Intermediate Financial Accounting Exam 1

Real accounts

(permanent) accounts are asset, liability, and equity accounts and they appear on the balance sheet

Nominal accounts

(temporary) accounts are revenue, expense and dividend accounts; except for dividends, they appear on the income statement

In preparing financial reports, it is assumed that users of the reports have reasonable knowledge of business and economic activities. T or F?

True

One of the objectives of financial reporting is to provide information that is useful in assessing cash flow prospects of the entity being reported on. T or F?

True

One purpose of a trial balance is to prove that debits and credits of an equal amount are in the general ledger. T or F?

True

Recognition of revenue when cash is collected is appropriate only when it is impossible to establish the revenue figure at the time of sale because of the uncertainty of collection. T or F?

True

Relevance and reliability are the two primary qualities that make accounting information useful for decision making. T or F?

True

The AICPA has had a diminished role in the Standard setting process after the passage of the Sarbanes-Oxley Act of 2002. T or F?

True

The Accounting Principles Board (APB) replaced the Committee on Accounting Procedure (CAP) and was designated as the AICPA's sole authority for public pronouncements on accounting principles. T or F?

True

The Accounting Principles Board (APB) was replaced in 1973 by the Financial Accounting Standards Board (FASB), which now is primarily responsible for setting accounting standards. T or F?

True

The Codification provides in one place all the authoritative literature related to a particular topic of GAAP. T or F?

True

The FASB issues accounting pronouncements through Accounting Standards Updates. T or F?

True

The Interest Expense account is credited during the closing process. T or F?

True

The Public Company Accounting Oversight Board (PCAOB) oversees the development of auditing standards. T or F?

True

The basis for determining whether an item is material is based on both quantitative and qualitative factors. T or F?

True

The difficulty in applying the cost constraint is that the costs and especially the benefits are not always evident or measurable. T or F?

True

The essential characteristics of accounting include identification and measurement. T or F?

True

The fact that equity represents an ownership interest and a residual claim against the net assets of an enterprise means that in the event of liquidation, creditors have a priority over owners in the distribution of assets. T or F?

True

The full disclosure principle states that information should be provided when it is of sufficient importance to influence the judgment and decisions of an informed user. T or F?

True

The going-concern assumption is generally applicable in most business situations unless liquidation appears imminent. T or F?

True

The monetary unit assumption means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis. T or F?

True

The objective of financial reporting is the foundation from which the other aspects of the framework logically result. T or F?

True

The periodicity assumption is a result of the demands of various financial statement user groups for timely reporting of financial information. T or F?

True

The primary governmental body that has influence over the FASB is the SEC. T or F?

True

The purpose of the EITF is to reach a consensus on how to account for new and unusual financial transactions. T or F?

True

The use of a worksheet at the end of each month or quarter permits the preparation of interim financial statements even though the books are closed only at the end of each year. T or F?

True

To be relevant, accounting information must be capable of making a difference in a decision. T or F?

True

Under the expense recognition principle, it is possible to have an expense reported on the income statement in one period and the cash payment for that expense reported in another period. T or F?

True

Use of reversing entries does not change the amounts reported in the financial statements for the previous period. T or F?

True

nformation that has been measured and reported in a similar manner for different enterprises is considered comparable. T or F?

True

Distinguish between cash-basis and accrual-basis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?

Under the cash basis of accounting, revenue is recorded only when cash is received and expenses are recorded only when paid. Under the accrual basis of accounting, revenue is recognized when a performance obligation is satisfied and expenses are recognized when incurred, without regard to the time of the receipt or payment of cash. A cash-basis balance sheet and income statement are incomplete and inaccurate in comparison to accrual-basis financial statements. The accrual-basis matches effort (expenses) with accomplishment (revenues) in the income statement while the cash basis only presents cash receipts and cash disbursements. The accrual basis balance sheet contains receivables, payables, accruals, prepayments, and deferrals while a cash-basis balance sheet shows none of these

Normal Balance Debit accounts

assets, expenses

moment in time elements

assets, liabilities, equity

prepare adjusting entry Aug 31, bad debt expense for year is $900

aug 31, debit bad debt expense 900 credit allowance for doubtful accounts 900

unearned revenues

cash received before services are performed

Asset accounts

cash, accounts receivable, notes receivable, prepaid accounts, supplies, equipment, buildings, land

Consistency is a type of

comparability

imperative for providing comparisons of a company from period to period

comparability (consistency)

Four qualitative characteristics that are related to both relevance and faithful representation.

comparability, verifiability, timeliness, and understandability

What are the enhancing qualities of the qualitative characteristics? What is the role of enhancing qualities in the conceptual framework?

comparability, verifiability, timeliness, and understandability. Enhancing qualities are qualitative characteristics that are complementary to the fundamental qualitative characteristics. These characteristics distinguish more useful information from less useful information.

faithful representation ingredients

completeness, neutrality, free from error

Equals increase in assets less liabilities during the year, after adding distributions to owners and subtracting investments by owners.

comprehensive income

Includes all changes in equity during the period, except those resulting from investments by owners and distributions to owners.

comprehensive income

increases in net assets in a period from nonowner sources

comprehensive income (also possible would be revenues and gains)

Qualitative characteristic being employed when companies in the same industry are using the same accounting principles

confirmatory value

quality of information that confirms users' earlier expectations

confirmatory value

expense accounts closing entry

debit income summary credit all expense accounts (to close expense accounts)

dividends closing entry

debit retained earnings credit dividends (to close dividends to retained earnings)

service revenue closing entry

debit service revenue credit income summary (to close revenue account)

Types of adjusting entries

deferrals and accruals

Decreases assets during the period by purchasing the company's own stock.

distributions to owners

Indicates that personal and business record keeping should be separately maintained

economic entity assumption

Balance Sheet Items

Assets (current and/or longterm) Liabilities Stockholders' equity Common Stock Retained Earnings

Accounting Equation

Assets = Liabilities + Stockholders' Equity

Losses

Decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity during a period except those that result from expenses or distributions to owners.

Residual interest in the assets of the enterprise after deducting its liabilities.

equity

Separates financial information into time periods for reporting purposes.

periodicity assumption

relevance ingredients

predictive value, confirmatory value, materiality

Deferrals

prepaid expenses and unearned revenues

Real or nominal: prepaid rent

real

real or nominal: salaries and wages payable

real

real or nominal, balance sheet or income statement: accumulated depreciation--equipment

real, balance sheet

real or nominal, balance sheet or income statement: equipment

real, balance sheet

real or nominal, balance sheet or income statement: inventory

real, balance sheet

real or nominal, balance sheet or income statement: supplies

real, balance sheet

predictive value is an ingredient of this fundamental quality of information

relevance

Two fundamental qualities that make accounting information useful for decision-making purposes.

relevance and faithful representation

The objective of financial reporting places most emphasis on

reporting to capital providers

Comparability

Quality of information that permits users to identify similarities in and differences between two sets of economic phenomena.

Two major types of FASB pronouncements

-Accounting Standards Updates (often referred to as Financial Accounting Standards) -Financial Accounting Concepts

Basic Accounting Assumptions

-Economic entity assumption -going concern assumption -monetary unit assumption -periodicity assumption

Work sheet

A worksheet or spreadsheet used to help a company prepare its financial statements.

Elements of financial statements

-assets -liabilities -equity -investments by owners -distributions to owners -comprehensive income -revenues -expenses -gains -losses

Five Steps to Revenue Recognition

1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied

What are the five steps used to determine the proper time to recognized revenue?

1. Identify the contract(s) with the customer 2. Identify the separate performance obligations in the contract. 3. Determine the transaction price 4. Allocate the transaction price to separate performance obligations 5. Recognized revenue when each performance obligation is satisfied

Accounting Cycle

1. analyze transactions 2. journalize 3. post from journals to ledger 4. prepare unadjusted trial balance 5. prepare adjusting entries 6. prepare adjusted trial balance 7. prepare statements (income, retained earnings, balance) 8. prepare closing journal entries and post to ledger 9. prepare post-closing trial balance (optional)

Accounting standard-setters use the following process in establishing accounting standards:

1. research 2. discussion paper 3. exposure draft 4. standard

Measurement Principles

A "mixed attribute" system that permits the use of various measurement bases.

Conceptual framework

A coherent system of interrelated objectives and fundamentals that can lead to consistent standards.

General Ledger

A collection of all the asset, liability, owners' equity, revenue, and expense accounts

Of what value is a common set of standards in financial accounting and reporting?

A common set of financial accounting and reporting standards applied by all businesses and entities should produce financial statements which are reasonably comparable. Without a common set of standards, each enterprise could, and would, develop a theory structure and set of practices, resulting in noncomparability among the financial statements of enterprises.

Generally Accepted Accounting Principles (GAAP)

A common set of standards and procedures adopted by the accounting profession.

What is a conceptual framework? Why is it necessary in financial accounting?

A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. A conceptual framework is necessary for financial accounting for the following reasons: (1) It enables the FASB to issue more useful and consistent standards in the future. (2) New issues will be more quickly solvable by reference to an existing framework of basic theory. (3) It increases financial statement users' understanding of and confidence in financial reporting. (4) It enhances comparability among companies' financial statements.

Financial Accounting Standards Advisory Council (FASAC)

A council responsible for consulting with the FASB on both major policy and technical issues.

Event

A happening of consequence

Trial Balance

A list of all open accounts in the ledger and their balances

Financial Accounting Concepts

A series of pronouncements issued by the FASB with the purpose of setting forth fundamental objectives and concepts that the FASB will use in developing future standards of financial accounting and reporting.

Financial Accounting Standards Board (FASB)

A seven member board created in 1973 which currently establishes and improves standards of financial accounting and reporting for the guidance and education of the public.

Internal controls

A system of checks and balances designed to prevent and detect fraud and errors.

Double-entry system

A system that records the dual effect of each transaction in its appropriate account

External event

A transaction between an entity and its environment

Internal event

A transaction that occurs within an entity

Post-closing trial balance

A trial balance prepared immediately after closing entries have been posted

According to the FASB Conceptual Framework, the elements—assets, liabilities, and equity—describe amounts of resources and claims to resources at/during a Moment in Time Period of Time A. Yes No B. Yes Yes C. No Yes D. No No

A. Yes No The FASB classifies the elements of financial statements into two distinct groups. The first group of three elements—assets, liabilities, and equity—describes amounts of resources and claims to resources at a moment in time. The other seven financial statement elements describe transactions, events, and circumstances that affect an enterprise during a period of time. Thus, alternatives B, C, and D are incorrect.

Ingredients of faithful representation are Completeness Neutrality Free from Error A. Yes Yes Yes B. Yes No Yes C. No No No D. No Yes No

A. Yes Yes Yes Ingredients of faithful representation are completeness, neutrality, and free from error.

What is the constraint that supports considering that the benefits of the information outweigh the sacrifices to provide the information? A. Cost. B. Prudence. C. Consistency. D. Conservatism.

A. Cost. The cost constraint requires weighing the costs of providing the information with the benefits derived from using it. Conservatism or prudence reflects a general tendency toward early recognition of unfavorable events.

Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy? A. Monetary unit assumption. B. Periodicity assumption. C. Going-concern assumption. D. Economic entity assumption.

A. Monetary unit assumption. The monetary unit assumption holds that the unit of measure remains reasonably stable. Severe inflation would cause this assumption to lose its relevance.

If the following journal entry was made for the purchase of a three-year insurance policy in February of the first year, would an adjusting entry and/or a reversing entry be appropriate at the end of the first year? Debit Unexpired Insurance 3,000 Credit Cash 3,000 A. Yes Adjusting Entry No Reversing Entry B. No Adjusting Entry Yes Reversing Entry C. Yes Adjusting Entry Yes Reversing Entry D. No Adjusting Entry No Reversing Entry

A. Yes Adjusting Entry No Reversing Entry An adjusting entry is necessary because a portion of the insurance has expired as of the end of the first year. However, because this prepaid item was originally entered in an asset account a reversing entry would be inappropriate.

Under the revenue recognition principle, revenue is generally recognized when: A. a company satisfies its performance obligations. B. the merchandise has been ordered. C. all expenses have been identified. D. the accounting process is virtually complete.

A. a company satisfies its performance obligations. Revenue is generally recognized when a company satisfies its performance obligations.

Prepaid expense

An item paid and recorded in advance of its use or consumption, part of it properly represents expense of the current period and part represents an asset on hand at the end of the period

Committee on Accounting Procedure

An organization composed of practicing CPAs which issued Accounting Research Bulletins dealing with a variety of accounting problems during the years 1939 to 1959.

Although many objections have been raised about the "cost" principle, it is still widely supported for financial reporting because it A. is an objectively determinable amount. B. is a good measure of current value. C. facilitates comparisons between years. D. takes into account price-level adjusted information.

A. is an objectively determinable amount. Cost is still widely supported for financial reporting because it is an objectively determinable amount. Answer (B) is incorrect because cost and current value are generally not the same amount subsequent to the date of acquisition. Answers (C) and (D) are incorrect because it does not facilitate comparisons between years, nor does it take into account price-level adjusted information.

According to the FASB conceptual framework, equity A. is the residual interest in the assets of an entity that remains after deducting its liabilities. B. is the same thing as comprehensive income. C. is the net gains less the net loses for a period of time. D. is the net revenues and expenses for a period of time.

A. is the residual interest in the assets of an entity that remains after deducting its liabilities. Equity is the residual interest in the assets of an entity that remains after deducting its liabilities.

The accounting equation (A = L + SE) must remain in balance: A. throughout each step in the accounting cycle. B. only when journal entries are recorded. C. only at the time the trial balance is prepared. D. only when formal financial statements are prepared.

A. throughout each step in the accounting cycle. If the accounting equation is out of balance at any time during the accounting cycle, then an error has been made.

Comparability

Ability to compare accounting information of different companies because they measure and report information in a similar manner.

Describe the major constraint inherent in the presentation of accounting information.

Accounting information is subject to the cost constraint. Information should not be provided unlessthe benefits exceed the costs of preparing it.

Completeness

All information necessary for faithful representation is provided. Includes all the information that is necessary for a faithful representation of the economic phenomena that it purports to represent.

Historical cost principle

An accounting principle that states that assets and liabilities should be recorded at their acquisition price.

Accounting Principles Board (APB)

An accounting rule-making board which provided official pronouncements, called APB Opinions, from 1959 through 1973

Accounting Principles Board (APB)

An accounting rule-making board which provided official pronouncements, called APB Opinions, from 1959 through 1973.

Financial Reporting Executive Committee

An agency of the AICPA authorized to make public statements on behalf of the AICPA on financial reporting matters.

Securities and Exchange Commission (SEC)

An agency of the federal government that administers the Securities Exchange Act of 1934.

Monetary unit assumption

An assumption stating that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Periodicity assumption

An assumption stating that the economic activities of an enterprise can be divided into artificial time periods.

Going concern assumption

An assumption that states an enterprise will continue in operation long enough to carry out its existing objectives and commitments.

Economic entity assumption

An assumption that states economic activity can be identified with a particular unit of accountability.

Consistency

An entity applies the same accounting treatment to similar events from period to period.

Transaction

An external event involving a transfer or exchange between two or more entities

Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on a Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, and 12/31) represent?

At December 31, the three days' wages due to the employees represent an accrued expense which creates a current liability, salaries and wages payable. The related expense must be recorded in this period to properly reflect the expense incurred.

journalize Aug 12, performed services for clients, for which $1,300 was collected in cash and $670 was billed to the clients

Aug 12, Debit cash 1,300 debit accounts receivable 670 credit service revenue 1,970

journalize Aug 15, paid August rent $600

Aug 15, debit rent expense 600 credit cash 600

journalize Aug 19, counted supplies and determined that only $270 of the supplies purchased on Aug 7 ($500) are still on hand

Aug 19, debit supplies expense 230 credit supplies 230

journalize Aug 2, Invested $12,000 cash and $2,500 of equipment in the business

Aug 2, Debit cash 12,000 debit equipment 2,500 credit owner's capital 14,500

prepare adjusting entry Aug 31, services performed but unbilled total $1,400

Aug 31, debit accounts receivable 1,400 credit service revenue 1,400

prepare adjusting entry Aug 31, interest on notes payable of $300 is accrued

Aug 31, debit interest expense 300 credit interest payable 300

prepare adjusting entry Aug 31, salaries and wages earned by employees of $700 have not been recorded

Aug 31, debit salaries and wages expense 700 credit salaries and wages payable 700

journalize Aug 7, purchased supplies on account for $500

Aug 7, Debit supplies 500 credit accounts payable 500

Which of the following violates the concept of faithful representation? A. The management report refers to new discoveries and inventions made, but the financial statements never report the results. B. Financial statements included buildings with a carrying amount estimated by management. C. Financial statements were issued one year late. D. All of the choices violate faithful representation.

B. Financial statements included buildings with a carrying amount estimated by management. Accounting information is a faithful representation to the extent that it is complete, neutral, and is reasonably free of error and bias. An estimate of carrying amount of buildings is deemed unreliable, the buildings should be recorded at their cost at the date of purchase and subsequent depreciated.

An accrued expense can best be described as an amount: A. Paid and not currently matched with earnings. B. Not paid and currently matched with earnings. C. Not paid and not currently matched with earnings. D. Paid and currently matched with earnings.

B. Not paid and currently matched with earnings. An accrued expense can best be described as an amount not paid and currently matched with earnings. The journal entry to record an accrued expense involves debiting an expense account which is deducted from revenues in determining income and crediting a liability account. Accrued expenses are generally incurred as a result of passage of time (e.g., interest, rent, salaries, etc.). Answers (A) and (D) are incorrect because by definition an accrued expense is one that has been incurred but not yet paid. Answer (C) is incorrect because the purpose of accruing an expense is to match it currently with earnings.

Continuation of an accounting entity in the absence of evidence to the contrary is an example of the basic concept of Consistency Going Concern A. No No B. Yes No C. No Yes D. Yes Yes

C. No Yes The going concern assumption in accounting implies that unless there is evidence to the contrary, an entity will continue to exist in order to carry out its objectives and fulfill its commitments. Consistency describes when an entity applies the same accounting treatment to similar events from period to period.

A prepaid expense can best be described as an amount: A. Paid and currently matched with earnings. B. Paid and not currently matched with earnings. C. Not paid and not currently matched with earnings. D. Not paid and currently matched with earnings.

B. Paid and not currently matched with earnings. A prepaid expense can best be described as an amount paid and not currently matched with earnings. The journal entry to record a prepaid expense involves an asset account and crediting cash. The asset is deferred to and expensed in future years. Answer (A) is incorrect because it is not matched with earnings until it is expensed in future years. Answers (C) and (D) are incorrect because a prepaid expense is one that has been paid.

Which of the following is a characteristic describing the primary quality of relevance? A. Materiality. B. Predictive value. C. Verifiability. D. Understandability.

B. Predictive value. For information to be relevant, it should have predictive or confirmatory value. Answer (A), materiality is a constraint which relates to the magnitude of an omission or misstatement that in light of the circumstances, may change or influence the decision of a person relying on the information. Answer (C) is incorrect because verifiability is an enhancing quality. Answer (D) is incorrect because understandability is an enhancing quality.

Which of the following is an example of an accrued liability? A. Supplies purchased at the beginning of the year and debited to an expense account. B. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. C. Depreciation expense. D. Rent, provided as a service during the period, cash to be received next year.

B. Property taxes incurred during the year, to be paid in the first quarter of the subsequent year. An accrued liability is an item of expense that has been incurred during the period, but has not been recorded or paid. The property taxes fits this definition, as they are an expense of the period in which they were incurred and represent a liability until they are paid in the subsequent period. The office supplies are a prepaid expense, depreciation is an estimated item, and the rent is an accrued revenue item.

An adjusting entry should never include: A. a debit to expense and a credit to a liability. B. a debit to expense and a credit to revenue. C. a debit to a liability and a credit to revenue. D. a debit to revenue and a credit to a liability.

B. a debit to expense and a credit to revenue. All adjusting entries include one balance sheet account (asset or liability) and one income statement account (revenue or expense). Thus, all alternatives other than alternative B represent possible adjusting entry descriptions.

During the first year of Wisnewski Co.'s operations, all purchases were recorded as assets. Store supplies in the amount of $6,540 were purchased. Actual year-end store supplies inventory amounted to $2,150. The adjusting entry for store supplies will: A. increase net income $4,390. B. increase expenses by $4,390. C. decrease store supplies by $6,540. D. debit accounts payable for $2,150.

B. increase expenses by $4,390. Purchased...................................$6,540 Year-end inventory.....................2,150 Used during year .....................$4,390

When a company makes reversing entries A. it credits all cash payments of expenses to the related expense account. B. it debits all cash payments of expenses to the related expense account. C. it debits all cash receipts to the related revenue account. D. all subsequent cash receipts and cash payments are credited to Income Summary.

B. it debits all cash payments of expenses to the related expense account. When a company makes reversing entries, all cash payments of expenses are debited to the related expense account. This simplifies the recording process in an accounting system.

The major objective of the quality of comparability is to: A. provide timely financial information for statement users. B. promote comparability between financial statements of different accounting periods. C. enable users to identify the real similarities and differences in economic events between companies. D. be sure the same information is disclosed in each accounting period.

B. promote comparability between financial statements of different accounting periods. Comparability between financial statements of different accounting periods presumes consistent application of GAAP.

Comprehensive income includes all changes in equity during a period except: A. sale of assets other than inventory. B. those resulting from investments by or distribution to owners. C. sales to a particular entity where ultimate payment by the entity is doubtful. D. those resulting from revenue generated by a totally owned subsidiary.

B. those resulting from investments by or distribution to owners. Comprehensive income includes net income and all other changes in equity, exclusive of owners' investments and distributions. Items A, C, and D fit into this broad definition.

International Accounting Standards Board (IASB)

Based in London, it produces the International Financial Reporting Standards (IFRS).

Statement of Retained Earnings Items

Beginning retained earnings Add: Net income Less: Dividends Ended retained earnings

During the lifetime of an entity accountants produce financial statements at artificial points in time in accordance with the concept of: Objectivity Periodicity A. No No B. Yes No C. No Yes D. Yes Yes

C. No Yes The concept of periodicity implies that economic activity can be divided into artificial time periods—months, quarters, and years for example.

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services? A. Debit cash and credit an expense account. B. Credit cash and debit a revenue account. C. Debit cash and credit a liability account. D. Credit cash and debit a liability or revenue account.

C. Debit cash and credit a liability account. An advance payment for goods or services requires a debit to cash and a credit to a liability account. When the goods or services are delivered to the customer, the revenue is recognized by debiting the liability and crediting a revenue account.

Which of the following is correct regarding double-entry accounting? A. Each transaction is recorded twice, once in the general journal and once in a specialized journal. B. Each transaction must involve two entries, either two debits, two credits, or one debit and one credit. C. Each transaction must result in equal amounts of debits and credits. D. Each transaction appears in at least two of the financial statements.

C. Each transaction must result in equal amounts of debits and credits. The double-entry system records the dual effect of each transaction and every transaction must be recorded with equal debits and credits.

In complying with the full disclosure principle, an accountant must determine the amount of disclosure necessary. How much disclosure is enough? A. Information sufficient for a person without any knowledge of accounting to understand the statements. B. All information that might be of interest to an owner of a business enterprise. C. Information that is of sufficient importance to influence the judgment and decisions of an informed user. D. Information sufficient to permit most persons coming in contact with the statements to reach an accurate decision about the financial condition of the enterprise.

C. Information that is of sufficient importance to influence the judgment and decisions of an informed user. In deciding what information to report, accountants follow the general practice of providing information that is of sufficient importance to influence the judgment and decisions of an informed user. Alternatives A and D are wrong because they do not assume an informed user. Alternative B would result in disclosing a significant amount of extraneous information.

The economic entity assumption in accounting is best reflected by which of the following statements? A. When a parent and subsidiary company are merged for accounting and reporting purposes the economic entity assumption is violated. B. The best way to truly measure the results of enterprise activity is to measure them at the time the enterprise is liquidated. C. The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. D. A business enterprise is in business to enhance the economic well being of its owners.

C. The activity of a business enterprise can be kept separate and distinct from its owners and any other business unit. The economic entity assumption holds that economic activity can be identified with a particular unit of accountability. Alternative A represents the essence of the economic entity assumption not a violation. Alternative B is related to the periodicity assumption and alternative D is not a basic accounting assumption.

Which of the following statements best describes the purpose of closing entries? A. To facilitate posting and preparing a trial balance. B. To determine the amount of gain or loss for the period. C. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. D. To complete the record of various transactions that were started in a prior period.

C. To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period. Closing entries represent the formal process by which all nominal accounts (revenue and expense) are reduced to zero and the net income or net loss is determined and transferred to owners' equity.

A trial balance prepared at year end showed Puccineli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by: A. the balance of $47,000 in accounts receivable being entered in the trial balance as $40,700. B. an error in adding the Sales Journal. C. the balance of $700 in the Equipment account being entered as a debit of $7,000. D. a net loss of $6,300.

C. the balance of $700 in the Equipment account being entered as a debit of $7,000. Recorded debit amount .................$7,000 Actual debit balance ..............................700 Excess debit total ...............................$6,300

Unearned Revenue

Cash received and recorded as a liability because the service obligation has not yet been satisfied by providing goods or services to customers.

Comprehensive income

Change in equity (net assets) of an entity during a period from transactions and other events and circumstances from nonowner sources.

Qualitative characteristics

Characteristics that make accounting information useful

Real Accounts

Common Stock and related accounts, Retained Earnings

What is the distinction between comparability and consistency?

Comparability facilitates comparisons between information about two different enterprises at a particular point in time. Consistency, a type of comparability, facilitates comparisons between information about the same enterprise at two different points in time.

Enhancing Qualities

Comparability, verifiability, timeliness, and understandability

Subsidary ledger

Contains the details related to a given general ledger account.

Compute the amount of depreciation expense related to a lawn mower and accessories for Jay Hawk Co. that should be reported on the Dec 31, 2025 income statement. Assume straight-line depreciation. Cost of mower and accessories: $4,000 Estimated Useful life: 5 yrs Salvage Value: $0 Date Purchased: 7/1/25 Monthly salary of groundskeeper: $1,100 Estimated annual fuel cost: $150

Cost - Salvage Value = Depreciable Cost: $4,000 - 0 = $4,000. Depreciable Cost / Useful Life = Depreciation Expense for One Year. $4,000 / 5 = $800 per year. The asset was used for 6 months, therefore 1/2-year of depreciation expense should be reported. Annual depreciation * 6/12 = amount to be reported on the 2025 income statement: $800 * 6/12 = $400

The Codification

Created by the FASB and provides in one place all the authoritative literature to a particular topic of GAAP.

Emerging Issues Task Force (EITF)

Created by the FASB with the purpose of having members reach a consensus on how to account for new and unusual financial transactions that have the potential for creating differing financial reporting practices.

Which of the following is a correct statement regarding the expense recognition principle? A. Expenses are recognized when they make a contribution to revenue. B. Costs can be charged to the current period as an expense simply because no connection with revenue can be determined. C. In recognizing expenses, accountants attempt to follow the approach of let the expense follow the revenue. D. All of the choices are correct.

D. All of the choices are correct The expense recognition principle allows for letting the expense follow the revenue (expense is recognized when it makes a contribution to income); however, immediate expensing is appropriate when there's no apparent association between an expense and a revenue.

Which of the following is not a benefit associated with the FASB Conceptual Framework Project? A. A conceptual framework should increase financial statement users' understanding of and confidence in financial reporting. B. Practical problems should be more quickly solvable by reference to an existing conceptual framework. C. A coherent set of accounting standards and rules should result. D. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply.

D. Business entities will need far less assistance from accountants because the financial reporting process will be quite easy to apply. The financial reporting process will always require the expertise of a person trained in accounting. The development of a conceptual framework will aid the accountant because new and emerging practical problems should be more quickly solvable by reference to an existing framework. Alternatives A, B, and C are benefits of the Conceptual Framework Project.

(L.O. 3) The Murphy Company sublet a portion of its warehouse for five years at an annual rental of $24,000, beginning on May 1, 2020. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to unearned rental income. Murphy reports on a calendar-year basis. The adjustment on December 31, 2020 for Murphy should be: A. No entry B. Debit Unearned rental income 8,000 Credit Rental income 8,000 C. Debit Rental income 8,000 Credit Unearned rental income 8,000 D. Debit Unearned rental income 16,000 Credit Rental income 16,000

D. Debit Unearned rental income 16,000 Credit Rental income 16,000 Murphy Company should make an adjusting entry to recognize that two-thirds of the performance obligation has been satisfied (8 months of an annual rental of $24,000) should be recognized as rental income in 2020. The journal entry that should be made is: Unearned rental income 16,000 Rental income ($24,000 × 2/3) 16,000

Which of the following is not a principal purpose of an unadjusted trial balance? A. It proves that debits and credits of equal amounts are in the ledger. B. It is the basis for any adjustments to the account balances. C. It supplies a listing of open accounts and their balances. D. It proves that debits and credits were properly entered in the ledger accounts.

D. It proves that debits and credits were properly entered in the ledger accounts. The trial balance accomplishes the things listed in the first three alternatives. However, the purpose of the trail balance is not to prove that the debits and credits were properly entered in the ledger accounts. The fact that the trial balance is in balance proves that an equal amount of debits and credits were made, but there is no assurance that the postings were made to the correct accounts.

If expenses are greater than revenues, the Income Summary account will be closed by a debit to: A. Income Summary and a credit to Cash. B. Income Summary and a credit to Retained Earnings. C. Cash and a credit to Income Summary. D. Retained Earnings and a credit to Income Summary.

D. Retained Earnings and a credit to Income Summary. If expenses are greater than revenues, then the Income Summary account will have a debit balance after closing entries have been made. Thus, to close the Income Summary account the journal entry would include a debit to Retained Earnings and a credit to Income Summary.

With regard to the accounting cycle, which of the following pairings of activities provides a correct chronology? A. The financial statements are prepared and later an adjusted trial balance is prepared. B. Reversing entries are prepared and later a post-closing trial balance is prepared. C. Closing entries are prepared and later financial statements are prepared. D. Transactions are journalized and later posted to the ledger.

D. Transactions are journalized and later posted to the ledger. Alternatives A, B, and C provide an incorrect chronology in the accounting cycle. Alternative D provides a correct chronology.

Rent collected in advance by a landlord is a (an): A. Accrued liability. B. Deferred asset. C. Accrued revenue. D. Unearned revenue.

D. Unearned revenue. Rent collected in advance by a landlord is an unearned revenue. Cash received in advance should not be recognized as revenue until the performance obligation has been satisfied. Answer (A) is incorrect because an accrued liability is the result of an expense which has been incurred but not yet paid. Answer (B) is incorrect because a deferred asset is a cost which has been incurred but the benefits will be received in the future. Answer (C) is incorrect because an accrued revenue is revenue for which the performance obligation has been satisfied but the cash has not yet been received.

If accounting information is complete, free from error, and neutral, it can be considered: A. relevant B. timely. C. comparable. D. a faithful representation.

D. a faithful representation To be a faithful representation, accounting information must possess three key characteristics: completeness, neutrality, and free from error.

In accounting an economic entity may be defined as: A. a business enterprise. B. an individual. C. a division within a business enterprise. D. all of the above.

D. all of the above. All of the alternatives (A, B, and C) are economic entities for accounting purposes.

A worksheet A. can be used in place of financial statements. B. is a formal device for accumulating, sorting, and recording information in the general ledger. C. is used to record and post the closing entries. D. provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

D. provides considerable assurance the company properly handled all of the details related to end-of-period accounting. A worksheet provides considerable assurance the company properly handled all of the details related to end-of-period accounting.

The concept referred to by the "expense recognition" principle is A. that current liabilities have the same period of existence as the current assets. B. that all cash disbursements for a period be matched to cash receipts for the period. C. that net income should be reported on a quarterly basis. D. that where possible the expenses to be included in the income statement were incurred to produce the revenues.

D. that where possible the expenses to be included in the income statement were incurred to produce the revenues. The expense recognition principle is the process of relating expenses with revenues on a cause and effect basis. Answer (A) is incorrect because the expense recognition principle is not related to the period of existence of current assets and current liabilities. Answer (B) is incorrect because the the expense recognition principle is not concerned with the timing of cash flows. Answer (C) is incorrect because the expense recognition principle is not concerned with a particular reporting period interval.

Side Kicks has year-end account balances of Sales Revenue $808,900, Interest Revenue $13,500, Cost of Goods Sold $556,200, Administrative Expenses $189,000, Income Tax Expense $35,100, and Dividends $18,900. Prepare the year-end closing entries.

Debit sales revenue 808,900 Debit interest revenue 13,500 credit income summary 822,400 Debit income summary 780,300 credit cost of goods sold 556,200 credit administrative expenses 189,000 credit income tax expense 35,100 debit income summary 42,100 credit retained earnings 42,100 debit retained earnings 18,900 credit dividends 18,900

At the end of its first year of operations, the trail balance of Alonzo Company shows Equipment $30,000 and zero balances in Accumulated Depreciation--Equipment and Depreciation Expense. Depreciation for the year is estimated to be $2,000. Prepare the adjusting entry for the equipment at Dec 31, and indicate the balance sheet presentation for the equipment at Dec 31.

Dec 31, Debit depreciation expense 2,000 credit accumulated depreciation--equipment 2,000 Equipment...............$30,000 Less: Accumulated Depreciation--Equipment....2,000 $28,000

Midwest Enterprises made the following entry on Dec 31, 2025 Debit Interest Expense 10,000 Credit Interest Payable 10,000 (to record interest expense due on loan from Anaheim National Bank) What entry would Anaheim National Bank make regarding its outstanding loan to Midwest Enterprise?

December 31 Debit Interest Receivable $10,000 Credit Interest Revenue 10,000 (to record accrued interest revenue on loan)

Fair value principle

Defined as "the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm's length transaction."

Declares and pays cash dividends to owners.

Distribution to owners (net effect is to reduce equity and assets)

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

Distributions to owners differ from expenses and losses in that they represent transfers to owners, and they do not arise from activities intended to produce income. Expenses differ from losses in that they arise from the entity's ongoing major or central operations. Losses arise from peripheral or incidental transactions

Reversing entries

Entries at the beginning of the next accounting period that are the exact opposite of the adjusting entries made in the previous period

Adjusting entries

Entries made at the end of an accounting period to bring all accounts up to date on an accrual accounting basis

Public Company Accounting Oversight Board (PCAOB)

Established by the Sarbanes-Oxley Act of 2002 and has oversight and enforcement authority and establishes auditing, quality control, and independence standards and rules.

Adjusting entries are an optional step in the accounting process. T or F?

False. Adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period.

Adjusting entries are used to correct errors that occur during the posting process. T or F?

False. Adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period. If errors are made in the posting process, they are corrected by means of correcting entries, not adjusting entries.

An adjusted trial balance that shows equal debit and credit columnar totals proves the accuracy of the adjusting entries. T or F?

False. An adjusted trial balance that shows equal debit and credit columnar totals proves nothing more than the fact that each adjusting entry contained an equal amount of debits and credits. Adjusting entries could have included the wrong total dollar amount or an inappropriate account could have been debited or credited. Mistakes such as these would still produce an adjusted trial balance that shows equal debit and credit columnar totals.

An effective process of capital allocation is not important to a healthy economy. T or F?

False. An effective process of capital allocation is critical to a healthy economy.

Accounting reports should be developed so that users without knowledge of economics and business can become informed about the financial results of a company. T or F?

False. An implicit assumption is that all users need reasonable knowledge of business and financial accounting matters to understand the information contained in the financial statements

Any company claiming compliance with GAAP must comply with most standards and interpretations but does not have to follow the disclosure requirements. T or F?

False. Any company claiming compliance with GAAP must comply with all standards andinterpretations, including disclosure requirements.

All those who serve on the FASB must be Certified Public Accountants. T or F?

False. At the present time it is not necessary to be a CPA to be a member of the FASB.

When an amount is determined by the accountant to be immaterial in relation to other amounts reported in the financial statements, that amount may be deleted from the financial statements. T or F?

False. Because an item is deemed to be immaterial does not justify its deletion from financial statements. If an amount is so small that it is quite unimportant when compared with other items, application of a particular standard may be considered of less importance.

The difference between Accounting Research Bulletins (ARBs) and Accounting Principles Board Opinions is that ARBs deal with accounting theory and the APB Opinions deal with accounting practice. T or F?

False. Both ARBs and APB Opinions represent authoritative pronouncements designed to establish principles of accounting. The major difference is that ARBs were issued by the Committee on Accounting Procedure (CAP) and APB Opinions were issued by the Accounting Principles Board.

Comparability pertains only to the reporting of information in a similar manner for different companies. T or F?

False. Comparability also refers to comparisons of a firm over time(consistency).

Adherence to the concept of consistency requires that the same accounting principles be applied to similar transactions for a minimum of five years before any change in principle is adopted. T or F?

False. Consistency means that a company applies the same methods to similar accounting transactions from period to period. It does not mean that companies cannot switch from one method to another. Companies can change to a new method that is considered preferable to the old method as long as financial statement users are made aware of the change.

In general, debits refer to increases in account balances, and credits refer to decreases. T or F?

False. Debits are recorded on the left side of an account and can be increases or decreases in account balances, depending on the account involved. Debits increase asset and expense accounts; they decrease liability, owner equity, and revenue accounts. Credits result in the opposite effect on account balances.

A conceptual framework underlying financial accounting is necessary because future accounting practice problems can be solved by reference to the conceptual framework and a formal standard-setting body will not be necessary. T or F?

False. Development of a conceptual framework will not provide a solution to all future accounting problems, nor will it eliminate the need for a formal standard-setting body. However, a soundly developed conceptual framework should enable the FASB to issue more useful and consistent standards resulting in easier solutions to emerging practical problems.

True or false: the double entry system means that each transaction must be recorded twice.

False. Double entry system means for every debit there is a credit amount and vice-versa.

It is not necessary to post the closing entries to the ledger accounts because new revenue and expense accounts will be opened in the subsequent accounting period. T or F?

False. Failure to post closing entries to the general ledger will leave a balance in revenue and expense accounts from a previous period and the retained earnings account will be misstated.

If an entity fails to post one of its journal entries to its general ledger, the trial balance will not show an equal amount of debit and credit balance accounts. T or F?

False. Failure to post one journal entry to the general ledger will misstate the debit and credit side of a trial balance by the same amount. Thus, the trial balance will show an equal amount of debits and credits.

General-purpose financial reports are most useful to company insiders in making strategic business decisions. T or F?

False. General-purpose financial reports help users who lack the ability to demand all the financial information they need from an entity and, therefore, must rely on, at least partly, the information in financial reports.

Confirmatory Value

Information that confirms or corrects prior expectations. Information about an economic phenomenon that corrects past or present expectations based on previous evaluations.

The FASB has a government mandate and therefore does not have to follow due process in issuing a standard. T or F?

False. In establishing financial accounting standards, the FASB relies on two basic premises:(1) the FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession, and (2) it should operate in full view of the public through a "due process" system that gives interested people ample opportunities to make their view known.

Capital providers are the only users who benefit from general-purpose financial reporting. T or F?

False. Information that is decision-useful to capital providers may also be useful to users of financial reporting who are not capital providers

Information that is a faithful representation is characterized as having predictive or confirmatory value. T or F?

False. Information that is relevant is characterized as having predictive or confirmatory value or both

Period costs such as officer salaries and administrative expenses attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods. T or F?

False. Product costs such as material, labor, and overhead attach to the product and are carried into future periods if the revenue from the product is recognized in subsequent periods. Period costs such as officers' salaries and other administrative expenses are charged off immediately, even though benefits associated with these costs occur in the future, because no direct relationship between cost and revenue can be determined.

Real (permanent) accounts are revenue and expense accounts and are periodically closed. T or F?

False. Real (permanent) accounts are asset, liability, and owners' equity accounts. Nominal (temporary) accounts are revenue and expense accounts. Nominal accounts are periodically closed; real accounts are not.

Relevant information only has predictive value, confirmatory, or both. T or F?

False. Relevant information must also be material

Reversing entries are made at the end of the accounting cycle to correct errors in the original recording of transactions. T or F?

False. Reversing entries are made to simplify the recording of a subsequent transaction related to an adjusting entry. When an entry is reversed, the related subsequent transaction can be recorded as if the adjusting entry had never been recorded. Reversing entries have nothing to do with the correction of errors.

A general journal may be used by any entity in recording its transactions, whereas special journals may be used only by entities whose transactions meet certain requirements. T or F?

False. Special journals can be used by any entity for any groups of transactions possessing common characteristics.

Accounting standards based on personal conceptual frameworks generally will result in consistent and comparable accounting reports. T or F?

False. Standard-setting based on personal conceptual frameworks will lead to different conclusions about identical or similar issues. Asa result, standards will not be consistent with one another, and past decisions may not be indicative of future ones

The International Accounting Standards Board (IASB) has been replaced by the FASB as the rule-making body for world-wide GAAP. T or F?

False. The IASB and U.S. accounting organizations are trying to work together to reconcile U.S. GAAP with IASB standards but are currently separate agencies.

The SEC has been the principal organization in the development of accounting standards. T or F?

False. The SEC has the mandate to establish accounting principles but has acted with remarkable restraint in the area of developing accounting standards. Generally, it has relied on the AICPA and FASB to regulate the accounting profession and develop and enforce accounting standards.

The Securities and Exchange Commission (SEC) sets accounting standards for companies that do work for the government. T or F?

False. The SEC is empowered to administer the 1933 and 1934 Securities Acts. The SEC was given broad powers to prescribe the accounting practices and standards to be employed by companies that issue securities to the public or are listed on a stock exchange.

The accounting profession has attempted to develop a set of standards so each enterprise can develop their own standards. T or F?

False. The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.

If Company A wishes to acquire an asset owned by Company B, the cost principle would require Company A to record the asset at the original cost to Company B. T or F?

False. The cost principle requires that assets be accounted for on the basis of acquisition cost. Whatever it costs a particular entity to acquire an asset is that entity's acquisition cost.

The economic entity assumption is useful only when the entity referred to is a profit-seeking business enterprise. T or F?

False. The economic entity assumption holds that the activity of a business entity can be kept separate and distinct from its owners and any other business unit. This assumption has nothing to do with the nature of the business organization.

Accounting theory is developed without consideration of the environment within which it exists. T or F?

False. The environment within which any discipline exists plays an integral role in shaping the theory of that discipline. The purpose of accounting is to serve the business environment through the issuance of timely and relevant financial information. To present such information, accounting theory must be developed with consideration being given to the business environment.

The fundamental qualitative characteristics that make accounting information useful are relevance and verifiability. T or F?

False. The fundamental qualitative characteristics that make accounting information useful are relevance and faithful representation

The Income Summary account used during the closing process is shown in the stockholders' equity section of the balance sheet. T or F?

False. The income summary account is a clearing account through which all revenue and expense accounts are closed at the end of an accounting period. Once the revenue and expense accounts have been closed, any balance existing in the income summary account is closed to retained earnings. Thus, the income summary account never appears on a financial statement.

The major purpose of the APB during its 13-year existence was to develop a single set of accounting standards useful to all business entities. T or F?

False. The major purposes of the APB were (a) to advance the written expression of accounting principles, (b) to determine appropriate practices, and (c) to narrow the areas of difference and inconsistency in practice.

The notes to financial statements generally summarize the items presented in the main body of the statements. T or F?

False. The notes to financial statements generally amplify or explain the items presented in the main body of the statements.

The post-closing trial balance consists of asset, liability, stockholders' equity, revenue and expense accounts. T or F?

False. The post-closing trial balance consists only of asset, liability, and owners' equity (the real) accounts.

The three elements—assets, liabilities, and equity—describe transactions, events, and circumstances that affect an enterprise during a period of time. T or F?

False. The three elements—assets, liabilities, and equity—describe amounts of resources and claims to resources at a moment of time.

An example of an internal event would be a flood that destroyed a portion of an entity's inventory. T or F?

False. This statement characterizes an external event rather than an internal event. Internal events occur within an entity, whereas external events involve interaction between an entity and its environment.

Use of a sound conceptual framework in the development of accounting principles will make financial statements of all entities comparable because alternative accounting methods for similar transactions will be eliminated. T or F?

False. Use of a sound conceptual framework will not eliminate alternative accounting methods for similar transactions. However, a sound conceptual framework should allow practitioners to dismiss certain alternatives quickly and focus on a logical and acceptable treatment.

Verifiability is solely an enhancing characteristic for faithful representation. T or F?

False. Verifiability is an enhancing characteristic that relates to bothrelevance and faithful representation

Assume that on Feb 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years' insurance coverage. Prepare P&G's Feb 1 journal entry and the annual adjusting entry on June 30

Feb 1, debit prepaid insurance 720,000 credit cash 720,000 June 30, debit insurance expense 150,000 credit prepaid insurance 150,000 (720,000/ 5/24)

Organizational Structure for Setting Accounting Standards

Financial Accounting Foundation (FAF)->Financial Accounting Standards Board (FASB)<->Financial Accounting Standards Advisory Council (FASAC)

Capital Allocation Process

Financial Reporting->Users -> Capital Allocation

Nonfinancial measurements issues

Financial reports fail to provide some key performance measures widely used by management, such as customer satisfaction indexes, backlog information, reject rates on goods purchased, as well as the results of companies' sustainability efforts

Timeliness

Having information that permits users to identify similarities in and differences between two sets of economic phenomena.

How does accounting help the capital allocation process?

If a company's financial performance is measured accurately, fairly, and on a timely basis, the right managers and companies can attract investment capital. Unreliable and irrelevant information leads to poor capital allocation, which adversely affects the efficiency of the securities market.

Gains

Increases in equity (net assets) from peripheral or incidental transactions of an entity and from other transactions and other events and circumstances affecting the entity during a period except those that result from revenues or investments by owners.

Revenues

Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, performing services, or other activities that constitute the entity's ongoing major or central operations.

Relevance

Information capable of making a difference in a decisions of users in their capacity of capital providers. Ingredients: Predictive value, confirmatory value, and materiality

Neutrality

Information is unbiased and cannot be selected to favor one set of parties over another.

Feedback value

Information that confirms or corrects prior expectations.

Predictive value

Information that helps users make predictions about the ultimate outcome of past, present, and future events. Information about an economic phenomenon that has value as an input to the processes used by capital providers to form their own expectations about the future.

Understandibility

Informed users perceive the significance of information. Quality of information that allows users to comprehend its meaning.

period of time elements

Investment by owners Distribution to owners Comprehensive income Revenue Expenses Gains Losses

increases ownership interest

Investments by Owners, Comprehensive Income (also, possible would be revenues and gains)

On July 1, 2025, Crowe Co. pays $15,000 to Zubin Insurance for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co., journalized the entry on July 1 and the adjusting entry on Dec 31

Jul 1, debit prepaid insurance 15,000 credit cash 15,000 Dec 31, debit insurance expense 2,500 credit prepaid insurance 2,500

Prepare Journal Entries May 1 B.D. Mehta invests $4,000 cash in exchange for common stock in a small wedding corporation.

May 1, Debit Cash 4,000 Credit Common Stock 4,000

Prepare journal entry May 13, Pays $400 to landlord for May rent

May 13, Debit Rent Expense 400 Credit Cash 400

prepare journal entry May 21, Bills Noble Corp. $500 for welding work done

May 21, Debit accounts receivable 500 Credit service revenue 500

Prepare Journal Entry May 3, Buys equipment on account for $1,100

May 3, Debit Equipment 1,100 Credit Accounts Payable 1,100

Basic Accounting Principles

Measurement principle: -historical cost principle -fair value principle Revenue Recognition Principle Expense Recognition Principle Full Disclosure Principle -Financial statements -Notes to the Financial Statements -Supplementary Information Cost Constraint

Emerging Issues Task Force Statements

Pronouncements issued by the EITF which examine emerging financial reporting issues and state how to account for new and unusual accounting transactions.

Financial Accounting Standards

Pronouncements issued by the FASB which are considered generally accepted accounting principles.

Financial Accounting Interpretations

Pronouncements issued by the FASB which represent modifications or extensions of existing standards.

Is it necessary that a trail balance be prepared periodically?

Not absolutely necessary but customary and desirable.

Expenses

Outflows or other using up of assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, performing services, or other activities that constitute the entity's ongoing major or central operations.

Sarbanes-Oxley Act of 2002

Passed by Congress in response to accounting scandals like Enron, Cendant, Sunbeam, Rite-Aid and WorldCom.

Assets

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Accounting Research Bulletins (ARBs)

Pronouncements issued by CAP dealing with a variety of timely accounting problems during the years 1939 to 1959

Accounting Research Bulletins (ARBs)

Pronouncements issued by CAP dealing with a variety of timely accounting problems during the years 1939 to 1959.

Fundamental accounting qualities

Relevance and Faithful representation

Equity

Residual interest in the assets of an entity that remains after deducting its liabilities.

Nominal Accounts

Revenue, expense, and dividend accounts; except for dividends, these accounts appear on the income statement.

Income statement items

Revenues Less: expenses Net income or Net Loss

When salaries and wages expense for the year is computed, why are beginning accrued salaries and wages subtracted from, and ending accrued salaries and wages added to, salaries and wages paid during the year?

Salaries and wages paid during the year will include the payment of any wages attributable to the prior year but unpaid at the end of the prior year. This amount is an expense of the prior year and not of the current year, and thus should be subtracted in determining salaries and wages expense. Similarly, salaries and wages paid during the year will not include any salaries and wages attributable to hours worked during the current year but not actually paid until the following year. This should be added in determining salaries and wages expense

Stockholders' Equity Accounts

Service revenue, salaries and wages expense, dividends, retained earnings, common stock

International Financial Reporting Standards (IFRS)

Standards created by the London-based International Accounting Standards Board (IASB) that along with GAAP are accepted for international use.

Financial Statements

Statements that reflect the collection, tabulation, and final summarization of the accounting data

APB Opinions

The APB's official pronouncements issued from 1959 through 1973 which were intended to be based mainly on research studies and be supported by reasons and analysis.

What is the difference between the Codification and the Codification Research system?

The FASB Accounting Standards Codification (Codification) is a compilation of all GAAP in one place. Its purpose is to integrate and synthesize existing GAAP, not to create new GAAP. It creates one level of GAAP which is considered authoritative. The FASB Codification Research Systems(CRS) is an online real-time database that provides easy access to the Codification. The Codification and the related CRS provide a topically organized structure that is subdivided into topics, subtopics, sections, and paragraphs

In what way is the SEC concerned about and supportive of accounting principles and standards?

The SEC has the power to prescribe, in whatever detail it desires, the accounting practices and principles to be employed by companies that fall within its jurisdiction. Because the SEC receives audited financial statements from nearly all companies that issue securities to the public or are listed on stock exchanges, it is greatly interested in the content, accuracy, and credibility of the statements. For many years, the SEC relied on the AICPA to regulate the profession and develop and enforce accounting principles. Lately, the SEC has assumed a more active role in the development of accounting standards, especially in the area of disclosure requirements. In December 1973, in ASR No. 150, the SEC said the FASB's statements would be presumed to carry substantial authoritative support and anything contrary to them to lack such support. It thereby supports the development of accounting principles in the private sector.

Verifiability

The ability to have information confirmed by independent persons.

Statement of cash flows

The financial statement which measures the cash provided and used by operating, investing, and financing activities during the period

Ledger

The book containing the accounts

Journal

The book of original entry where transactions and selected other events are initially recorded

Materiality

The constraint of determining if an item is important enough to likely influence the decision of a reasonably prudent investor or creditor.

Cost constraint

The constraint that states that information should be provided only if the benefits of providing such information outweigh the costs of providing it.

Income Statement

The financial statement which measures the results of operations during the period

Statement of retained earnings

The financial statement which reconciles the balance of the retained earnings account from the beginning to the end of the period

Closing entries

The formal process by which all nominal accounts are reduced to zero and the net income or net loss is determined and transferred to the owners' equity account

Due Process system of the FASB

Topics identified -> Preliminary Views: research and analysis conducted and preliminary views of pros and cons issued ->Public hearing -> Exposure Draft ->Accounting standards update, topic is now considered GAAP

If you had to explain or define GAAP, what essential characteristics would you include in your explanation?

The explanation should note that generally accepted accounting principles or standards have "substantial authoritative support." They consist of accounting practices, procedures, concepts ,and methods that are recognized by a large majority of practicing accountants as well as other members of the business and financial community. Statements issued by the Financial Accounting Standards Board constitute "substantial authoritative support."

Reliability

The extent that information is verifiable, is a faithful representation, and is reasonably free of error and bias.

Free from error

The extent to which information is accurate in representing the economic substance of a transaction

Balance Sheet

The financial statement that shows the financial condition of the enterprise at the end of the period

In January 2026, Janeway Inc. doubled the amount of its outstanding stock by selling on the market an additional 10,000 shares to finance an expansion of the business. You propose that this information be should by a footnote on the balance sheet as of December 31, 2025. The president objects, claiming that this sale took place after December 31, 2025, and therefore should not be shown. Explain your position.

The general guide followed with regard to the full disclosure principle is to disclose in the financial statements any facts of sufficient importance to influence the judgment of an informed reader. The fact that the amount of outstanding common stock doubled in January of the subsequent reporting period probably should be disclosed because such a situation is of importance to present stockholders. Even though the event occurred after December 31, 2025 (referred to as a subsequent event), it should be disclosed on the balance sheet as of December 31, 2025, in order to make adequate disclosure. (The major point that should be emphasized throughout the entire discussion on full disclosure is that there is normally no "black" or "white" but varying shades of grey and it takes experience and good judgment to arrive at an appropriate answer)

Debit

The left side of an account

What is the basic accounting problem created by the monetary assumption when there is significant inflation? What appears to be the FASB position on a stable monetary unit?

The monetary unit assumption assumes that the unit of measure (the dollar) remains reasonably stable so that dollars of different years can be added without any adjustment. When the value of the dollar fluctuates greatly over time, the monetary unit assumption loses its validity. The FASB in Concept No. 5 indicated that it expects the dollar unadjusted for inflation or deflation to be used to measure items recognized in financial statements. Only if circumstances change dramatically will the FASB consider a more stable measurement unit

American Institute of Certified Public Accountants (AICPA)

The national professional organization of practicing Certified Public Accountants.

Faithful representation

The numbers and descriptions represent what really existed or happened. Quality of information that assures users that information represents the economic phenomena that it purports to represent.

What is the primary objective of financial reporting?

The objective of financial reporting is to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity.

Financial Accounting Foundation

The organization that selects the members of the FASB and the FASAC, funds their activities, and generally oversees the FASB's activities.

Full disclosure principle

The principle that information should be provided if it is of sufficient importance to influence the judgment and decisions of an informed user.

Revenue Recognition Principle

The principle that revenue be recognized when a company satisfies its performance obligations.

Posting

The process of transferring the essential facts and figures from the book of original entry (journal) to the ledger accounts

Expense Recognition Principle

The recognition of expenses is related to revenues; "Let the expense follow the revenue."

Credit

The right side of an account

Accounting Standards Updates

These Updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC

Accounting Standards Updates

These Updates amend the Accounting Standards Codification, which represents the source of authoritative accounting standards, other than standards issued by the SEC.

Do the following events represent business transactions? a. A computer is purchased on account b. a customer returns merchandise and is given credit on account c. a prospective employee is interviewed d. the owner of the business withdraws cash from the business for personal use e. merchandise is ordered for delivery next moth

Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting records because a change in assets, liabilities, and/or owners'/stockholders' equity has been effected as a result of a transfer of values from one party to another. Transactions (c) and (e) are not business transactions because a transfer of values has not resulted, nor can the event be considered financial in nature and capable of being expressed in terms of money

A conceptual framework is a coherent system of interrelated objectives and fundamentals that can lead to consistent standards and that prescribes the nature, function, and limits of financial accounting and financial statements. T or F?

True

A worksheet completed through the adjusted trial balance column provides the information needed for preparation of the financial statements without reference to the ledger or other records. T or F?

True

Accounting rule-making that relies on a body of concepts will result in useful and consistence pronouncements. T or F?

True

Adjusting entries result from compliance with the revenue recognition and expense recognition principles. T or F?

True

An adjustment for salaries and wages expense, incurred but unpaid at year end, is an example of an accrued liability. T or F?

True

An entity perspective generally views companies as separate and distinct from the owners (present shareholders). T or F?

True

Bad debts are recorded in the period in which the sale was made to ensure that receivables are reported at their net realizable value. T or F?

True

Double-entry accounting is the process that leads to the basic equality in accounting expressed by the formula: assets = liabilities + stockholders' equity. T or F?

True

Financial accounting is the process that culminates in the preparation of financial reports on an enterprise and that are used by both internal and external parties. T or F?

True

GAAP is the term used to indicate the whole body of FASB authoritative literature. T or F?

True

Generally accepted accounting principles (GAAP) are defined, in part, as those principles that have substantial authoritative support. T or F?

True

Generally, confirmation of a sale to independent interests is used to indicate the point at which revenue is recognized. T or F?

True

In general, reversing entries are used for two types of adjusting entries: accrued revenues and accrued expenses. T or F?

True

trial balance

a list of accounts and their balances at a given time

chart of accounts

a list of all account names used to record transactions of a company

What is a performance obligation, and how is it used to determine when revenue should be recognized?

a promise to deliver a product or provide a service to a customer. The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. In the case of services, revenue is recognized when the services are performed. In the case of selling a product, the performance obligation is met when the product is delivered

What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts? a. Accounts Payable b. Expense accounts c. Revenue accounts d. Retained earnings account e. Cash

a. No change. b. Before closing, balances exist in these accounts; after closing, no balances exist. c. Before closing, balances exist in these accounts; after closing, no balances exist d. Before closing, a balance exists in this account exclusive of any dividends or the net income or net loss for the period; after closing, the balance is increased or decreased by the amount of net income or net loss and decreased by dividends declared. e. No change.

Name the accounts debited and credited for each of the following transactions: a. billing a customer for work done b. receipt of cash from customer on account c. purchase of office supplies on account d. purchase of 15 gallons of gasoline for the delivery truck for cash

a. debit accounts receivable, credit service revenue b. debit cash, credit accounts receivable c. debit supplies, credit accounts payable d. debit delivery expense, credit cash

Identify which qualitative characteristic of accounting information is best described in each item below. a. The annual reports of Best Buy Co. are audited by certified public accountants b. Black & Decker and Cannondale Corporation both use the FIFO cost flow assumption. c. Starbucks Corporation has used straight-line depreciation since it began operations. d. Motorola issues its quarterly reports immediately after each quarter ends

a. verifiability b. comparability c. comparability (consistency) d. timeliness

Economic consequences of accounting standard-setting means

accounting standards can have detrimental impacts on the wealth levels of the providers of financial information

Liability accounts

accounts payable, notes payable, salaries and wages payable, interest payable, accrued liabilities, unearned revenue

Accruals

accrued revenues and accrued expenses

GAAP is comprised of

any accounting guidance included in the FASB Codification

Items characterized by service potential or future economic benefit.

assets

Allocates expenses to revenues in the proper period.

expense recognition principle

accrued expenses

expenses incurred but not yet paid in cash or recorded

Prepaid expenses

expenses paid in cash before they are used or consumed

General purpose financial statements are prepared primarily for

external users

Neutrality is an ingredient of this fundamental quality of accounting information.

faithful representation

Ensures that all relevant financial information is reported.

full disclosure principle

Arises from peripheral or incidental transactions.

gains and losses

Rationale why plant assets are not reported at liquidation value.

going concern assumption

The authoritative status of the conceptual framework is as follows

it is used when there is no standard or interpretation related to the reporting issues under consideration

Briefly explain the meaning of decision-usefulness in the context of financial reporting

it provides information that is useful for making decisions (referred to as the decision-usefulness approach). When making these decisions, investors are interested in assessing the company's (1) ability to generate net cash inflows and (2) management's ability to protect and enhance the capital providers' investments. Financial reporting should therefore help investors assess the amounts, timing, and uncertainty of prospective cash inflows from dividends or interest, and the proceeds from the sale, redemption, or maturity of securities or loans. For investors to make these assessments, the economic resources of an enterprise, the claims to those resources, and the changes in them must be understood.

Obligation to transfer resources arising from a past transaction.

liabilities

Normal balance Credit accounts

liabilities, stockholders' equity accounts, revenue accounts

An item is not recorded because its effect on income would not change a decision.

materiality

Indicates that fair value changes subsequent to purchase are not recorded in the accounts

measurement principle (historical cost)

Assumes that the dollar is the "measuring stick" used to report on financial performance.

monetary unit assumption

Ignores the economic consequences of a standard or rule.

neutrality

real or nominal, balance sheet or income statement: salaries and wages expense

nominal, income statement

real or nominal, balance sheet or income statement: service revenue

nominal, income statement

Increases assets during a period through sale of product.

revenues

Arises from income statement activities that constitute the entity's ongoing major or central operations.

revenues and expenses

accrued revenues

revenues for services performed but not yet received in cash or recorded

Issuance of interim reports is an example of what enhancing quality of relevance?

timeliness

What is the objective of financial reporting?

to provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions about providing resources to the entity through equity investments and loans or other forms of credit. Information that is decision-useful to capital providers (investors) may also be useful to other users of financial reporting who are not investors.

Requires a high degree of consensus among individuals on a given measurement.

verifiability

The expectations gap is

what the public thinks accountants should do and what accountants think they can do

Selane Eatery operates a catering service specializing in business luncheons for large corporations. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service?

when a performance obligation is satisfied. In the case of services, revenue is recognized when the services are performed. Therefore, revenue for Selane Eatery should be recognized at the time the luncheon is served