Chapters 1-4

What are the steps that are to be considered in complex revenue recognition scenarios?

1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Distinguish between a journal and ledger.

A journal is a chronological record of the accounts transactions. A ledger is a record of accounts kept on their own page with the overall debit or credit of the account.

Internal auditor

A person within an organization who reviews and monitors the controls, procedures, and information of the organization.

The following statements all pertain to the accounting cycle. Which of these statements is wrong?

A post-closing trial balance is prepared prior to closing temporary accounts.

General Ledger

A record of the accounts comprising financial statements, and their respective balances

Accounts

A recored that is kept for each asset, liability, equity, revenue, expense, and dividend component of an entity

Which method of accounting (cash or accrual) is generally preferred, and why?

Accrual because when looking at the results of operation it is much easier to see and gives a more accurate up to date happenings.

Revenues and expenses that gradually accumulate throughout an accounting period are known as:

Accruals

The appropriate journal entry to record equipment depreciation expense would consist of a debit to Depreciation Expense and a credit to which of the following accounts?

Accumulated Depreciation: Equipment

Liabilities

Amounts owed by an entity to others.

Dividends

Amounts paid from profits of a corporation to shareholders as a return on their investment in the stock of the entity.

Contra asset

An account that is subtracted from a related account -- contra accounts have opposite debit/credit rules.

Cash basis

An accounting approach where revenue is recorded when cash is received (no matter when "earned"), and expenses are recognized when paid (no matter when "incurred")

Periodicity assumption

An accounting assumption that purports to divide a continuous business process into measurement intervals, such as months, quarters, and years.

International Accounting Standards Board (IASB)

An organization charged with producing accounting standards with global appearance.

Financial Accounting Standards Board (FASB)

An organization charged with producing standards for financial reporting in the USA

Failure to record the receipt of a utility bill for services already received will result in:

An overstatement of equity.

Real accounts

Asset, liability, and equity accounts; these accounts appear on the balance sheet. Companies do not close real accounts, also called permanent accounts.

The economic resources owned by a company that are expected to benefit future periods are:

Assets

Which of the following equations properly represents a derivation of the fundamental accounting equation?

Assets - liabilities = owner's equity

Which of the following equations properly represents a derivation of the fundamental accounting equation?

Assets - liabilities = owner's equity.

Of the following account types, which would be increased by a debit?

Assets and expenses.

Define and cite examples of assets and liabilities.

Assets are items a company owns that can help economic benefit in the future. -cash -investments -office equipment -machinery -real estate -company-owned vehicles Liabilities are what you owe to others. -bank debt -money owed to suppliers -wages owed -taxes owed

Property, Plant, and Equipment

Assets with long lives that will be used in an entity's production processes; land, buildings, and equipment

What are the three general rules, with examples of each, for expense recognition?

Associating Cause and Effect: commission expense recorded in the same accounting period as the sale. Systematic and Rational Allocation: the use of a truck over many years, use depreciation to slowly spread out the cost. Immediate Recognition: severance pay to a fired employee.

Define the periodicity assumption, and know its importance in income measurement.

Assumes that business activity can be divided into intervals. Helps us to draw a line in the sand to divide the months, quarters, and years of a business' activity.

Define the term "accrual."

Are expenses and revenues that gradually accumulate throughout an accounting period.

Define reversing entries.

Are optional accounting procedure that is a journal entry to "undo" an adjusting entry.

Describe why cash flows from operating activities can differ from reported net income.

Cash flows exclude non-cash items and makes adjustments to the net income. Net income just shows the income of money minus the cost of selling the goods.

In order of presentation, name five typical current assets.

Cash, short-term investments, accounts receivable, inventories, prepaid insurance

Describe the nature and purpose of control and subsidiary accounts.

Control accounts are the original ledger. Whereas, sub-accounts are a break out of the balance to show the receivable accounts for that balance.

Financial statements

Core financial reports that are prepared to represent the financial position and results of operations of a company

A trial balance is compiled from the account balance information contained in the ledger.

Correct

At the end of the current accounting period, Johnson Company failed to record utilities consumed during the period. Johnson will be billed for the utilities during the next accounting period. As a result, current period assets, liabilities, equity, and income, respectively, are:

Correct, understated, overstated, overstated

Book value

Cost minus accumulated depreciation; the net amount at which an asset is reported on the balance sheet.

Articulate the steps in a the accounting cycle process.

Close Revenues to Income Summary, close Expenses to Income Summary, Close Income Summary to Retained Earnings, Close Dividends to Retained Earnings

What is included in the appropriate heading for a balance sheet?

Company Name Balance Sheet Date

Why is a journal alone insufficient to provide a clear picture of business activity and position?

Because journals are more specified and do not contain all of the business transactions.

Why is the journal called the book of original entry, and in what order are transactions listed therein?

Because source documents are reviewed and interpreted with the respected accounts.

Why might an unadjusted trial balance be inappropriate for preparation of correct financial statements?

Because then there wouldn't be up to date information pertaining to the business.

The conditions for revenue recognition are:

Both (a) and (b).

Wilson Company owns land which cost $100,000. If a "quick sale" of the land was necessary to generate cash, the company feels it would receive only $80,000. The company continues to report the asset on the balance sheet at $100,000. This is justified under which of the following concepts?

Both objectivity and historical cost

An adjusting journal entry to record an accrued expense would necessarily involve a _____________ to an expense account.

Debit

Assets and expenses may be increased with a:

Debit

Liabilities, equity, and revenue accounts are decreased with:

Debit

The normal balance of an expense account is a ____________ balance.

Debit

The proper journal entry to record Ransom Company's billing of clients for $500 of services rendered is:

Debit Accounts Receivable for 500, and Credit Service Revenue for 500

The proper journal entry to record $1,000 of Dividends paid by Myer's Corporation is:

Debit Dividends for 1,000, and Credit Cash for 1,000

On November 1, 20X1, Limit Company purchased a one-year insurance policy for $12,000. Limit Company debited Cash and credited Prepaid Insurance for $12,000. At the end of December, 20X1, $2,000 of insurance had expired. The journal entry to properly state all accounts involved on December 31, 20X1, would be:

Debit Insurance Expense for 2,000, Debit Prepaid Insurance for 22,000, and Credit Cash for 24,000

After closing all revenue and expense accounts, Norris Company had a debit balance in its Income Summary account of $10,000. The proper entry to record the closing of the Income Summary account would be:

Debit Retained Earnings for 10,000, and Credit Income Summary for 10,000

Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically $10,000 per week. Which of the following journal entries would Blankenship ordinarily record on the Friday payday?

Debit Salary Expense for 10,000, and Credit Cash for 10,000

Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically $10,000 per week. Blankenship's year-end occurred on Wednesday, at which time a correct adjusting entry was recorded. On the following Friday, which of the following payroll journal entries should be recorded?

Debit Salary Expense for 4,000, Debit Salary Payable for 6,000, and Credit Cash for 10,000

Blankenship Company pays its employees every Friday for work rendered that week. The payroll is typically $10,000 per week. What journal entry would be recorded (on Wednesday) if the end of the accounting period occurred on a Wednesday?

Debit Salary Expense for 6,000, and Credit Salary Payable for 6,000

Simmons Company received and recorded a $5,000 payment for services to be rendered in the future. If the income statement approach to adjusting entries is used, the appropriate adjusting entry at the end of the accounting period for $3,000 of revenue not yet earned would be:

Debit Service Revenue for 3,000, and Credit Unearned Service Revenue for 3,000

A trial balance with equal debit and credit totals means that the accounting process is free of error.

False

Accounting information is useful only to the owners of a business

False

If the income statement approach is used to record revenues received in advance of being earned, then an adjusting entry will always be necessary at the end of the accounting period.

False

Many accounting measurements are based on the historical-cost principle, which holds that assets and liabilities are initially entered into accounting records at acquisition cost, but subsequently change as market values change.

False

Accounting software packages generally:

Each of the choices is correct.

Recite the basic conditions precedent to revenue recognition.

Earnings process complete (production) + exchange transaction (salesman/consumer) = revenue recognition (accounting)

Distinguish between the economic and accounting concepts of income.

Economists refer to income as a measure of "better-offness". Accountants base it off the historical cost and income is "revenues" minus "expenses".

How computer software can be used to facilitate financial statement preparation.

It will do it automatically for you so the account has less work to do. An understanding of how to do it is still important.

What benefit is a post-closing trial balance, and what type of accounts would be found there?

It's a tool that demonstrates what the account balances are.

The chart of accounts is a:

Listing of a company's accounts

Which should precede the other on a classified balance sheet?

Long-term investments

The relevant time period related to the definition of current assets is one year or the operating cycle, whichever is:

Longer

Describe how technology has reshaped accounting from book-keping to a decision-making discipline.

Made accounting less of a bookkeeping process and more decision making process.

Why might the alternative treatment of adjustments "simplify" the accounting process?

Makes a debit related to future periods and causes an offset of credit which reduces the amount equal to the amount consumed during the period.

Describe the benefits of a computerized accounting systems.

Makes less work for accountants and allows for fewer errors when linking transactions, journals, ledgers, and trial balances.

Which branch of accounting is concerned primarily with external reporting or communicating the results of economic activities to parties outside the firm?

Financial Accounting

The primary private sector agency that oversees external financial reporting standards is the:

Financial Accounting Standards Board

Distinguish between financial and managerial accounting.

Financial accounting is the information given out via financial statements to banks or investors. Managerial accounting is the information gathered by an owner or manager and used to make decisions.

What useful information is not provided by financial reports?

Future prospects, results of expenditures, new product introductions, new pricing strategies, customers decisions,

Prepaid expense

Goods or services purchased in advance of their consumption.

Describe typical data entry processes for computerized accounting systems.

Has a memo section, entry number, entry date, account number, account name, debit, credit, totals.

The _____________ _____________ holds that expenses should be recorded in the same time period as the revenues they helped to produce.

Matching principle

The _____________ _____________ is the length of time it takes a company to turn cash back into cash via investing in inventory and accepting accounts receivable.

Operating cycle

Distinguish between payment and recognition.

Payment is when the money is actually given to the party. Recognition is just when the company recognizes the revenues and expenses.

Which of these items would be accounted for as an expense?

Payment of the current period's rent.

Which of the following statements about reversing entries is true?

Identical account balances are achieved in the subsequent accounting period whether reversing entries are utilized or not.

Revenue

Inflows and other benefits received in exchange for the providing of goods and services.

An appropriate journal entry to record accrued interest would involve a debit to Interest Expense and a credit to:

Interest payable

Long-term investments

Investments made for long-term holding purposes; including land for speculation, securities of other companies, etc.

Retained earnings will change over time because of several factors. Which of the following factors would explain an increase in retained earnings?

Net income

If the subtotal amounts in the income statement columns of a worksheet reveal debits in excess of credits, then which is indicated?

Net loss

Are dividends an expense?

No

Will a trial balance necessarily produce correct financial statements?

No, but it does give you a start.

If a trial balance is in balance, is it necessarily correct?

No, it is not a guarantee.

Are reversing entries mandatory?

No, they are an optional accounting procedure.

Revenue, expense, and dividend accounts must be closed or reduced to zero so amounts are not carried over from one period to the next. These accounts are appropriately known as temporary or _____________ accounts.

Nominal

Which account types are closed at the end of an accounting period?

Nominal accounts

Define T-account.

Is a useful tool for demonstrating transactions and events.

Define revenue recognition.

Normally occurs at the time services are rendered or when goods are sold and delivered.

Current liabilities

Obligations that will be liquidated within one year or the operating cycle, whichever is longer.

Define the matching principle.

Is the idea that the expenses should be recognized with the revenues they helped produce.

Why is a ledger needed, in addition to a journal?

It allows a more concise keeping of the many different accounts that are used by the business.

Describe the need for and application of posting.

It allows the accountant to take less time matching the journal entry with the ledger and makes the money keeping process a little less tedious.

How can a trial balance can be used to facilitate preparation of financial statements?

It can give you a tentative set of financial statements.

Explain what a chart of accounts is and how it is used.

It is a listing of all of the accounts by a particular company.

What a T-account is and how it can be used?

It is a way to maintain accounts of a business. It is used as scratch paper.

Describe how a trial balance might be updated for adjusting entries?

It is analyzed for potential adjustments, a list is developed of necessary adjustments, the forms are submitted to the chief accountant/controller, the approved forms serve as supporting documents to authorize data in the accounting system.

How are profits and losses determined and presented in the worksheet?

It is entered in the lower portion of the income statement columns.

Describe how financial statements are generated from an adjusted trial balance.

It is mostly mechanical and is easily automated. The accounting software will race through the steps to prepare the financial statements.

Define the principle of historical cost.

It is the reporting of transactions at their original cost.

What is the significance of the CPA (or global equivalent) designation?

It makes sure someone knows what they are doing and they agree to maintain a certain level of integrity and honor.

What is the matching principle and why is it important in expense recognition and income measurement?

It makes sure that the costs and revenue are linked together in the same sale.

Adjusting entries should be determined:

Prior to preparing financial statements

Which of the following areas of the accounting profession is sometimes referred to as industry accounting?

Private accounting

Journalizing

Process of recording transactions and events into the journal.

How is the quick ratio calculated?

Quick ratio = (cash + short-term investments + accounts recievable) / current liabilities

Accounts whose balances are carried forward from period to period are commonly called permanent or _____________ accounts.

Real

What is an account?

Records kept for individual assets, liability, equity, revenue, expense, and dividend components.

Adjusting entries at the end of an accounting period would not be required for which of the following?

Revenue that has been earned and recorded in the accounting records.

Describe closing entries related to revenues, expenses, the Income Summary, and the Dividend account.

Revenues closing entries are just the total debit and credit for the period. Expenses closing entries are salaries, advertising, fuel, depreciation, and interest to income summaries. Income Summary closing entries are taken straight to the retained earnings account. Dividend closing entries are also taken straight to the retained earnings account.

Accrued revenues

Revenues that have been earned and recorded, but are not as yet collected.

The periodicity assumption seems practical and logical; however, it introduces allocation problems when dividing the life of a company into specific units of time.

True

The records that are kept for the individual asset, liability, and owner's equity components are known as accounts.

True

The trial balance is prepared to determine whether accounting records are in balance.

True

Under the cash basis of accounting, revenues and expenses are recognized as receipts and payments occur.

True

Which account would be debited to reflect receipt of a $500 utility bill?

Utilities Expense

Define temporary (nominal) and real accounts.

When revenue, expense, and dividend accounts are zeroed out they become temporary nominal accounts. Asset, liability, and equity accounts are called real accounts because their totals are carried over.

Cite examples of long-term investments.

Stock investments, cash value of insurance

Illustrate a simplified equity section for a corporation, and describe the nature of capital stock, retained earnings, and dividends.

Stockholders' Equity Capital Stock Retained Earnings Dividends Capital stock: amounts received from investors for the stock of the company Retained earnings: profit that is gained and reinvested into the expansion of the business Dividends: distribution of revenue to shareholders in portion to their holdings

What is a common misunderstanding regarding credits?

That they always reduce an account balance.

What is working capital?

The difference between current assets and current liabilities.

Working capital

The difference between current assets and current liabilities.

Debits

The nature of an action to an account to indicate an increase (assets, expenses, and dividends) or decrease (liabilities, equity, and revenue).

Credits

The nature of an action to an account to indicate an increase (liabilities, equity, and revenue) or decrease (assets, expenses, and dividends).

Operating cycle

The period of time it takes to convert cash back into cash (i.e., purchase inventory, sell the inventory on account, and collect the receivable) and collect.

Accounting cycle

The procedures needed to process transactions through an accounting system; including journalization, posting, adjusting, and preparing financial statements.

Closing process

The process by which temporary accounts are "zeroed" out and the effects transferred to retained earnings.

Posting

The process of transferring journal entry effects into the respective general ledger accounts

Depreciation

The process used to allocate the cost of a long-lived property to the accounting periods benefited.

Other assets

The category of a classified balance sheet for reporting assets that are not logically attached to one of the other specific sections.

If a company had a current ratio of 0.5, then which of the following statements regarding that company's working capital would be true?

The company's working capital would be negative.

Demonstrate, by example, the use of reversing entries, versus no reversing entries.

Reversing entries: 3,000 accrued salaries at the end of 20X8, next payday was January 15, 20X9, and 6,000 were paid to employees. Not reversing entries: adjusting entry in 20X8 to record 3,000 of accrued salaries is the same, the first journal entry in 20X9 reverses the adjusting entry, On January 15, 20X9 the entire payment of 6,000 is recorded as an expense.

A _____________ _____________is the exact opposite of an adjusting entry.

Reversing entry

Historical cost principles

The concept that many transactions and events to be measured and reported at acquisition cost.

Describe the form and content for a statement of cash flows.

The content is broken into three parts cash from operating activities, cash from investing activities, and cash from financial activities. The form is just an easy way to see these three categories broken up into smaller categories that go into more detail about the main three.

When adjustments are needed?

Should be made every time financial statements are prepared.

What are three typical business entity forms?

Sole proprietorship, partnership, corporation

Who would normally be in a position to suggest adjusting entries?

Someone in the company that is very knowledgable about the companies workings.

Why would a company employ special journals, in addition the general journal?

They are employed when there is a highly repetitive transaction.

Adjusting process

To analyze account balances and update them at the end of an accounting period to reflect the correct measure of revenues and expenses.

Why do accountants use the transactions approach to compute net income?

To be more accurate when computing the net income.

Why are adjusting entries needed?

To cause the accounts to appropriately reflect those changes.

What is the meaning of the word "recognize."

To record it into the accounting records.

When and why are the books "closed?"

To reset for the beginning of the next accounting period.

Into which worksheet columns are amounts from the adjusted trial balance to be extended?

To the debit column of the balance sheet.

Adjusting entries are necessary to fulfill the goals of proper income measurement and are consistent with the cash basis of accounting.

True

An adjusted trial balance is prepared by changing specific account balances in the trial balance by the amount of the adjustments from the adjusting entries.

True

_____________ revenue represents future revenue that has been collected but not yet earned, whereas _____________ revenues have been earned but not yet received.

Unearned accrued

Accrued expenses

Unpaid expenses that have already been incurred.

Current assets minus current liabilities is defined as:

Working capital

The _____________ is a large columnar form that assists in the preparation of an entity's financial statements.

Worksheet

The term "revenues" means net income.

Wrong

Business expenses should be recognized in the same period as the revenues they helped to produce. This concept is known as the:

matching principle

Identify five typical users of accounting information.

Banks, managers, owners, creditors, and investors.

Identify the United States private sector accounting standard setting body.

FASB (Financial Accounting Standards Board)

What types of items are discussed in the notes to the financial statements?

Policies, events, lawsuits, and other parts of the operation.

To determine whether the accounts are still in balance after closing entries have been journalized and posted, accountants often prepare a _____________-_____________ _____________ _____________ .

Post closing trial balance

The transactions in the journal and the accounts in the ledger are linked together by a transfer process called:

Posting

Which of the following errors will be disclosed in the preparation of a trial balance?

Posting only the debit portion of a particular journal entry.

_____________ _____________ are goods and services purchased for future consumption and paid for in advance.

Prepaid expenses

Describe adjusting entries for multi-period costs and revenues and accrued revenues and expenses.

Prepaid expenses, depreciation, and unearned revenue are used for multi-period costs. Unrecorded expenses and unrecorded revenues are used for accrued items.

Unearned revenue

Revenue that has been collected in advance of providing goods and services to "earn it;" reported as a liability until earned.

Remington provided the following information about its balance sheet: Cash $ 100 Accounts receivable 500 Stockholders' equity 700 Accounts payable 200 Bank loans 1,000 Based on the information provided, how much are Remington's liabilities?

$1,200

Gerald had beginning total stockholders' equity of $160,000. During the year, total assets increased by $240,000 and total liabilities increased by $120,000. Gerald's net income was $180,000. No additional investments were made; however, dividends did occur during the year. How much were the dividends?

$60,000

What are specialized areas of work within private accounting?

internal auditors, bookkeeping, accounting clerk

If a company has a current ratio of 2, and then pays half of its current liabilities from current assets, the current ratio would become:

3

Describe the appearance of a T-account and state how it corresponds to a general ledger account.

A T-account is just the debits and credits and totals of each then the total balance in blue. It takes the numbers directly from the ledger.

Shipman Company had accrued salaries of $300 on December 31. The company recorded reversing entries on the following January 1. On the next payday, January 7, the appropriate entry to record the payment of $1,000 in salaries should include:

A debit to Salaries Expense of $1,000.

Source Document

A document evidencing a transaction or event and potentially providing for the initiation of a journal entry.

Accounting equation

A financial relationship at the heart of the accounting model: Assets = Liabilities + Owners' Equity

Statement of retained earnings

A financial statement that discloses changes in retained earnings during a designated period of time; those changes usually attributable to income and dividends

Balance sheet

A financial statement that presents a firm's assets, liabilities, and owners' equity at a particular point in time.

Income statement

A financial statement that summarizes the revenues, expenses, and results of operations for a specified period of time.

Corporation

A form of business organization where ownership is represented by divisible units called shares of stock

Trial balance

A listing of account balances from the ledger, used to test the equality of debits and credits

Chart of Accounts

A listing of the accounts of an entity, along with any identification coding.

What is the purpose of a trial balance?

A listing of the ledger accounts along with their debit or credit balance.

When and why might one use a worksheet for preparation of financial statements?

A manager might ask for a monthly financial report, an auditor may use a worksheet to prepare financial statements that take into account the recommended adjustments before suggesting the actual ledgers be altered.

Current ratio

A measure of liquidity; calculated by dividing current assets by current liabilities.

Sole proprietorship

A non-corporation business owned by a sole individual.

Partnership

A non-corporation representing an association of two or more persons organized to carry out a business plan for a profit motive.

Income summary

A non-financial statement account used only to facilitate the closing process by summarizing and zeroing-out the revenue and expense accounts.

Capital stock

A non-specific reference to the ownership interests of shareholders in a corporation.

Fiscal year

A one-year accounting period that does not correspond to a calendar year.

Accounting

A set of concepts and techniques that are used to measure and report financial information about an economic unit.

Define accounting.

A set of ideas and rules used to measure and report money by businesses.

Subsidiary Account

A subcomponent account record providing individual balance details; e.g., the record for one customer out of a group of customers comprising all accounts receivable

Adjusted trial balance

A trial balance prepared after adjusting entries have been prepared and posted to the ledger.

Describe the nature and conceptual importance of the "accrual" basis of accounting.

Accrual basis is recording as natural increase occurs. It is reflective of measuring revenues as earned and expenses as incurred.

Public accounting

Accounting activities provided by a person to the general public, typically relating to audit, tax, and similar services.

The general ledger is comprised of numerous individual asset, liability, equity, revenue, and expense _____________ .

Accounts

Temporary accounts

Accounts that will be reset to a zero balance with each new accounting period; revenue, expense, and dividend accounts (also called "nominal" accounts).

Nominal accounts

Accounts that will be reset to a zero balance with each new accounting period; revenue, expense, and dividend accounts (also called "temporary" accounts).

Which method of accounting is theoretically preferred and used by virtually all large companies?

Accrual basis

Financial statements may be prepared directly from the _____________ _____________ _____________ .

Adjusted trial balance

A post-closing trial balance is prepared:

After closing

Full disclosure principle

All relevant facts that would influence investors' and creditors' judgments about the company are disclosed in the financial statements or related notes.

Which of these represents the 4th step in the formal revenue recognition process?

Allocate the transaction price to the performance obligations in the contract.

Managerial accounting

An area of accounting concerned with reporting results to managers and others who are internal to an organization

Financial accounting

An area of accounting that deals with external reporting to parties outside the firm; usually based on standardized rules and procedures

Quick ratio

An extreme measure of liquidity, calculated by dividing quick assets (cash, short-term investments, and accounts receivable) by current liabilities.

Certified Public Accountant (CPA)

An individual who is licensed by a state to practice public accounting.

Long-term liabilities

Any obligation that is not current, and include bank loans, mortgage notes, and the like.

Natural business year

Applicable to certain businesses that have a seasonal business pattern, and an attempt is made to establish an accounting fiscal year to match.

The accounting profession can be divided into three major categories; specifically, the practice of public accounting, private accounting, and governmental accounting. A somewhat unique and important service of public accountants is:

Auditing

When and why might reversing entries be used?

Can be useful in simplifying record-keeping. It undoes the adjusting entry and allows you to double-check your work.

Name the four basic financial statements.

Balance sheets, income statements, cash flow statements, shareholders equity

Which financial statement most closely corresponds to the accounting equation?

Balance Sheet

Demonstrate the proper headings (with their dating) for the balance sheet, income statement, and statement of retained earnings.

Balance Sheet -Name of Company -Title of Report -Date of Report Income Statement -Name of Company -Income Statement -Time Interval Reported Statement of Retained Earnings -Name of Company -Statement of Retained Earnings -Reporting Period End Date

The post-closing trial balance would consist of which account types?

Balance sheet accounts

The Accumulated Depreciation account is termed a _____________ asset.

Contra

Which of the following accounts would not be closed at the end of an accounting period?

Capital stock

Under the _____________ basis of accounting, revenues are recorded in the period of receipt and expenses in the period of payment. This method is generally regarded as being inferior to the _____________ basis of accounting.

Cash accrual

Define and apply both the accrual basis and cash basis of accounting.

Cash basis is much simpler, revenue is recorded when cash is received and expenses are recognized when paid. Accrual basis is are expenses and revenues that gradually accumulate throughout an accounting period.

Public accounting firms perform numerous services including auditing, income tax, and _______________.

Consulting

A liability account should be increased with a ________________.

Credit

In preparing a worksheet, a net loss would be computed and entered in the:

Credit column of the income statement columns of the worksheet.

In order, list the classifications for assets on a classified balance sheet.

Current assets, Long-term investments, property plant & equipment, intangible assets, other assets

On a classified balance sheet, the appropriate ordering of specific classifications is:

Current assets; long-term investments; property, plant, and equipment; intangible assets; other assets.

Working capital is computed by subtracting _____________ _____________ from _____________ _____________ .

Current liabilities current assets

What two key categories distinguish liabilities on the balance sheet?

Current liabilities, long-term liabilities

How is the current ratio calculated?

Current ratio = current assets / current liabilities

What are the six types of accounts, and provide the related debit/credit rules for each?

DEAD=Dividends, Expenses, Assets, Debits, RELIC=Liabilities, Revenues, Equity. DEAD carry a debit balance and are increased with debits and decreased with credits. RELIC carry a credit balance and are decreased with debits and increased with credits.

Errors like transaction omission, transaction duplication, and posting to the wrong accounts would cause trial balance totals to be:

Equal

Distinguish between exchange transactions and nonexchange events.

Exchange transactions are transactions that have an identifiable exchange between the company and an outside party. Non-exchange events are transactions that have no clear exchange between the company and a party. Like a debit loss.

Accruals

Expenses and revenues that gradually accumulate throughout an accounting period.

What is meant by the term "full disclosure?"

Financial statements result in fair presentation and all parts that would influence anyone are recorded in the financial statement or its notes.

An accounting year that covers a period of time other than January 1 through December 31 is typically referred to as a _____________ year.

Fiscal

The income statement is a statement:

For a period of time

Name selected governmental agencies that employ many accountants.

General Accounting Office, Securities and Exchange Commissions, Federal Bureau of Investigation,

All the accounts taken together comprise a firm's:

General Ledger

Identify the global accounting standard setting body.

IASB (International Accounting Standards Board)

Why are ethical valuese paramount within and to the accounting profession.

If it did not exist then there would be a loss in the faith of accounting and there would be no need in having those practices.

Amounts in the adjusted trial balance columns of the worksheet are extended to the _____________ _____________ , retained earnings, or balance sheet columns of the work sheet.

Income statement

Prepaid expenses would initially be recorded in an expense account under which adjusting entry approach?

Income statement approach

Describe alternative treatments of prepaid expenses and unearned revenues.

Income statement wherein the expense account is debited at the time of purchase.

The _____________ _____________ account is closed directly to retained earnings.

Income summary

The _____________ _____________ account is used only in closing, and summarizes the net income or net loss of a business.

Income summary

Accounts are increased with credits and decreased with debits.

Incorrect

_____________ assets usually follow property, plant, and equipment on a classified balance sheet.

Intangible

What types of items would be found in the intangible assets and other assets sections of the balance sheet?

Intangible: goodwill Other: receivable from employee

Which accounting record is sometimes known as the book of original entry?

Journal

The following comments each relate to the recording of journal entries. Which statement is true?

Journalization is the process of converting transactions and events into debit/credit format.

Intangible assets

Lack physical existence, and include items like purchased patents and copyrights.

Demonstrate the property, plant, and equipment section of a balance sheet (noting the correct presentation of accumulated depreciation).

Land, buildings & equipment, less accumulated depreciation

The accountant's worksheet:

Lays the groundwork for formal financial statement preparation.

Modified cash basis

Like the cash basis, except that certain large expenditures for durable assets may be recorded as assets initially

Current assets should be listed on a balance sheet in order of _____________ .

Liquidity

The reported amount for an asset, less its accumulated depreciation, is frequently referred to as _____________ _____________ _____________ .

Net book value

The recording and accounting for prepaid expenses, depreciation, and similar items is consistent with the adjusting process for:

Multi-period costs and revenues that must be split among two or more accounting periods

The _____________ _____________ is paramount to income measurement, and holds that an organization's life can be divided into discrete measurement intervals.

Periodicity assumption

Which concept holds that an organization's life can be divided into discrete accounting periods (months, quarters, years)?

Periodicity assumption

Why do accountants use debits and credits, rather than pluses and minuses?

Pluses and minuses do not cover all the possibilities that can come from an account. Whereas debits and credits can.

The trial balance:

Provides a listing of the balance of each account in active use.

Differentiate between public and private accounting.

Public accounting is used to help people with taxes and other such things. Often times they work for a firm. Private accounting is when you work for one business and you maintain their accounting books and such to make sure they are heading in the direction they want to go financially.

Which of the following transactions would have no impact on stockholders' equity?

Purchase of land from the proceeds of a bank loan

Which of the following transactions would have no impact on stockholders' equity?

Purchase of land from the proceeds of a bank loan.

Describe the trade-off between relevance and reliability, particularly related to valuation issues.

Relevance is when it is given in a timely manner. Whereas, reliability is given when we know the outcome of our transaction. However, the longer we wait for it to be reliable the less relevance it has and when you give it too early it has great relevance but not a lot of reliability. Valuation issues come into play when we need both at the same time. However, we must trade-off between the two to get the answer we want which can often be a gamble to investors.

Payment of accounts payable with cash cause retained earnings to:

Remain the same

Purchase of assets for cash cause total assets to:

Remain the same

Owner investments

Resources provided to an organization by a person in exchange for a position of ownership in the organization

What is the nature of the modified cash-basis system?

Results in revenue and expense recognition as cash is received and disbursed, with the exception of large cash outflows for long-lived assets.

Post closing trial balance

Reveals the balance of accounts after the closing process, and consists of balance sheet accounts only.

The journal entry to record the billing of clients for services rendered would involve a debit to Accounts Receivable and a credit to:

Revenue

Under the the income statement approach to adjusting entries, the receipt of $5,000 of unearned revenue would be recorded by debiting Cash. What account should be credited?

Revenue

Distinguish between the terms revenue and net income.

Revenue is what you make from the selling of your goods. Net income is what you make minus the cost of selling the goods.

Under the accrual basis of accounting, revenue should be recognized at the time services are rendered or when goods are sold and delivered to a customer.

Right

Whether or not a company utilizes reversing entries, identical financial statements should be achieved.

Right

Which form of account is more popular in practice?

Running balance form

Which of the following would not be included on a balance sheet?

Sales

What are some of the typical features of a computerized accounting system?

Simplify data entry, divide accounting processes, attempt to be user friendly, attempt to minimize keystrokes, built on database logic, provide up to date data, capable of producing numerous specialized reports.

Name three entity forms and note their significance to the equity section on the balance sheet.

Single owners capital instead of capital stock for a proprietorship, divided into separate sections for each partner in the partnership, capital stock is listed for corporations, LLC and PLC are variants of the proprietorship and partnership forms.

What information is provided by financial reports?

Snapshot of an entity as of a certain date.

What are key areas of service within a public accounting firm?

Taxes, external auditor, business system analyst

What is meant by the term "liquidity?"

The ability of a firm to meet it's near-term obligations as they come due

Luquidity

The ability of a firm to meet it's near-term obligations as they come due.

Describe the relationship between the fundamental accounting equation and the structure of the balance sheet.

The accounting equation is the backbone of the balance sheet. The balance sheet is just an easy way to see and understand the use of the accounting equation.

Accrual basis

The accounting process whereby revenues are measured and recorded as earned, while expenses are recorded as incurred.

Expense

The costs incurred in producing revenues.

Define retained earnings and identify the elements that cause it to change.

The cumulative net earnings of a company. Can be affected by revenue, cost of goods, operating expenses

Assets

The economic resources owned by an entity; entailing probable future benefits to the entity.

Auditing

The examination of transactions and systems that underlie an organization's financial statements with the goal or reporting thereon

Retained earnings

The excess of a corporation's income over its dividends

Retained earnings

The excess of a corporation's income over its dividends.

Net loss

The excess of expenses over revenues for a designated period of time.

Net income

The excess of revenues over expenses for a designated period of time.

What is a fiscal year versus a calendar year?

The fiscal year is the adoptable year, the start date and end date can be whatever date the company wants. The calendar year is January 1 through December 31.

Current assets are those assets which management intends to convert into cash or consume within:

The longer of (a) or (b)

The following comments all relate to the recording process. Which of these statements is correct?

The general ledger is posted from transactions recorded in the general journal.

Describe the self-balancing interrelationships between the core financial statements.

The income for the period ties into the statement of retained earnings and the end retained earnings ties into the balance sheet.

Owners' equity

The residual of assets minus liabilities, representing the collective interest or position of the entity's owners.

Describe the look and operation of a running balance form of account.

The running balance form of account has a lot of references to journal pages that contain the information about each individual account. However, the total amount from that journal is displayed, either the credit or debit.

Control Account

The total of all subcomponent account records of an account; e.g., the sum of all individual accounts receivable.

Describe the steps by which information form source documents is transferred to the ledger.

The transaction is analyzed to determine accounts associated, a journal entry is entered into the general journal, the journal entries are posted to the appropriate general ledger pages.

Describe the importance of transaction analysis and source documents.

Transaction analysis is important because then we can determine what accounts are impacted and how they are impacted. Source documents are important because then we can initiate the recording of a transaction.

The basic sequence in the accounting process can best be described as:

Transaction, source document, journal entry, ledger account, trial balance.

Demonstrate how specific transactions impact the balance sheet without impacting the overall equality.

Transactions don't affect the overall equality because there is a constant change in transactions. However, the equity of the company will still be the assets and liabilities. Assets and liabilities are not affected by transactions. They are only affected by what you own and what you owe.

Distinguish between a trial balance and an adjusted trial balance.

Trial balance is prepared before considering adjusting entries. Adjusted trial balance demonstrates the equality of debits and credits after recording adjusting entries.

A company could experience a net loss and have dividends during the same accounting period.

True

Describe the need for accounts, and how a collection of accounts comprises the general ledger.

Without an account a business cannot have a ledger. The collection of accounts is how the company keeps track of transactions and then the ledger is how they keep track of the different accounts.

Accountants have developed ethical standards that pertain to financial record keeping and reporting.

Yes

Can every transaction be described in "debit-credit" form, and must debits must equal credits?

Yes, it can.

Outline the accounting steps that lead to the preparation of a trial balance.

You must check the debits and credits, then you must look at a chart of accounts, then check all control and sub-accounts, then you can make your trial balance

The ledger can be thought of as a:

a book with seperate pages for each account

Journal

a chronological listing of the transactions and events of an organization, in debit/credit format.

The normal balances of accounts correspond to the fundamental _______________ ________________.

accounting equation

Write the accounting question, and some mathematical variations of this equation (e.g., assets - liabilities = owner's equity).

assets = liabilities + equity liabilities = assets - equity assets - liabilities = equity -liabilities = assets + equity -equity = assets + liabilities

Current assets

assets that will be converted into cash within one year or the operating cycle, whichever is longer

For purposes of measuring business income, the life of a business is:

divided into discrete accounting periods.

In any transaction, total debits must __________ __________ _________.

equal total credits

The shortened form of the accounting equation is assets equals _____________ plus owners' equity.

liabilities

Evidence of transactions is often provided by the receipt or issuance of accounting forms known as _____________ _____________ .

source documents

In general, accountants measure income using an approach based on:

transactions

A __________ ___________ is a listing of the general ledger accounts along with the dollar balances contained therein.

trial balance

Name selected not-for-profit enterprises that employ accountants.

universities, museums, hospitals, charitable groups