A201 Exam 1
Four Basic Financial Statements
1. Balance Sheet; financial position @ point in time: A=L+SE 2. Income Statement; rev-expense= NI 3. Statement of Stockholder's Equity; changes in CS/RE 4. Statement of Cash Flows; cash inflows and outflows
financial heading
1. Company Name 2. Title of Statement (i.e BS) 3. Date 4. Unit of measure (i.e million of $)
non operating items (other income & expense)
1. interest revenue 2. dividend revenue 3. interest expense 4. gains/losses on sale of investments/ long term assets 5. income tax expense
Fin. State. Assumptions:
1. separate-entity: account & owner are separate 2. going-concern: business will continue operations 3. monetary-unit: don't adjust $$
Prepare a trial balance.
A trial balance is a list of all accounts and their balances at a particular date. Debits must equal credits, but that doesn't necessarily mean that all account balances are correct.
Understand when revenues and expenses are recorded.
Accrual Basis Accounting-Accounting method that records revenues when earned and expenses when incurred.; cash based is when revenue cash is received and expenses when cash is paid.
Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity
Beta Company paid utilities expense of $2,000 for the current month. Which of the following statements correctly shows the effect of this transaction on the accounting equation?
Assets will decrease by $2,000, liabilities will remain unchanged, and stockholders' equity will decrease by $2,000 Correct
Amber Corporation provided services to customers on account for $26,000. Which of the following statements correctly shows the effect of this transaction on the accounting equation?
Assets will increase by $26,000, liabilities will remain unchanged, and stockholders' equity will increase by $26,000
Which financial statement presents the financial position of the company on a particular date
Balance sheet
Providing services to customers on account would be recorded as
Debit Accounts Receivable; Credit Service Revenue
On November 1, 2021, a company receives cash of $6,000 from a customer for services to be provided evenly over the next six months. Deferred revenue is recorded at that time. Which of the following adjusting entries is needed on December 31, 2021?
Debit Deferred Revenue, $2,000; Credit Service Revenue $2,000.
Ambassador Hotels purchases one year of fire insurance coverage on December 1 for $24,000, debiting Prepaid Insurance. On December 31, Ambassador would record the following year end adjusting entry:
Debit Insurance Expense, $2,000; Credit Prepaid Insurance, $2,000.
A company owes employee salaries of $5,000 on December 31 for work completed in the current year, but the company doesn't plan to pay those salaries until the following year. What adjusting entry, if any is needed on December 31?
Debit Salaries Expense, $5000; Credit Salaries Payable, $5,000.
The purchase of supplies on account would be recorded as
Debit Supplies; Credit Accounts Payable
Exceptions to Stockholder's Equity
Dividends Declared & Expenses are debits only 2 exceptions to the rule because they reduce stockholder's equity
internal events
Events occurring within the company, for example, using some assets to create an inventory product.
Record transactions in a journal using debits and credits.
For each transaction, total debits must equal total credits.
Assess whether the impact of external transactions results in a debit or credit to an account balance.
For the basic accounting equation (Assets = Liabilities + Stockholders' Equity), assets (left side) increase with debits. Liabilities and stockholders' equity (right side) increase with credits. The opposite is true to decrease any of these accounts. The Retained Earnings account is a stockholders' equity account that normally has a credit balance. The Retained Earnings account has three components—revenues, expenses, and dividends. Revenues increase the balance of Retained Earnings, while expenses and dividends decrease the balance of Retained Earnings. Therefore, we increase revenues with a credit (similar to increasing retained earnings) and increase expenses and dividends with a debit (similar to decreasing retained earnings).
The body of rules and procedures that guide the measurement and communication of financial accounting information is know as
Generally Accepted Accounting Principles
Financial accounting serves which primary function(s)?
Helps external users make business decisions about the business. Communicates business activities to interested parties. Helps investors make investment decisions about the company Measures business activities.
Which of the following causes the accounting equation NOT to balance?
Increase assets; increase dividends.
On May 5, Johnson Plumbing receives a phone call from a customer needing a new water heater and schedules a service visit for May 7. On May 7, Johnson installs the new water heater. The customer pays for services on May 10. According to the revenue recognition principle, on which date should Johnson record service revenue?
May 7 Revenue is recorded in the period it is earned, not when cash is collected
As Expenses Increase...
Net Income, RE, and SE decrease
Which of the following transactions causes a decrease in total assets?
Pay employee salaries for the current month
Post transactions to the general ledger.
Posting is the process of transferring the debit and credit information from transactions recorded in the journal to the T-accounts in the general ledger.
In a classified balance sheet, long term assets that are used in the normal course of business and help generate revenue are called
Property, plant and equipment.
Which of the following transactions causes an increase in stockholders' equity?
Provide services to customers on account.
What are the two fundamental qualitative characteristics identified by the Financial Accounting Standards Board's (FASB) conceptual framework?
Relevance and faithful representation
Revenue and Expense Recognition
Revenue: is recorded when company transfers the good or services; when "earned" Expenses: are recorded when incurred on earning revenue; when "incurred"
Demonstrate the purposes and recording of adjusting entries.
The main purpose of adjusting entries is to update the accounts to conform with the accrual concept. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts.
If a company has total expenses increase by $10,000 which of the following is possible?
Total assets decrease by $10,000
If a company has an increase in total revenues of $10,000, which of the following is possible?
Total assets increase by $10,000.
Posting is the process of
Transferring the debit and credit information from the journal to individual accounts in the general ledger.
Revenues (operating)
any increase in assets or settlements of liabilities from the major or central ongoing operations of busibess
A credit is used to decrease which of the following accounts?
assets
Current Ratio
current assets/ current liabilities evaluates the company's liquidity
external events
exchange between the company and a separate entity.
sales revenue
is a CREDIT
debit, credit
left ; right
A credit is used to increase which of the following accounts?
liabilities; CS; NI (in RE)
Describe the two primary functions of financial accounting.
measure business activities of a company communicate information about those activities to investors and creditors for decision-making purposes
Net Profit Margin Ratio
net income/net sales ; A rising net profit margin signals more efficient management of sales and expenses
Earnings Per Share (EPS)
net income/shares outstanding ; required to disclose this on the income statement or in the notes.
Expense Recognition Principle
record when services used
Which of the following describes the purpose of closing entries?
reduce the balances of the temporary accounts to zero to prepare them for measuring activity in the next period
operations of business
the sale of goods or rendering of services as the central focus of the business