Acct. exam 2 combination
Accrual basis
a system of accounting in which revenues are recognized when a performance obligation is satisfied and expenses are recognized when incurred.
Cash basis
a system of accounting where revenues are recognized when cash is received and expenses are recognized when cash is paid.
(types of adjusting entries) deferred revenue
a liability on the books that will generate revenue (unearned rev) where cash is received b4 revenues are recognized
Deferred revenue
a liability resulting from the receipt of cash before the recognition of revenueal so called unearned revenue
Accrued liabilty
a liability resulting from the recognition of an expense before the payment of cash
A customer returned damaged goods for credit. Which of the seller's accounts decreases? Question 10 options: Sales Returns Purchase Returns Accounts Receivable Sales Revenue
acct rec
When an inventory system updates the Inventory account at the time of each sale, this is known as: Question 1 options: a perpetual system an accrual system a periodic system a contra-purchase system
perpetual
1/10, n/30
means that the customer can deduct 1% from the selling price if the bill is paid within ten days of invoice date. (if not, due within 30 days)
Which one of the following would not be found as an asset on the balance sheet of a manufacturer? Question 3 options: finished goods work in process merchandise inventory raw materials
merch inventory
10 EOM
net amount is due anytime within ten days after the ned of the month in which the sale took place
Expenses
outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities
cons to periodic system
loss of control, can't prepare interim financial statements
Accrued Asset Definition
An asset resulting from the recognition of a revenue before the receipt of cash.
nominal accounts
accounts that are closed to a zero balance at the end of each accounting cycle
real accounts
accounts that are not closed to a zero balance at the end of each accounting cycle
COGS =
beg inventory + net purchases =goods available for sale -ending inventory =cost of goods sold
COG available for sale
beg inventory + COG purchased
Items should be reported as part of the company's "inventory" at year end, if they are Sold during the period. Determined to be part of cost of goods sold. Purchased from a creditor, available for sale, and paid for the following year. Held in anticipation of an increase in market value.
c
3 forms of inventory
direct materials/raw materials unfinished products finished goods
n/30
due within 30 days of the invoice.
expired costs
expenses
expired costs are called
expenses
Which one of the following ratios is a common analytical tool used by merchandise corporations, but not by service corporations? Earnings per share Gross profit ratio Current ratio Profit margin
gross profit ratio
net sales =
gross sales -sales returns and allowances (contra rev acct) -sales discounts (contra rev account)=net sales
manufacturing overhead
includes all other costs that are related to the manufacturing process but cannot be directly matched to specific units of output
Revenues
inflows of assets or settlements of liabilities from delivering or producing goods, rendering services or conducting other activities.
raw materials
ingredients used in making a product
periodic system
inventory account is updated only at the end of the period, when the COGS is also determined
perpetual system
inventory account is updated perpetually after each sale or purchase of merchandise
finished goods
inventory that has completed the production process and is available for sale
Adjusting entries
journal entries made at the end of a period by a company using the accrual basis of accounting
adjusting entries
journal entries made at the end of a period by a company using the accrual basis of accounting
Current value
the amount of cash or its equivalent that could be received by selling an assetcurrently
Historical cost
the amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on the later balance sheets
Straight-line method
the assignemnt of an equal amount of depreciation to each period
matching principle
the association of revenue of a period with all of the costs necessary to generate that revenue
Matching principle
the association of revenue of a period with all of the costs necessary to generate that revenue.
In order to evaluate a company's gross profit ratio, Question 8 options: the ratio should be compared with other companies in the same industry. the ratio should be compared with those of both prior years and competitors. the ratio should be compared with forecasted financial statements. the ratio should be compared with those of prior years.
the ratio should be compared with those of both prior years and competitors.
The accrual basis of accounting recognizes revenues when
they are earned and recognizes expenses when incurred.
Deferred Revenue
this is a liability on the books that will generate revenue (unearned revenue) where cash is received before revenues are recognized
Deferred Expense
this is an asset on the books that will become an expense (prepaid expenses) when cash is paid before expenses are incurred
Roki Inc. uses the periodic inventory system. June 1 On hand, 50 units @ $15.00 each $ 750.00 5 Purchased 115 units @ $15.10 each 1,736.50 14 Purchased 75 units @ $15.20 each 1,140.00 Total cost of goods available for sale $3,626.50 30 On hand, 90 units If Roki uses the LIFO inventory method, the cost of goods sold for June would be Question 7 options: $2,200.00 $2,272.50 $2,296.08 $1,354.00
$2,272.50
Three types of manufacturing costs
1. raw materials (direct materials) 2. direct labor 3. manufacturing overhead
Days in inventory
365/inventory turnover
A company fails to record one storeroom full of inventory in its year-end inventory records. As a result, this will cause: an overstatement of cost of goods sold for the current year. an overstatement of inventory on the year-end balance sheet. an overstatement of retained earnings at the end of the year. an understatement of gross profit in the following year.
? an overstatement of inventory on the year-end balance sheet.
Herndon Corp. purchased merchandise on account from Likert Corp. on November 18, 2016. On November 21, 2016, Herndon returned damaged merchandise to Likert and was granted an adjustment on its account. Herndon uses the periodic inventory system. What effect does the merchandise return have on Herndon's accounting equation? Assets and liabilities decrease. Assets and stockholders' equity decrease. Liabilities and stockholders' equity decrease. Liabilities decrease and stockholders' equity increases.
?? Liabilities decrease and stockholders' equity increases.
Accrued liability definition
A liability resulting from the recognition of an expense before the payment of cash.
accounting cycle
A series of steps performed each period and culminating with the preparation of a set of financial statements.
Accrual basis of accounting definition
A system of accounting in which revenues are recognized when a performance obligation is satisfied and expenses are recognized when incurred
Calculating COGS
Beg inventory +COG purchased =COG avail for sale -Ending inventory =COGS
Inventory turnover =
COGS / avg inventory
What accounts are affected by perpetual system of accounting
DR account recievable Cr sales rev DR COGS CR Inventory
Accounts affected in periodic system
DR acct. rec CR sales rev
Accrued Asset
Dr Asset Cr Revenue
Deferred Expense: Dr ? Cr?
Dr Expense Cr Asset
Accrued Liability Dr ? Cr?
Dr Expense Cr Liability
Deferred Revenue Dr ? Cr?
Dr Liability Cr Revenue
(perpetual) If Daisy inc sells a pair of shoes that costs the company $70, in addition to the record of sale, they would also recod
Dr cogs Cr. inventory
Multi-step Income Statement Includes
Net Sales -COGS =Gross Profit -Selling/admin expenses =Net Income b4 taxes -income tax expense =net income
All of the following statements regarding the gross profit ratio are true except: Question 9 options: Managers, investors, and creditors use the gross profit ratio to measure one aspect of profitability. The gross profit ratio alone is sufficient to determine a company's profitability. If a company's net sales were $200,000 and cost of goods sold were $120,000, its gross profit ratio would be 40%. The gross profit ratio explains how many cents on every dollar are available to cover expenses other than cost of goods sold and to earn a profit.
The gross profit ratio alone is sufficient to determine a company's profitability.
At the year end inventory count, if goods in transit are shipped FOB destination, they should be included in the inventory count of Question 6 options: The seller The buyer Neither the buyer nor the seller
WRONG ANSWER: buyer
Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2016. The goods were shipped the same day. The merchandise's selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2016. Park paid the amount due on June 13, 2016. When did title to the merchandise transfer from Jay Zee Music Company to Park? Question 2 options: June 10, 2016 June 5, 2016 June 13, 2016 Cannot be determined from the information provided
WRONG ANSWER: cannot be determined
Park, Inc. purchased merchandise from Jay Zee Music Company on June 5, 2016. The goods were shipped the same day. The merchandise's selling price was $15,000. The credit terms were 1/10, n/30. The shipping terms were FOB shipping point. Park received the merchandise on June 10, 2016. Park paid the amount due on June 13, 2016. If Park uses the periodic inventory system, the effect of recording the payment on June 13, 2016, will include Question 5 options: a decrease to Accounts Payable for $15,000. a decrease to Purchases for $15,000. a decrease to Cash for $15,000. an increase to Inventory for $14,850.
WRONG ANSWER:a decrease to Purchases for $15,000.
current value
amount of cash or its equivalent that could be received by selling an asset currently
historical cost
amount paid for na asset and used as a basis for recognizing it on the balance sheet and carrying it on the later balance sheets
direct labor
amounts paid to workers to manufacture the product
Contra account
an account with a balance that is opposite that of a related account
purchases
an acct used in a periodic inventory system to record acquisitions of merchandise
transportation in
an adjunct acct used to record freight costs paid by the buyer
(types of adjusting entries) deferred expense
an asset on the books that will become an expense (prepaid expenses) when cash is paid before expenses are incurred
Deferred expense
an asset resulting from the payment of cash before the incurrence of expenseal so called a prepaid expense
Accrued Liability
an expense that has been incurred and needs to be recognized. where expenses are incurred before cash is paid
(types of adjusting entries) Accrued Liability
an expense that has been incurred and needs to be recognized. where expenses are incurred before cash is paid
Unexpired costs are called
assets
unexpired costs
assets
Deferral
cash has been paid or receive but expense or revenue has not yet been recognized
Accrual
cash has not been paid or received but expense has been incurred or revenue recognized
Deferred Expense definition
cash is paid before it is incurred
The cash basis of accounting recognizes revenues when
cash is received and expenses are recognized when cash is paid.
COG sold
cost of goods available for sale MINUS ending inventory
Situations requiring adjusting entries are: a. cash paid before expense is incurred. b. cash received before revenue is recognized. c. expense incurred before cash is paid. d. All of the above.
d
Recognition
process of recoding an item in the financial statements as an asset, liability, rev, an expense or the like
recognition
process of recording an item in the financial statemnts as an asset, liability, a revenue an expense or the like
net purchases=
purchase returns and allowenses purchase discounts
An accrued revenue is earned and must be:
recorded in the period earned.
An accrued liability is incurred and must be
recorded in the period incurred.
(types of adjusting entries) Accrued Asset
rev that has been earned and needs to be recognized. where rev are recognized before cash is received
Accrued Asset
revenue that has been earned and needs to be recognized. where revenues are recognized before cash is received
Revenue recognition principle
revenues are recognized when a performance obigation is satisfied
revenue recognition principle
revenues are recognized when a performance obligation is satisfied
unfinished products/ work in progress
some of the materials have entered the process and some labor costs have been incurred but the product is not finished
accural basis
system of acct. where revenues are recognized when a performance obligation is satisfied and expenses are recognized when incurred.
cash basis
system of acct. where revenues are recognized when cash is received and expenses are recognized when cash is paid
purpose of financial statements
to communicate various types of economic information about a company
true or false: purchases is not an asset account
true it is included in income statement as a crucial part of calculation cogs . shows as an increase in expenses, thus reduction in net income and stock. equity in the acct equation