Accounting 300 Terms
Aurora Corporation operated without insurance coverage for the first month of operations. Then, on February 1, the company paid the $4,800 premium on a two-year insurance policy with benefits beginning on that date. The company uses the accrual basis. How much insurance expense will be reported on the company's income statement for their first year ended December 31?
$2,200 Explanation: The expense recognized is the amount of insurance that was used during the year. The premium payment of $4,800 divided by 24 months, results in a monthly premium of $200. Eleven months of premium were used (that is, expired) during 2018 (February through December). Premium of $200 per month × 11 months = $2,200 of insurance expense for the first year. Alternatively, multiply the total insurance premium by the fraction used. That fraction will equal the number of months the company was covered by insurance during the year divided by the total number of months covered by the premium. $4,800 × (11/24) = $2,200.
During its first year of operations, Mario Lupo formed Lupo Company as a corporation and personally invested $15,000 in the business in exchange for common stock. Lupo Company also paid dividends of $2,000. The company earned $35,000 of revenues and incurred $23,000 of expenses. At the end of the year, the company's equity totaled:
$25,000 Explanation: Assets = Liabilities + Equity. Assets = Liabilities + [Common Stock + Revenues − Dividends − Expenses] Equity = [Common Stock of $15,000 + Revenues of $35,000 − Dividends of $2,000 − Expenses of $23,000] Equity = $25,000
Aurora Corporation operated without insurance coverage for the first month of operations. Then, on February 1, the company paid the $4,800 premium on a two-year insurance policy with benefits beginning on that date. The company uses the cash basis. How much insurance expense will be reported on the company's income statement for their first year ended December 31?
$4,800 Explanation: The expense recognized is the full amount paid since the company is using the cash basis.
A company reports net sales of $600,000, cost of goods sold of $200,000, and net income of $100,000. Its gross profit equals:
$400,000 Explanation: Gross margin = net sales minus cost of goods sold. Gross margin = $600,000 − $200,000 = $400,000.
Order financial statements are prepared
1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows
Operating Cycle for a Merchandiser
1. purchases 2. merchandise inventory 3. credit sales 4. accounts receivable 5. cash collection
Carlin Company has current assets of $100,000, total assets of $1,000,000, current liabilities of $50,000, total liabilities of $250,000 and total equity of $750,000. What is the current ratio (rounded to the nearest decimal point)?
2.0 Explanation: Current Ratio = Current Assets / Current Liabilities Current Ratio = $100,000 / $50,000 = 2.0
Roselawn Company reported net sales of $90,000 and net income of $18,000 for the previous year ended December 31. The company reported net sales of $100,000 and net income of $20,000 for the current year ended December 31. Total assets amounted to $200,000 at December 31 of the previous year and $246,000 at December 31 of the current year. The company's profit margin for the current year ended December 31 (rounded to the nearest decimal point) is:
20.0% Explanation: Profit Margin = Net Income / Net Sales Return on Assets = $20,000 / $100,000 = 0.200 = 20.0%
Carlin Company has total assets of $1,000,000, liabilities of $400,000, and equity of $600,000. What is the debt ratio (rounded to a whole percent)?
40% Explanation: The ratio is calculated as follows: $400,000/$1,000,000 = 40%.
Rosalind Company reported revenues of $111,500, expenses of $92,545, and net income of $18,955 for the year. Assets totaled $200,000 at the beginning of the year and $246,000 at the end of the year. The company's return on assets for the year (round the percent to one decimal) is:
8.5% Explanation: Return on Assets = Net Income / Average Total Assets Return on Assets = $18,955 / [($200,000 + $246,000) / 2] = 0.085 = 8.5%
Which of the following are the ways that a company can finance the purchase of assets?
A company may finance growth by issuing additional shares of stock, called equity financing or through borrowing, called debt financing.
Accounting
Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.
An unclassified balance sheet:
An unclassified balance sheet broadly groups accounts into assets, liabilities, and equity. A classified balance sheet organizes assets and liabilities into subgroups, such as "current" and "long-term".
Return on assets measures a company's ability to generate an adequate return on its investment in:
Assets
Accounting Equation
Assets = Liabilities + Equity
Why is accounting important?
Businesses, regulatory agencies, and the general public use accounting information.
Accounting certifications includes:
CPA
The company's unclassified balance sheet reported the assets listed in the above table. The total current assets that would be reported on a classified balance sheet prepared for the company are:
Cash $12,000 + Merchandise inventory $6,000 + Short-term notes receivable $1,000 + Prepaid insurance $1,500 + Short-term investments $10,000 + Supplies $250 = Current assets of $30,750.
Identify which items belong on the statement of cash flows.
Cash flows from investing, operating and financing activities
Alex invested $30,000 in cash in his business. How will this entry be posted in the ledger accounts?
Cash is an asset account and Common Stock is an equity account. Since the Common Stock investment in the business increases the cash balance, we post $30,000 in the debit column of the Cash account and post $30,000 in the credit column of the Common Stock.
Identify which items belong on the balance sheet.
Cash, accounts receivable, and common stock
Which of the following statements are true about the chart of accounts?
Companies have complete flexibility in how they establish the account titles they use as long as they are sufficient to allow accurate recording of business transactions. The chart of accounts as well as the general ledger should follow the sequence in the financial statements. This allows a much more efficient means of accessing and reviewing the account information. It is also important to have accounts grouped by type so that financial data can be summarized as appropriate.
On December 31, the company paid a $200 invoice that they received in November for electricity.
Debit Accounts Payable $200 and Credit Cash $200
On December 31, the company provides consulting services and bills its customer $3,000 for these services.
Debit Accounts receivable $3,000 and Credit Consulting Revenue $3,000
On December 31, the company provides consulting services and receives cash of $5,000.
Debit Cash $5,000 and Credit Consulting Revenue $5,000
On January 1, the company purchased equipment that cost $10,000. The equipment is expected to be worth about (or has a salvage value of) $1,000 at the end of its useful life in five years. The company uses straight-line depreciation. It has not recorded any adjustments relating to this equipment during the current year.
Debit Depreciation expense $9,000 and credit accumulated depreciation $9,000
On December 31, the company purchases equipment for $10,000 and pays for the purchase in cash.
Debit Equipment $10,000 and Credit Cash $10,000
Roberto Company uses a perpetual inventory system. On December 1, the company purchased $3,300 of merchandise for cash.
Debit Merchandise Inventory $3,300 and Credit Cash $3,300 Explanation: The buyer uses a perpetual inventory system; therefore, the cost of the merchandise purchased for resale is recorded with a $3,300 debit to Merchandise Inventory, an asset account. Because cash is paid, it is reduced with a $3,300 credit.
On December 31, the company purchases supplies for $1,000 on credit.
Debit Supplies $1,000 and Credit Accounts Payable $1,000
On November 31, the company received an invoice from the electric company for $200. The company will pay the invoice in December.
Debit Utilities Expense $200 and Credit Accounts Payable $200
Identify which items belong on the statement of retained earnings.
Dividends, beginning retained earnings, ending retained earnings
The Sarbanes-Oxley Act requires the following?
Documentation and verification of internal controls.
Analyze the following transaction and select the best answer. The business pays $2,000 in cash to the landlord for office space rent.
Equity reduces by $2,000
Business Activities
External transactions-exchanges of value between two entities, which yield changes in the accounting equation Internal transactions -exchanges within an entity, which may or may not affect the accounting equation Events-happenings that affect the accounting equation and are reliably measured
The organization that is responsible for issuing International Financial Reporting Standards is the:
IASB
Which of the following is a proper reflection of the sequence of steps when deciding on the preferred course of action in making an ethical decision?
Identify ethical concerns; Analyze options; Make ethical decision.
Accounting Activities
Identifying- select transactions and events Recording-input, measure, and log Communicating- prepare, analyze, and interpret Explanation: Item #1: Preparing and entering a listing of checks issued is categorized as a Recording activity. Item #2: Using a cash register to enter sales is categorized as a Recording activity. Item #3: Entering a list of the sales invoices for the company's recordkeeper is an Identifying activity. Item #4: Interpreting information from financial reports is a Communicating activity. Item #5: Preparing financial statements is a Communicating activity.
The four basic financial statements are:
Income Statement, Statement of retained earnings, Balance sheet, and Statement of cash flows.
If a company's net income increased while its net sales remained constant, the company's profit margin would:
Increase Explanation: Profit Margin = Net Income / Net Sales An increase in net income while net sales remain constant would increase the company's profit margin since more net income would be generated per dollar of sales.
interim financial statements
Interim financial statements cover less than one year, usually spanning one-, three-, or six-month periods.
Recordkeeping. Recordkeeping, or bookkeeping
Is the recording of transactions and events, either manually or electronically.
GAAP (Generally Accepted Accounting Principles)
Item #1: Recording expenses falls under the expense recognition principle. Item #2: Recording revenue earned falls under the revenue recognition principle. Item #3: Reporting the details behind the financial statements falls under the full-disclosure principle. Item #4: Recording accounting information based on cost falls under the measurement principle.
External Users
Lenders, shareholders, regulators, customer groups, external auditors, customers
_____ includes opportunities in general accounting, cost accounting and internal auditing.
Managerial Accounting
Accounts appearing on the post closing trial balance
Only permanent accounts will appear on a post-closing trial balance which includes assets, liabilities, and equity accounts.
prepaid expenses reflect
Prepaid (deferred) expenses reflect transactions when cash is paid before the related expense is recognized.
The majority of accounting opportunities are in _____ accounting.
Private
Internal Users
Research and development managers, purchasing managers, purchasing managers, human resource managers, production managers, service managers, marketing managers
Identify which items belong on the income statement.
Revenue, expenses and net income
Why are posting references entered in the journal when entries are posted to the ledger accounts?
So we will know that the entry has been posted.
identify those that are likely to serve as source documents
Source documents can include a telephone bill, a sales ticket, an invoice from a supplier, and a bank statement.
order of the first five steps in the accounting cycle
Step 1: Analyze transactions Step 2: Journalize Step 3: Post Step 4: Prepare unadjusted trial balance Step 5: Adjust accounts
Four-Step Closing Process
Step 1: Close the revenue accounts. Step 2: Close the expense accounts. Step 3: Close the income summary account. Step 4: Close the dividends account.
Three step adjusting process
Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record an adjusting entry to get from step 1 to step 2.
The primary difference between the accrual basis and the cash basis of accounting is:
The accrual basis records revenues when services or products are delivered and records expenses when incurred and the cash basis records revenues when cash is received and records expenses when cash is paid.
On January 31, Jean Consulting Company receives a bill for that month's utilities in the amount of $500. Jean sets it aside because she does not plan to pay the bill until its due date of February 15. What effect, if any, does this event have on the company's accounting equation as of January 31?
The business must record this event, which would increase liabilities and decrease equity on January 31.
Select the correct reporting time period for each financial statement.
The income statement is prepared over a period of time. The balance sheet is prepared as of a period of time. The statement of retained earnings is prepared over a period of time. The statement of cash flows is prepared over a period of time.
Trial Balance
The trial balance is an accounting "tool" providing a clear visual means of establishing that debits and credits and that the general ledger is in balance. It is not a financial statement, nor does it serve the primary purpose of calculating net income. It is prepared prior to any of the financial statements.
If a credit balance in Unearned Revenue (a liability account) is incorrectly listed as a credit balance in the Sales Revenue account (a revenue account), is the trial balance still in balance?
Yes, the trial balance still balances. However, when preparing the financial statements liabilities would be understated and revenue would be overstated. Remember, just because debits equal credits does not ensure that account balances are correct!
Accounts Payable
a liability and is increased with a credit.
A record of the increases and decreases in a specific account is a(n):
account
Liability Accounts
accounts payable, income tax payable, salaries payable, and unearned revenue
adjusting entry affects
affects one or more income statement accounts and one or more balance sheet accounts (but never the Cash account)
An adjusted trial balance includes which of the following accounts:
all accounts and their balances
Accounts Receivable
an asset and increased with a credit.
Supplies
an asset and increased with a debit.
cash
an asset and is increased with a debit and decreased with a credit.
Dividends
an equity account and decreases equity, so it is increased with a debit.
Professional Fees Earned
an equity account and is increased with a credit.
common stock
an equity account and is increased with a credit.
Salaries Expense
an expense and is increased with a debit.
accounts payable
asset
A periodic inventory system updates the accounting records ____:
at the end of the period.
merchandise available for sale
beginning inventory + net purchases OR ending inventory + cost of goods sold
Asset Accounts
cash, accounts receivable, supplies (not supplies expense), prepaid items including prepaid insurance and prepaid advertising, equipment, and land
Dividends
classified as a dividend which belongs on the Statement of Retained Earnings.
Equity Accounts
common stock, dividends, revenues and expenses
General Ledger
contains all of the accounts, once they have been established in the chart of accounts, and then also the transaction and balance data pertaining to each account
Assume that the Accumulated Depreciation account has an unadjusted normal balance of $120,000. The company's list of adjusting entries includes one that debits Depreciation Expense and credits the Accumulated Depreciation account for $20,000. The adjusted balance in the Accumulated Depreciation account is a:
credit balance of $140,000 The unadjusted credit balance of $120,000 plus the credit of $20,000 from the related adjusted entry will result in an adjusted credit balance of $140,000.
The current ratio is computed as:
current assets divided by current liabilities
On November 1, the company rented space to another tenant. A check in the amount of $9,000, representing three months' rent in advance, was received from the tenant on that date. The payment was recorded with a credit to the Unearned Rent Revenue account. (on Dec 31st)
debit Unearned rent revenue $6,000 and credit rent revenue $6,000 ($9,000 × 2/3)
On Saturday, December 31, the company's owner provided ten hours of service to a customer. The company bills $100 per hour for services provided on weekends. Payment has not yet been received. The owner did not stop in the office on Saturday; as such, on December 31, the services were unbilled and unrecorded. Complete the necessary December 31 journal entry
debit accounts receivable $1,000 and credit services revenue $1,000 ($100 per hour × 10 hours)
The company's adjusted trial balance includes the following accounts balances: Cash, $15,000; Equipment, $85,000; Accumulated Depreciation, $25,000; Accounts Payable, $10,000; Retained earnings, $59,000; Dividends, $2,000; Fees Earned, $56,000; Depreciation Expense, $25,000; and Salaries Expense, $23,000. All accounts have normal balances.
debit fees earned $56,000 and credit income summary $56,000 Explanation: The $56,000 credit entry to Income Summary equals total revenues for the period.
The company employs a single employee who works all five weekdays and is paid on the following Monday. The employee works the entire week ending on Friday, December 30. The employee earns $800 per day. Complete the necessary December 31 journal entry
debit salaries expense $4,000 and credit salaries payable $4,000 ($800 per day × 5 days)
The company's adjusted trial balance includes the following accounts balances: Cash, $15,000; Equipment, $85,000; Accumulated Depreciation, $25,000; Accounts Payable, $10,000; Retained earnings, $59,000; Dividends, $2,000; Fees Earned, $56,000; Depreciation Expense, $25,000; and Salaries Expense, $23,000. All accounts have normal balances. Prepare the third closing entry
debit the income summary $8,000 and credit retained earnings $8,000
A perpetual inventory system updates the accounting records ____:
for each purchase and each sale.
Current Ratio
helps assess a company's ability to pay its debts in the near future and is computed by dividing current assets by current liabilities
The return on assets for your small business was 11.2% last year and 12.6% this year. Your return on assets:
improved
rent expense
is an expense which belongs on the Income Statement.
Examples of merchandising companies
jewelry, hardware, clothing
The process of recording transaction in a journal is called:
journalizing
Accounts Payable
liability
Unearned Revenue
liability
Annual reporting period
may cover a calendar year, a 52-week period, or 12 consecutive months.
Return on Assets
net income/average total assets=ROA
Gross Profit
net sales - cost of goods sold = gross profit Gross profit is commonly found on the income statements of merchandisers. Net income equals net sales minus cost of goods sold and the costs of other expenses. Gross profit is calculated by subtracting the cost of goods sold from net sales.
Consulting Revenue
s a revenue which belongs on the Income Statement.
Merchandise inventory includes:
the costs the merchandise, shipping costs, and any costs to prepare the inventory for sale. DOES NOT INCLUDE: Merchandise inventory does not include cost of goods sold. Cost of goods sold is the cost of the merchandise that has been sold. Merchandise inventory also does not include the costs to sell the inventory. This is a selling expense which is reported on the income statement.
Before the adjusting entry for a deferral of an expense, the expenses will be _____ and the assets will be _____.
understated; overstated
Revenue Recognition Principle
when the goods and services are provided to customers, a company will record revenue when the goods or services are provided to the customers and at an amount expected to be received from customers
