Noahs Financial Accounting vocab Ch 1-3
c
Accounting information is a. useful in profitable businesses only. b. considered the most important part of a company's information system by all managers. c. an integral part of business. d. used only by CPAs.
asset
Elements of the financial statements. For each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Cash
c
The Pets Plus Superstore, Inc., acquires 50 doggie beds from a supplier for $500 in cash. What is the give portion of this transaction? a. Pets Plus giving the doggie beds to customers in return for cash b. The supplier giving the doggie beds to Pets Plus c. Pets Plus giving $500 in cash to the supplier d. The supplier giving $500 to Pets Plus
Depreciation is the process of systematically allocating the cost of a long-term asset to each of the periods it is used.
What is depreciation?
b
A company's current ratio is 1.85. You can safely conclude that a. the company is a good investment. b. the company will have no trouble paying its current obligations. c. the company has a short-term problem related to paying its bills. d. the company has a long-term problem related to meeting its obligations
Net Income: $2,050 Ending Balance: $1,550
Capboy Company earned $5,000 of revenues and incurred $2,950 worth of expenses during the period. Capboy also declared and paid dividends of $500 to its shareholders. What was net income or the period? Assuming this is the first year of operations for Capboy, what is the ending balance in retained earnings for the period?
L
Classify the item listed under the following balance sheet headings: A - Assets L - Liabilities SE - Shareholders' equity Accounts payable
A
Classify the item listed under the following balance sheet headings: A - Assets L - Liabilities SE - Shareholders' equity Accounts receivable
A
Classify the item listed under the following balance sheet headings: A - Assets L - Liabilities SE - Shareholders' equity Cash
SE
Classify the item listed under the following balance sheet headings: A - Assets L - Liabilities SE - Shareholders' equity Common stock
A
Classify the item listed under the following balance sheet headings: A - Assets L - Liabilities SE - Shareholders' equity Inventory
L
Classify the item listed under the following balance sheet headings: A - Assets L - Liabilities SE - Shareholders' equity Notes payable
Internal controls are a company's policies and procedures to protect the assets of the firm and to ensure the accuracy and reliability of the accounting records. They are important because, by setting up and adhering to internal controls, a company minimizes the risks of being in business.
Define internal control and explain why it is important.
a
During its first year of business, West Company earned service revenues of $2,000. If the company collected $700 related to those sales, how much revenue would be shown on West's income statement for the year? a. $2,000 b. $700 c. $1,300 d. Cannot be determined with the given information
asset
Elements of the financial statements. For each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Accounts receivable
liability
Elements of the financial statements. For each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Notes payable
asset
Elements of the financial statements. For each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Prepaid insurance
SH equity
Elements of the financial statements. For each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Retained earnings
liability
Elements of the financial statements. For each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Unearned revenue
Materiality refers to the financial significance of the amounts reported in the financial statements or to the significance of an item or transaction. For example, a $5 wastebasket with a life longer than one year is immaterial in amount would be reported as an expense on the income statement rather than as an asset on the balance sheet. A piece of furniture that costs $10,000 and will last 5 years, on the other hand, is material and will be placed as an asset on the balance sheet.
Explain materiality and give an example of both a material and an immaterial item.
Cash basis and accrual accounting differ in the timing in which revenue and expenses are recognized. In cash basis accounting, revenues and expenses are recognized (put on the income statement) when the actual exchange of cash occurs. By contrast, in accrual accounting, revenues are recognized when they are earned and expenses are recognized when they are incurred. When preparing generally accepted financial statements, accrual accounting is used.
Explain the difference between cash basis accounting and accrual basis accounting.
Liabilities are amounts a firm owes its creditors. Expenses are costs incurred to earn revenue. When a firm records an expense that it doesn't pay for at the time, a liability will be recorded. All expenses do NOT become liabilities. Sometimes an expense is simply paid in cash.
Explain the difference between liabilities and expenses.
financing
For each of the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. The business takes out a loan from the local bank.
Revenues - Expenses = Net Income 1. $260 2. $1,185 3. $340 4. $570 5. $9,950
For each of the following, calculate the missing amount: 1. Revenues $560; Expenses $300; Net Income 2. Net Income $700; Expenses $485; Revenues 3. Expenses $600; Revenues $940; Net Income 4. Revenues $1,240; Net Income $670; Expenses 5. Net Income $6,450; Expenses $3,500; Revenues
preventive It prevents any error that a person might make in typing in the price.
For the control given, tell whether it is primarily a preventive control, a detective control, or a corrective control. Retro Clothing, Inc., has an online purchase system that automatically inserts the total price of each item a customer orders.
detective The teller is trying to detect whether or not an error has been made.
For the control given, tell whether it is primarily a preventive control, a detective control, or a corrective control. The teller double-checks the account number on the loan payment before applying payment.
primarily a detective control, because they detect errors. However, just their existence as part of the firm's internal control system might serve as a preventive control. Plus, the auditors will make corrections before the financial statements are issued, so they might also serve as a corrective control.
For the control given, tell whether it is primarily a preventive control, a detective control, or a corrective control. External auditors are hired to audit the year-end financial statements.
liability
For the each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Accounts payable
SH equity
For the each item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Common stock
operating
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. A firm provides services to its customers.
financing
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. A firm pays dividends to its shareholders.
operating
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. A firm pays its employees for work completed.
operating
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. A firm sells inventory.
financing
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. An entrepreneur contributes his own money to start a new business.
investing
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. The business buys a machine.
operating
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. The business purchases inventory.
financing
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. The business repays a loan.
operating
For the following cash transactions, identify whether it is better described as an operating, financing, or investing activity. The business sells inventory to customers.
Balance Sheet
For the following line item, give the financial statement on which it would appear. Accounts Payable
Balance Sheet
For the following line item, give the financial statement on which it would appear. Accounts Receivable
Income Statement
For the following line item, give the financial statement on which it would appear. Advertising Expense
Income Statement
For the following line item, give the financial statement on which it would appear. Cost of Goods Sold
Balance Sheet
For the following line item, give the financial statement on which it would appear. Equipment
Balance Sheet
For the following line item, give the financial statement on which it would appear. Long Term Debt
Statement of Cash Flows
For the following line item, give the financial statement on which it would appear. Net Cash from Operations
Income Statement
For the following line item, give the financial statement on which it would appear. Operating Expense
Balance Sheet
For the following line item, give the financial statement on which it would appear. Prepaid Rent
Income Statement
For the following line item, give the financial statement on which it would appear. Sales Revenue
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Borrowed money from bank
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Collected some cash from customers to whom the firm had made sales on account
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Issued stock for cash
1
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Made sales to customers on account
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Paid dividends
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Paid in advance for insurance policy
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Paid rent in advance
1
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Provided services to customers on credit
3
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Purchased inventory
2
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Used some of the prepaid insurance
2
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income. Used some supplies previously purchased
2
For the following transaction that occurred during a recent accounting period, tell whether it (1) increases net income, (2) decreases net income, or (3) does not affect net income.. Paid salaries to employees for work done this year
asset
For the item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Accounts receivable
asset
For the item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Automobile
asset
For the item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Cash
asset
For the item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Inventory
asset
For the item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Prepaid insurance
asset
For the item that follows, tell whether it is an asset, a liability, or a shareholders' equity item. Supplies
c
How are assets reported in the balance sheet? a. Chronologically b. Alphabetically c. In the order of their liquidity d. In the order of their relative values
Accrual basis accounting means that revenues are recorded when earned regardless of when the cash is received, and expenses are recorded when incurred (used to earn the revenue to which it will be matched) regardless of when the cash outlay takes place. Cash basis accounting means that only cash collected is revenue and cash disbursements are expenses.
How does accrual basis accounting differ from cash basis accounting?
Accruals and deferrals exist because a firm uses accrual basis accounting. They are timing differences between the exchange of the goods or services and the exchange of the cash payment. In cash basis accounting, there are no timing differences. Cash received is the signal to recognize revenue, and cash disbursed is the signal to recognize an expense.
How does matching relate to accruals and deferrals?
The current ratio is computed by dividing the total amount of current assets by the total amount of current liabilities. The ratio gives information about a company's ability to fund its current operations in the short run.
How is the current ratio computed? What does it tell us about a company?
c
If revenue exceeds expenses for a given period, a. total assets for the period will decrease. b. cash for the period will increase. c. the income statement will report net income. d. liabilities for the period will decrease.
d
Interest is the cost of a. purchasing inventory. b. making a sale. c. being in business. d. using someone else's money.
No. Some business organizations, known as not-for-profits, provide goods and services for the sole purpose of helping people. If those organizations do want a profit, they want to use it to provide more goods and services to their clients.
Is the goal of all organizations to make a profit?
c
Logan Company received $300 from a customer as payment for a credit sale made in a previous accounting period. Logan will record this as a. $300 in sales revenue. b. a $300 reduction in accounts payable. c. a $300 reduction in accounts receivable. d. a $300 increase in accounts receivable.
Supplies Expense: $950 The purchase is a deferral because the cash was exchanged before the expense was incurred. The expense was incurred as the supplies are used.
MBI Corporation started the month with $800 worth of supplies on hand. During the month, the company purchased an additional $300 worth of supplies. At the end of the month, $150 worth of supplies was left on hand. What amount would MBI Corporation show as supplies expense on its income statement for the month? Is the needed adjustment related to an accrual or a deferral?
No, according to accrual accounting, a company has to recognize a sale when the revenue is earned and collection is reasonably assured no matter when the cash is collected.
Must a company collect the money from a sale before the sale can be recognized?
Information should be relevant, reliable, consistent, and comparable
Name the four characteristics that help make accounting information useful.
(1) operating (2) investing (3) financing
Name the three types of activities that make up most business transactions.
Two common deferred expenses are insurance (prepaid insurance) and rent (prepaid rent).
Name two common deferred expenses.
b
Online Pharmacy Company borrowed $5,000 cash from the National Bank. As a result of this transaction, a. assets would decrease by $5,000. b. liabilities would increase by $5,000. c. equity would increase by $5,000. d. revenue would increase by $5,000.
c
Phillip's Camera Store had a retained earnings balance of $1,000 on January 1, 2010. For the year 2010, sales were $10,500 and expenses were $6,500. The company declared and distributed cash dividends of $2,500 on December 31, 2010. What was the amount of retained earnings on December 31, 2010? a. $4,000 b. $1,500 c. $2,500 d. $2,000
d
Sales revenue is most often recognized in the period in which a. the customer agrees to purchase the merchandise. b. the seller agrees to sell the merchandise to the customer at a specified price. c. the seller collects cash from the customer. d. the seller delivers the merchandise to the customer.
b
The balance sheet of United Studios at December 31 showed assets of $30,000 and shareholders' equity of $20,000. What were the liabilities at December 31? a. $30,000 b. $10,000 c. $20,000 d. $50,000
b
The carrying (book) value of an asset is a. an account that increases an asset account on the balance sheet. b. the original cost of an asset minus the accumulated depreciation. c. the original cost of an asset. d. equivalent to accumulated depreciation.
b
The matching principle is best described as the process of a. matching assets to liabilities and owners' equity. b. recognizing a cost as an expense in the period in which it is used to generate revenue. c. matching cash collections to revenue. d. matching income to owners' equity.
d
The profit margin on sales ratio indicates how well the firm is a. marketing its products for sale. b. controlling its accounting records. c. managing its accruals and deferrals. d. controlling its costs
c
The two parts of shareholders' equity are a. assets and liabilities. b. net income and common stock. c. contributed capital and retained earnings. d. revenues and expenses.
$225 If the note and interest have been repaid (very likely), the cash for interest paid would be an operating cash flow. The cash to repay the principal of the note will be a financing cash flow.
UMC Company purchased equipment on July 1, 2010, and gave a three-month, 9% note with a face value of $10,000. How much interest expense will be recognized on the income statement for the year ended December 31, 2010? What effect does the repayment of the note plus interest have on the statement of cash flows for 2010?
Total Assets = Total liabilities + SH Equity (Contributed Capital + Retained Earnings) 1 Assets increased by $1,750 2 Cash balance at Dec 31, 2010 is $3,350 3 The total SH equity on Dec 31, 2010 is $3,750 4 Net income for the year is $1,750
Unisource Company started the first year of operations with $2,000 in cash and common stock. During 2010, the Unisource Company earned $4,600 of revenue on account. The company collected $4,200 cash from accounts receivable and paid $2,850 cash for operating expenses. Enter the transactions into the accounting equation. 1. What happened to total assets (increase or decrease and by how much)? 2. What is the cash balance on December 31, 2010? 3. What is the total shareholders' equity on December 31, 2010? 4. What is net income for the year?
An accrued expense is the expression for the liability recorded when an expense has been incurred, but no cash has been exchanged. An example of an accrued expense is when a company has received its utility bill, but has not yet paid the bill. The utilities payable is considered an accrued expense.
What are accrued expenses?
A deferred expense is actually not an expense at all. It is an asset. The firm has paid in advance for products or services that will be used to help the firm generate revenue in the future. An example of a deferred (or prepaid) expense is when a 12-month insurance policy is purchased and paid for in advance. The firm records the cash outlay but will defer, or put off, recognizing the expense until time passes and the insurance expires.
What are deferred expenses?
Maintain their balance from accounting period to accounting period. They include: - all asset accounts - all liability account - common stock and retained earnings
What are permanent accounts?
Capture activity during an accounting period, but at the end of the accounting period, they are all closed into the Retained Earnings account. They include: - all revenue accounts - all expense accounts - all dividend accounts
What are temporary accounts?
The advantages of the corporate form of ownership are limited liability for the owners and the owners can diversify their financial risk.
What are the advantages of the corporate form of ownership?
Income statement: revenues minus expenses for a period of time Statement of changes in owners' equity: changes in the owners' equity for a period of time Balance sheet: assets, liabilities, and owners' equity of a business at a specific point in time Statement of cash flows: all cash inflows and outflows for the period
What are the basic financial statements? Describe the information that each provides.
double taxation lack of owner participation in running the company
What are the disadvantages of the corporate form of ownership?
The four basic financial statements are the income statement, balance sheet, statement of changes in shareholders' equity, and statement of cash flows.
What are the four basic financial statements?
sole proprietorship partnership corporation.
What are the possible ownership structures for a business?
(1) contributions from owners, and (2) by net income from the operations of the firm—earned equity.
What are the two ways that shareholders' equity is generated in a business?
To recognize revenue means to record it so that it appears on the income statement.
What does it mean to recognize revenue?
To recognize revenue means to record it so that it will show up on the income statement.
What does recognize revenue mean in accounting?
The income statement reports the firm's performance during an accounting period. revenue and expense accounts.
What does the income statement report about a firm? Name the types of accounts that appear on the income statement.
GAAP is the set of guidelines called generally accepted accounting principles that a publicly traded company in the United States must follow when preparing its financial statements to help ensure consistency.
What is GAAP?
IFRS stands for international financial reporting standards and is the set of principles set by the International Accounting Standards Board and is in use in many places throughout the world.
What is IFRS?
XBRL is the name for the computer language used to code financial information for submission to the SEC. When all firms use it, their financial information will be easier to use and easier to compare than it is in the current format.
What is XBRL and why is the SEC mandating its use?
A current asset is something of future value to the firm that will be used or converted to cash in the coming year.
What is a current asset?
A current liability is an obligation that will be satisfied (with current assets) or paid in the coming year
What is a current liability?
An accrued revenue is revenue that has been earned, but no cash has been collected for it. An example of accrued revenue is when a company performs a service and bills the customer, but payment has not yet been received. When a company accrues revenue, a receivable will be recorded along with the revenue.
What is accrued revenue?
At the end of the accounting period, the books and records must be reviewed and adjusted to ensure that: 1) the balance sheet correctly reflects the position of the company at the end of the accounting period. 2) The income statement correctly reflect the revenues earned and the matching expenses during the accounting period.
What is adjusting the books?
An accrual transaction is one in which the revenue is earned or the expense is incurred before the exchange of cash. A deferral transaction is one in which the exchange of cash takes place before the revenue is earned or the expense incurred.
What is an accrual? What is a deferral?
Deferred revenue is revenue that has been collected but not yet earned. An example of a deferred revenue is when a 12-month magazine subscription is sold and the customer pays the magazine publisher in advance. The magazine publisher receives the cash payment before any magazines are sent. The firm will earn the revenue over time as the magazines are published and mailed over the following 12 months. Deferred revenue is also called unearned revenue and is a liability.
What is deferred revenue?
Interest is the cost of borrowing money. It is calculated as follows: Interest = Principal x Rate x Time
What is interest and how is it computed?
Assets = Liabilities + Equity
What is the accounting equation?
Cost of goods sold refers to the cost of the items (inventory) the company has sold. It's an expense.
What is the cost of goods sold?
The full-disclosure principle means that the firm must disclose any circumstances and events that would make a difference to the users of the financial statements.
What is the full-disclosure principle?
Accounting information is based on actual cost. This puts an emphasis on reliability and verifiability and helps keep accounting records objective.
What is the historical cost principle?
According to the matching principle, costs are matched to revenues. In other words, costs are included as expenses on the same income statement as the revenues they help generate. For example, sales commissions would be an expense on the same income statement as the sales to which they pertain are shown as revenue. Matching relates to revenues and expenses.
What is the matching principle?
Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analsis.
What is the monetary unit assumption?
The profit margin ratio is defined as net income divided by net sales. It measure how much of each dollar of sales makes it all the way to the bottom line as profit.
What is the profit margin on sales ratio and what does it indicate?
to provide goods and services to customers to make a profit for the owners.
What is the purpose of a business?
The statement of cash flows shows all of the cash inflows and all of the cash outflows that occurred during the accounting period. Cash flows are classified as cash from operating activities, cash from investing activities, and cash from financing activities. These classifications help investors see exactly how a firm is getting its cash and spending its cash.
What is the purpose of the statement of cash flows? How are the cash flows categorized? What is the significance of classifying cash flows into these categories?
Financial statement information is only a small part of the information generated and used in a business.
What is the relationship between the information available to a business and the information provided in financial statements?
Revenue is recognized when earned. The earnings process is normally complete when services are performed or a seller transfers ownership or products to the buyer.
What is the revenue recognition principle?
The separate entity assumption means that the financial records of the owner(s) are kept separate from the firm's records and the firm is a "separate entity."
What is the separate-entity assumption?
The income statement gives all the revenues earned, whereas the statement of cash flows includes only the cash collected (for current or past revenues). The same is true for expenses. All expenses incurred to generate the period's revenue are included on the period's income statement, whereas only the actual cash outflows are shown on the statement of cash flows.
What makes the income statement different from the statement of cash flows?
(1) errors in recording and updating the financial accounting records (2) unauthorized access to the accounting information (3) loss or destruction of accounting data.
What risks are associated with the financial accounting records?
b
What type of activities relate to what the firm is in business to do? a. Investing activities b. Operating activities c. Financing activities d. Protection activities
b
When a company pays cash in June to a vendor for goods purchased in May, the transaction will a. increase cash and decrease inventory. b. decrease accounts payable and decrease cash. c. decrease accounts receivable and decrease cash. d. increase accounts payable and increase inventory.
d
When prepaid insurance has been used, the following adjustment will be necessary: a. Increase insurance expense, decrease cash. b. Increase prepaid insurance, decrease insurance expense. c. Increase insurance expense, increase prepaid insurance. d. Increase insurance expense, decrease prepaid insurance.
b
Which financial statement is a snapshot of the financial position of a company at a specific point in time? a. Income statement b. Balance sheet c. Statement of changes in shareholders' equity d. Statement of cash flows
b
Which financial statement is similar to the accounting equation? a. The income statement b. The balance sheet c. The statement of changes in shareholders' equity d. The statement of cash flows
The balance sheet
Which financial statement pertains to a single moment in time?
d
Which of the following accounts is a liability? a. Depreciation expense b. Dividends c. Accumulated depreciation d. Unearned advertising fees
b
Which of the following financial statement elements is found on the balance sheet? a. Insurance expense b. Retained earnings c. Sales revenue d. All of the above
d
Which of the following is an example of a deferral? a. Cash has not changed hands and services have not been rendered. b. Services have been rendered but nothing has been recorded. c. A business never has enough cash. d. Resources have been purchased for cash but not yet used.
c
Which of the following is an example of a financing cash outflow? a. Borrowing money from a bank by signing a long-term note payable b. Financing the purchase of a new factory by issuing new shares of stock c. Paying a cash dividend to stockholders d. Purchasing a new delivery truck
c
Which of the following is an example of an accrual? a. Revenue collected in advance b. Supplies purchased for cash but not yet used c. Interest expense incurred but not yet paid d. Payment for insurance policy to be used in the next two years
c
Which of the following is not a type of internal control? a. Preventive b. Corrective c. Collusion d. Detective
d
Which of the following statements is consistent with accrual basis accounting? a. Revenues are recorded when cash is received. b. Expenses are recorded when cash is paid. c. Expenses are recorded in a different period than the related revenue. d. Revenues are recorded when earned and expenses are matched with the revenues.
a
Which of the following would never appear on a company's income statement? a. Prepaid insurance b. Cost of goods sold c. Interest expense d. Sales revenue
Managers: internal decision making investors: to make decisions about investing creditors: to decide whether to loan money or extend credit
Who are some of the people in need of business information and for what purposes?
Depreciation is necessary because the cost of a long-term asset must be matched to the time periods in which the asset is used to generate revenue. It's a way to spread the cost of long-term assets over the periods in which they are used.
Why is depreciation necessary?
A bank would only want to loan money to a firm that was going to continue operations in the forseeable future; otherwise, it would be unlikely the bank would be able to collect repayment of the loan.
Why would the going-concern assumption be important to a bank giving a business a loan?
b
Z Company's accountant forgot to make an adjustment at the end of the year to record depreciation expense on the equipment. What effect did this omission have on the company's financial statements? a. Understated assets and liabilities b. Overstated assets and shareholders' equity c. Understated liabilities and overstated shareholders' equity d. Overstated assets and understated shareholders' equity