accounting-exam 1

(ch.1) -what is the basic accounting equation? -define the terms, assets, liabilities, and stockholders equity -how is paid in capital different from retained earnings? -what transactions affect stockholders equity?

-assets=liabilities+stockholders equity -assets are economic resources with future benefits owned by the business entity. liabilities is the portion of assets to which creditors have legal claim. stockholders equity is the portion of assets to which stockholders (owners) have legal claim -paid in capital is the portion of the stockholders' equity that resulted from investments of assets into the corporation by shareholders. retained earnings is the portion of the stockholders' equity that resulted from the corporation successfully operating business (generating net income). -paid in capital: shareholder investments retained earnings: revenues, expenses and dividends declared

(ch.2) state the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) the stockholders' equity accounts (common stock, retained earnings, revenues, expenses, and dividends declared).

-increases are recorded as debits and decreases are recorded as credits -increases are recorded as credits and decreases are recorded as debits -common stock: increases are recorded as credits and decreases are recorded as debits retained earnings: increases are recorded as credits and decreases are recorded as debits revenues: increases are recorded as credits and decreases are recorded as debits expenses: increases are recorded as debits and decreases are recorded as credits dividends declared: increases are recorded as debits and decreases are recorded as credits

(ch.1) what is the purpose of an annual report? what mandatory items must be included in the annual report? what is the auditors report? what does it mean if the auditor issues an unqualified opinion?

-the annual report provides information on how the company did financially in the preceding year -the report includes financial statements and notes, a management discussion, other selected financial data and the auditors report -the auditors report is a report from an independent firm of certified public accountant's indicating whether the financial statements are complete, reasonable, and prepared in accordance with the GAAP -and unqualified opinion it means they are complete, reasonable, and prepared in accordance

(ch.1) who develops and adopts generally excepted accounting principles? why should the concept of having a set of rules be important to a financial statement? who develops and adopts the international financial reporting standards? why is having a set of international rules desirable?

-the financial accounting standards board -a set of rules is important for financial statements to be consistent and comparable -the international accounting standards board -there needs to be rules because of globalization of corporate entities and capital markets

(ch.1) what are four specific requirements of the sarbanes oxley act

-top management must review internal control systems and must certify the accuracy of corporate financial information -move severe penalties for fraudulent activity -increase in the independence of external auditors along with establishment of an oversight board to monitor the activities of independent auditors -increased oversight of the audit function by corporate boards of directors

(ch.4) the steps in the accounting cycle are listed in random order below. list the steps in the proper sequence by placing the numbers 1-9 in the blank spaces

1. analyze business transactions 2. journalize the transactions 3. post to ledger accounts 4. prepare a trial balance 5. journalize and post closing entries 6. prepare an adjusted trial balance 7. prepare financial statements 8. journalize and post closing entries 9. prepare a post-closing trial balance.

(ch.2) indicate whether the following accounts generally will have (a) debit entries only, (b) credit entries only, or (c) both debit and credit entries. 1. cash. 5. accounts payable. 2. accounts receivable. 6. salaries expense. 3. dividends declared 7. service revenue. 4. common stock 8. retained earnings

1. both 2. both 3. debits 4. credits 5. both 6. debits 7. credits 8. both

(ch.1) which of the following items are liabilities of jewelry stores?

accounts payable, salaries payable

(ch.4) why are closing entries necessary?

closing entries are necessary to zero out the temporary retained earnings accounts, which measure changes in retained earnings for specific periods of time, to get them ready for a new time period.

(ch.4) what standard classifications are used in preparing a classified balance sheet?

current assets, plant assets, intangible assets, long-term investment assets, and other long term assets current liabilities and long-term liabilities paid-in capital and retained earnings

(ch.4) identify the account(s) debited and credited in each of the four closing entries, assuming the company has net income

debit revenues and credit income summary debit income summary and credit expenses debit income summary and credit retained earnings debit retained earnings and credit dividends declared

(ch.2) does a double-entry system mean that each transaction is recorded twice? explain.

no -- double entry refers to the idea that our basic accounting model is an equation. each transaction causes at least two things to happen (in order to keep the equation in balance). when using accounts, this translates to the concept that for each transaction, the total debits equal to the total credits.

(ch.2) if total debits equal total credits on a trial balance, does that mean no errors were made? explain

no -- it simply means that equal debits and credits were posted to the accounts. The debits and credits could have been posted to the wrong accounts, debits and credits could have been posted twice or not at all, or the wrong dollar amounts could have been posted to the accounts.

(ch.2) "the terms debit and credit mean increase and decrease, respectively." do you agree? explain.

no -- the term debit simply means left and the term credit simply means right, referring to the left and right hand column of an account.

(ch.3) "depreciation is a valuation process that results in the reporting of the fair market value of the asset." do you agree? explain. why is a contra-asset account used when recording depreciation?

no depreciation is a cost based on computation required under the matching principle. it is the systematic and rational allocation of the cost of the plant asset to the time periods benefited by the plant asset's use. the resulting book value of the asset, as reported on the balance sheet, is still a cost number and bears no relationship to the current fair market value of the asset. a contra-asset account is used so that the original cost can be retained in the plant asset account and can be presented on the balance sheet along with the accumulated depreciation. this allows the financial statement user to see the extent of the investment in plant assets and the relative age of assets which leads to easier comparisons and better analysis of plant assets.

(ch.1) marty flew to las vegas and spent the weekend partying and gambling. when he returned, he recorded the costs as expenses on the books of his laundry service. is this accounting correct?

no, thees are marty's personal purchases

(ch.2) what are the advantages of using a journal in the recording process?

provides a permanent, chronological record of the complete debit and credit effect of business transactions. should reduce errors in transactional analysis. can lead to a division of labor. allows for backtracking from the ledger back to the complete transaction.

(ch.3) when are revenues to be recorded under the revenue recognition principle? when are expenses to be recorded under the matching principle?

revenue recognition principle: revenues should be recorded in the time period in which they are earned (when services are performed). matching principle: expenses should be recorded in the same time period as the related revenue (typically in the period of consumption).

(ch.1) harper travel agency purchased land costing $85,000 for cash on december 10, 2017. at december 31, 2017, the land's value has increased to $93,000. what amount should be reported for land on harper's balance sheet at december 31, 2017? explain.

the amount of $85000 because of the cost principle of accounting

(ch.1) in financial accounting, we are focused on the general purpose financial statements. what is meant by general purpose

the financial statements are designed to meet the general needs of all the diverse user groups

(ch.2) describe the content and purpose of (a) the general ledger, (b) chart of accounts, (c) trial balance.

the general ledger is the complete set of asset, liability, and stockholders' equity accounts used by a business entity. the purpose of the general ledger is to record the effect of business transactions by account, such that the account balances can be reported on the appropriate financial statement. it is a listing of the account names and unique account numbers of the accounts in the general ledger. its purpose is to identify which accounts are in the general ledger and their location (like a table of contents). It is a listing of all the accounts in the general ledger and the debit or credit balance of the account on a specific date. The total of the debit balances is computed and the total of the credit balances is computed -- these two totals should equal each other. The purpose of the trial balance is to ensure that equal debits and credits were posted for each transaction and that the accounts were balanced correctly.

(ch. 3) why are adjusting entries necessary?

typically, at the end of the period, there are unrecorded transactions for the following reasons... 1) convenience 2) timing 3) lack of source documentation

(ch.3) in completing the engagement in question 3, zupan pays no costs in march, $2,000 in april, and $2,500 in may (incurred in april). how much expense should the firm deduct from revenues in the month when it recognizes the revenue? why?

under the matching principle, all of the expenses that relate to this revenue must be recorded in the same time period in which the revenue was recorded. therefore the entire $4,500 of expense should be recorded in april, so that it is matched against the revenue.

(ch.3) susan zupan, a lawyer, accepts a legal engagement in march, performs the work in april, and is paid in may. if zupan's law firm prepares monthly financial statements, when should it recognize revenue from this engagement? why?

under the revenue recognition principle, revenue should be recorded in the period in which it is earned, that is, when the services have been performed. therefor the the revenue should be recorded in april.

(ch.2) an auditor points to a specific credit posted to the cash account. the auditor asks you to "prove" that this is a valid business transaction. how would you do that?

using the journal page number and the date, find the entry in the journal. the entry will show all the debits and credits for the transaction and will include the description of the transaction which includes a reference to the source document.