Final Accounting part 1

Faithful representation

The information must be true -Must be complete (nothing left out) -Must be objective (unbiased) -Must be error free Ex) Wells Fargo reports earnings of $20 million when true earnings determined by a private investigation shows the true number should be $16 million. Wells Fargo did not provide faithful representation of its numbers.

Dividends paid by a company to its shareholders are reported on the company's a. balance sheet and statement of cash flows. b. income statement and statement of stockholders' equity. c. income statement and balance sheet. d. balance sheet. e. statement of stockholders' equity and statement of cash flows.

statement of stockholders' equity and statement of cash flows.

Working capital is a. None of these. b. used to evaluate a company's long-term debt paying ability. c. used to evaluate a company's short-term debt paying ability. d. calculated by dividing current assets by current liabilities. e. calculated by adding current assets by current liabilities.

used to evaluate a company's short-term debt paying ability.

The revenue recognition principle dictates that revenues should be recognized a. when the performance obligation is satisfied. b. when cash is received. c. at the end of the period. d. in the period that income taxes are paid. e. when the customer receives the invoice.

when the performance obligation is satisfied.

Fair Value Principle

Assets and liabilities are listed at their "fair" value. By fair value, we mean the market value or the value the asset can sell for.Ex) the fair value for the car example would be 29k not 35k. Most will list the company at its historical cost. Some will list at the fair value.

the accounting cycle thus far

1. analyzing transactions 2. journal entry 3. ledger 4. trial balance 5. adjusting entries 6. adjusted trial balance 7. financial statements 8. closing entries 9. Post-closing trial balance

Which of the following is true with regards to the forms of business organization? a. A corporation is a business organized as a separate legal entity owned by stockholders. b. Corporations and their owners generally receive more favorable tax treatment than sole proprietorships and partnerships. c. The majority of U.S. business is transacted by sole proprietorships. d. All of these are true. e. Proprietors are generally not personally liable for their proprietorships' debts.

A corporation is a business organized as a separate legal entity owned by stockholders.

Which one of the following is not a proper justification for adjusting entries? a. All of these are proper justifications for adjusting entries b. Adjusting entries are necessary to bring the general ledger accounts in line with the budget. c. Adjusting entries are necessary to enable financial statements to be in conformity with generally accepted accounting principles. d. Adjusting entries are necessary to ensure that the expense recognition principle is followed. e. Adjusting entries are necessary to ensure that the revenue recognition principle is followed.

Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

What is the FASB?

FASB stands for Financial Accounting Standards Board. The FASB is a private organization that is the main standard-setting body in the U.S. FASB is given the authority by the SEC to establish most of the accounting rules/guidelines. (Creates rules we follow in this class)

A trial balance would only help in detecting which one of the following errors? a. A journal entry that is posted twice b. For a given transaction, the account that should have been debited was credited and the account that should have been credited was debited. c. A debit to retained earnings was debited to common stock by mistake. d. For a given transaction, the account that should have been debited was debited but no account was credited e. A trial balance would help detect all of these errors

For a given transaction, the account that should have been debited was debited but no account was credited

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. GAAP represent the rules/guidelines established by the FASB that accountants agree to follow when preparing financial statements. GAAP's most important rule is the use of accrual accounting. (By 2016, all U.S. companies will be required to switch to International Reporting Standards (IFRS). This is used by most of the world and is similar to GAAP.

What are the accounting rules that have substantial authoritative support and are recognized as a general guide for financial reporting purposes in the U.S.? a. General accounting principles b. None of these c. Generally accepted auditing principles d. Generally accepted accounting principles e. Generally accepted accounting standards

Generally accepted accounting principles

Which of the following would you not see the impact of the payment of dividends? a. Income statement b. Retained earnings statement c. Balance sheet d. Statement of Cash Flows e. All of the above

Income statement

Understandability

Information must be clear and concise so it is easy to understand for the users

Comparability

Information must be clear enough to compare across different companies Ex) the numbers of Coca-Cola should be easy to compare with Pepsi

Relevance

Information must be important enough to make a decision -must have predictive value (helps with future decisions) -must have confirmatory value (confirms or corrects past predictions) -must be material (large enough to matter)

Which of the following is an example of a financing activity? a. Buying a delivery truck in exchange for cash b. Issuing additional shares of common stock in exchange for cash c. Buying inventory on account d. Selling goods on account e. All of these

Issuing additional shares of common stock in exchange for cash

Management Discussion and Analysis Section

Management comments on the performance of the company based on the current numbers and states its future outlook. It will also mention the ability to pay upcoming bills that are due and any expansion plans.

On April 1, a company hires a new employee who will start to work a week later. The employee will be paid on the last day of each month. Should a journal entry be made of March 6? Why or why not? a. Yes, the company is now obligated to pay the employee, thus that event must be recorded. b. None of these. c. Yes, failure to record the event would cause the financial statements to be misleading d. No, the financial position of the company has been changed, but cash has not yet been paid. e. No, hiring an employee is an important event; however it is not an economic even that should be recorded.

No, hiring an employee is an important event; however it is not an economic even that should be recorded.

Cash paid to suppliers would be an example of what type of cash flow? a. Financing activity b. Operating activity c. Investing activity d. Journalizing activity e. All of the above

Operating activity

Who is the SEC?

SEC stands for Securities and Exchange Commission. The SEC is an agency of the U.S. government that is responsible for monitoring the U.S. financial markets and account standard-setting bodies. (cop for financial markets)

Which account will have a zero balance after closing entries have been journalized and posted? a. Retained Earnings. b. Service Revenue. c. Supplies. d. Prepaid Insurance. e. Accumulated Depreciation.

Service Revenue.

Which statement is correct? a. The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles. b. As long as a company consistently uses the cash-basis of accounting, generally accepted accounting principles allow its use. c. All of these are true. d. As long as management is ethical, a company is allowed to use the cash basis of accounting e. The cash-basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.

The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles.

Where would you find a list of accounts and their balances at a given time? a. General ledger b. Journal entries c. Income statement d. Trial balance e. Balance sheet

Trial balance

A trial balance is a. a listing of the temporary accounts and balances b. one of the financial statements provided to the shareholders c. also called the chart of accounts. d. a listing of the ledger accounts and balances. e. a listing of stockholders' equity accounts and balances.

a listing of the ledger accounts and balances.

Verifibility

an outsider should be able to produce the same results the company presented in their financial statements given the same data. Ex) An independent auditor (accountant) should be able to produce the same numbers that appear on the balance sheet in order to give their opinion for the annual summary

Cash received before services are performed may be recorded as a debit to a cash account and a credit to a liability account is called a. accounts payable. b. an unearned revenue. c. None of these answer choices are correct. d. an accrued revenue. e. an unrecorded revenue.

an unearned revenue.

Independent Auditor's Report

assesses the validity/accuracy of the statements; the auditor lets everyone know if the numbers make sense; this is where the principal checks if the teacher did anything suspicious (has favorites, accepted payments from parents, etc.)

Historical cost principle

assets are recorded at their original costEx) Lets say you purchase a car for 35k. Assume depreciation is 6k at this point in time. The historical cost principle states that you will ALWAYS list the car at 35k not 29k.

Going Concern Assumption

business will not shut down anytime soon

Transactions in a journal are recorded in a. alphabetical order. b. chronological order. c. dollar amount order. d. in the following order: assets, liabilities, and then equities. e. account number order.

chronological order.

Full disclosure Principle

companies must state all important information. If it is not possible to state important info in the financial statements, then the info should be in the footnotes.

Conservatism

companies should choose accounting methods that are least likely to overstate assets or income. Look back at the example with the cars. In order to be conservative, we must list the car at 29k instead of 36k. If we list the car at 36k, we would be overstating the value.

A company purchased office supplies costing $4,000 and debited supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,500 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: a. debt Supplies Expense for $1,500 and credit Cash for $2,500. b. debit Supplies for $1,500 and credit Supplies Expense for $1,500. c. debit Supplies for $2,500 and credit Supplies Expense for $2,500. d. debit Supplies Expense for $2,500 and credit Supplies for $2,500. e. debit Supplies Expense for $1,500 and credit Supplies for $1,500.

debit Supplies Expense for $2,500 and credit Supplies for $2,500

A company that receives money in advance of performing a service a. debits Cash and credits Unearned Service Revenue. b. debits Unearned Service Revenue and credits Accounts Payable. c. debits Cash and credits Service Revenue. d. debits Cash and credits Prepaid Insurance. e. debits Cash and credits Accounts Receivable.

debits Cash and credits Unearned Service Revenue.

If the company has not yet recorded its performance of $100 of services to a customer who had paid in advance, the company should record an adjusting entry that a. debits Unearned Revenue for $100 and credits Service Revenue for $100. b. debits Service Revenue for $200 and credits Unearned Revenue for $200. c. debits Service Revenue for $100 and credits Unearned Revenue for $100 d. debits Unearned Revenue for $100 and credits Cash for $100. e. debits Unearned Revenue for $200 and credits Service Revenue for $200.

debits Unearned Revenue for $100 and credits Service Revenue for $100.

A certain company records wages only when it pays them. Recording the payment of wages a. increases stockholders' equity and decreases stockholders' equity. b. increases assets and increases stockholders' equity. c. decreases assets and decreases stockholders' equity. d. decreases assets and decreases liabilities. e. increases assets and decreases assets.

decreases assets and decreases stockholders' equity.

Payments to stockholders out of a company's profits are called a. dividends. b. liabilities. c. contributions. d. credits. e. expenses.

dividends.

Economic entity assumption

every corporation has properly classified their transactions; no personal transactions are charged to the business. Ex) Elon Musk cannot use the Tesla account to pay for all the drugs he is on

Matching Principle/Expense Recognition Principle

expenses have to be matched to revenues in the period that those revenues are earned/expenses are recognized when they are incurred. Ex) JetBlue purchased all snacks last year. When would the expense be recognized? Cash was paid last year and the expenses would be incurred after the flight occurs.

Periodicity Assumption

financial statements are broken down into logical time periods Ex) monthly, quarterly, annually

Materiality

if an item is small in monetary value and insignificant to business decisions, then the company should not have to follow GAAP when reporting it.Ex) if a company purchases a rubber trash can to place in their store, then the company technically should report this item as equipment and therefore depreciate it. Materiality tells us that we can just call it an expense of $20 and be done with it instead.

The effects of performing services for cash on the basic accounting equation are to a. decrease assets and decrease liabilities. b. increase assets and increase liabilities c. increase liabilities and increase stockholders' equity d. decrease assets and decrease stockholders' equity. e. increase assets and increase stockholders' equity.

increase assets and increase stockholders' equity.

Accrued expenses are expenses incurred that are not yet paid or recorded. An adjusting entry made to record an accrued expense a. decreases assets and increases income for the period. b. decreases assets and decreases liabilities. c. increases assets and increases income for the period. d. decreases liabilities and decreases income for the period. e. increases liabilities and decreases income for the period.

increases liabilities and decreases income for the period.

The purchase of an asset, such as supplies, on account a. increases the purchaser's assets and liabilities. b. increases the purchaser's assets and stockholders' equity. c. increases the purchaser's assets and decreases stockholders' equity. d. leaves the purchaser's total assets unchanged e. decreases the purchaser's assets and increase liabilities.

increases the purchaser's assets and liabilities.

Timely

information has to be current so it has to come from a recent time period

Consistency

information within a particular company must be compiled in the same manner across different time periods in order to compare figures. Otherwise, they must disclose the changes in the footnotes. Ex) the method by which Facebook calculates "active" users should not change from one period to another.

Immediately after transaction information has been recorded in the journal, it should be recorded in the a. ledger. b. trial balance. c. bank reconciliation. d. income statement. e. journal.

ledger.

Information about the significant accounting policies and methods used in preparing the financial statements would be found in the a. an auditor's report. b. general ledger. c. notes to the financial statements. d. management analysis section. e. balance sheet.

notes to the financial statements.

The segment of a corporation's annual report that describes the corporation's accounting methods is the

notes to the financial statements.

The economic entity assumption states that economic events a. transactions can be expressed in terms of money. b. of every entity can be separately identified and accounted for. c. of different entities can be combined if all the entities are corporations. d. of a sole proprietorship are not to be distinguished from events of its owners. e. must be reported to the Securities and Exchange Commission.

of every entity can be separately identified and accounted for.

Monetary unit assumption

only information measured in dollars is reported in the financial statements. Customer loyalty for example, is not measured in dollars so it is not reported in financial statements.

Cost

producing the tremendous amount of information by the SEC can b e costly. To be fair, FASB takes into consideration the cost of these requirements before imposing them on corporations.-Remember, the SEC/FASB don't want to make the process too burdensome. Otherwise, no company would decide to become a corporation.