Accounting Exam 1
Place these items in the order in which they appear on the statement of cash flows. 1. Cash flows from operating activities 2. Cash flows from investing activities 3. Cash flows from financing activities
1 2 3; operating, investing, then financing.
Which of these would be reported in the financing activities section of the statement of cash flows? A. Cash borrowed from the bank B. Cash paid to reduce the principal borrowed from banks C. Cash dividends paid to stockholders D. Cash paid to buy computers E. Cash paid to buy land
A B C
Separate Entity Assumption
Accounts for a business separate from its owners
How is accrual basis accounting different from cash basis accounting?
Accrual basis you record revenue when earned and expenses when used. Cash basis you record revenue and expenses when cash is received or paid.
Which of the following are users of financial statements? GAAP, Stockholders, Customers, Government agencies, Suppliers
All except GAAP. GAAP are rules not users
___: Legal liability is the responsibility of two or more owners
Partnerships
___: Owners have unlimited liability
Partnerships and sole proprietorships
Managerial accounting reports are used by the company's
employees
Permanent Accounts
ending balance from one year becomes its beginning balance for the following year. (ex. Retained earnings and all other balance sheet accounts)
The order in which assets are reported on the balance sheet is based on when the asset is
expected to be turned into cash or consumed
The underlying rules of accounting in the US are called
generally accepted accounting principles (GAAP)
Contra-Asset Account
goes against the account
Deferral adjustments
involves ONE ASSET and ONE EXPENSE; ONE LIABILITY and ONE REVENUE
Accrual adjustments
involves ONE ASSET and ONE REVENUE; ONE LIABILITY and ONE REVENUE
Borrowed $26,000 from the bank. Interest rate (annually) is 6%. You want to find the interest you accumulated over one month. You then
multiply the principle amount borrowed with the interest rate in decimals and also with the time in months. So, I = $26,000 x .06 x 1/12 = $130
Cost principle
requires that assets be recorded at the amount exchanged for them at the time of purchase
The unit-of-measure assumption states that ___
results of business activities should be reported in an appropriate monetary unit
Matching Principle - Expense Recognition
Record expenses in the same period as the revenues with which they can be reasonably associated
The line item "net income" appears on the ____. (Check all that apply) Income statement, statement of retained earnings, balance sheet
Income statement and the statement of retained earnings
Match the definition. 1. Assets 2. Liabilities 3. Stockholders' Equity 4. Revenues 5. Expenses A. Amounts used to generate profits B. Owners' claims to economic resources C. Creditor's claims to economic resources D. Amounts earned by selling goods and services E. Economic resources that will provide future benefit
1E 2C 3B 4D 5A
How is the income statement affected when costs are recorded as assets rather than expenses? A. Net income is overstated B. Net income is understated C. Revenues are higher than expenses D. Assets are overstated
A
If your company needs to record the use of a resource during the current period but will not pay for it until a later period, you should record A. An accrual adjusting journal entry B. A deferral adjusting journal entry C. A debit to an expense and a credit to an asset D. A debit to a liability and a credit to an expense
A
At March 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expire to an expense account is omitted. Which account will be incorrectly stated, because of the error, on the income statement for March. A. Prepaid insurance B. Insurance Expense C. Net Income D. Stockholders' Equity
B
What does it mean when a company capitalizes a cost? A. The cost is recorded as an expense. B. The cost is recorded as an asset. C. The cost is paid out the contributed capital account D. When the cost will be paid later
B
When should a cost be recorded as an asset? A. When the cost is earned B. When the cost is used C. When the cost will provide future economic benefit D. When the cost will be paid later
C
Which of the following have normal debit balances? Cash, supplies, equipment, common stock, accounts payable, notes payable
Cash, supplies, and equipment
Which of the following have normal credit balances? Cash, supplies, equipment, common stock, accounts payable, notes payable
Common stock, Accounts payable, and Notes payable
___: Income is taxed twice
Corporations
Retained earnings are ____. (Select all that apply) Decreased by dividends, increased by dividends, equal to the company's cash balance, cash available to be paid to stockholders, increased by net income
Decreased by dividends, increased by net income
Duality of effects
Every transaction has at least two effects
Revenue Principle - Revenue Recognition
Revenues are recognized when they are earned
What does the matching principle or, expense recognition principle, require?
That expenses are recorded in the same period as the revenues.
An exchange of promises is not recorded. T/F
True
Temporary Accounts
are used to track only the current year's results and then are closed before the next year's activities are recorded (Revenues, expenses, and dividends)