Econ 3A Midterm 2

Accounts often need to be adjusted because

many transactions affect more than one time period

All of the following are necessary to compute the future value of a single amount except the

maturity value

Gross profit equals the difference between

net sales revenues and cost of goods sold.

Net income will result if gross profit exceeds

operating expenses

Detailed records of goods held for resale are not maintained under a

periodic inventory system

An asset-expense relationship exists with

prepaid expense adjusting entries.

In a service-type business, revenue is considered earned

when the service is performed.

Which of the following activities is not a component of the operating cycle?

Sale of merchandise, Collection of cash from merchandise sales, Purchase of merchandise

Perry Company deposits $10,000 in a fund at the end of each year for 5 years. The fund pays interest of 3% compounded annually. The balance in the fund at the end of 5 years is computed by multiplying

$10,000 by the future value of an annuity factor.

On January 1, 2006, E.D. Reardon Inc. purchased equipment for $30,000. The company is depreciating the equipment at the rate of $400 per month. At January 31, 2007, the balance in Accumulated Depreciation is

$5,200 credit

Javier's Tune-Up Shop follows the revenue recognition principle. Javier services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Javier on September 5. Javier receives the check in the mail on September 6. When should Javier show that the revenue was earned?

August 31

Which of the following reflect the balances of prepayment accounts prior to adjustment?

Balance sheet accounts are overstated and income statement accounts are understated.

If inventory is overstated what other account is most likely impacted and in what direction?

COGS is most likely understated.

On July 1 the Winter Shoe Store paid $12,000 to Ace Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Winter Shoe Store is

Debit Rent Expense, $2,000; Credit Prepaid Rent, $2,000

A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $30,000 with annual interest of 6%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?

Interest Expense 300 Interest Payable 300

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

Merchandise Inventory

Describe the difference between cash basis and accrual basis accounting over the life of an entity

None

Which of the following is an internal event (transaction)?

Potato chips are transferred from the production line to the packaging area

When cash has been paid in advance of the benefit being derived, the company has ______ the loss of cash, but should not yet ______ the expense.

Realized/ Recognized (in that order!)

Which of the following will cause a trial balance to be out of balance?

The balance for an account is incorrectly computed/ A debit entry is posted as a credit/ An account is accidentally omitted from the trial balance

An accounting time period that is one year in length is called

a fiscal year

Under a perpetual inventory system

accounting records continuously disclose the amount of inventory

Each of the following is a major type (or category) of adjusting entry

accrued expenses/prepaid expenses/accrued revenues

The closing entry process consists of closing

all temporary accounts

When using the periodic system the physical inventory count is used to determine

both the cost of the goods sold and the cost of ending inventory

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would

debit Cost of Goods sold and credit Merchandise Inventory.

The entry to record the return of goods from a customer would include a

debit to Sales Returns and Allowances.

Adjustments for unearned revenues:

decrease liabilities and increase revenues

The primary difference between a periodic and perpetual inventory system is that a periodic system

determines the inventory on hand only at the end of the accounting period.

The future value of 1 factor will always be

greater than 1

Debit entries are used to

increase asset accounts