Financial Accounting

When is a trade receivable created?

In the normal course of business when a sale of merchandise or services on credit occurs.

The assumption that a company makes about its inventory cost flow affects cost of goods sold on its _____ and inventory on its _____.

Income statement; balance sheet

Revenues cause equity to ______ and they are increased on the _____ side of the T-account

Increase; right

Items held for sale in the normal course of business are referred to as ______

Inventory

The weighted average cost method uses the weighted average cost to calculate the value of:

Inventory and cost of goods sold

Land, equipment, and buildings would be under which activity on the balance sheet

Investing

An external transaction:

Involves an exchange between the company and a separate economic entity.

Sales Discount (cash discount):

Is a cash discount offered to encourage prompt payment of an account receivable

Sales returns and allowances:

Is a reduction of sales revenues for return of or allowances for unsatisfactory goods.

Net Sales:

Is the top line reported on the income statement.

The ______ inventory system records all inventory-related transactions in the inventory account (e.g. transportation, purchase returns and allowances, purchase discounts) and reduces inventory at the time of sale.

Perpetual

Which inventory system records a change in the Inventory account every time goods are bought, sold or returned?

Perpetual

Retained Earnings definition

Profits earned by a company that have not been paid to stockholders

Revenue

Reports the amount earned on the income statement

Unearned Revenue:

Reports the amount of cash collected from customers in advance on the balance sheet.

Cash collected from customers

Reports the amount of cash collected from customers on the statement of cash flows

X Company purchased $5000 of supplies on credit. What does this affect and in what way on the balance sheet?

Result in an increase in Accounts Payable on the balance sheet.

The sum of what two elements equals stockholders' equity?

Retained earnings and common stock

Net Income =

Revenues - Expenses

Account payable is increased with an entry on the ____ side of the account.

Right

The contributed capital account is increased with an entry on the ____ side of the T-account.

Right

How is Net Sales computed:

Sales revenue Less: Credit card discounts Sales discounts Sales returns and allowances = Net sales

What type of goods does merchandising companies sell?

Sell goods that have been obtained from a supplier

What type of goods does manufacturing companies sell?

Sell goods that they have made themselves

What type of goods does service companies sell?

Sell services rather than physical goods

On the balance sheet, contributed capital appears under..?

Stockholders' equity

Revenue Realization Principle requires:

That revenues be recorded when they are earned (delivery has occurred or services have been rendered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured)

The beginning balance always is on the _____ side of a T-account

left

At December 31, Equate, Inc.'s assets equal $50,000 and liabilities equal $30,000. Stockholders' equity must equal:

$20,000

List the steps in the accounting cycle in chronological order:

1. Analyze transactions 2. Record journal entries in the general journal 3. Post amounts to the general ledger 4. Prepare a trial balance 5. Adjust revenues and expenses in the journal and post to the ledger 6. Prepare financial statements

What order do the three steps for entering a transaction in a journal go in?

1. Enter name of account(s) debited and their amount(s) 2. Enter name of account(s) credited and their amounts(s) 3. Enter explanation

What is a T-account used for? (3 things)

1. May be used as a tool to visualize the effects of a transaction. 2. Represent a ledger account 3. Will show the debit or credit side of each transaction

List the flow of inventory costs in order during the typical manufacturing process:

1. Purchase raw materials 2. Add materials, labor and overhead to Work in process inventory 3. Move completed goods into Finished goods inventory 4. Move sold inventory to Cost of goods sold

Transaction analysis is based on which two principles?

1. The accounting equation remains in balance with each transaction 2. Every transaction affects at least two accounts

1. Mortgage payable (due in 25 years) 2. Note payable (due in 5 years) 3. Note payable (due in five months) What order should these liability accounts be in on the balance sheet?

3 2 1

A company owns an economic resource that will provide it with future benefits. This economic resource is:

An asset

An internal transaction is:

An event that affects the financial position of the company but does not include an exchange with a separate economic entity.

When do non-trade receivables arise?

Arises from transactions other than the normal sale of merchandise or services.

Equipment, land, and cash are examples of:

Assets

Goods available for sale can:

Be sold and then become cost of goods sold on the income statement

Independent verify:

Compare perpetual records to periodic physical counts of inventory

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record:

Cost of goods sold, which will be reported on the income statement A decrease in its inventory

In a perpetual system, the entry to record the sale of merchandise to a customer on account would include a:

Credit to inventory Debit to Cost of goods sold

Using a perpetual inventory system, the journal entry to record a sale on account will include a: (4 things)

Credit to inventory Debit to accounts receivable Debit to cost of goods sold A credit to sales revenue

Match each user of financial information with the type of decision: Creditors - Regulators - Customers - Managers -

Creditors - Decide whether to lend money Regulators - Decide on social welfare issues Customers - Decide whether to purchase products Managers - Decide production and expansion

In a perpetual system, the entry to record the sale of merchandise includes a

Debit to Cost of goods sold

Cash received from customers, cash paid to employees, and cash paid to suppliers are using what type of method in the operating activities section of the statement of cash flows?

Direct

What information appears on the statement of stockholders' equity?

Dividends, ending balance of retained earnings, net income, beginning balance of retained earnings.

Separate duties:

Do not make one employee responsible for the accounting and handling of inventory

What 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.

The two sources of stockholders' equity are amounts:

Earned by the corporation and paid in from shareholders

When inventory is sold, the cost of inventory is recognized as a(n) ______

Expense

Purchasing supplies from a vendor is a _______ transaction?

External

True or False: Debit means to increase an account.

False

Assets are initially recorded at:

Historical cost

Assets appear on the ____ side of the accounting equation

Left

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. What would be understated/overstated?

Liabilities will be overstated and stockholders' equity will be understated.

Restrict access:

Limit the handling of inventory to authorized personnel only

Financial statements can be prepared: (3 things)

Monthly, quarterly, annually

If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and a credit to Sales revenue, how will this error affect net income for the current period?

Net income will be too high.

When a business issues stock, what does it give to its owners?

Stock certificates

MMM Pizza bought $1,500 of cookware on account (i.e., on credit). What is the effect of recording this transaction on the company's total liabilities?

Total liabilities will increase.

True or False: A debit or credit can increase an account, depending on what kind of account it is.

True

True or false: The business entity, and not the owners, are viewed as owning the resources and as owing the debts of the business.

True

True or false: The purchaser should record freight-in as an asset, inventory.

True

What is a note receivable?

Written promises that require another party to pay the business under specified conditions (amount, time, interest).

Financing activities will typically cause a change:

in the makeup of both total liabilities and stockholders' equity

The ______ inventory system uses separate accounts for these items and records cost of goods sold at the end of the accounting period.

Periodic

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

Sunshine Company paid a utility bill of $50. Show how to record this transaction to the T-accounts

$50 on left side of the Utility Expense account; $50 on the right side of the Cash account.

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records: (2 things)

1. Expenses in the period incurred, even though cash has not yet been paid. 2. Revenues in the period when the revenue is earned, even though the cash has not yet been collected.

The weighted average cost method uses the _____ cost for cost of goods sold on the income statement and the ______ cost for inventory on the balance sheet.

Average; average

What item on a balance sheet results from the financing activities that took place when owners invested in the business?

Contributed capital

A company made a $1,000 payment on its $100,000, 20-year mortgage. The decrease in liabilities would be recorded with a ____ to Notes payable.

Debit

Expenses decrease net income and retained earnings, so expenses are recorded with a _____, just like all decreases in stockholders' equity.

Debit

During the month of September, Pizza Company paid its employees $16,000 for wages earned in the last week of September and the first week of October. In September, $8,000 had been recorded as a liability in Accrued Expenses Payable. What would be the correct entry?

Debit Accrued Expenses Payable and Wages Expense, both for $8,000 and credit Cash for $16,000.

Accounting transactions are classified as which of the following?

External transactions and internal transactions

True or false: The purchaser should record freight-in as a selling expense

False

True or false: The seller should record freight-out as cost of goods sold.

False

The definition of inventory includes which of the following items? (3 things)

Items used currently int he production of goods to be sold Items held for resale Items currently in production for future sale

If a company assumes that its inventory costs flow out in the opposite order from which of the goods were purchased, it uses _____ to value its inventory.

LIFO

A chart of accounts is a:

List of all account names and numbers used by a company

A separate account is:

Maintained for each financial position element

Weighted average inventory method:

Matches the average cost of each unit of inventory with sales.

Specific Identification inventory method:

Matches the expense of a particular item made with the sale of that item

FIFO inventory method:

Matches the expense of the first item purchased with sales

LIFO inventory method:

Matches the expense of the last items purchased with sales.

Gross profit is

Net sales minus cost of goods sold

FIFO uses the ____ cost for cost of goods sold on the income statement and the _____ cost for inventory on the balance sheet

Oldest; newest

The journal entry to record the payment of cash to a trucker for a purchase of merchandise received will cause:

One asset to increase and another asset to decrease

The three activities used to categorize cash inflows and outflows on the statement of cash flows includes:

Operating, investing, and financing

The heading of a balance sheet for a company that has been in business for years and has a June 30, 2011 year end would have: (3 things)

The name of the business The title "Balance Sheet" At June 30, 2011

FOB (Free On Board) Shipping Point

Title changes hands at shipment, and the buyer normally pays for shipping

FOB Destination

Title changes hands on delivery, and the seller normally pays for shipping.

What is the primary objective of financial reporting?

To provide financial information about companies that is useful to capital providers for decision making.

Bijoux Company uses a perpetual inventory system. Its bookkeeper properly recorded a $5,000 sale on account, but forgot to record the related cost of goods sold of $3,000. As a result of this error,:

Total assets will be too high. Net income will be too high.

M Company purchased a $30,000 pizza delivery truck in exchange for a 4-year note. The company recorded this as a $30,000 debit to the Truck account and a $30,000 credit to Cash. As a result this entry's: (2 things)

Total liabilities are too low & total assets are too low

True or false: The seller should record freight-out as a selling expense.

True

What is the inventory costing method that adds together the total cost of all goods available for sale during the period, and then divides that by the number of units available for sale to get a value to assign to all goods sold and all goods remaining in inventory?

Weighted average method