C. The cost is paid out the contributed capital account D. When the cost will be paid later

B

When should a cost be recorded as an asset? A. When the cost is earned B. When the cost is used C. When the cost will provide future economic benefit D. When the cost will be paid later

C

Which of the following have normal debit balances? Cash, supplies, equipment, common stock, accounts payable, notes payable

Cash, supplies, and equipment

Which of the following have normal credit balances? Cash, supplies, equipment, common stock, accounts payable, notes payable

Common stock, Accounts payable, and Notes payable

___: Income is taxed twice

Corporations

Retained earnings are ____. (Select all that apply) Decreased by dividends, increased by dividends, equal to the company's cash balance, cash available to be paid to stockholders, increased by net income

Decreased by dividends, increased by net income

Duality of effects

Every transaction has at least two effects

Revenue Principle - Revenue Recognition

Revenues are recognized when they are earned

What does the matching principle or, expense recognition principle, require?

That expenses are recorded in the same period as the revenues.

An exchange of promises is not recorded. T/F

True

Temporary Accounts

are used to track only the current year's results and then are closed before the next year's activities are recorded (Revenues, expenses, and dividends)