Exam 1

The accounting cycle consists of 3 steps in what order

1. Analyze, 2. Record, 3. Summarize the transactions

3 common misconceptions of the net income statement

1. Net income does it include estimates 2. Net income reports all changes of the value that incurred during the accounting period, net income = cash

Companies typically prepare ______ financial statements each accounting period.

4; Income statement, balance statement, retained earnings, cash flows

A company issued $10,000 of commons stock to its owners for cash. It recorded the transaction by increasing the assets and increasing the liabilities. Which is correct about? Liabilities will be too high Assets will be too high Stockholders equity will be too low Assets will be too low Stockholders equity will be too high Liabilities will be too low

Liabilities will be too high AND SE will be too low

What lines appear on the balance sheet?

Liabilities, Assets, SE. not Revenues or Expenses as they appear on the income statement

____ measures a company's ability to pay liabilities as they come due in the short run.

Liquidity

What are possible effects on the accounting equation when recording a transaction that affects two accounts?

One asset account increases and one SE account increases, One asset account increases and one asset account decreases

The statement of retained earnings..

One of the four financial statements

Collecting cash from customers for services provided is a _____ activity

Operating

______ activities are the primary source for revenues and expenses and affect whether a company earns a profit or incurs a loss

Operating

Stockholders' Equity

Owners of the company; can buy/sell stock privately or publicly on a stock exchange if the company is legally registered to do so

Net Income

Profit, by generating NI a company increases its SE

Account _____ is an asset on the balance sheet that reports the amounts owed by customers for sales or services provided on credit.

Receivable

All accounting systems____

Record and summarize the financial effects of transactions, follow accounting cycle, and combine beginning balances with the activity during the accounting cycle to yield the ending balances for each amount.

Which of the following statements are true regarding the Income Statment?

Report revenues minus expenses, are sometimes called the statement of operations. They do not report the increase of cash! Nor do they report assets, liabilities, and SE

purpose of balance sheet

Reports assets, liabilities, and equity at a specific date. Provides information about resources, obligations to creditors, and equity in net resources. Helps in predicting amounts, timing, and uncertainty of future cash flows.

Retained Earnings Statement outline

Retained earnings as of the beginning of the month, net income, dividends, retained earnings as of the end of the month

If a company issues money to common stock, the common stock t account will have a credit on the ____ side.

Right and Credit

Accounts payable is increased with an entry on the ____ Sid of the T-account.

Right, credit, credit or credits

Which of the following are external users of the company's financial statements

SEC, Creditors, Stockholders, government aganecies

Business earnings profits by___

Selling goods or services at more than the cost to provide the service or deliver goods; having revenues higher than expenses

Purpose of GAAP (Generally Accepted Accounting Principles)

Sets out to standardize the classifications, assumptions and procedures used in accounting industries across the US

Identify the primary ways in which a business may be organized

Sole propietorship, coroperation, partnership

A transaction that involves an exchange of assets, liabilities and or stockholders equity between the company and someone else is called a ______ exchange

external

All transactions ______

have at least two effects on the accounting equation affect assets, liabilities, and/or stockholders' equity A=L+SE

Expenses appear on the ______.

income statement

A debit to cash and a credit to common stock is recorded when a company ____.

incorporates and its owners contribute cash

Liabilities

measurable amounts that the company owes to creditors

Investing activities are concerned with acquiring long-term assets; financing activities provide the money needed to operate the business and to provide capital for investing activities; and ______ activities are involved with providing goods and services to the customer

operating

On the balance sheet, equipment is reported at its

original cost, not high current value

Which type of accountant is hired by a business as an employee and provides accounting services for that particular business

private accountant

The statement of Retained Earnings reports the ______.

profits that have accumulated in the company over time

The statement of retained earnings reports the ______.

profits that have accumulated in the company over time

Which type of accountant is contracted by variety of different companies for advice and other services?

public accountant

The unit-of-measure assumption states that ______.

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

single-step income statement includes

revenues-expenses=net income

A corporation earns profits for its stockholders by

selling goods at more than their cost providing services at more than cost

What are the three forms of business organization?

sole proprietorship, partnership, corporation

Which financial statement reports the accumulation of profits kept by the business during the current accounting period with that of prior periods?

statement of retained earnings

A classified balance sheet shows the

subtotals for current assets and current liabilities

The primary goal of most companies is to

to make a profit

The purpose of the Board of Directors is

to make certain the investors and/or owners interests are protected. Oversee company's managers. Use financial statements to ensure the companies manages are making Rt decisions that are in the best financial interest of the company stockholders

Retained Earnings Equation

total assets - total liabilities - common stock

Accounts are

used to accumulate and report the effects of each different business activity

Creditors want to see that a company that owes them money has ______.

assets that are greater than its liabilities

Assets have a normal ______ balance

Debit or debits

If a company collected $1000 from its customers in advanced and then full-filled $800 of its obligation and incurred expenses of $700 of which it paid $300, using accrual basis accounting, it would report net income equal to

$100; NI equals $800 revenue - $700 of expenses incurred. In accrual accounting, revenue is the amount form providing goods or services regardless of the amount collected and expenses are incurred regardless of amount paid

The statement of cash flows shows

- cash flows from investing activities - cash flows from financing activities - cash flows from operating activities

The beginning balance of a business cash account is 100,000. During the month the business issued $25,000 of common stock for cash. The balance of the business Cash account now is_________.

A debit of 125,000

A business issued 20,000 of stock in exchange for cash. The journal entry to record this transaction will include _________of $20,000.

A debit to cash and a credit to stock. More than one answer

Assets

A resource the company controls and expects to benefit from in the future; ie; cash, machine, equipment, software, building, inventory

Financial information needed to manage a company is provided by an __ system

Accounting

What is referred to as the language of business because it is such a key part of business, and its terms are typically used in discussing business?

Accounting

dividends equal

Amount shared/distributed during a period/month

Which of the following are possible effects on the accounting equation when recording a transaction that increases a liability by $100?

Another asset increases by $100; A stockholders' equity account decreases by $100

Which of the following is another way to express the expanded accounting equation Assets + Liabilities = common stock + retained earnings Assets = Liabilities - common stock + retained earnings Assets - Liabilities = common stock + retained earnings

Assets - Liabilities = common stock + retained earnings; reason: assets equal liabilities plus SE

What is the basic accounting equation?

Assets = Liabilities + Stockholders' Equity

Which of the following are ways of expressing the basic accounting equation?

Assets = Liabilities + Stockholders' Equity Assets - Stockholders' Equity = Liabilities Assets - Liabilities = Stockholders' Equity

A classified balance sheet shows subtotals are current ______ and current_____

Assets and Liabilities

The proper heading on a financial sheet

Business name, Financial Report name, time period

When revenue is credited, the possible three debits are;

Cash, Accounts Receivable, Deferred Revenue

Dividends

Company's share profits to the shareholders based on the corporation's performance. Comp profit - accumulated - retained earnings. Decision to distribute stockholders. Retained earnings is decreased by dividends

Accounts payable would record an increase with a ____

Credit

Liabilities have a normal ___ balance

Credit

The retained earnings is increased with an entry on the ___ side of the account.

Credit

If you pay cash for supplies, the entry to record this transaction would include _______ to cash

Credit as that decreases the cash

A company would record an increase in common stock on the ____ side

Credit, right side

Which of the following are the main groups of external investors?

Creditors, investors, government agencies

A debit or decrease to liabilities would be recorded with a _______ to notes payable

Debit

Equipment account is increased with an entry on the ___ side

Debit

A company received $2k of equipment and promised to pay next month. The increase in equipment would be recorded with a ____to the equipment account.

Debit, because it's an asset that is increased by debits

Retained earnings are_________

Decreased by dividends, and increased by net income

Which are true about the income statement?

Each major caption has an underline subtotal, such as total expenses, Net income has a double underline, revenues are listed before expenses, a dollar sign is only at the top and bottom of the column numbers

Managerial accounting reports are used by the company's

Employees and managers

A trial balance is an internal report used to determine whether total debits ____ total credits.

Equal

True of False; Financial statements must have a year end of December 31st

False, can be as of any date

Which group is responsible for creating the US GAAP?

Financial Accounting Standards Board (FASB)

The management of Acme, INC. prepared a statement for comp external users that listed the company's assets, liabilities and SE as of the last day of the year. This statement is an

Financial statements

What are the correct terms for the 3 activities found on the statement of cash flows?

Financing, Investing, Operating

The underlying rules of accounting in the US are called ______.

Generally Accepted Accounting Principles (GAAP)

The duality effects refers to the fact that each transaction______.

Has at least two effects on the accounting equation

The heading of an income statement____.

Includes the time period covered, the name of the company, and indicates if the reported numbers are rounded to the nearest thousand or million. This is for larger businesses

The financial statement that records revenues and expenses is the ___

Income Statement

Which financial statement records revenues and expenses

Income statement

If a company paid $200 cash for supplies that were purchased last month, but the company recorded it a debit to AP and a credit to cash $20, the accounting records are __

Incorrect because the credit doesn't equal the debit

A company receives money in common stock to its owners, what effect would this have on the accounting equation?

Increase SE and increase Assets. It will not effect retained earnings

A company receives $10,000 from issuing common stock to its owners. The effect of the accounting equation is a _____________.

Increase in assets and increase in SE

A financial statement heading states that it was prepared: "For the year End of December 31, 2020". What types of financial statements could this be?

Statement of cash flows, statement of retained earnings, income statement, but NOT the balance sheet because the balance sheet heading would read "December 31, 2020" or "at December 31, 2020". The balance sheet is not : for the year ended" butt at a point in time

Which of the following are external users of the company's financial statements?

Stockholders, SEC, creditors

What is the income statement?

Summarizes the financial impact of the operating activities undertaken by the company during the accounting period. It includes three main sections; revenues, expenses, and net income

Accounts Payable

Supplies to be purchased on credit said to be on account

An income statement is referred to as a single-step income statement because_____

The format separates total revenues from expenses and reports a single measure of income.

Stockholders' Equity

The owners' claim to assets after creditors claims have been fulfilled

The heading of a balance sheet should include?

The title, at what date, the name of the business

If a company sol merchandise to a foreign company, what is the unit of measure assumption?

The unit of measure assumption assumes the transaction of were in US dollars, thus sales in euros are translated to US dollars for reporting services

The net income margin ratio is calculated by dividing net income by ______.

Total revenue

Business activities that affect the basic accounting equation and are recorded in the accounting system are called_____

Transactions

True or false: a fiscal year can end on a date other than December 31. A calendar year ends on December 31

True

retained earnings increases when

a company earns and keeps its profit

The unit of measure concept is the idea that a company should report its financial results on its financial statements using ______.

a single monetary unit, such as the US dollar

______ are used to accumulate and report the effects of each different business activity separately rather than combining the various types of activities together

accounts

All transactions ______

affect assets, liabilities, and/or stockholders' equity have at least two effects on the accounting equation

Wages Expense is ________ while Wages payable is ________

an expense on the income statement; a liability on the balance sheet

A balance sheet reports

assets, liabilities, stockholders equity during the accounting period

Which financial statement reports the financial position of the business at a point in time?

balance sheet

The main goal of an accounting system is to

capture information about a business so that it can be reported to decision makers

What does a business typically receive when it issues stock to owners?

cash

A company typically receives ____ an asset, when it issues stock to its owners.

cash or money

The formula for calculating the current ratio is ____

current assets divided by current liabilities

The totals on a trial balance reveal whether the total ______ equal the total ______.

debits and credits

Revenues

earned by selling goods or services to customers