Financial Accounting Exam 1

On November 1, Lawn & Order, Inc. paid $24,000 for two years of rent in advance for rent beginning on November 1. How much should be expensed for the month of November?

$1,000 - $24,000/24 months= $1,000 per month. For the month of November, only one month of the Prepaid rent has been used up.

Beauty and the Bistro, Inc. had $5,000 of supplies available to use during the year. At the end of the year, it recorded an adjusting entry for $4,500 for the amount used during the year. Supplies on the balance sheet equals ______.

$500

Net profit margin formula

(Net profit / revenue) x 100

In what order are the financial statements prepared?

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

What is a sole proprietorship?

A business owned by one person

What is a corporation?

A business owned by stockholders who share in its profits but are not personally responsible for its debts

What is a partnership?

A business owned by two or more people

A prepayment that is originally recorded as an asset will be:

Allocated to future accounting periods based on the value of the benefit used during the period.

Record the unrecorded amortization for the year on software, $5.

Amortization Expense (dr) $5, Accumulated Amortization (cr) $5

Which of the following would be listed as a long-term asset? A) Supplies. B) Total assets. C) Building and Equipment. D) Cash.

C) Building and Equipment.

During November 2015, Asler, Inc., performs consulting services. The client does not pay Asler until January, 2016. A) Using the accrual basis of accounting, the revenue is reported in January 2016. B) Using the accrual basis of accounting, the revenue is reported when Asler's expenses are paid. C) Using the accrual basis of accounting, the revenue is reported in November 2015. D) Using the cash basis of accounting, the revenue is reported in November 2015.

C) Using the accrual basis of accounting, the revenue is reported in November 2015.

If certain assets are partially used up during the accounting period, then: A) nothing is recorded on the financial statements until they are completely used up. B) a liability account is decreased or eliminated and an expense is recorded. C) an asset account is decreased or eliminated and an expense is recorded. D) nothing is recorded on the financial statements until they are replaced or replenished.

C) an asset account is decreased or eliminated and an expense is recorded.

BS: List some Current Assets accounts

Cash Accounts Receivable Inventory Short-term investments Prepaid Rent

Create an entry for this transaction: Received $1,000 from customers on April 8 on Accounts Receivable.

Debit Cash $1,000 Credit Accounts Receivable $1,000

Create an entry for this transaction: Received an electric utility bill on April 30 for $1,200 usage in April; the bill will be paid next month.

Debit Utilities Expense $1,200 Credit Accounts Payable $1,200

For Expenses, what type of adjustment is made when something is paid but not incurred?

Deferral

(Deferrals/Accruals) Increase Costs and Decrease Revenues?

Deferrals

The ___ recognition principle requires that a portion of long-lived assets be transferred to an expense account during the accounting period the asset is being used to generate revenues.

Expense Recognition Principle

Brand Affinity Technologies received a $500 bill for this month's celebrity advertising services, which it will pay next month. What has been incurred?

Expense and Liability has been incurred.

Chiquita Brands International used up $5,000 of the benefits of its banana harvesting and transportation equipment. What has been incurred and used up?

Expense has been incurred, Asset has been used up.

Record the adjusting entry for accrued interest for $1 on notes payable.

Interest Expense (dr) $1, Interest Payable (cr) $1

If a publicly traded company is trying to maximize its perceived value to decision makers external to the corporation, the company is most likely to report too small a value for which of the following on its balance sheet?

Liabilities

Other type of organizational form?

Limited Liability Company (LLC) - Combines characteristics of a partnership and corporation

Company purchases a cash register for a cash payment of $1,200. Will this affecting total assets?

No effects on total assets. Equipment increases (debited) by $1,200, and Cash decreases (credited) by $1,200.

Record the adjusting entry for salaries and wages earned but not paid for $12.

Salaries and Wages Expense (dr) $12, Salaries and Wages Payable (cr) $12

Organizational forms

Sole proprietorship, partnership, and corporation

What is another name for the Balance Sheet?

Statement of financial position

Which of the following accounts found on an unadjusted balance typically require adjusting entries?

Supplies Interest Payable Prepaid Rent

What are the effects on the accounting equation from the adjustment for depreciation?

Total assets will decrease and total stockholders' equity will decrease.

The creditors' claims to a company is represented by

Total liabilities

How many of the following statements regarding debits and credits are true? - A decrease in assets will result in a credit to an asset account. - Across all accounts, the total value of all debits must equal the total value of all credits. - The total value of all debits to a particular account must equal the total value of all credits to that account.

Two - A decrease in assets will result in a credit to an asset account. - Across all accounts, the total value of all debits must equal the total value of all credits.

To determine the adjusting entries required, a(n) _____ is prepared

Unadjusted trial balance

What is a good starting point for determining which accounts require adjustment?

Unadjusted trial balance

Which of the following is true regarding the income statement? A) The income statement is sometimes called the statement of operations B) The income statement reports revenues, expenses, and liabilities C) The income statement only reports revenue for which cash was received at the point of sale D)The income statement reports the financial position of a business at a particular point in time

A) The income statement is sometimes called the statement of operations

For Revenues, what type of adjustment is made when something is earned but not received?

Accrual

(Deferrals/Accruals) Decrease Costs and Increase Revenues?

Accruals

Accumulated Depreciation is (increased/decreased) as the equipment is used causing the carrying value to (increased/decreased) on the balance sheet.

Accumulated Depreciation is increased as the equipment is used causing the carrying value to decrease on the balance sheet.

BS: List some Stockholder's Equity accounts

Common Stock Retained Earnings

After the adjustments have been completed, the balance in the Rent Expense account represents the ______.

Cost of rent for the accounting period

Are revenues debit or credit?

Credit

The adjusting entry for supplies used during the period requires a ___ to Supplies and a ___ to Supplies Expense

Credit to Supplies and Debit to Supplies Expense

Current ratio formula

Current Ratio = Current Assets / Current Liabilities

5. The T-account is used to summarize which of the following? A) Increases and decreases to a single account in the accounting system. B) Debits and credits to a single account in the accounting system. C) Changes in a specific account balance over time. D) All of the above

D) All of the above

When should a company recognize revenue? A) When the price is fixed or determinable. B) When delivery has occurred or services have been provided (rendered). C) When there is persuasive evidence of an arrangement for customer payment and collection is reasonably assured. D) All of these are necessary to recognize revenue.

D) All of these are necessary to recognize revenue.

Galvan Corporation (GC) capitalized a $20,000 automobile. Which of the following is true? A) GC recorded Contributed Capital for $20,000. B) GC recorded a liability for $20,000. C) GC recorded an expense for $20,000. D) GC recorded an asset for $20,000

D) GC recorded an asset for $20,000

Which of the following statements regarding revenues and expenses is (are) true? A) Revenues and expenses are considered assets and liabilities, respectively. B) Both revenues and expenses typically have credit balances. C) Both a. and b. are true. D) Neither a. nor b. are true.

D) Neither a. nor b. are true.

Are expenses debit or credit?

Debit

The adjusting entry to record depreciation, includes a debit to ___ ___ and a credit to ___ ___

Debit to Depreciation Expense and Credit to Accumulated Depreciation

The adjusting entry to record the amount of prepaid rent used during the period requires a ___ to Rent Expense and a ___ to Prepaid Rent

Debit to Rent Expense and Credit to Prepaid Rent

What is GAAP and what does it stand for?

GAAP is the abbreviation for Generally Accepted Accounting Principles - Revenue Recognition Principle - Historical Cost Principle - Matching Principle - Full Disclosure Principle - Objectivity Principle

Record the adjusting entry for income tax for the year was $8. It will be paid in 2022.

Income Tax Expense (dr) $8, Income Tax Payable (cr) $8

Deferred

Money paid in advance for a product or service for future benefit

How is net income calculated?

Net Income = Revenues - Expenses

Accrued

Product or service delivered before given an invoice or payment

Matching Principle

Recognize expenses in the same period as the revenues they help to generate.

International Flavors and Fragrances completed a project to develop a new scent for Hilton Hotels, for which it will be paid $1,000 next month. What has been generated and acquired?

Revenue has been generated, Asset has been acquired.

Concerts for which Live Nation Entertainment sold $10,000 of tickets last month, were performed this month. What has been generated and fulfilled?

Revenue has been generated, Liability has been fulfilled.

Net profit formula

Revenues - Expenses

Record the adjusting entry for supplies counted on December 31, 2021 for $10. *The unadjusted trial balance stated a balance of $30 for the Supplies account.

Supplies Expense (dr) $20 and Supplies (cr) $20

A company was recently formed with $50,000 cash contributed to the company by stockholders for common stock. The company then borrowed $20,000 from a bank and bought $10,000 of supplies on account. The company also purchased $50,000 of equipment by paying $20,000 in cash and issuing a note for the remainder ($30,000 notes payable). What is the amount of total assets to be reported on the balance sheet?

Total assets: $50,000+10,000+50,000= $110,000 Don't add in "The company borrowed $20,000 from a bank", because that would be considered Notes Payable. What the company bought with the money, Supplies ($10,000) would be accounted for.

The balance in the Prepaid Insurance account after the adjusting entries have been recorded represents the ______.

Value of the insurance prepayment that remains to benefit future periods

The duality of effects can best be described as follows:

When a transaction is recorded in the accounting system, at least 2 effects on the basic accounting equation will result.

Will an exchange of an asset for a promise to pay be recorded in the accounting system?

Yes, because the asset was exchanged.

Do debits always equal credits?

Yes, debits always equal credits in each step of the financial statement preparation. The basic accounting equation must be in balance at all times.

In what order are Revenues and Expenses listed on the Income Statement?

1. Revenues 2. Expenses 3. Net Income (Loss)

Supplies are recorded as a(n) ______ when purchased

Asset

Basic accounting equation

Assets = Liabilities + Stockholders' Equity

What is listed on the Balance Sheet?

Assets, liabilities, and stockholders equity

When are adjustments made?

At the end of the accounting period

Which of the following items is not a specific account in a company's chart of accounts? A) Sales Revenue. B) Net Income. C) Income Tax Expense. D) Unearned Revenue.

B) Net Income.

If an expense has been incurred but will be paid later, then: A) nothing is recorded on the financial statements. B) a liability account is created or increased and an expense is recorded. C) an asset account is decreased or eliminated and an expense is recorded. D) a revenue and an expense are accrued.

B) a liability account is created or increased and an expense is recorded.

If a company receives $20,000 cash on accounts receivable and uses the cash to pay $20,000 on accounts payable then: A) liabilities would decrease by $20,000 while stockholders' equity would decrease by $20,000. B) assets would decrease by $20,000 while liabilities would decrease by $20,000. C) assets would increase by $20,000 while liabilities would decrease by $20,000. D) liabilities would decrease by $20,000 while stockholders' equity would increase by $20,000

B) assets would decrease by $20,000 while liabilities would decrease by $20,000.

Retained Earnings equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

What is listed on the Statement of Retained Earnings?

Beginning retained earnings, net income, dividends, and ending retained earnings

BS: List some Long term Assets accounts

Equipment Buildings Land Intangible Assets

Adjustments help to ensure that all _____ are recorded in the period in which they are incurred

Expenses

Is Deferred Revenue counted toward the profit formulas?

No. Deferred Revenue is listed as a current liability on the Balance Sheet, but it is not reported on the Income Statement.

BS: List some Long term Liabilities accounts

Notes Payable (long-term)

How many of the following statements regarding the revenue recognition and matching principles are true? - According to the revenue principle, a company should not record the revenue from a transaction until it is actually received in cash. - To ensure revenue reporting is consistent over time, a business adopts a revenue recognition policy that defines the time at which they report revenues from providing goods or services to customers. - The matching principle requires that expenses be determined first and then revenues be "matched" to those expenses.

One - To ensure revenue reporting is consistent over time, a business adopts a revenue recognition policy that defines the time at which they report revenues from providing goods or services to customers.

Each deferral adjustment involves one _____ and one _______ account, or one _________ and one _______ account.

One asset and one expense account, or one liability and one revenue account.

What is the primary source of revenues and expenses?

Operating activities. -Can determine whether a company earns a profit or incurs a loss

What is listed on the Income Statement?

Revenues, expenses, and net income

Which side of a T-account is the credit side?

Right side

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

How many of the following statements regarding the balance sheet are true? - Any item on a balance sheet labeled payable is a liability of that company. - Current Assets are listed on the balance sheet in order of how fast they are used up or can be turned into cash. - The basic accounting equation must always balance.

Three - Any item on a balance sheet labeled payable is a liability of that company. - Current Assets are listed on the balance sheet in order of how fast they are used up or can be turned into cash. - The basic accounting equation must always balance.

Month-end adjustments as a part of the accounting cycle

1. Analyze Monthly Adjustments 2. Record Adjusting Entries 3. Summarize in T-accounts Adjusted 4. Prepare Trial Balance 5. Report Financial Statements

Place the steps taken at the end of the accounting period to complete the financial statement preparation process in the correct order. Prepare an adjusted trial balance Prepare adjusting entries Prepare the financial statements

1. Prepare adjusting entries 2. Prepare an adjusted trial balance 3. Prepare the financial statements

Is a higher or lower current ratio better?

A higher current ratio is better. The transactions increased the company's ability to pay Current Liabilities.

Accounting Cycle

A six-step procedure that results in the preparation and analysis of the major financial statements. 1. Analyze 2. Record 3. Summarize 4. Prepare trial balance 5. Report financial statements

If an apartment leasing company receives the rent for January 2022 from a tenant in December 2021, this will be reported by the leasing company as: A) A liability in 2021 B) A liability in 2022

A) A liability in 2021

Which of the following is an expense of this period? A) Costs of items used up this period but paid for next period. B) Costs of items paid for in this period but used up next period. C) Both A) and B) above are expenses of this period. D) Neither A) nor B) above are expenses of this period.

A) Costs of items used up this period but paid for next period.

Which of the following is most likely be reported as an asset? A) Prepaid Rent. B) Wages. C) Service Revenue. D) Unearned Revenue

A) Prepaid Rent.

BS: List some Current Liabilities accounts

Accounts Payable Notes Payable (short-term) Salaries and Wages Payable Deferred Revenue

For Expenses, what type of adjustment is made when something is incurred but not paid?

Accrual

If a company borrows money from a bank and signs an agreement to repay the loan several years from now, in which account would the company report the amount borrowed? A) Accounts Payable. B) Contributed Capital. C) Bonds Payable. D) Notes Payable.

D) Notes Payable.

For Revenues, what type of adjustment is made when something is received but not earned?

Deferred

___ is the process of allocating the cost of buildings, vehicles, and equipment to expense over time as they are used.

Depreciation

Record the adjusting entry for depreciation for the year on the equipment, $6.

Depreciation Expense (dr) $6, Accumulated Depreciation (cr) $6

True or false: Adjustments ensure that assets on the balance sheet are reported at amounts that have been used up or expired during the period.

False -Adjustments ensure that assets report their economic benefit remaining, not the amount that has been used up or expired during the period. The related expense on the income statement is the amount used or expired during the accounting period.

On June 30, Planet of the Crepes paid $12,000 in advance for insurance coverage beginning July 1 through December 31. Which of the following are correct regarding the July financial statements?

Insurance Expense of $2,000 is on the income statement and Prepaid Insurance of $10,000 is on the balance sheet

Which side of a T-account is the debit side?

Left side

As the balance in the Accumulated Depreciation increases, total assets ___ because Accumulated Depreciation is a ___-account.

Total assets decreases because Accumulated Depreciation is a contra-asset-account

What are the effects on the accounting equation from the adjustment for which the seller has satisfied the performance obligation to its buyers during the accounting period that had previously been recorded as a liability?

Total liabilities will decrease and total stockholders' equity will increase.