Accounting: Brick 1
Which formula is used to calculate operating income? Revenue + Direct Operating Cost = Operating Income Indirect Operating Cost - Revenue = Operating Income Gross Income - Operating Expenses = Operating Income Gross Profit - Indirect Operating Cost = Operating Income
C — Gross Income - Operating Expenses = Operating Income.A company's operating income is, in other words, its income from core operations. Operating income is calculated by subtracting operating costs from gross income.
What is the minimum number of accounts that accounting entries can have? One Four Five Two
D — All accounting entries must contain at least two accounts: one that is debited and another that is credited.
Which is not classified as a current asset? Cash Product inventory Liquid assets Prepaid liabilities Property
E — Considering that current assets are expected to be converted to cash within a year, property, which is a long-term asset often held for multiple years, would not be classified as such.
When a company purchases property, plant, and equipment, how is it reflected on the statement of cash flows? As a source of cash in the "cash from investing activities" section As a source of cash in the "cash from financing activities" section. As a use of cash in the "cash from investing activities" section. As a use of cash in the "cash from operating activities" section.
C — Acquisitions of property, plant and equipment are uses of cash/cash equivalents and categorized as an investing activity. The operating activities section of the statement of cash flows captures the inflow/outflows from business operations, such as sales or labor expenses, rather than investments.
Which accounts are associated with cost of goods sold? Accrued interest Depreciation Dividends Inventory
D — Cost of goods sold is an interim step on the income statement and is calculated as: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold.
Which describes the double-declining balance depreciation method? Estimated salvage value is greater at the end of the assets' useful life than with straight-line depreciation. It yields reports of higher income in the early years and lower income later on. This method decreases the useful life of the asset and disposal costs by half. The depreciation expense is larger in the first few years and gets smaller as time goes on.
D — The depreciation expense is larger in the first few years and gets smaller as time goes on. Double-declining balance depreciation is an accelerated depreciation method that is used to offset an asset's increased maintenance costs with lower depreciation expenses throughout its lifetime. For example, in knowing that assets will have lower repair and maintenance expenses in their early years, companies allocate higher depreciation expenses to newer assets.
Unearned revenues are recorded on a company's balance sheet under which kind of account? Current asset Owners' or stockholders' equity Non-current asset Liability
D — Unearned revenues are incurred when businesses or individuals receive payment for a product or service that has yet to be delivered or provided. Until the item is delivered, these types of transactions are marked as liabilities.
After making a sale of $3,000, where $1,200 is paid in cash and $1,800 is sold on credit, how would a company go about updating its balance sheet? $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash $3,000 debit in retained earnings; $1,200 credit in cash; $1,800 credit in accounts receivable $1,800 debit in accounts payable; $1,200 debit in cash; $3,000 credit in retained earnings $1,200 credit in cash; $1,800 credit in accounts payable; $3,000 debit in retained earnings
A — $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash. Cash is classified as a current asset and therefore expected to be consumed, sold or exhausted within a year, so it's recorded on the balance sheet as a debit when it's received. When a customer makes a payment, cash is debited. Conversely, when a customer buys something on credit, the sale is documented in accounts receivable, where all funds owed to a company are accounted for. Retained earnings are a portion of the profits earned that are not used as dividends and are often reserved for reinvesting into the business.
The listing of all the financial accounts within a company's general ledger is called the _____. Chart of accounts Journal entry Balance sheet P&L statement
A — A chart of accounts helps companies break down all financial transactions made during a certain period into subcategories. That enables them to gain deeper insight into the profitability and effectiveness of various products, services or business units.
Which of the following is true? Accounts receivable are found in the current asset section of a balance sheet. Accounts receivable increase by credits. Accounts receivable are generated when a customer makes payments. Accounts receivable become more valuable over time.
A — Accounts receivable is a short-term asset included in the current asset section of a balance sheet and increases by debits. They come about when customer sales are made on credit, not cash. Accounts receivable become harder to collect, and therefore less valuable, as they age.
Which of the following account types increase by debits in double-entry accounting? Assets, Expenses, Losses Assets, Revenue, Gains Expenses, Liabilities, Losses Gains, Expenses, Liabilities
A — Assets, expenses and losses increase with debits. Revenue, liabilities and gains increase with credits.
A company that uses the cash basis of accounting will: Record revenue when it is collected. Record revenue when it is earned. Record revenue at the same time as accounts receivable. Record bad debt expense on the income statement.
A — Cash basis accounting records revenue when paid. Accrual accounting reflects revenue when it is earned. Accounts receivable and its related bad debt are part of accrual accounting only.
Which side of the ledger account are debits recorded on? Left Right Depends on the debit
A — Debits are recorded on the left side of the ledger account because they decrease equity, liability and revenue and increase expense or asset accounts.
What is the most-used method to amortize intangible assets on a company's financial statements? Straight-line method Sum of the years' digits method Double-declining balance method Units of production method
A — The straight-line method is the only GAAP-compliant method for amortizing intangible assets.
When are liabilities recorded under the accrual basis of accounting? When incurred When paid At the end of the fiscal year When bank accounts are reconciled
A — Under the accrual basis of accounting, liabilities are recorded in the fiscal period that they are incurred or committed, regardless of when paid.
Which organizations are involved in development of US Generally Accepted Accounting Principles (GAAP)? (Check all that apply.) Financial Accounting Standards Board (FASB) Government Accounting Standards Board (GASB) Securities and Exchange Commission (SEC) Federal Accounting Standards Advisory Board (FASAB)
A, B, C & D — All of the organizations listed are involved in development of financial accounting standards.
In a journal entry, a debit decreases which of the following accounts? Cash Accounts Payable Supplies Expense Both a and c
B — Accounts payable tracks the money businesses owe to their creditors, so when businesses begin to pay off their purchases, which are recorded as debits, the balance in accounts payable decreases.
Which financial statement is a report of a company's revenues and expenses during a certain time period? Statement of Changes in Equity Income Statement Statement Of Cash Flows
B — An income statement is a financial report that documents a company's earnings over a specific time period — yearly, quarterly or monthly — and records the expenses and costs associated with earning that revenue.
Are assets on the balance sheet recorded at their estimated fair market value? Yes No Sometimes; it's situational
B — Assets are recorded at their historical cost values, which means that they are documented at their original cost and time acquired.
What are the main sections on a balance sheet? Assets, liabilities, income Assets, liabilities, equity Assets, liabilities, expenses Assets, gains, revenue
B — Assets, liabilities and equity are found on the balance sheet. Revenue (or sales), expenses, gains, losses and net income (or earnings) are income statement accounts.
Which is true about time in accounting? Current liabilities are debts payable within 2 years. Balance sheets reflect a company's financial position at a certain point in time. The time value of money is a finance concept, not relevant in accounting. Accounts receivable are more easily collected as time passes.
B — Balance sheets are prepared "as of" a specified date. Current liabilities are due within the next 12 months. Time value of money, or net present value, is often used by accountants such as for lease accounting. Accounts receivable become less likely to be paid as they age.
Which is not an example of financing cash flow? Paying off a debt of $25,000 Investing in equipment worth $90,000 Paying $12,000 worth of dividends to shareholders Issuing $42,000 worth of shares
B — Cash flow is defined as the movement of cash in and out of a business, and cash flow from financing activities (CFF) — or cash flow financing — is a section of the cash flow statement that includes transactions involving debt, equity and dividends. The purchase of plant, property and equipment (PP&E) would fall under cash flow from investing.
Increasing an asset involves crediting the account. True False
B — Increasing an asset involves debiting the account, because assets and expenses have natural debit balances.
Which is the method of depreciation used for US tax returns that is not GAAP-compliant? Straight-line method Modified accelerated cost recovery systems Double-declining balance method Units of production method
B — The IRS requires the MACRS method for most fixed assets. MACRS is not GAAP-compliant because salvage values are ignored and because it relies on an IRS-determined table of useful lives that is inconsistent with GAAP principles.
Which of the following must a certified public accountant (CPA) have in-depth knowledge of to pass the CPA licensing exam? (Check all that apply.) Accounting software packages Auditing Derivatives International banking laws
B — The four sections of the CPA exam are Auditing and Attestation, Business Environment and Concepts, Financial Accounting and Reporting, and Regulation. While knowledge of accounting software, derivative financial instruments and international banking law are helpful, they are not mandatory for licensure.
What would the journal entry be for a company that takes out a five-year, $100,000 business loan? Debit $100,000 non-current asset, Credit $100,000 non-current liabilities Debit $100,000 current asset, Credit $100,000 non-current liabilities Debit $100,000 non-current liabilities, Credit $100,000 non-current assets Debit $100,000 current liabilities, Credit $100,000 current assets
B — The transaction increases cash, a current asset, via a debit. It also increases loans payable, which is a non-current liability because it is due in five years, via a credit.
Which of the following scenarios increases accounts payable? A customer fails to pay an invoice. A supplier delivers raw materials on credit. Office supplies are purchased with cash. None of the above
B — When a supplier delivers raw material a liability is incurred. Customer payments relate to accounts receivable, not accounts payable. Expenses paid with cash do not generate accounts payable because the payment is made concurrent with incurring the liability.
What is the result of the following transaction for Company A? Company A's customer is unable to pay for a previous credit sale in accordance with Company A's 90-day payment terms. The customer makes a promissory note to Company A that extends payment over a 24-month term including 5% interest. No result because the customer didn't pay. Accounts receivable increases because of the interest. A note receivable is recorded in non-current assets. Company A records the loan as a liability.
C — Company A records a note receivable from its customer. It is a non-current asset because the term is greater than 12 months. A non-paying customer would cause accounts receivable to be written off. Interest payments are not recorded in accounts receivable. Company A is the payee of the promissory note, not the debtor, and has no liability.
Which of these statements about accrual accounting is true? Revenue is recorded only when payments are received, while expenses are recognized when they're incurred. All revenue from prepayments should be recognized when the payment is received, while expenses accrue over the life of the obligation. If the business has provided the goods or services and can reasonably expect to receive cash, it can recognize the revenue in that period. The matching principle dictates that expenses should be recognized when they are incurred, regardless of when revenue is recognized.
C — If the business has provided the goods or services and can reasonably expect to receive cash, it can recognize the revenue in that period. The accrual concept requires that revenues and costs are recognized when they are earned or incurred, rather than when they are received in cash or paid. This method tends to provide companies with better and more comprehensive insights into their profitability and overall financial health.
Which of the following is not a core financial statement? The Income Statement Statement of Cash Flows The Trial Balance The Balance Sheet
C — Running a trial balance is an intermediary step in the financial close, not a core financial statement. Core financial statements are: the income statement, the balance sheet, statement of cash flows, statement of retained earnings and the notes to the financial statements.
Which one of these WILL NOT yield earnings before interest and taxes (EBIT)? Revenue - Cost of goods sold - Operating expenses Net income + Tax expense + Interest expense Sales + Taxes + Interest Gross profit - Operating expenses
C — Sales + Taxes + Interest.Earnings before interest and taxes (EBIT) is a business's net income before interest and taxes are deducted, and it's often used as a measure of operating profit. There are multiple ways to calculate EBIT; no matter which you use, the metric provides a look at a company's profitability regardless of its capital structure.
Which inventory valuation method reflects the most current market value for inventory on hand? Last-in-First-Out (LIFO) Average Costs First-in-First-Out (FIFO) Specific Identification
C — The FIFO method assumes that the oldest inventory is sold first, and inventory on hand at the end of a period is the newest. The newest purchases reflect the most current market values.
Which of the following statements is not true about intercompany accounting? Intercompany transactions are between two units within the same legal entity. Intercompany transactions are eliminated in consolidated parent financial statements. They can significantly impact taxes. Intercompany transactions are between different legal entities under the same parent control.
C — The FIFO method assumes that the oldest inventory is sold first, and inventory on hand at the end of a period is the newest. The newest purchases reflect the most current market values.
The income statement, which presents the results of operations, can be prepared in many forms including: Single Step Income Statement Condensed Income Statement Common Sized Income Statement All of the above
D — All are correct. A single step income statement has a section for revenue and expenses and only requires one subtraction to arrive at net income/loss. A condensed income statement only includes summary totals. Common sized income statements add a column to show the calculation of each line item as a percentage of revenue.
How are a company's financial statements used? For internal analysis For external negotiation For compliance All of the above
D — All are correct. Financial statements are used for internal analysis, like trending and calculating key performance indicators. External negotiations, such as applying for loans and credit cards, require financials statements. Compliance agencies, such as the Securities & Exchange Commission (SEC), require financial statements from public companies.