Financial Accounting (MDAB 6211)

Amounts collected in advance of being earned are recorded as _______. (Select all that apply.)

-Deferred Revenue -A liability -Unearned Revenue

Which of the following adjusting entries will decrease assets and stockholders' equity?

-Adjusting for depreciation on equipment -Adjusting for amounts used that were paid in advance

Show the effect of the adjusting entry for interest earned on a note receivable.

-Assets increase. -Stockholders' equity increases

Chip & Dale, Inc. makes an adjusting entry at the end of the accounting period on investments it owns. As a result, it will show which account on its balance sheet?

Interest receivable

On the balance sheet, contributed capital appears under ______.

stockholders equity

Miss Step, the bookkeeper, forgot to record the adjusting entry for supplies used during the period. This will cause which of the following items on the statement of stockholders' equity to be overstated? (Check all that apply.)

Net income Total stockholders' equity Ending retained earnings

Which of the following increases Retained Earnings?

Net income, or a credit to revenues

Which of these line items appear on a balance sheet? (Check all that apply.)

Property, plant and equipment Inventories Accounts payable (NOT: Sales Revenue, Interest expense)

Select the investing activities from the list below.

Purchasing land Purchasing a company logo Purchasing equipment

For accounting information to be relevant, the information should ______.

allow users to predict future events of the business allow users to assess past activities of the business

If a company debits Interest Receivable and credits Interest Revenue, it must be recording ______.

amounts earned from its investments but not yet collected

On the balance sheet, Wages Payable represents ______.

amounts owed to employees for work completed

Income distributed to stockholders are ______ and ______ Retained Earnings

dividends; decrease

The asset turnover ratio measures the ______.

dollars of sales generated for each dollar invested in assets

Adjustments help to ensure that all revenues are recorded in the period in which they are______.

earned, made, accrued, generated, recognized, or realized

The main goal of US GAAP is to ______.

ensure that companies produce useful information for users of financial statements

The five elements of the accounting equation include ______. (Select all five.)

expenses assets liabilities stockholders' equity revenues

An ______ event involves an exchange between the company and a separate economic entity.

external

Assets are listed in order of ______ and liabilities are in order of ______ on the balance sheet

liquidity; due dates

When a company sells phones bundled with a one-year service contract, then the portion of revenue allocated to the one-year service is recognized ______.

over time as the service is provided

Of the following amounts posted to the Cash account in the general ledger (i.e., the Cash T-account), which of these are operating activities?

$30,000 credit for prepaid assets $800,000 debit for collections from customers $90,000 credit for payments to employees $100,000 credit for payments of supplies

Which of the following types of transactions represent deferral adjustments that are recorded to adjust for amounts expired or used during the period? (Select all that apply.)

-Decrease to Supplies and increase to Supplies Expense -Decrease to Prepaid Insurance and increase to Insurance Expense

Miss Step, the bookkeeper, forgot to record the adjusting entry for some accrued expenses during the period. This will cause which of the following items on the statement of stockholders' equity to be in error?

-Net income will be overstated. -Ending retained earnings will be overstated.

If there is an error in recording an adjusting entry on the income statement causing Net Income to overstated, then ______.

-Total stockholders' equity on the balance sheet will be overstated -Retained Earnings on the statement of stockholders' equity will be overstated

Adjusting entries are typically recorded ______.

-at the end of the accounting period -to ensure revenues and expenses are recorded in the period in which they occur, even though the cash will be collected or paid in a future period

The journal entry a law firm records when it provides legal services for a client who will pay in a later period includes a ______.

-credit to Service Revenue -debit to Accounts Receivable

The adjusting entry for interest earned on a note receivable includes a ______.

-debit to Interest Receivable -credit to Investment Income

The general journal, also known as the journal, ______.

-is where transactions are first recorded -is where the effects of each transaction is recorded chronologically -does not provide account balances

Miss Hap, the company's accountant, forgot to make the adjusting entry to record the amount of prepaid expenses used during the period. As a result ______.

-stockholders' equity will be overstated -assets will be overstated Reason: The Prepaid Expenses account should have been decreased for amounts expired during the period. Since assets should have been decreased and the expense should have decreased stockholders' equity, both will be overstated.

List the steps in the accounting cycle in chronological order.

1. Analyze transactions 2. Record journal entires in ledger 3. Post amounts to the general ledger 4. Adjust revenues and expenses in the journal and post to ledger 5. Prepare financial statements 6. Close revenues, expenses, gains and losses to Retained Earnings

Why is the balance in the Depreciation Expense account generally different from the balance in the Accumulated Depreciation account?

Depreciation expense only reflects the current period depreciation. Accumulated Depreciation contains depreciation since the asset was purchased.

Which financial statement is a company's primary measure of profit?

Income statement Reason: The balance sheet reports the company's financial position at a point in time. The income statement reports the profit (net income) earned during the accounting period.

The adjusting entry to record revenues earned, but not yet billed (accrued revenues), affects which of the following financial statements? (Check all that apply.)

Income statement Statement of stockholders' equity Balance sheet

In its 1st year of operation, Jetway Airlines paid Salaries Expense of $40 million. On December 31, it recorded an entry for additional Salaries Expense of $2 million that will be paid at the beginning of the 2nd year. What should Jetway report in the income statement and balance sheet for its first year ended December 31?

Income statement: Salaries Expense $42 million; Balance sheet: Salaries Payable $2 million

As of December 31, $2,500 of interest expense has accrued on a $50,000 note payable. The note payable and the accrued interest will become due and payable next year. How will the interest affect the adjustments at the end of the period?

Interest Expense should be increased, because the cost of interest relates to the current period.

Which of the following statements is correct regarding the adjustment to record interest accrued on a note payable?

Interest is classified as an expense since it is a cost of borrowing.

Are sales revenue or net income on a balance sheet?

No

What are the effects on the accounting equation from the adjustment for revenue earned during the accounting period that had previously been recorded as a liability?

Total liabilities will decrease and total stockholders' equity will increase.

What are the effects on the accounting equation from the adjusting entry for interest expense accrued, but not paid, at the end of the accounting period?

Total liabilities will increase and total stockholders' equity will decrease.

What are the effects on the accounting equation from the adjustment for wages incurred, but not yet paid, during the accounting period?

Total liabilities will increase and total stockholders' equity will decrease. Reason: The adjusting entry requires a debit to Wages Expense and a credit to Wages Payable. Thus, total liabilities will increase, not decrease, and total stockholders' equity will decrease.

True or false: Net income on the income statement will typically differ from the net operating cash flows on the statement of cash flows.

True

True or false: Operating activities are the primary sources of revenue and expenses involved in running a business.

True

The purpose of an account is to ______.

accumulate the dollar effect of transactions for each financial statement item

Noncurrent assets, such as equipment, are reported at their ______ value on the balance sheet.

carrying

Amounts on the debit side of the Cash T-account are ______.

cash receipts and may be the result of operating, investing or financing activities

When accrual basis accounting is used and an expense is debited, then ____________ was credited.

cash, a payable and/or a prepaid expense

The statement of stockholders' equity reports the ______.

changes in earnings and dividends for a specified period of time

The step in the accounting cycle where entries are recorded to update retained earnings and zero out temporary accounts is referred to as the _____ process.

closing

Financing provided by owners is referred to as ______.

contributed capital

Z Best, Inc. issued $1,000,000 of stock for cash. Z Best recorded the transaction by increasing cash and decreasing common stock and additional paid-in capital. As a result of this entry, ______.

contributed capital is understated stockholders' equity is understated the accounting equation is out of balance

An asset's book value or carrying value is its ______.

cost minus accumulated depreciation

The entry to record the sale of services for cash includes a ______.

credit to Service Revenue debit to Cash

Current assets divided by current liabilities is the ____ ratio.

current

Pizza Company prepaid 3 months' store rent. The journal entry to record this transaction includes a ______.

debit to Prepaid Rent credit to Cash

______ revenues and expenses result because the cash changed hands prior to the revenue being earned or the expense being incurred.

deferred

A deferral adjusting entry that adjusts assets (such as Prepaid Insurance) ______.

expenses the amount used during the period Reason: Deferred assets such as Prepaid Insurance are assets because they have been paid for in advance of being used. Once used, a deferral adjusting entry is required to record the amount used or consumed during the period. The entry decreases the asset and increases the related expense.

Unearned Revenue is a(n) ______ and is _____ when cash is collected in advance of being earned.

liability; credited

Sales to customers in which the customers pay within 30 days are referred to as ______.

sales on account credit sales

Paying cash for an expense incurred in the same period has what effect on the accounting equation?

stockholders' equity decreases assets decrease

Company X receives $10,000 from issuing 10,000 shares of $1 par value common stock to its owners. The effect on the accounting equation is ______.

stockholders' equity increases assets increase

The income statement reports ______. (Select all that apply.)

the profitability of the company for the accounting period how well the company performed during the accounting period the revenues minus the expenses for the accounting period

FOB destination means that goods are owned by the buyer as soon as ______.

they arrive at the buyer's place of business

Net Income equals..

total revenue minus total expenses

The expense recognition principle dictates ______.

when costs are deducted against revenues on the income statement

Deferring a revenue or expense account in accounting means that the amount ______.

will be reported as a revenue or an expense in a later period

Boopsie Agin, the company's bookkeeper, recorded the purchase of merchandise on account with a debit to Cost of Goods Sold and a credit to Cash. As a result, ______. (Check all that apply.)

liabilities are understated stockholders' equity is understated assets are understated

Ms Take, the accountant, forgot to record the interest owed at the end of the accounting period. As a result of this error, ______.

liabilities will be understated stockholders' equity will be overstated

Unearned revenue appears on the balance sheet as a ______.

liability

Of the following amounts posted to the Cash account in the general ledger (i.e., the Cash T-account), which of these are investing activities?

$10,000 debit for collections from asset disposals $20,000 credit for investments in other companies

Ace Electronics sold $5,000 of goods to customers of which $3,000 has been collected. Using accrual accounting, Ace Electronics should report revenues of ______.

$5,000

Seesaws, Inc. has assets of $900 and liabilities of $400. Its stockholders' equity equals

500

When Pizza Company delivers pizza to customers and bills its customer accounts, it should record a debit to ______ and a credit to ______.

Accounts Receivable; Revenue

How do accrual adjustments affect liabilities and expenses?

Accrual adjustments can increase liabilities and increase expenses. Reason: Accruals relate to entries that record revenues and expenses earned or incurred prior to when the cash changes hands. Accrual adjustments include increasing assets and revenue or increasing expenses and liabilities.

How does the timing of adjusting entries differ from the accounting for daily transactions?

Adjustments are made at the end of the accounting period because making them on a daily basis would be inefficient.

Why is the Unearned Revenue account reduced during the adjustment process?

As the revenue is earned, it is removed from the Unearned Revenue account and transferred into a revenue account.

What type of account appears on the left side of the accounting equation and is increased with amounts on the left side of T-accounts?

Asset

When are adjusting entries recorded?

At the end of the accounting period prior to preparing the financial statements

The four financial statements include the:

Balance Sheet, Income Statement, Statement of Stockholder's Equity, Statement of Cashflows

_______ adjustments are used when cash has not been exchanged in a prior transaction, and _______ adjustments are used when cash has been exchanged in a prior transaction. (Enter one word per blank.)

Blank 1: Accrual or Accrued Blank 2: deferral or deferred

______ revenues result in Unearned Revenue when cash is collected in advance of being earned. 2. _______ revenues result in Accounts Receivable when revenue is earned prior to collection. 3. ______ expenses result in a liability when an expense is incurred prior to being paid. 4. ______ expenses result in an asset when cash is paid in advance. (Enter one word per blank.)

Blank 1: Deferred Blank 2: Accrued Blank 3: Accrued Blank 4: Deferred

Accumulated Depreciation has a normal account______ balance which indicates that it _____ Total Assets.

Blank 1: credit or negative Blank 2: decreases, reduces, lowers, offsets, decreased, or decrease

Which of the following would affect the operating activities section of the statement of cash flows? (Check all that apply.)

Cash received from customers Cash paid to suppliers Cash paid to employees (not cash paid for land (investing activity), or cash paid to repay debt)

In which of the following ways does a periodic system differ from a perpetual system? (Check all that apply.)

Cost of Goods Sold is not updated until the end of the accounting period in a periodic system. Inventory is not updated until the end of the accounting period in a periodic system.

Which of the following are typically netted against sales to arrive at net sales?

Credit card discounts Sales returns and allowances Sales discounts

What information appears on the statement of stockholders' equity?

Dividends Ending balance of retained earnings Net income Beginning balance of retained earnings

Which of the following accounting cycle steps describes the summarizing in ledger accounts?

Dollars amounts from journal entries are copied (posted) to the appropriate accounts in the ledger, so that account balances can be totaled.

Which are the 2 accounting principles underlying accrual accounting.

Expense recognition Revenue recognition

True or false: All expenditures are expenses.

False Reason: Expenditures may also be for the purchase of assets, not just expenses.

True or false: The income statement is useful for determining the amount of economic resources held by the company.

False Reason: The balance sheet, not the income statement, reports the economic resources, assets. The income statement reports the revenues minus the expenses for the accounting period.

True or false: The term "defer" means "in advance."

False Reason: Defer means to "postpone until later."

True or false: Creditors hope to gain in two ways—they hope (1) to receive dividends and (2) to sell their shares at a higher price.

False Reason: Investors, not creditors, hope to receive dividends and to sell their shares at a higher price. Borrowers are legally obligated to pay creditors interest, not dividends, and repay the principal.

Which are the sections found in a classified income statement?

Income from operations Income before income taxes (not assets or liabilities)

Which of the following are not used in the calculation of operating income? (Check all that apply.)

Gain on sale of land Interest expense

Net sales revenue minus cost of goods sold is ______.

Gross profit

A financial statement heading notes that it was prepared: "For the Year Ended December 31, 2019." This could be the ______. (Check all that apply.)

Income Statement, Statement of Stockholder's Equity, Statement of Cashflows

When items from beginning inventory become part of cost of goods sold, then ______.

LIFO liquidation is occurring

A balance sheet shows which of the following elements?

Liabilities Assets Stockholders' equity (not revenues, expenses, dividends)

Company X issued 10,000 shares of its $1 par value stock to its owners for $10,000 cash. It recorded the transaction by increasing assets and increasing liabilities. Which of the following statements are correct? (Check all that apply.)

Liabilities will be overstated. Stockholders' equity will be understated.

In a perpetual inventory system, the return of merchandise XYZ recently purchased on account will have the following effects on XYZ's accounting equation. (Check all that apply.)

Liabilities will decrease. Assets will decrease.

Which of these line items appears on both the income statement and the statement of stockholders' equity?

Net income

On October 31, Pizza Company sold pumpkin spice pizzas for Halloween parties on account. The customers have 30 days to pay for the pizzas. In which month should Pizza Company record the revenue under accrual accounting?

October

Which of the following are examples of prepaid expense accounts?

Prepaid Rent Prepaid Insurance

Which of the following statements are true about rent paid in advance?

Prepaid Rent is on the balance sheet and reports the amount paid in advance. Prepaid Rent is an asset because cash has been paid in advance for future use.

When a company pays cash in advance for rent that is to be used over the next 2 years, the company records a debit to ______ and a credit to ______.

Prepaid Rent; Cash

The business earns $2,800 cash for services performed. How would this receipt affect the total stockholders' equity of a business?

Revenue is increased which causes stockholders' equity to increase.

Which of the following line items appear on an income statement?

Sales revenue Income tax expense Cost of goods sold

Who normally pays for shipping when the shipping terms are FOB destination?

Seller

Which of the following are found on the balance sheet?

Supplies Unearned revenue Accrued expenses payable (NOT dividends or supplies expense)

Which of the following statements are true about supplies?

Supplies Expense is on the income statement and reports the amount of supplies used during the period. Supplies are assets because they have not yet been used. Supplies is on the balance sheet and reports the amount of supplies on hand.

Which of the following statements is incorrect regarding the need to make accrual adjustments at the end of the accounting period?

The Cash account should be adjusted for the effects of accrued revenues and expenses during the accounting period. Reason: The Cash account is adjusted only for errors arising from failing to accurately record cash transactions. The balance sheet accounts related to accrued revenues and expenses are, respectively, Accounts Receivable and Accounts Payable.

When recording journal entries which account titles are indented?

The account titles that are credited.

True or false: The accounting equation is Assets = Liabilities + Stockholders' Equity.

True

In a perpetual inventory system, which of the following statements are true? (Check all that apply.)

The purchaser should record freight-in as an asset, Inventory. The seller should record freight-out as a selling expense.

Which of the following statements most accurately describes the purposes of the closing entries?

To establish zero balances in the income statement accounts and to transfer net income into retained earnings

What are the effects on the accounting equation from the adjustment for depreciation?

Total assets will decrease and total stockholders' equity will decrease. Reason: Accumulated Depreciation increases, but it represents a conta-account or negative asset. So, total assets will decrease when this account is increasing. Depreciation Expense is debited, so expenses are increasing causing a decrease to stockholders' equity.

What are the effects on the financial condition of the business from the adjustment for revenues earned, but not yet collected, during the accounting period?

Total assets will increase and total stockholders' equity will increase. Reason: The value of the revenue earned, but not recorded or collected during the current period, should be recorded as an adjusting entry with a debit to Accounts Receivable (+A) and a credit to Revenues (+SE

True or false: The adjusting entry to record depreciation does not directly reduce the noncurrent asset accounts, such as Equipment, so that the original cost of the asset remains unchanged.

True Reason: The reduction to the asset account is taken through the Accumulated Depreciation account rather than directly through the noncurrent asset account. The noncurrent asset account is not affected and, therefore, keeps its original balance until it is sold or discarded.

Which of the following statements are correct regarding Unearned Revenue?

Unearned Revenue is a liability account which is set up when a customer pays in advance for a product or service. Unearned Revenue refers to a liability that is settled when a company delivers a product or performs a service.

Profit is ______. (Check all that apply.)

a measure of performance called net income

When payments are made for amounts owed for purchases made or expenses incurred in the prior period, the entry recorded is debit to _____

a payable account and credit to Cash

A separate______ is maintained in order to accumulate the dollar effect of transactions on each financial statement item.

account or t-account

GAAP are ______.

accounting rules (or principles) developed by the FASB for use in the US

The assumption that a company makes about its inventory cost flow has ______. (Check all that apply.)

an effect on the company's balance sheet an effect on the company's income statement

Careful consideration is taken when making changes in GAAP ______.

and is actively debated before the changes are required because they may affect selling prices of public companies' stock

If the adjusting entry to accrue interest of $1,000 on a note receivable is omitted, then ______.

assets, net income, and stockholders' equity are understated by $1,000 Reason: The adjusting entry to accrue interest includes a debit to Interest Receivable (an asset) and a credit to Investment Income (stockholders' equity). Thus, assets will be understated and stockholders' equity, as well as net income, will be understated.

n a balance sheet dollar signs are in front of the numbers ______.

at the top and bottom of the asset section at the top and bottom of the liabilities and stockholders' equity section

Prepaid expenses appear on the ______.

balance sheet as an asset

Profit is ______. (Check all that apply.)

called net income a measure of performance

The adjusting entry to record depreciation on equipment includes a ______.

credit to Accumulated Depreciation debit to Depreciation Expense

Bank 'n' Roll, Inc. pays its employees once a month and records the expense at the time of payment. On May 31, Bank 'n' Roll, Inc. paid its employees $10,000 for work performed in May. The entry to record the payment includes a ______ for $10,000. (Check all that apply.)

credit to Cash debit to Wages Expense

Florist Gump, Inc. sold 1,000 vases of flowers for $50 each for cash. The entry to record the sale includes a ______.

credit to Sales Revenue for $50,000 debit to Cash for $50,000

The adjusting entry to record interest owed on notes payable includes ______.

debit Interest Expense credit Interest Payable

The entry to record the payment of wages that were incurred in the prior quarter is ______.

debit Wages Payable and credit Cash

On May 10, BC Company ordered $500 of supplies, promising to pay for them in June. The supplies were received and recorded on May 15. BC paid the $500 on June 1. The journal entry that BC makes on June 1 would include a ______. (Check all that apply.)

debit to Accounts Payable of $500 credit to Cash of $500

Pizza Company sold pizzas on account. The journal entry to record the sales will include a ______.

debit to Accounts Receivable credit to Sales Revenue

Bank 'n' Roll, Inc. paid $55,000 to employees which consisted of paying $30,000 for the current month and $25,000 owed from last month (which was recorded last month as a liability in Accrued Expenses Payable). The entry to record the payment includes a ______. (Check all that apply.)

debit to Accrued Expenses Payable for $25,000 debit to Wages Expense for $30,000 credit to Cash for $55,000

Pastabilities, Inc. paid $5,000 for advertising expenses incurred during the month. The journal entry to record this transaction includes the following ______.

debit to Advertising Expense credit to Cash

The purpose of a balance sheet is to report the ______.

financial position of a business at a particular point in time

Faithful representation exists when the information is ______.

free from error neutral complete

The effect of journal entries on each account is summarized in the ______.

general ledger

The line item "net income" appears on the ______. (Check all that apply.)

income statement statement of stockholders' equity

Revenues ______ stockholders' equity, so revenues are recorded with a ______.

increase; credit

Creditors expect to receive ______ from the money they lend.

interest

The gain from the sale of investments are ______ on the income statement.

not included as operating income but are included in net income

Interest Revenue is ______ on the income statement.

not included as operating income but is included in net income

Collecting cash from customers for services provided is a(n) ______ activity.

operating

The ability to confirm past events and to predict future activities are components of which primary qualitative characteristic?

relevant information

Accrual adjustments to record amounts earned but not yet collected include a credit to a(n) ______ account.

revenue

The two basic accounting principles that determine when revenues and expenses are recorded under accrual accounting are ______ principles.

revenue and expense recognition

Net income equals ______.

revenues minus expenses

Accounts Receivable is ______.

the amount the company expects to collect for previous credit sales

When supplies are purchased on credit it means that ______.

the business will pay for the supplies at a later time the Accounts Payable account will be increased a liability has been incurred

To see the detail of increases and decreases in a company's Cash account, you should look at ______.

the company's general ledger

Accounts are ______.

used to accumulate and report the effects of each different business activity

The primary purpose of financial reporting is to provide ______.

useful information to providers of capital