BA 211 Midterm

Spring Company has assets and equity that amount to $260,000 and $70,000 respectively. Liabilities total

$190,000

Dynamic Production Services started the year with total assets of $130,000 and total liabilities of $50,000. The company is a sole proprietorship. The revenues and the expenses for the year amounted to $100,000 and $60,000 respectively. During the year, there were no new capital contributions and the owner withdrew $45,000. Calculate Dynamic's net income for the year.

$40,000

Diamond Company had the following transactions during June: Performed services $3000 on account; received cash on account, $8000; paid $900 for repair expense; paid $1600 to a supplier that it owed from the previous month. What is the combined effect on Cash of these June transactions?

$5500 increase

The asset account, Office Supplies had a beginning balance of $5700. During the accounting period, office supplies were purchased on account, for $5100. A physical count, on the last day of the accounting period, show $2000 of office supplies on hand. What is the amount of Supplies Expense for the accounting period?

$8800

Average Inventory

(Beginning Inventory + Ending Inventory) / 2

straight line depreciation

(cost-residual value)/useful life

Adjusting Journal Entries

-made at the end of an accounting period -never involves cash -recorded on the last day of the month

Purpose of Internal Control

1. protect assets 2. ensure reliable accounting 3. promote efficient operations 4. urge adherence to company policies

Fiscal year

12 months

The credit terms 2/10, n/30 are interpreted as:

2% cash discount if the amount is paid within 10 days, or the balance due in 30 days.

Days' Sales in Inventory

365/inventory turnover

Selling Merchandise

4 accounts are affected: typically sales revenue and cash (or accounts receivable) and then COGS and Merchandise inventory

Lower of Cost or Market (LCM)

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.

Accumulated Depreciation

A contra asset account representing the total depreciation taken to date. Normal balance is a credit

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

Statement of Owner's Equity

A summary of the changes in owner's equity that have occurred during a specific period of time, such as a month or a year.

Which of the following is TRUE of a trial balance?

A trial balance is a list of all accounts with their balances.

______ represents the right to receive cash in the future from customers for goods sold or for services performed.

Accounts Receivable

A company that uses a perpetual inventory system sold goods to a customer on account for $2300. The cost of goods sold was $1150. Which of the following journal entries correctly records this transaction?

Accounts Receivable $2300 Sales Revenue $2300 COGS $1150 Merchandise Inventory $1150

Which of the following is true of assets?

Assets are something of value the business owns or controls.

Regarding the accounting equation, which of the following is a correct statement?

Assets- Liabilities = Equity, The accounting equation is made up of three parts, The accounting equation is the basic tool of accounting (ALL STATEMENTS ARE TRUE)

Accounting Equation

Assets= Liabilities + (Owner's Capital- Owners Withdrawals + Revenues - Expenses)

Ending Merchandise Inventory

Beginning inventory + net purchases - cogs

Which of the following accounts decrease with a credit?

Cash (assets)

A company receives payment from one of its customers on August 5 for services performed on July 21. Which of the following entries would be recorded if the company uses accrual basis accounting?

Cash 1,000 Accounts Receivable 1,000

John Tilden contributes cash to his business in exchange for capital. John is the sole proprietor. The two accounts involved in this transaction are

Cash and Tilden, Capital

Principles of Internal Control

Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. Apply technological controls. Perform regular and independent reviews.

Adjusting entries may involve any account, including cash. (T/F)

False

An owner's withdrawals affect the business's net income or net loss and are recorded as an expense. (T/F)

False

Debit refers to the right side of the T-account and credit refers to the left side. (T/F)

False

Equity decreases with expenses and revenues. (T/F)

False

Given the same purchase and sales data, and assuming the cost of inventory is rising, the costing methods for inventory will result in different amounts for sales revenue. (T/F)

False

Managerial Accounting focuses on providing information for external decision makers. (T/F)

False

Which of the following statements best defines financial statements?

Financial statements are business documents that report on a business in monetary terms, providing information to help users make informed business decisions.

FOB shipping point

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller.

FOB destination

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.

GAAP refers to guidelines for accounting information in the US. The acronym GAAP in this statement refers to

Generally Accepted Accounting Principles

Assets

Increase with a Debit, decrease with a credit

Liabilities

Increase with a credit, decrease with a debit

Owner, Capital

Increase with a credit, decrease with a debit

Revenues

Increase with a credit, decrease with a debit

Expenses

Increase with a debit, decrease with a credit

Owner, Withdrawals

Increase with a debit, decrease with a credit

What is the effect of the adjusting entry for Depreciation Expense?

It decreases total assets and increases total expenses.

Expense Recognition Principle

Match expenses with revenues in the period when the company makes efforts to generate those revenues

Which of the following must be reported at the lower-of-cost-or-marker value?

Merchandise Inventory

The account title used for recording a written promise that a customer will pay the business a fixed amount of money and interest by a certain date in the future is

Notes Payable

Which of the following is NOT a balance sheet account?

Owner, Withdrawals

Sales Discount

Reduce revenue and is recorded at the amount we expect to get

Net income or loss

Revenue - Expenses

Accruals

Salaries, expenses, accounts receivable

Operating Expense Ratio

Sales Revenue - ( COGS + Expenses)

Net Sales Revenue

The amount a company has earned on sales of merchandise inventory after returns, allowances, and discounts have been taken out.

The accountant for Barnes Auto Repair Company failed to make an adjusting entry to record $5000 of unpaid salaries for the last two weeks of the year. Which of the following is an effect of this omission?

The net income will be overstated.

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Which of the following is TRUE of an income statement?

There is net income when the total revenues are greater than total expenses.

A law firm provides legal services for clients who do not pay immediately. As a result of this transaction, assets and revenues increase. (T/F)

True

Any person or business to whom a business owes money is called the business's creditor. (T/F)

True

At the end of the period, the accounting cycle includes adjusting the accounts, preparing financial statements and closing the accounts. (T/F)

True

Businesses strive to sell merchandise inventory quickly because the merchandise inventory generates no profit until it is sold. (T/F)

True

Even in a perpetual inventory system, the business must count its inventory at least once a year (T/F)

True

Generally Accepted Accounting Principles (GAAP) require the use of the accrual basis accounting (T/F)

True

On a multi-step income statement, merchandisers report operating expenses in two categories- selling expenses and administrative expenses. (T/F)

True

The heading of a balance sheet will show the date as a specific date, not a period of time. (T/F)

True

The normal balance of an account is the increase side of the account. (T/F)

True

Which of the following entries would be made to record the purchase of inventory on account, if a company uses the perpetual system?

a debit Merchandise Inventory and a credit to Accounts payable

Depreciation

a lessening in value based on how long we think the item will last

Purchase Allowance

an incentive to keep goods that are not "as ordered"

Mulberry company collected $7000 from one of its customers, the amount owed from the previous month. How does this affect the accounting equation for Mulberry?

assets increase by $7000; assets decrease by $7000

Country Homes Company just recorded a transaction in its books. If this transaction increased the total liabilities by $16,000, then

assets must increase, or equity must decrease by $16000

Inventory Turnover Ratio

cost of goods sold/average inventory

On a balance sheet for a merchandiser, Merchandise Inventory is listed as a(n)

current asset

Current Ratio

current assets divided by current liabilities

The allocation of a plant asset's cost to expense over its useful life is called

depreciation

Which of the following is NOT recorded by accountants?

effects of an economic boom

Owner's, Withdrawals is a(n) ____ account that has a normal _____ balance.

equity; debit

Which of the following inventory costing methods uses the cost of the oldest purchases to compute the cost of goods sold?

first-in, first-out

For a merchandiser, the term "inventory" refers to

goods held for sale to customers

Gross Profit Percentage

gross profit/net sales

Financial Statements

income statement, statement of owners equity, balance sheet, and statement of cash flows

Which of the following is NOT an inventory costing method?

lower of cost or market

Gross Profit

net sales - cost of goods sold

Gross Profit is calculated as

net sales revenue less cost of goods sold

Ending Merchandise Inventory

number of units on hand x unit cost

Cost of Goods Sold

number of units sold x unit cost

Cash Basis Accounting

only recorded when cash is received, not allowed under GAAP

Deferrals

prepaid expenses (assets) and unearned revenues (liabilities)

Net Cost of Inventory

purchase cost of inventory - purchase returns and allowances - purchase discounts + freight in

Accrual basis accounting

revenues are recorded when they are earned

Liquidity

the ease with which an asset can be converted into cash

The amount of net income is transferred from _____ to _____.

the income statement; the statement of owner's equity

Accounting Cycle

the process by which companies produce their financial statements for a specific period

Normal balance

the side of the account that is increased