Accounting Exam 2

The Income Summary account can be defined as which of the following

An account that contains a credit for the sum of all revenues An account used during the closing process A temporary account An account whose balance equals net income or net loss

Define "current" as it applies to assets and liabilities on a classified balance sheet.

Current items are those expected to come due within one year or the company's operating cycle, whichever is longer.

What are current liabilities?

Current liabilities are usually settled by paying out current assets such as cash. Current liabilities are reported in the order of those to be settled first. Current liabilities are obligations due to be paid within one year.

Determine which of the statements below are correct regarding the current ratio

The current ratio is one measure of a company's ability to pay its short-term debts. A current ratio of less than 1.0 would indicate that a company would have a problem paying off short term debt. The current ratio helps a supplier determine whether it wants to extend credit to a customer. The current ratio can affect interest rates charged by creditors when lending money to a business

Explain what unearned revenues are by choosing the correct statement below.

Unearned revenues refer to cash received in advance of providing a service or product

StoryBook Company provided services to several customers during the month of December. These services have not yet been paid by the customers. StoryBook should record the following adjusting entry at the end of December:

debit accounts receivable credit services revenue

A classified balance sheet can be described as a balance sheet that

is more useful to decision makers. lists current assets in the order of how quickly they can be converted to cash. organizes assets and liabilities into important subgroups.

Identify which of the accounts below would be classified as a plant asset account.

land equipment buildings machinery

Merchandise inventory can be described as

products that a company owns and intends to sell. an account increased with a debit. an account appearing on a balance sheet of a merchandiser. an asset account.

Sales is a(n) ______ account.

revenue

Credit terms of "2/10, n/60" means:

the company will receive a 2 percent discount if paid within 60 days.

Some of the steps in the accounting cycle are listed below. Place them in the correct order of use.

1. Journalize transactions into the journal 2. Journalize and post adjusting entries 3. prepare the adjusted trial balance 4. prepare the financial statements 5. journalize and post-closing journal entries 6. prepare post-closing

Which of the statements below describe(s) a permanent account?

A permanent account is reported on the balance sheet. A permanent account's balance is carried forward to the next accounting period

Which of the following statements about the Accumulated depreciation account is (are) correct?

Accumulated depreciation accumulates the total depreciation taken on an asset since its purchase. The Accumulated depreciation account allows the original cost of the asset to remain in the plant asset account. Accumulated depreciation is subtracted from its plant asset on the balance sheet. Accumulated depreciation is a contra account.

Explain your understanding of what an accrued expense is by selecting the statements below which are correct.

Adjustments involve increasing both an expense and a liability account. They refer to costs that are incurred in a period, but are both unpaid and unrecorded. They are reported on an income statement. Examples of accrued expenses are wages expense and interest expense.

Identify the accounts below that would be classified as long-term liabilities on a classified balance sheet

Bonds payable (due in five years) Mortgage payable

What is the book value of an asset?

Book value is the original cost of an asset minus its accumulated depreciation.

Describe good cash management practices involving inventory purchases.

Buyers should take advantage of early payment discounts. Invoices should be paid on the last day of the discount period.

Identify the statements below which are correct regarding a merchandiser's multi-step income statement.

Cost of goods sold is subtracted from net sales in order to determine gross profit. Expenses are subtracted from gross profit in order to calculate net income.

Cost of goods sold is characterized by which of the following statements?

Cost of goods sold is used to figure gross profit. Cost of goods sold is also called cost of sales. Cost of goods sold includes the expenses of buying and preparing an item for sale. Cost of goods sold is an expense reported on the income statement.

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate what the correct adjusting entry should include

Debit Unearned revenues for $400.

Chimney Sweeps provided chimney cleaning services to several clients during the month of February. Chimney's customers have not yet been billed. Chimney's customers owe $2,000 to Chimney. How will Chimney Sweeps record this transaction?

Debit accounts receivable and credit services revenue

Which statements below are true regarding permanent and temporary accounts?

Temporary accounts are reported on the income statement. Temporary accounts have a balance for one period only. Permanent accounts will appear on a post-closing trial balance. Permanent accounts are reported on the balance sheet. Retained Earnings is a permanent account, but Dividends is a temporary account.

What is the purpose of the Accumulated Depreciation account?

The account allows both the original cost of plant assets and the total depreciation taken to be shown simultaneously

What is the date primarily used in adjusting entries?

The last day of the period

What is a plant asset?

a long-term tangible asset used to produce and sell products or services

Show your understanding of the steps involved in adjusting entries by placing the following steps in the correct order of preparation.

1. prepare an unadjusted trial balance 2. Journalize and post adjusting entries 3. prepare and adjusted trail balance 4. Prepare financial statements

Identify the statements below which summarize what cash discounts are

A reduced payment applies to the discount period. A seller views a cash discount as a sales discount. Cash discounts are described in credit terms. Sellers can grant a cash discount to encourage buyers to pay earlier. A buyer views a cash discount as a purchase discount.

Describe the general ledger after adjusting and closing entries have been posted

All expense accounts will show a $0 balance after closing. The abbreviations "adj." and "clos." have been entered in the explanation columns of the ledger. The Dividends account will have a $0 balance after closing. The Income Summary account will show three closing entries.

Which of the following costs are included in merchandise inventory?

Costs necessary to ready the merchandise for sale Taxes assessed on the merchandise Purchase costs Shipping fees charged by the vendor

Determine which statements below are correct regarding merchandise available for sale during a period.

Ending inventory + Cost of goods sold = Merchandise available for sale Beginning inventory + Net purchases = Merchandise available for sale

Explain your understanding of what an accrued expense is by selecting the statements below which are correct.

Examples of accrued expenses are wages expense and interest expense. Adjustments involve increasing both an expense and a liability account. They are reported on an income statement. They refer to costs that are incurred in a period, but are both unpaid and unrecorded.

Review the following statements and determine which is (are) correct regarding an adjusted trial balance and how it is used In preparing financial statements

Financial statements are prepared more easily using the adjusted trial balance than with the general ledger. The ending Retained Earnings account balance on the balance sheet is transferred from the statement of retained earnings. The income statement is the first financial statement prepared after preparing the adjusted trial balance. The adjusted trial balance includes all accounts and balances appearing in financial statements.

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. Demonstrate the required adjusting journal entry on Dec. 31.

Insurance expense would be debited for $300.

Identify the accounts below that would be classified as a long-term investment.

Investments in bonds Notes receivable due in 2 years Land held for future expansion

A plant asset can be defined as

It has a life within the business greater than one year. It is reported on the balance sheet. It is a tangible long-term asset. Its original cost (minus any salvage value) is expensed over its useful life.

Which of the following describe the Salaries payable account?

It is increased with a credit. It is reported on the balance sheet. It reports amounts owed to employees. It is a liability account.

Define the Salaries payable account

It reports amounts owed to employees and is a liability

What defines a long-term investment?

Long-term investments are sometimes referred to as noncurrent investments. Notes receivable and stock and bond investments are assets that are expected to be held for more than one year.

Identify the accounts below that would be classified as current liabilities on a classified balance sheet

Notes payable (due in three months) Unearned rent Accounts payable Taxes payable

Define plant assets by selecting the correct statements below

Plant assets are difficult to convert to cash quickly. Plant assets are equipment and other assets that have a life greater than one year. Plant assets are property, plant and equipment that are tangible.

Identify which of the accounts below would be classified as a current asset.

Prepaid rent Office supplies Cash Accounts receivable

Which of the following accounts would be considered a prepaid expense or prepaid asset account?

Prepaid rent Prepaid insurance supplies

Identify which of the following steps in the accounting cycle is optional.

Reversing journal entries

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted

What is the difference between an adjusted trial balance and an unadjusted trial balance?

The adjusted trial balance is used to prepare financial statements. The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted. The adjusted trial balance generally has more accounts listed than the unadjusted trial balance.

Define what the book value of an asset is

The formula is Cost less Accumulated depreciation. it is sometimes referred to as the net amount of an asset. It is the original cost of an asset minus its accumulated depreciation.

unearned revenues

They are also called deferred revenues. They are reported on a balance sheet. They refer to cash received in advance of performing a service or product. They are a liability.

Identify which group of accounts may require adjustments at the end of the accounting period.

Unearned revenue; Supplies; Prepaid rent

Which of the accounts below are considered accrued expenses?

Wages expense, Interest expense

Determine which of the following transactions may require adjustments.

a 24-month insurance policy was prepaid Equipment was purchased in the middle of the year. Supplies were purchased at the beginning of the year, but not all were used. An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month. Six months of rent were paid in advance.

The formula for figuring interest expense is:

amount owed x interest rate x fraction of the year since last payment

Gross profit is:

another phrase for revenues.

A periodic inventory system updates the accounting records

at the end of the period

The Fish Aquarium obtained funds from a bank and owes interest on a note at the end of the month. The required adjusting journal entry will

debit interest expense and credit interest payable

A perpetual inventory system updates the accounting records

for each purchase and each sale