Final Exam for INTRO TO ACCT 201

What are four types of financial statements?

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

When note is said to be dishonered (all goes bad)

1. Maturity Value DEBIT Acounts Receivable 2. Face Value CREDIT Notes Receivable and Interest Revenue for the difference

Bad Debt Expense

1. Operating expense incurred failure to collect receivables 2. Uncollectible Account Expense 3. Doubtful account Expense

2 methods used to estimate uncollectible accounts receivable at the end of the period

1. Percent of sales 2. Analysis of the receivables

Which document is most important to complete before the company's financial statements can be prepared?

Adjusted trial balance

Using the percent of sales.....

Adjusting entry is made without regard to the balance of the allowance account

Formula for costs available for sale

Beginning inventory + costs of goods purchased

Revised Periodic Depreciation

Book Value (current) - New Salvage Value = Dep. Cost Dep. Cost/Remaining useful life = revised periodic dep.

The ______ of an asset is the difference between the cost of a depreciable asset and its related accumulated depreciation.

Book value

What can not be used in adjusting entries?

Cash

Cash Basis Accounting

Company's record revenue when they receive cash. ---Fails to record revenue for a company that has performed services but no cash yet. ---Not in accordance with GAAP

2 methods to value accounts receivable

Direct Write-Off Method, Allowance Method

In a period of declining prices, which of the following inventory methods generally results in the lowest balance sheet figure for inventory? Need more info to answer Average cost method LIFO method FIFO method

FIFO method

Maturity Value of a note is =

Face Amount + Interest = MV

Maturity Value

Face Amount(Principal) + Principal X Days X % note =

Adjusting entries are classified as revenues. (T/F)

False

Generally accepted accounting principles require the application of the revenue recognition principle because accounting software has made the revenue recognition easy to apply. (T/F)

False

The adjusted trial balance is prepared after the preparation of the financial statements. (T/F)

False

Without an adjusting entry for accrued interest expense, net income and stockholders' equity are understated.

False.

What is freight in?

Freight out is the transportation cost associated with the delivery of goods from a supplier to its customers. This cost should be charged to expense as incurred and recorded within the cost of goods sold classification on the income statement.

What is the difference between profit margin ratio and gross profit ratio?

GPR measures margin which selling price exceeds COGS, PMR measures margin which selling price covers expenses (including COGS)

By calculating the difference between the amounts in two journal entries for each sale of merchandise, ________ for each sale can be determined.

Gross profit

Income from operations plus or minus other revenues or expenses equals

Income before taxes.

The collection of a $500 account beyond the 2 percent discount period will result in a debit to Cash for $490. debit to Accounts Receivable for $500. debit to Cash for $500. debit to Sales Discounts for $10.

debit to Cash for $500

The collection of an $1500 account within the 2 percent discount period will result in a credit to Accounts Receivable for $1470. credit to Cash for $1470. debit to Sales Discounts for $30. debit to Accounts Receivable for $1470.

debit to Sales Discounts for $30

A utility bill for $180 has not been recorded and will not be paid until next month. What are the debit and credit?

Incurred Expense debit: expense credit: payable

Depreciation

The process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner. It is designed to properly match revenues and expenses. It is a cost allocation process, not an asset valuation process.

Why do we want to close entries in our preparation of financial statements?

The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger. Recall that Temporary accounts are used to record accounting activity during a specific period.

Which of the following statements is correct with respect to ending inventories? Under FIFO, the ending inventory is based on the latest units purchased The FIFO method assumes that the cost of the earliest goods acquired are the last to be sold It is generally good business management to sell the most recently acquired good first FIFO seldom coincides with the actual physical flow of inventory

Under FIFO, the ending inventory is based on the latest units purchased

Closing Entries

Transfer net income or net loss and dividends to retained earnings, so the balance in RE matched the RE statement.

A flower shop makes a large sale for $1,000 on January 31st. The customer is sent a statement on February 5th and a check is received on February 10th. The flower shop follows GAAP and applies the revenue recognition principle. The shop recognizes the revenue on January 31st. (T/F)

True

Assets are debit amounts on an adjusted trial balance and liabilities are credit amounts on an adjusted trial balance. (T/F)

True

The adjusted trial balance is the primary basis of the financial statements. (T/F)

True

The preparation of adjusting entries is needed to ensure that the expense recognition principle is followed.

True

True or False: A high profit margin suggests that there is a good return on each dollar of sales.

True

Under accrual basis accounting, a company recognizes revenue when they perform services even if the cash is not received. (T/F)

True

Under the cash basis of accounting, cash must be received before revenue is recognized. (T/F)

True

Failure to make an adjusting entry at the end of a period to record an accrued revenue would cause an ___________ of assets and an understatement of revenues.

Understatement.

$3900 of unearned service revenue has been earned at the end of the month. What are the Debit and Credit?

Unearned Revenue debit: unearned service revenue credit: service revenue

A(n) ________ account is debited and a(n) ________ is credited when an adjusting entry for services rendered.

Unearned revenue; revenue

Reason for adjusting unearned revenues

Unearned revenues recorded in liability accounts that have been earned.

As a buyer in an perpetual system, when accounting for purchase discounts, what 3 accounts are used and what accounts are debited and credited?

Accounts payable-debited Cash-credited Inventory-credited

What are the entries for a sales revenue?

Accounts receivable is debited and Sales revenue is credited

__________ basis accounting is in accordance with generally accepted accounting principles.

Accrual

Which of the following statements about accrual-basis accounting is NOT true? A) Accrual-basis accounting recognizes expenses when they are paid. B) Accrual-basis accounting follows the revenue recognition principle. C) Accrual-basis accounting follows the expense recognition principle. D) Accrual-basis accounting is the method required by generally accepted accounting principles.

Accrual-basis accounting recognizes expenses when they are paid.

Salaries of $1250 have been earned by employees but not paid at June 30. What are the debit and credit?

Accrued Expenses Debit: Salaries Expense Credit: Salaries Payable

The sale or transfer of accounts receivable in order to raise funds is called collateralizing pledging factoring leasing

factoring

A ______ _____ is an accounting period that is one year long.

fiscal year

Copyrights are granted by the federal government for the life of the creator or 70 years, whichever is shorter and therefore cannot be amortized for the life of the creator or 70 years, whichever is longer for the life of the creator plus 70 years

for the life of the creator plus 70 years

An exception to disbursements being made by check is acceptable when cash is paid to an owner to employees as wages to employees as loans from petty cash

from petty cash

Sales revenues are usually considered earned when an order is received. adjusting entries are made. goods have been transferred from the seller to the buyer. cash is received from credit sales.

goods have been transferred from the seller to the buyer

Sales revenue less cost of goods sold is called net profit. gross profit. net income. marginal income

gross profit

Goods held on consignment are kept for sale on the premises of the consignor. never owned by the consignee. included in the consignee's ending inventory. included as part of no one's ending inventory.

never owned by the consignee.

A check returned to the bank marked "NSF" means no signature found not sufficient funds no service fee not satisfactorily filled out

not sufficient funds

Every adjusting entry will include

one income statement account and one balance sheet account

Which of the following are common time periods that businesses use as their accounting period? A) quarterly B) monthly C) daily D) annually

quarterly monthly annually

If disposal of plant asset occurs during the year, depreciation is recorded for the fraction of the year to the date of the disposal not recorded for the year recorded for the whole year not recorded if the asset is scrapped

recorded for the fraction of the year to the date of the disposal

What rules is used to compute net income?

revenues-expenses

When a note receivable is dishonored, A.R is DEBIT for what amount?

the MV of the note

Unearned revenue adjusting entries impact

A liability account

With a prepaid expense, what are the adjustments?

-Assets are overstated -Expenses are understated

With an accrued revenue, what are the adjustments?

-Assets are understated -Revenues are understated

Average Collection Period

(365)/(A/R Turnover), Measures the average amount of time a receivable is outstanding. (Measure of Liquidity)

Interest Formula

(Face Value of Note) ** (Annual Interest Rate) ** (time in years) = interest

Accounts Receivable Turnover

(Net Credit Sales)/ (Average Net A/R), Measures the number of times, on average a company collects receivables during the period. (Measure of Liquidity)

2 Methods of recording bad debt expense are

- Direct Write Off Method - Allowance Method

Promissory Notes reported includes

- Due - Interest rate - Maturity Value

With an accrued expense, what are the adjustments?

-Expenses are understated -Liabilities are understated

If an asset increased, there must be the corresponding dual effects?

-Increase in a specific liability -Decrease in. another asset or. -increase in stockholders. equity

With an unearned revenue, what are the adjustments?

-Liabilities are overstated -Revenue are understated

Which of the following is an example of an accrual? -Record Wage Expense that is incurred and paid in the same period. -Record Revenues that were received in cash in an earlier period. -Record Revenues that will be received in cash in a subsequent period. -Record Rent Expense that was prepaid.

-Record Revenues that will be received in cash in a subsequent period.

Time in terms of one year (computing to months)

1 month = 1/12 2 month = 2/12 9 month= 9/12

3 factors in computing depreciation

1) Cost to make the asset ready for use 2) Useful Life - Estimate of expected productive life in terms of time, units of activity, or units of output 3) Salvage Value - Estimate of the asset's value at the end of its useful life. Based on scrap/trade in value

What is the formula for a multi-step income statement?

1) Gross profit 2) income from operations 3) Net income

Expenditures During Useful Life

1) Ordinary Repairs - (Rev) Expenditures to maintain the operating efficiency and expected productive life of a unit. Debited to Maintenance and Repairs Exp. 2) Additions and Improvements - Costs incurred to increase the operating efficiency productive capacity, or expected useful life. Capital Expenditure 3) Impairment - A permanent decline in the fair value of an asset.

Steps in the Allowance Method

1) Record Estimated Uncollectibles Journal Entry - Dr. Bad Debt Expense Cr. Allowance for Doubtful Accounts 2) Record the Write-Off of an uncollectible account Journal Entry - Dr. Allowance for Doubtful Accounts; Cr. Accounts Receivable (A write-off effects only balance sheet accounts) 3) Recovering an uncollectible account Journal Entry - Dr. A/R Cr. Allowance for Doubtful Accts Dr. Cash Cr. A/R 4) Estimate The Allowance

2 ways to dispose of an asset

1) Sale of Plant Asset - Equipment is sold to another party 2) Retirement of Plant Asset

What are the three cost flow assumptions?

1. FIFO 2.LIFO 3. Average cost

All businesses are involved in three types of activity

1. Financing 2. Investing 3. Operating

3 Depreciation Calculation Methods

1) Straight Line Method: A method in which companies expense an equal amount of depreciation for each year of the asset's useful life. Formula #1: Depreciable Cost/Useful Life = D Exp. Formula #2: Annual Rate % x Depreciable Cost = D Exp. 2) Declining Balance Method: A depreciation method that applies a constant rate to the declining book value of the asset and produces a decreasing annual depreciation expense over the asset's useful life. Higher depreciation in early years. Ignores salvage value. Calculation: (100%/useful life (years)) x 2 = Double declining balance rate Book value at the beginning of the year x Double declining balance rate = Depreciation Expense 3) Units of Activity Method: Useful life is expressed in terms of the total units of production or the use expected from the asset. The amount of depreciation is proportional to the level of activity during the period. This method is ideally suited to equipment whose activity can be measured in units of output, time, or miles. Calculation: Depreciable Cost/Total Units of Activity = Depreciation Cost per unit Depreciation Cost Per unit x units of activity yr = D Exp.

Healing Corporation issued a one-year 9%, $25,000 note on April 30th, 2014. Interest expense for the year ended December 31st, 2014 was

1,500

Account Receivable

1. A claim against the customer created by selling merchandise or services on credit 2. Someone buys from you on credit IOU, due in 30 or 60 days 3. Current Assest

Notes Receivable

1. A customer's written promise to pay an amount and possibly interest at an agreed-uopn rate 2. More formal written out IOU period more than 60 days 3. Current Assest

Net Realizable Value =

1. A.R - ADA = NRV 2. Estimated selling price of an item - Any direct costs of disposal = Net Realizable Value

Accounting Cycle Steps

1. Analyze transactions. 2. Journalize the transactions. 3. Post to ledger accounts. 4. Prepare trial balance. 5. Journalize & post adjusting entries. 6. Prepare adjusted trial balance. 7. Prepare financial statements. 8. Journalize & post closing entries. 9. Prepare post closing trial balance.

Notes Receivable journalize

1. when A.R is recorded DEBIT Notes Receivable, CREDIT Accounts Receivable 2. when note mature(all goes good); DEBIT cash, CREDIT Notes Receivable and Interest Revenue

Which of the following accounting entries would you MOST expect to accompany a $2,500 increase in cash, and why? 1.)A $2,500 increase in unearned service revenue, because unearned service revenue is considered a liability until the service is actually performed. 2.)A $2,500 decrease in unearned service revenue, because unearned service revenue is considered an asset no matter when it is received. 3.)A $2,500 decrease in notes payable, because this reduction in liabilities would need to be offset by a corresponding increase in assets. 4.)A $2,500 increase in notes payable, because this increase in stockholders' equity would need to be offset by a corresponding increase in assets.

1.)A $2,500 increase in unearned service revenue, because unearned service revenue is considered a liability until the service is actually performed.

Percent of Sales Method

1.If credit sales for the period are $3,000,000 and it is estimated that ¾% will be uncollectible, Bad Debt Expense is debited for $22,500 ($3,000,000 × .0075). This approach disregards the balance of $3,250 in the allowance account before the adjustment. 2. After the following adjusting entry on December 31 is posted, Allowance for Doubtful Accounts will have a balance of $25,750 ($3,250 + $22,500).

Annual Rate Percentage

100%/Useful life (in years) = Annual Percentage Rate

Bluing Corporation issued a one-year 9%, $150,000 note on April 30th, 2014. Interest expense for the year ended December 31st, 2014 was

9,000

How do you calculate interest?

= Principal ($) x Time (day/360)/(months/12) x Rate(%/100)

PRINT & BRING TO TEST pg 397

?

Adjusting entries are required every time...

A company prepares a financial statements.

Allowance For Doubtful Accounts

A contra asset account to Accounts Receivable. Companies do not close allowance for doubtful accounts at the end of the fiscal year.

Which 3 types of accounts are increased with debits?

A debit increases asset or expense (including dividends) accounts, and decreases liability, revenue or equity accounts.

Factor

A finance company or bank that buys receivables from businesses for a fee, then collects the payments directly from the customer.

Direct Write-Off Method

A method of accounting for bad debts that involves charging receivables balances to Bad Debt Expense at the time receivables are determined to be uncollectible. Shows only actual losses from uncollectibles; No Estimation. This method is not acceptable under GAAP Journal Entry: Debit Bad Debt Expense, Credit A/R.

Allowance Method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period. Receivables are stated as the cash (net) realizable value.

Disposing of Notes Receivable

A note is honored when its maker pays in full at maturity date. A dishonored note is a note that is not paid in full at maturity. No longer negotiable, but can create new terms to facilitate payment.

Regardless of the care used in granting credit and the collection procedures used?

A part of the credit sales will not be collectible.

Prepaid expense How are the accounts affected before adjustment(overstated or understatement)? What are the adjusting entries?

A payment of an expense in advance. Assets overstated (Adjusting entry= Expenses debited) Expenses understated (Adjusting entry=Assets or Contra Assets credited)

Accrued revenue How are the accounts affected before adjustment(overstated or understatement)? What are the adjusting entries?

A revenue that has been earned but cash has not yet been collected. Assets understated (Adjusting entry= Assets debited) Revenues understated (Adjusting entry=Revenues credited)

Promissory Note

A written promise to pay a specified amount of money on demand or at a definite time. Used (1) when individuals and companies lend/borrow money (2) when the amount of the transaction and the credit period extend normal limits (3) In settlement of A/R

Accrued Expenses

ACCRUAL Expenses incurred but not yet paid in cash / received.

Accrued Revenues

ACCRUAL Revenues from services performed but not yet received payment for.

Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: no adjusting entry is necessary Accounts Receivable Cash Miscellaneous Expense Accounts Receivable Cash Accounts Receivable

Accounts Receivable Cash

4 types of receivables

Accounts Receivable - The amounts customers owe on account resulting from the sale of goods and services. Collection of A/R is usually 30-60 days Notes Receivable - A written promise for amounts to be received. Usually requires collection of interest and extends for time periods of 60-90 days. Trade Receivable - Notes and Accounts Receivable that results from transactions Other Receivables- Interest Receivable, loans to company officers, advances to employees, income tax refundable. Other gains and revenues

What are the entries credit sales? (a.k.a what accounts are debited and what are credited?)

Accounts Receivable is debited Sales Revenue is credited.

Permanent accounts

All asset accounts, all liability accounts, stockholder's equity accounts

Permanent accounts

All balance sheet accounts are considered permanent accounts because their balances are carried forward into future accounting periods.

Receivables

All money claims against other entites, including people, business firms, and other organizations

Which of the following statements is correct in relation to the closing entry process?

All temporary accounts are closed at the financial year end.

Why is Allowance Method Better than Direct Write Off Method?

Allowance provides better matching of expenses and revenues.

Maturity Value define

Amount due at the maturity or due date of a note

Accounts Receivable

Amounts to be received in the future due to the sale of goods or services

Periodicity Assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Bad Debt Expense

An expense account to record losses from extending credit. It is a selling expense under operating expenses.

Accrued Expense How are the accounts affected before adjustment(overstated or understatement)? What are the adjusting entries?

An expense that the business has incurred/collected but has not yet paid. Expenses understated (Adjusting entry= Expenses debited) Liabilities understated (Adjusting entry=Liabilities credited)

What is the first step in the accounting cycle?

Analyze Business transactions

A furniture factory's employees work overtime to finish an order that is sold on April 30th. The office sends a statement to the customer in early May and payment is received by June. The overtime wages should be expensed in the month of

April

Expanded Accounting Equation

Assets = Liabilities + Common Stock - Dividends + Revenues - Expenses

Accrued Revenues account before adjustment:

Assets understated Revenues understated

Uncollectible Receivables is called

Bad Debt Expense

What are the entries for cash sales? (a.k.a what accounts are debited and what are credited?)

Cash and Cost of Goods Sold is debited Sales Revenue and Inventory is credited

Cost of Land

Cash purchase price, Accrued property tax, Closing costs (title, attorney fees), Real Estate Broker's commission, Costs for making land ready for use (clearing, draining, filling, grading, Demolition Costs-SV)

What are the 5 common types of current assets?

Cash, Investments, Receivables, Inventories, and Prepaid expenses.

As a seller in an perpetual system, when accounting for purchase discounts, what 3 accounts are used and what accounts are debited and credited?

Cash-debited sales discount-debited accounts receivable-credited

Retirement of Plant Assets

Companies simply retire, as opposed to sell, some assets. No cash received at disposal and no possibility for a gain. Journal Entry: Dr. Accumulated Dep, Loss on Disposal (current book value) Cr. Equipment (original cost)

Quality of Earnings

Company provides full and transparent info

The Sales Returns and Allowances account is classified as a(n) contra revenue account. asset account. contra asset account. expense account.

Contra revenue account

Book Value

Cost - Accumulated Depreciation

Plant Assets Costs

Cost consists of all expenditures necessary to acquire an asset & make it ready for its intended use

The sales section of an income statement for a retailer would not include Sales revenue. Net sales. Cost of goods sold. Sales discounts.

Cost of Goods sold

What are the expenses for a merchandising company?

Cost of goods sold and operating expenses

What are the entries for a sales expense?

Cost of goods sold is debited and Inventory is credited

In periods of rising prices, which is an advantage of using the LIFO inventory costing method? Phantom profits are reported Ending inventory will include latest (most recent) cost and thus be more realistic Cost of goods sold will include latest (most recent) cost and thus be more realistic Net income will be the highest and thus reflect the prosperity of the company

Cost of goods sold will include the latest (most recent) cost and thus be more realistic

Capital Expenditures

Costs included in a plant asset account - Capitalize & Depreciate. It is the amount of money spent to improve a long term asset.

Revenue Expenditures

Costs not included in a plant asset account - expensed right away such as maintenance and repairs expense

Name the 4 standard classifications of Assets.

Current Assets Long Term Investments Property, Plant, and Equipment Intangible Assets

Name the 3 standard classifications of Liabilities and Stockholders' Equity.

Current Liabilities Long term Liabilities Current Stockholders' equity

Other Receivables expected to be collected within 1 year are classified as

Current assets

Aging

DEBIT Bad Debt Exp CREDIT Allowance for Doubtful Accounts ADA

How to journalize a Direct Write-Off?

DEBITS Bad Debt Expense CREDIT Accounts Receivable

Unearned Revenues

DEFERRAL Cash received before services are performed.

Prepaid Expenses

DEFERRAL Expenses paid in cash before they're used / consumed. "Costs that expire through use or passage of time"

The Vintage Laundry Company purchased $6500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory os the laundry supplies indicated only $2000 on hand. The adjusting entry that should be made by the company on June 30 is:

Debit Laundry Supplies Expense $4,500 Credit Laundry Supplies $4,500

The balance in the prepaid rent account before adjustment at the end of the year is $15,000 and represents three months' rent paid on December 1. ________ will be an adjustment by the company

Debit Rent Expense, $5,000; credit Prepaid Rent, $5,000

Accrued Revenues adjusting entry:

Debit: Assets Credit: Revenues

Prepaid Expenses adjusting entry:

Debit: Expense Credit: Asset

Accrued Expenses adjusting entry:

Debit: Expenses Credit: Liabilities

Unearned Revenues adjusting entry:

Debit: Liabilities Credit: Revenues

Depreciable Cost

Depreciable Cost = Cost - Salvage Value

# of Days' Sales

End-of-Year A.R / Avg daily sales Measures length of time the A.R have been outstanding

Adjusting Entries

Ensures that the revenue recognition and expense recognition principles are followed. --Required every time a company prepares financial statements ---Includes one income statement & 1 balance sheet.

Reversing Entry

Entry made at the beginning of the next accounting period. Exact opposite of the adjusting entry made in the previous period.

Which of the following are considered temporary accounts? A) Retained Earnings B) Expense Accounts C) Dividends D) Revenue Accounts

Expense accounts dividends revenue accounts

If an adjusting entry for depreciation is NOT made, ________ will be understated.

Expenses

Reason for adjusting accrued expenses

Expenses have been incurred but not yet paid in cash or recorded.

Accrued Expense account before adjustment:

Expenses understated Liabilities understated

What is the formula for net income?

Income before taxes minus(less) income tax expense

Examples of prepaid expenses

Insurance Supplies Advertising Depreciation

When merchandise company PURCHASES a good, it is initially record the good as a ________ then a ________ when the sale is completed.

Inventory (current asset), and an expense (cost of goods sold)

Allowance account will have a credit balance after the adjusting entry been posted (Allowance Method)

Is a Contra Asset Account

Earnings per share (formula)

Is a profitability ratio that measures the net income earned on each share of common stock.

What is an advantage of using the multiple-step income statement? It is easier to prepare than the single-step income statement. It highlights the components of net income. Gross profit is not a separate item. Net income will be higher than net income computed using the single-step income statement.

It highlights the components of Net Income

What are closing entries?

Journal entries used to prepare and finalize temporary accounts for a new fiscal period

Which of the following is not a basic principle of cash management? Increase collection of receivables Invest idle cash keep inventory levels high delay payment of liabilities

Keep inventory levels high

Loss on Sales

Occurs when proceeds from sale are less than book value Journal Entry 1: Dr. Dep Exp; Cr. Accumulated Dep Journal Entry 2: Dr. Cash, Accumulated Dep, Loss on disposal; Cr. Equipment

In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense? LIFO Income tax expense for the period will be the same under all assumptions FIFO Average Cost Method

LIFO

3 classes of Depreciable Assets

Land Improvements, Buildings, Equipment. In these 3 classes, the usefulness and revenue producing ability decline over the asset's useful life because of wear and tear and obsolescence Note: Land is not a depreciable asset because its usefulness and revenue producing ability remain intact over time.

If a company holds ________, these goods should be included in its ending inventory.

Legal title to goods

Unearned Revenues account before adjustment:

Liabilities overstated Revenues understated

Post Closing Trial Balance

List of all permanent account balances that the company carries forward into the next accounting period.

Percentage of Receivables

Management establishes a percentage relationship between the amount of receivables and expected loss from uncollectible accounts

Account Receivable Turnover

Net Sales / Avg Accounts receivable Measure how frequently A.R are being converted into cash

What is the formula for single-step income statement?

Net income = total revenues minus (-) total expenses (ex: Net income= net sales- COGS)

Compton Inc. made a $500 ordinary repair to a piece of equipment. Compton's accountant debited this amount to the asset account, Equipment and credited Cash. Was this the correct entry and if not, why not? No, the correct entry would be a debit to Maintenance and Repairs Expense and a credit to Cash Yes, this was the correct entry No, the correct entry would be a debit to service revenue and a credit to cash No, the correct entry would be a debit to Cash and a credit to Maintenance and Repairs Expense

No, the correct entry would be a debit to Maintenance and Repairs Expense and a credit to Cash

Investments

Noncurrent Assest - Collection expected beyond 1 year

Revenues for services performed but recorded at the statement date are ______ revenues.

Not yet recorded

Gain on Sale

Occurs when proceeds from a sale exceed book value Journal Entry 1: Dr. Dep Exp; Cr. Accumulated Dep Journal Entry 2: Dr. Cash, Accumulated Depreciation Cr. Equipment and Gain on disposal of assets

Do temporary accounts and permanent accounts appear on the post-closing trial balance?

Only permanent

Interest expense would be classified on a multiple-step income statement under the heading Other revenues and gains. Operating expenses. Cost of goods sold. Other expenses and losses.

Other expenses and losses

The one to who the note is PAYABLE is called?

Payee

What is a major difference between a periodic system and a perpetual system?

Periodic system determines COGS by count only at the end of an acct. period and does NOT keep detail records of inventory on hand.

The office equipment has a 5-year life with no salvage value and is being depreciated at $250 per month for 60 months.

Prepaid Expense Debit: Depreciation Expense Credit: Accumulated Depreciation Equipment

The insurance policy is for a year. What are the debit and credit?

Prepaid Expense debit: insurance expense credit: prepaid insurance

What kind of adjusting entry is needed for the following situation: Supplies on hand at June 30 total $980. (It says on T chart that I have $2000, but now I have $980) What are the debit and credit?

Prepaid Expenses (must subtract remaining amount from original amount to determine how much you need to debit and credit) Debit: Supplies Expense Credit: Supplies

Reason for adjusting prepaid expenses

Prepaid expenses recorded in asset accounts have been used.

A new bookkeeper at TLC Pet Clinic posts transactions to ledger accounts and then journalizes and posts adjusting entries. What step of the accounting cycle did she overlook?

Preparation of a trial balance

What is the final step in the accounting cycle?

Prepare a post-closing trial balance

From an accounting standpoint, the acquisition of a long-lived asset such as a building can be thought of as a long-term:

Prepayment for the use of the asset

Computing interest on a note

Principal X Rate X Time = Interest

Net Cash

Provided by operating activities. Determined by adding cash received from operating the business and subtracting cash expended during operations.

Expense Recognition Principle

Recognize expenses during the period they helped generate revenue regardless of when they are purchased **matching principal**

Direct Write Off Method

Recognizes the expense only when an account is judged to be WORTHLESS or uncollectible

2 issues of Accounts Receivable

Recognizing Accounts Receivable, Valuing Accounts Receivable

Revenue Recognition Principle

Record revenue when it is earned regardless of when the cash is received

Plant Assets

Resources that have physical substance, are used in the operations of a business, and are not intended for sale to customers. Expected to provide service for a number of years.

temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Reason for adjusting accrued revenues

Revenues have been earned but not yet received in cash or recorded.

How to you find the amount for gross profit?

Sales revenue minus(less) COGS

What is the main source of revenue for a merchandising company?

Sales revenue or sale of merchandise

For sales discounts, what accounts are debited and what are credited?

Seller typically debit Sales Discounts Accounts receivable is credited

Adjusted Trial Balance

Shows balances at end of accounting period of all accounts, includes those just adjusted. "Shows the effects of all financial events that have occurred during accounting period"

Evidence for a transaction comes in the form of

Source documents

Land Improvements

Structural additions made to land such as parking lots, fences, landscaping and sprinklers. They have limited useful lives, and thus companies must depreciate (expense) their cost over useful life. Land Improvement costs consist of the cash purchase price and costs incurred in making it ready for its intended use.

Earnings Management

The planned timing of revenues, expenses, gains and losses, to smooth out bumps in net income

Due Date define

The date a note is to be paid

The LIFO reserve is The difference between the value of the inventory under LIFO and the value under average cost the amount used to adjust inventory to historical cost The difference between the value of the inventory under LIFO and the value under FIFO an amount used to adjust inventory to the lower of cost or market

The difference between the value of the inventory under LIFO and the value under FIFO

What does the time period assumption state?

The economic life of a business can be divided into artificial time periods.

What does an adjusted trial balance prove?

The equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.

Unearned Revenue How are the accounts affected before adjustment(overstated or understatement)? What are the adjusting entries?

The liability created by receiving revenue in advance. Liabilities overstated (Adjusting entry=Liabilities debited) Revenues understated (Adjusting entry= revenues credited)

Maker fails to pay the debt on the due date

The note is said to be dishonered

If employees are bonded It is impossible for them to steal from the company It means they are not allowed to handle cash They have worked for the company for the last ten years They have been insured against misappropriation of assets

They have been insured against misappropriation of assets

How many steps in the accounting cycle involve preparing some kind of trial balance?

Three.

Based on an accrual(the accumulation or increase of something over time) basis of accounting, when are transactions recorded?

Transactions are recorded in which the events occur in. Thus revenues and expenses are recognized even if cash was not obtained.

Based on a cash-basis accounting, when are transactions recorded?

Transactions are recorded when cash is obtained.

Accrual Basis Accounting

Transactions that change a company's financial statements are recorded in the periods in which the events occur, even if the cash has not been exchanged.

Under the cash basis of accounting, when is revenue is recognized?

When cash has been received.

Working capital (formula)

Working Capital = Current Assets - Current Liabilities

Promissory Notes

Written promise to pay a sum of money on demand or at a definite time

What does accrued mean?

a charge or cost (relating to work done but not yet invoiced) made provisions for at the end of a financial period.

The situation that requires a departure from the cost basis of accounting to the lower of cost or market basis in valuing inventory is necessitated by an increase in the value of inventory a desire for more profit a decline in the value of inventory an increase in selling price

a decline in the value of inventory

Two individuals at a retail store work the same cash register. You evaluate this situation as a violation of establishment of responsibility supporting internal independent verification a violation of separation of duties supporting the establishment of responsibility

a violation of establishment of responsibility

Q 4.55: Diane Vasquez, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. While making the entry she will debit Cash and credit:

accounts receivable

if a check correctly written and paid by the bank for $628 is incorrectly recorded on the company's books for $682, the appropriate treatment on the bank reconciliation would be to add $54 to the book's balance deduct $54 from the bank's balance subtract $54 from the book's balance deduct $628 from the book's balance

add $54 to the book's balance

Which of the following shows the ledger account balances? A) profit and loss statement B) tax return C) adjusted trial balance D) master budget

adjusted trial balance

Temporary accounts

all revenue accounts, all expense accounts, dividends

What is the process of depreciation?

allocating the cost of an asset to expense over its useful life in a rational and systematic manner

The balance in the accumulated depreciation account represents the amount to be deducted from the cost of the plant asset to arrive at its fair market value amount charged to expense in the current period amount charged to expense since the acquisition of the plant asset cash fund to be used to replace plant assets

amount charged to expense since the acquisition of plant asset

Bad Debt Expense is recorded on the income statement as an operating expense an expense subtracted from net sales to determine gross profit a contra revenue account part of cost of goods sold

an operating expense

Closing entries and a post-closing trial balance are steps in the accounting cycle that occur:

annually

Adjusting entries for prepaid expenses exist in

asset accounts

Prepaid Expenses account before adjustment:

assets overstated expenses understated

Accounts receivable are valued and recorded on the balance sheet at cash receivable value in the investments section only if they are not past due at gross amounts less sales returns and allowances

at cash receivable value

Plant assets are ordinarily presented in the balance sheet at current market values at cost less accumulated depreciation in a separate section along with intangible assets at replacement costs

at cost less accumulated depreciation

Formula for cost of goods sold

beginning inventory + cost of goods purchased - ending inventory = cost of goods sold

Cash must be received before revenue is recognized under the

cash basis of accounting

The retailer considers Visa and MasterCard sales as promissory sales credit sales contingent sales cash sales

cash sales

Physical controls to safeguard assets do not include safety deposit boxes locked warehouses cashier department supervisors vaults

cashier department supervisors

Two categories of expenses in merchandising companies are operating expenses and financing expenses. cost of goods sold and operating expenses. other expenses and cost of goods sold. cost of goods sold and financing expenses.

cost of goods sold and operating expenses.

When applying the lower of cost or market value rule to inventory valuation, market generally means original cost current replacement cost resale value original cost, less physical deterioration

current replacement cost

A high accounts receivable turnover ratio indicates The company sales are increasing a large proportion of the company sales are on credit customers are making payments very quickly customers are making payments slowly

customers are making payments very quickly

A revenue account is closed with a ______ to the revenue account and a _______ to income summary.

debit credit

A company using a perpetual inventory system that returns goods previously purchased on credit would debit Cash and credit Accounts Payable. debit Accounts Payable and credit Inventory. debit Sales and credit Accounts Payable. debit Accounts Payable and credit Purchases

debit Accounts Payable and credit Inventory

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would debit Cost of Goods sold and credit Inventory. debit Inventory and credit Cost of Goods Sold. make no additional entry until the end of the period. debit Cost of Goods Sold and credit Purchases.

debit Cost of Goods Sold and credit Inventory

The Harris Company purchased equipment for $9,000 on December 1st. It is estimated that annual depreciation on the computer will be $1,800. If financial statements are to be prepared on December 31st, ________ will be an adjustment by the company

debit Depreciation Expense, $150; credit Accumulated Depreciation, $150.

On July 1st the Fisher Shoe Store paid $18,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31st, which of the following is an adjusting entry that should be made by the company?

debit Rent Expense, $3,000; credit Prepaid Rent, $3,000

Lowell Crafts purchased $6,500 worth of supplies on August 2nd and recorded the purchase as an asset. On August 31st, an inventory of the supplies indicated only $1,000 on hand. What adjusting entry should be made by the company on August 31st?

debit Supplies Expense, $5,500; credit Supplies, $5,500

When an account is written off using the allowance method, accounts receivable is unchanged and the allowance account increases decreases and the allowance account decreases decreases and the allowance account increases increases and the allowance account increases

decreases and the allowance account decreases

A check written by the company for $275 is incorrectly recorded by a company as $257. On the bank reconciliation, the $18 error should be added to the balance per books deducted from the balance per books added to the balance per bank deducted from the balance per bank

deducted from the balance per bank

Which of the following bank reconciliation items would not result in an adjusting entry? collection of a note by the bank service charge deposits in transit NSF check of customer

deposits in transit

The primary difference between a periodic and perpetual inventory system is that a periodic system provides better control over inventories. determines the inventory on hand only at the end of the accounting period. records the cost of the sale on the date the sale is made. keeps a record showing the inventory on hand at all time.

determines the inventory on hand only at the end of the accounting period.

Deposits in transit have been recorded by the company's books but not yet by the bank are customer's checks that have not yet been received by the company have not been recorded by the bank or by the company have been recorded by the bank but not yet by the company

have been recorded by the company's books but not yet by the bank

Mrs. Smith has worked for Bosco Inc. for 20 years without taking a vacation. An internal control feature that would address this situation would be physical controls documentation procedures establishment of responsibility human resource controls

human resource controls

Freight costs incurred by a seller on merchandise sold to customers will cause an increase to a contra-revenue account of the seller. in operating expenses for the seller. to the cost of goods sold of the seller. in the selling expenses of the buyer.

in operating expenses for the seller.

A loss on disposal of a plant asset is reported in the financial statement in the Other Expenses and Losses section of the Income Statement As a direct increase to the capital account on the balance sheet As a direct decrease to the capital account on the balance sheet in the Other Revenues and Gains section of the income statement

in the Other Expenses and Losses section of the income statement

According to the revenue recognition principle, when should revenue be recognized in the accounting period?

in the period in which the performance obligation is satisfied

When the allowance method of accounting for uncollectible accounts is used, Bad Debt expense is recorded in the same year as the credit sale as each credit sale is made when the account is written off as uncollectible in the year after the credit sale is made

in the same year as the credit sale

Supervisors counting cash receipts daily is an example of establishment of responsibility independent internal verification segregation of duties human resource controls

independent internal verification

Allowance for Doubtful Accounts on the balance sheet is deducted from accounts receivable is offset against total current assets increases the cash realizable value of accounts receivable appears under the heading "current assets"

is deducted from accounts receivable

The direct write-off method of accounting for uncollectible accounts emphasizes cash realizable value emphasizes balance sheet relationships is not generally accepted as a basis for estimating bad debts emphasizes the matching of expenses with revenues

is not generally accepted as a basis for estimating bad debts

Goodwill is only recorded when the purchase of an entire business occurs can be sold by itself to another company may be expensed upon purchase if desired can be purchased and charged directly to stockholder's equity

is only recorded when the purchase of an entire business occurs

Cash equivalents do not include commercial paper U.S. treasury bills money market accounts long-term investments

long-term investments

Manufacturers usually classify inventory into all the following general categories except: raw materials. merchandise inventory. work in process. finished goods.

merchandise inventory

If a company spends $12 million dollars for a warehouse, when should the cost be written off?

over the useful life of the warehouse

If an adjustment is needed for unearned revenues, the liability is ______ and the related revenue is understated before adjustment.

overstated

Control over cash disbursements is generally more effective when disbursements are made by the accounts payable subsidiary clerk all bills are paid in cash payments are made by check all purchases are made on credit

payments are made by check

All balance sheet accounts are considered _______ accounts because their balances are carried over into future accounting periods.

permanent

A post closing trial balance will show:

permanent accounts to be carried forward to the next accounting period.

Temporary accounts are closed so as to

prepare the income summary statement

Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control procedure, if any, is being violated? None, Ron has proven to be trustworthy and has enough experience to do a good job Establishment of responsibilities segregation of duties documentation procedures

segregation of duties

Intangible Assets are not reported on the balance sheet because they lack physical substance should be reported under the heading Property, Plant, and Equipment should be reported as current assets on the balance sheet should be reported as a separate classification on the balance sheet

should be reported as a separate classification on the balance sheet

Companies must make adjusting entries because:

some costs expire with the passage of time and have not yet been journalized.

Adding beginning inventory to the cost of goods purchased will give you

the cost of goods available for sale.

The LIFO inventory method assumes that the cost of the latest units purchased are the last to be allocated to cost of goods sold the first to be allocated to ending inventory the first to be allocated to cost of goods sold not allocated to cost of goods sold or ending inventory

the first to be allocated to cost of goods sold

If goods in transit are shipped FOB destination the seller has legal title to the goods until they are delivered. no one has legal title to the goods until they are delivered. the buyer has legal title to the goods until they are delivered. the transportation company has legal title to the goods while the goods are in transit.

the seller has legal title to the goods until they are delivered.

What is the purpose of the ledger?

to keep in one place all information about changes in specific account balances

What is the purpose of adjusted trial balance?

to prove the equality of all debit and credit balances after all adjustments

Suppose that a company did not make an adjusting entry to record revenue earned but not yet billed to customers. The result of this error would be to:

understate assets, net income, and stockholders' equity.

A company that makes few purchases on credit or makes few sales on credit ___________ be justified in using the cash basis of accounting.

would