Financial Accounting Final Exam

bond indenture

a legal document describing rights and obligations of both issuer and bond holder

stockholder's equity

consists of (1) paid-in or contributed capital and (2) retained earnings

straight-line depreciation

cost - salvage value / useful life

cash dividends

decision to pay these dividends rest with the board of directors and is based on evaluating the amount of retained earnings and cash as ewll as many other factors

units of production depreciation

depreciation per unit x units produced in a period

FOB (free on board)

determines who pays transportation costs

direct method of reporting operating activities of cash flows

direct method separately lists each major item of operating cash receipts and each major item of operating cash payments

internal user

directly involved in managing/operating the organization (managers, budget investors)

Accounting Equation

Assets = Liabilities + Equity

T/F: Days' sales uncollected also called days' sales in receivables is calculated by dividing net sales by current balance of accounts receivable and multiplying the result by 365.

FALSE

T/F: When recording and writing off Bad Debts: record the loss when it is determined to be uncollectible with a Debit to Accounts Receivable and a Credit to Bad Debt Expense.

FALSE

T/F: A consignee sells goods for the owner, owns the consigned goods, and reports them in its inventory.

FALSE a consignee only sells good for the owner. they DO NOT own the goods

Inventory valuation methods: assigns the lowest amount to cost of goods sold resulting in the highest gross profit and the highest net income.

FIFO

The monetary assumption:

Means that we can express transactions and events in monetary, or money, units.

The full disclosure principle:

Prescribes that a company report the details behind financial statements that would impact users' decisions.

business entity assumption

a business is accounted for separately from other businesses

premium on stock

a corp sells its stock for more than it's par value

treasury stock

a corporations reacquired shares a corp acquires their own shares for several reasons 1. to acquire another company 2. to avoid a hostile takeover 3. to use for employee compensation 4. to maintain a strong market share for their stock

stock dividend

a distribution of additional shares of its own stock to stockholders without any payment in return

maturity date of a bond

due date of par value and any unpaid interest

monetary unit assumption

express transactions and events in monetary units

T/F: Adjusting entries are made after the preparation of financial statements.

false

preferred stock

gives the owners a priority status over common stockholders in one or more ways

earnings per share (EPS)

net income per share; amount of income earned by each share of outstanding common stock. reported on the income statement

stated value stock

no-par stock that is assigned a "stated" value per share by the directors. this stated value becomes legal capital

no-par value stock

not assigned a value per share by the corporate charter

revenue recognition principle

recognize revenue when it's earned, proceeds don't need to be in cash, measure revenue by cash received, and cash value of items received

expense recognition principle

record expense incurred

cash dividend entries

reduce in equal amounts both cash and retained earnings components of stockholders' equity

book value per common share

reflects the amount of equity applicable to common shares on a per share basis

full disclosure principle

report all financial details that would impact users decisions

statement of cash flows

report cash receipts (inflows) and cash payments (outflows) during a period include both cash and cash equivalents

Canopy Services paid K. Canopy, the sole shareholder of Canopy Services, $5,700 in dividends during the current year. The entry to close the dividends account at the end of the year is:

retained earnings 5700 debit dividends 5700 credit because dividends decreased assets it goes in credits

capital stock

shares issued to obtain capital

external user

someone who is not directly involved in the organization (investors)

par value

stated value

Wiley Consulting purchased $7,000 worth of supplies and paid cash immediately. Which of the following general journal entries will Wiley Consulting make to record this transaction?

supplies 7000 debit cash 7000 credit because the purchase of the supplies is an increase in assets so it goes in debit

premium on bond

the amount by which a bond selling price exceeds par value

discount on bond

the amount by which a bond selling price is less than par value

retained earnings (stock)

the cumulative net income (and loss) not distributed as dividends to its stockholders

stock split

the distribution of additional shares of stock to stockholders according to their percent of ownership

time period assumption

the life of a company can be divided into time periods

maturity

the maturity date of a note is the day that the note must be repaid

common stock

the name of stock when all classes have the same rights and privileges. issuance of stock affects only paid-in capital accounts, not retained earnings accounts

market value per share (stock)

the price at which a stock is bought and sold

paid-in capital (stocks)

the total amount of cash and other assets the corporation receives from its stockholders in exchange for stock

authorized stock

the total amount of stock that the charter authorizes for sale

FOB destination

title transfers at the destination and the seller pays shipping costs

FOB shipping point

title transfers at the shipping point and buyer pays shipping costs

dividend yield

to determine if the companies stock is an income stock (pays large and regular dividends) or a growth stock (pays little or no cash dividends)

investing activities (cash flow)

transactions and events that affect long term assets (mainly the purchase and sale of long term assets)

financing activities (cash flow)

transactions and events that affect long term liabilities and equity ex: 1. obtaining cash from issuing debt and repaying the amounts borrowed 2. receiving cash from or distributing cash to owners

operating activities (cash flow)

transactions and events that determine net income

T/F: A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52 weeks.

true

T/F: Double-entry accounting demands that the accounting equation remain in balance, which means at least two accounts are affected with at least one debit and one credit, and, the total debited amount must equal the total amount credited.

true

T/F: The business entity assumption means that a business is accounted for separately from other business entities, including, its owner or owners.

true

price-earnings ratio (PE)

used to gain understanding of the market's expected receipts for the stockholders

A company has net sales of $489,600 and average accounts receivable of $40,800. What is its accounts receivable turnover?

12.00 accounts receivable turnover = net sales / average accounts receivable 489,600/40,800

A company had net sales of $84,000 and accounts receivable of $6,720. Its days' sales uncollected is:

29.2 days days' sales uncollected = accounts receivable/net sales x 365

A company's net sales are $675,000, its cost of goods sold is $459,000, and its net income is $74,250. Its gross margin ratio equals

32% gross margin = net sales - cost of goods / net sales

A company's Accounts Receivable balance at its December 31 year-end is $489,300, and its Allowance for Doubtful Accounts has a debit balance of $554 before year-end adjustment. Its net sales are $1,300,000. It estimates that 6% of outstanding accounts receivable are uncollectible. What amount of bad debts expense is recorded at December 31?

$28,804 take 4% of 489,300 and subtract 554

A company has $550,000 in net sales and $193,000 in gross profit. This means its cost of goods sold equals

$357,000 net sales - gross profit = cost of goods sold

A company purchased $4,500 of merchandise on May 1 with terms of 2/10, n/30. On May 6, it returned $250 of that merchandise. On May 8, it paid the balance owed for merchandise, taking any discount it is entitled to. The cash paid on May 8 is

$4,165 take the total purchase amount and subtract the return amount 4500-250=4250 take 2% of 4250 to determine the discount 4250x.02=85 subtract the discount from 4250 to determine the cash paid on may 8 4250-85=4165

A company's Accounts Receivable balance at its December 31 year-end is $125,650, and its Allowance for Doubtful Accounts has a credit balance of $328 before year-end adjustment. Its net sales are $572,300. It estimates that 4% of outstanding accounts receivable are uncollectible. What amount of bad debts expense is recorded at December 31?

$4,698 take 4% of 125,650 and then subtract 328

A building is offered for sale at $500,000, but, has an assessed value of $425,000. A purchaser believes the building to be worth $475,000, and negotiates a purchase price for $450,000. The purchaser records the building at:

$450,000 because you record purchases at the actual price.

A company receives a $9,000, 8%, 60-day note. The maturity value of the note is

$9,120 maturity value = principle (1 + rate x time) 9,000 ( 1 + .08 x 60/360 )

A company's quick assets are $37,500, its current assets are $80,000, and its current liabilities are $50,000. Its acid-test ratio equals

0.750 acid test ratio = cash + short term investments + current receivables / current liabilities quick assets = 37,000 (short-term investment) current assets = 80,000 (DO NOT USE) current liabilities = 50,000 37,500/50,000= 0.750

A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events. This definition includes three crucial elements. Select the three elements.

1. a past transaction or event 2. a present obligation 3. a future payment of assets or services

5 steps in preparing the Statement of Cash Flows

1. compute net increase or decrease in cash 2. compute net cash from or for operating activities 3. compute net cash from or for investing activities 4. compute net cash from or for financing activities 5. compute net cash from all sources; then prove it by adding it to beginning cash to get ending cash

Three important dates relating to dividends. List them with the appropriate journal entry regarding a cash dividend

1. date of declaration: the date the directors vote to declare and pay the dividend debit: retained earnings credit: dividend payable 2. date of record: the future date for identifying those stockholders to receive dividends no entry required 3. date of payment: the date when the corporation makes payment debit: dividend payable credit: cash

Bear Cat Enterprises has total assets of $1,000,000, liabilities of $400,000, and equity of $600,000. What is its debt ratio?

40% because debt ratio = total liabilities/total assets

Use the following information from Marvel Company for the month of July. July 1 Beginning inventory 75 units @ $25 each July 3 Purchase 348 units @ $27 each July 8 Sale 300 units July 15 Purchase 257 units @ $28 each July 23 Sale 275 units Perpetual: Assume that Marvel uses a perpetual LIFO inventory system. What is the dollar value of its ending inventory? A. $2,685 B. $2,625 C. $2,940 D. $2,852

A. $2,685 last in, first out start from the bottom with purchases. start from the top with sales. 257 units + 348 units - 300 units sold = 305 units 305 units - 275 units sold = 30 units remaining units: 30 units @ 27$ and 70 units @ 25$ (30x27) + (70x25) = 2,685

The following information is available for Hapley Company: The November 30 bank statement shows a $1,895 balance. The general ledger shows a $1,742 balance at November 30. A $795 deposit placed in the bank's night depository on November 30 does not appear on the November 30 bank statement. Outstanding checks amount to $638 at November 30. A customer's $335 note was collected by the bank in November. A collection fee of $15 was deducted by the bank and the difference deposited in Hapley's account. A bank service charge of $10 is deducted by the bank and appears on the November 30 bank statement. How will the customer's note appear on Hapley's November 30 bank reconciliation? A. $320 appears as an addition to the book balance of cash B. $320 appears as an addition to the bank balance of cash. C. $320 appears as a deduction from the bank balance of cash. D. $320 appears as a deduction from the bank balance of cash.

A. $320 appears as an addition to the book balance of cash

April 1, Lawn Care Professionals received $2,500 cash for lawn care services to be performed in April and May. The journal entry to record this transaction includes a A. credit to Unearned Lawn Service Fees for $2,500. B. debit to Unearned Lawn Service Fees for $2,500. C. debit to Lawn Service Fees Earned for $2,500. D. credit to Cash for $2,500.

A. credit to Unearned Lawn Service Fees for $2,500.

The following information is available for Hapley Company: The November 30 bank statement shows a $1,895 balance. The general ledger shows a $1,742 balance at November 30. A $795 deposit placed in the bank's night depository on November 30 does not appear on the November 30 bank statement. Outstanding checks amount to $638 at November 30. A customer's $335 note was collected by the bank in November. A collection fee of $15 was deducted by the bank and the difference deposited in Hapley's account. A bank service charge of $10 is deducted by the bank and appears on the November 30 bank statement. What is the reconciled balance on Hapley's November 30 bank reconciliation? A. $1,742 B. $2,052 C. $1, 895 D. $2,201

B. $2,052 to determine the reconciled balance, take the balance of the general ledger and add the customer's note that was collected by the bank. then subtract the bank service charge. 1,742+320-10=2,052

Select the incorrect statement regarding Assets A. The cost of a purchased Building includes its purchase price, brokerage fees, taxes, title fees, attorney costs, and all expenditures to make it ready for its intended use. B. Assets have a useful life of less than one year or one accounting cycle. C. A Plant Asset is a tangible asset used in a company's operations. D. The cost of Machinery and Equipment includes the purchase price, taxes, transportation charges, insurance while in transit, and the installing, assembling and testing of the machinery and equipment.

B. Assets have a useful life of less than one year or one accounting cycle.

The current ratio: A. Is used to measure the relation between assets and long-term debt. B. Is used to help assess a company's ability to pay its debts in the near future. C. Measures the effect of operating income on profit. D. Is calculated by dividing current assets by equity.

B. Is used to help assess a company's ability to pay its debts in the near future.

Which of the following accounting principles prescribes that a company record its expenses incurred to generate the revenue reported? A. Business Entity Assumption B. Expense recognition (Matching) principle C. Going-concern assumption D. Measurement (cost) principle

B. expense recognition (matching) principle

The special account used only in the closing process to temporarily hold the amounts of revenues and expenses before the net difference is added to (or subtracted from) the retained earnings account is the:

Balance column account

Use the following information from Marvel Company for the month of July. July 1 Beginning inventory 75 units @ $25 each July 3 Purchase 348 units @ $27 each July 8 Sale 300 units July 15 Purchase 257 units @ $28 each July 23 Sale 275 units Perpetual: Assume that Marvel uses a perpetual FIFO inventory system. What is the dollar value of its ending inventory? A. $2,625 B. $2,852 C. $2,940 D. $2,685

C. $2,940 first in, first out. 75 units + 348 units - 300 units sold = 123 units 123 units + 257 units - 257 units sold = 105 units 105 units @ $28 = $2,940

The 4 Cats reported annual net income of $15,000 on sales of $300,000. What is its profit margin? A. 20% B. 2% C. 5% D. .5%

C. 5% because profit margin=net income/sales

Prior to recording adjusting entries, the Supplies account has a $750 debit balance. A physical count of supplies shows $250 of unused supplies available. The required adjusting entry is: A. Debit Supplies Expense $250; Credit Supplies $250. B. Debit Supplies $500; Credit Supplies Expense $500. C. Debit Supplies Expense $500; Credit Supplies $500. D. Debit Supplies $250; Credit Supplies $250

C. Debit Supplies Expense $500; Credit Supplies $500. because supplies is an expense and $250 of it is still unused so it does not need to be recorded. So, your debit supplies expense is $500 and your credit is also $500.

The closing process is necessary in order to: A. Ensure that all permanent accounts are closed to zero at the end of each accounting period. B. Calculate net income or net loss for an accounting period. C. Ensure that net income or net loss and dividends for the period are closed into the retained earnings account. D. Ensure that the company complies with state laws.

C. Ensure that net income or net loss and dividends for the period are closed into the retained earnings account.

Effective cash management principles include all the following except: A. plan expenditures B. invest excess cash C. discourage collection of receivables D. keep only necessary assets E. delay payment of liabilities until last possible day allowed

C. discourage collection of receivables

August 1, 2019, Co. A purchased a two-year insurance policy for $36,000 with coverage to begin immediately. What is the amount of insurance expense listed on Co. A's income statement for the year ended December 31, 2019 ? A. $1,500 B. $15,000 C. $28,500 D. $7,500

D. $7,500 because total two year policy is 36,000. divide by 2 for yearly is 18,000. divide by 12 for monthly is 1,500. August through December is 5 months. 1,500 x 5 = 7,500

KPMG performs accounting services for a client and bills the client $15,000. How would this transaction be recorded? A. Accounts receivable decrease with a debit of $15,000 and revenues increase with a credit of $15,000. B. Accounts receivable increase with a debit of $15,000 and revenues decrease with a credit of $15,000. C. Accounts receivable increase with a credit of $15,000 and revenues increase with a debit of $15,000. D. Accounts receivable increase with a debit of $15,000 and revenues increase with a credit of $15,000.

D. Accounts receivable increase with a debit of $15,000 and revenues increase with a credit of $15,000. because they received $15,000 for their service (accounts receivable in the debit) and they made a revenue of $15,000 (revenues in the credit)

Smith borrows $50,00 cash from Third National Bank. How does this transaction affect the accounting equation? A. Assets increase by $50,000; no effect on liabilities; equity increases by $50,000. B. No effect on assets; liabilities increase by $50,000; equity decreases by $50,000. C. Assets increase by $50,000; liabilities decrease by $50,000; no effect on equity. D. Assets increase by $50,000; liabilities increase by $50,000; no effect on equity.

D. Assets increase by $50,000; liabilities increase by $50,000; no effect on equity.

All of the following statements regarding profit margin are true except: A. Profit margin can be used to compare a firm's performance to its competitors. B. Profit margin reflects the percent of profit in each dollar of revenue. C. Profit margin is calculated by dividing net income by net sales. D. Profit margin is not a useful measure of a company's operating results.

D. Profit margin is not a useful measure of a company's operating results.

T/F: Credit terms, 2/10 n/30, offer a 10 % discount if invoice is paid within 10 days of invoice date, if not full payment is due within 30 days of invoice date.

FALSE

Inventory valuation methods: assigns the highest amount to cost of goods sold resulting in the lowest gross profit and the lowest net income.

LIFO

T/F: A current liability is an obligation due within one year or the company's operating cycle, whichever is longer.

TRUE

T/F: The Cost-benefit principle holds that the costs of internal controls must not exceed their benefits.

TRUE

T/F: The cost of inventory includes the cost incurred to buy the goods, ship them to the store, and make them ready for sale.

TRUE

T/F: The expense recognition or matching principle states that inventory costs should be recorded against revenue in the period when inventory is sold.

TRUE

T/F: When the principle of Materiality is applied to Bad Debts, it holds that an amount can be ignored if its effect on the financial statements is unimportant to users' decisions.

TRUE

solvency

ability to generate future revenues and meet long-term obligations

market prospects

ability to generate positive market expectations

liquidity and efficiency

ability to meet short-term obligations and to efficiently generate revenues

profitability

ability to provide financial rewards to attract and retain financing

Measurement/cost principle

accounting information based on actual cost

Generally Accepted Accounting Principles (GAAP)

aims to make information relevant, reliable, and comparable

paid in capital in excess of par value (stocks)

amount received from issuance of stock that is in excess of the stock's par value. it is reported as part of equity; it is not revenue and is not listed on the income statement

par value stock

an amount assigned per share by the corporation in its charter

LIFO (last in, first out)

assigns the most recent items acquired to cost of goods sold

FIFO (first in, first out)

assumes that inventory items are sold in the order they're acquired. when sales occur, the costs of the earliest units acquired are charged to cost of goods sold

double-declining depreciation

book value x2/ useful life

going-concern assumption

businesses will continue operating instead of being sold or closed

issuing stock

can be sold directly/indirectly to stockholders

Geraldine Parker, the sole stockholder of Gi Gi's Dance Studio, started the business by investing $10,000 cash and donating a building worth $20,000 in exchange for common stock. Identify the general journal entry below that Gi Gi's will make to record the transaction.

cash 10,000 debit building 20,000 debit common stock 30,000 credit because investing with cash and a building increases the assets so it goes in debit AND common stock increases equity so it goes in credit

Strickland Corp. issued 1,000 shares of $10 par stock for $15 a share. Select the journal entry to record the issuance of the stock.

cash 15,000 debit common stock 10,000 credit Paid-in capital in excess of par, Common stock 5,000 credit

ABC Catering received $800 cash from a customer for catering services to be provided next month. Determine the journal entry.

cash 800 debit unearned catering revenue 800 credit because the received cash increases their assets so it goes in debit

interest

charge for using money loaned from another entity

indirect method of reporting operating activities of cash flows

indirect method reports net income then adjusts it to obtain net cash provided or used in operating activities

contract rate

interest rate of semi-annual interest payments