Accounting Final

What is a bond payable?

A bond payable is a long-term debt issued to multiple lenders called bondholders, usually in increments of $1,000 per bond.

What is a fiscal year? Why might companies choose to use a fiscal year that is not a calendar year?

A fiscal year is an accounting year of any 12 consecutive months. A company might choose to use a fiscal year that is not a calendar year, if the low point in business activity is other than December 31.

Which method of accounting (cash or accrual basis) is consistent with Generally Accepted Accounting Principles?

Accrual basis accounting is consistent with generally accepted accounting principles.

What does accumulated depreciation represent?

Accumulated depreciation is the sum of all depreciation expense recorded to date for a depreciable asset.

What are the steps used when analyzing a business transaction?

Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or decreases. Step 3: Determine if the accounting equation is in balance.

What does the going concern assumption mean for a business?

The going concern assumption assumes that the entity will remain in business for the foreseeable future and long enough to use existing resources for their intended purpose.

Plant assets are recorded at historical cost. What does the historical cost of a plant asset include?

The historical cost of a plant asset includes the purchase price plus taxes, purchase commissions, and all other amounts paid to ready the asset for its intended use.

In the recording of depreciation expense, which account is credited?

When recording depreciation expense, the Accumulated Depreciation account is credited.

What is a bank reconciliation?

A bank reconciliation compares and explains the difference between cash on the company's books and cash according to the bank's records on a specific date.

What is a corporation?

A corporation is a business organized under state law that is a separate legal entity.

What is freight out and how is it recorded by the seller?

Freight out expense is one in which the seller pays freight charges to ship goods to customers. Freight out is a delivery expense to the seller.

What is par value?

Par value is an arbitrary amount assigned by a company to a share of its stock.

How is net income calculated? Define revenues and expenses.

Revenues - Expenses = Net Income. Revenues are earnings resulting from delivering goods or services to customers. Expenses are the cost of selling goods or service.

How is the net cost of inventory calculated?

The net cost of inventory is calculated by taking the purchase cost of inventory less purchase returns and allowances less purchase discounts plus freight in.

Under the new revenue recognition standard, how is the sale of inventory recorded?

Under the new revenue recognition standard, the sale of inventory is recorded at the net amount, or the sales price less any applicable discount. Sales returns and allowances are also estimated and recorded.

What is a T-account? On which side is the debit? On which side is the credit? Where does the account name go on a T-account?

A T-account is a shortened form of each account in the ledger. The debit is on the left side, credit on the right side, and the account name is shown on top.

What does a ledger show? What's the difference between a ledger and the chart of accounts?

A chart of accounts and a ledger are similar in that they both list the account names and account numbers of the business. A ledger, though, provides more detail. It includes the increases and decreases of each account for a specific period and the balance of each account at a specific point in time.

Why would a company choose to issue bonds instead of issuing stock?

A company may issue bonds instead of stock because the interest on the bonds is tax deductible and dividends are not, and bonds do not affect the percentage of ownership of the corporation. In addition, earnings per share will increase with bonds.

What is a contra account?

A contra account is an account that is paired with and listed immediately after its related account in the chart of accounts and associated financial statement, and whose normal balance is the opposite of the balance of the related account.

What is a deferred expense? Provide an example.

A deferred expense is an advance payment of a future expense, and is considered an asset rather than an expense. When the prepayment is used up, the used portion of the asset becomes an expense via an adjusting entry. An example of a deferred expense is Prepaid Insurance.

When does a discount on bonds payable occur?

A discount on bonds payable occurs when a bond's issue price is less than the face value. This occurs because the stated rate of interest is less than the market rate of interest

What is a merchandiser, and what is the name of the merchandise that it sells?

A merchandiser is a business that sells merchandise, or goods, to customers. The merchandise that these types of businesses sell is called merchandise inventory.

Describe the multi-step income statement.

A multi-step income statement lists several important subtotals. In addition to net income (the bottom line), it also reports subtotals for gross profit and income from operations.

When does a premium on bonds payable occur?

A premium on bonds payable occurs when a bond's issue price is greater than the face value. This occurs because the stated rate of interest exceeds the market rate of interest.

What is a purchase return? How does a purchase allowance differ from a purchase return?

A purchase return is when businesses allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable. Purchase allowances are granted to the purchaser as an incentive to keep goods that are not "as ordered." Together, purchase returns and allowances decrease the buyer's cost of the inventory.

Describe the similarities and differences among the four different types of business entities discussed in the chapter.

A sole proprietorship has a single owner, terminates upon the owner's death or choice, the owner has personal liability for the business's debts, and it is not a separate tax entity. A partnership has two or more owners, terminates at partner's choice or death, the partners have personal liability, and it is not a separate tax entity. A corporation is a separate legal entity, has one or more owners, has indefinite life, the stockholders are not personally liable for the business's debts, and it is a separate tax entity. A limited-liability company has one or more members and each is only liable for his or her own actions, has an indefinite life, and is not a separate tax entity.

What is the difference between the trial balance and the balance sheet?

A trial balance verifies the equality of total debits and total credits of all accounts on the trial balance and is an internal document used only by employees of the company. The balance sheet, on the other hand, presents the business's accounting equation and is a financial statement that can be used by both internal and external users.

What is accounting?

Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. Accounting is the language of business.

When are adjusting entries completed, and what is their purpose?

Adjusting entries are completed at the end of the accounting period to record revenues in the period in which they are earned and expenses in the period in which they are incurred. Adjusting entries also update asset and liability accounts. Adjustments are needed to properly measure net income (loss) on the income statement and assets and liabilities on the balance sheet.

What is the process by which businesses spread the allocation of an intangible asset's cost over its useful life?

Amortization is the process by which businesses spread the allocation of an intangible asset's cost over its useful life.

What is an accrued expense? Provide an example.

An accrued expense is an expense that a company has incurred but not yet paid. For example, salaries expense is incurred by a company as employees work, even though the company might not pay the employees until a later period.

What is an accrued revenue? Provide an example.

An accrued revenue is a revenue that a company has earned but not yet collected in cash. For example, service revenue is earned by a company as it provides services to a customer, even though the company might not collect cash from the customer until a later period.

When is an adjusted trial balance prepared, and what is its purpose?

An adjusted trial balance is prepared after adjustments have been journalized and posted. An adjusted trial balance is a list of all of the accounts with their adjusted balances, and its purpose is to ensure that total debits equal total credits of all accounts. The adjusted trial balance is used to prepare the final financial statements.

What is an amortization schedule?

An amortization schedule details each loan payment's allocation between principal and interest and the beginning and ending loan balances.

What is an invoice?

An invoice is the seller's request for payment from the buyer. It is also called a bill.

What is the accounting equation? Briefly explain each of the three parts.

Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the business in the future. They are things of value that a business owns or has control of. Liabilities are debts that are owed to creditors. They are one source of claims against assets. Equity is the other source of claims against assets. Equity is the stockholders' claims against assets and is the amount of assets that is left over after the company has paid its liabilities. It represents the net worth of the corporation.

Identify which types of accounts have a normal debit balance and which types of accounts have a normal credit balance.

Assets, dividends, and expenses have a normal debit balance. Liabilities, common stock, and revenue have a normal credit balance.

How does authorized stock differ from outstanding stock?

Authorized stock is the maximum number of shares of stock that the corporate charter allows for the corporation to issue. Outstanding stock is issued stock in the hands of the stockholders.

How is book value calculated, and what does it represent?

Book value is a depreciable asset's cost minus accumulated depreciation. Book value represents the cost invested in the asset that the company has not yet expensed.

How do businesses control cash receipts over the counter?

Businesses control cash receipts over the counter by using a cash register. The cash register only opens after the clerk enters a transaction and it is recorded. A receipt is given to the customer. The cash register report of cash sales at the end of the day is compared to the cash in the drawer. All cash is deposited in the bank at the end of the day. These measures, coupled with oversight by a manager, discourage theft.

What does the word capitalize mean?

Capitalize means that an asset account was debited (increased) because the company acquired an asset. Capitalized assets, except for land, are depreciated over their useful lives.

What is the difference between cash basis accounting and accrual basis accounting?

Cash basis accounting records revenues only when cash is received and expenses only when cash is paid. Accrual basis accounting records revenues when earned and expenses when incurred.

What are two certifications available for accountants? Briefly explain each certification.

Certified Public Accountants (CPAs) are licensed professional accountants who serve the general public. They work for public accounting firms, businesses, government, or educational institutions. To be certified they must meet educational and/or experience requirements and pass an exam. Certified Management Accountants (CMAs) specialize in accounting and financial management knowledge. They work for a single company.

List three characteristics of a corporation.

Characteristics of a corporation are the following (students are required to list three): Is a separate legal entity Has one or more owners No personal stockholder liability for the debts of the corporation Does not allow stockholders to bind the business to a contract Has an indefinite life Is a separate taxable entity Allows for capital accumulation

What is the closing process?

Closing the books (often referred to as the closing process) consists of journalizing and posting the closing entries in order to get the accounts ready for the next period. The closing process zeroes out all revenue accounts and all expense accounts in order to measure each period's net income separately from all other periods. The closing process also zeroes out the dividends account. In addition, the closing process updates the Retained Earnings account balance for net income or loss during the period and any dividends paid to stockholders.

What are some common controls used with a bank account?

Common controls used with a bank account are the use of a signature card, deposit tickets, checks, bank statements, and bank reconciliations.

What is the purpose of the chart of accounts? Explain the numbering typically associated with the accounts.

Companies need a way to organize their accounts so they use a chart of accounts. Accounts starting with 1 are usually Assets, 2 - Liabilities, 3 - Equity, 4 - Revenues, and 5 - Expenses. The second and third digits in account numbers indicate where the account fits within the category.

What is the goal of conservatism?

Conservatism in accounting means exercising caution in reporting items in the financial statements. A company should report the least favorable figures in the financial statements when two or more possible options are presented. The goal of conservatism is to report realistic figures and to never overstate assets or net income.

What is Cost of Goods Sold (COGS), and where is it reported?

Cost of Goods Sold is the cost of merchandise that has been sold to the customer. It is shown on the income statement as an expense.

When are credits increases? When are credits decreases?

Credits are increases for liabilities, common stock, and revenue. Credits are decreases for assets, dividends, and expenses.

What is a current liability? Provide some examples of current liabilities.

Current liabilities must be paid with cash or with goods and services within one year or within the entity's operating cycle if the cycle is longer than a year. Examples of current liabilities include: Accounts Payable, Notes Payable due within one year, Salaries Payable, Interest Payable, Sales Tax Payable, Income Tax Payable and Unearned Revenue.

Identify two asset categories on the classified balance sheet, and give examples of each category.

Current: Accounts Payable, Salaries Payable, Interest Payable. Long-term: Mortgage Payable, Notes Payable.

Identify two asset categories on the classified balance sheet, and give examples of each category.

Current: Cash, Accounts Receivable, Office Supplies. Property, Plant, and Equipment: Equipment, Land, Buildings.

When are debits increases? When are debits decreases?

Debits are increases for assets, dividends, and expenses. Debits are decreases for liabilities, common stock, and revenue.

What is a deferred revenue? Provide an example.

Deferred revenue is a liability created when a company collects cash from customers in advance of doing work. For example, an example of a deferred revenue is the collection of cash for services to be provided by the company in the future.

What is depreciation? Define useful life, residual value, and depreciable cost.

Depreciation is the allocation of a plant asset's cost to expense over its useful life. Depreciation matches the expense against the revenue generated from using the asset to measure net income. Useful life is the length of the service period expected from an asset. Residual value is the expected value of a depreciable asset at the end of its useful life. Depreciable cost is the cost of a plant asset minus its estimated residual value.

How is discarding of a plant asset different from selling a plant asset?

Discarding of plant assets involves disposing of the asset for no cash. Selling an asset involves receiving cash in exchange for the asset.

What type of account is Discount on Bonds Payable? What is its normal balance? Is it added to or subtracted from the Bonds Payable account to determine the carrying amount?

Discount on Bonds Payable is a contra account to Bonds Payable. The normal balance of the Discount on Bonds Payable is a debit, and it is subtracted from the Bonds Payable account to determine the carrying amount.

List some examples of timing differences, and for each difference, determine if it would affect the book side of the reconciliation or the bank side of the reconciliation

Examples of timing differences are: Deposits in transit―affect the bank side Outstanding Checks―affect the bank side Electronic funds transfer―affect the book side

Describe FOB shipping point and FOB destination. When does the buyer take ownership of the goods, and who typically pays the freight?

FOB shipping point means the buyer takes ownership (title) to the goods after the goods leave the seller's place of business(shipping point). In this case, the buyer (owner of the goods while in transit) also pays the freight. FOB destination means the buyer takes ownership (title) to the goods at the delivery destination point. In this case, the seller (owner of the goods while in transit) usually pays the freight.

Briefly describe the two major fields of accounting.

Financial accounting provides information for external decision makers, such as outside investors, lenders, customers, and the federal government. Managerial accounting focuses on information for internal decision makers, such as the company's managers and employees.

How is gain or loss determined when disposing of plant assets? What situation constitutes a gain? What situation constitutes a loss?

Gain or loss is determined by comparing the cash received and the market value of any other assets received with the book value of the plant asset disposed of. A gain occurs when the cash received and the market value of any other assets received is greater than the book value of the disposed plant asset. A loss occurs when the cash received and the market value of any other assets received is less than the book value of the disposed plant asset.

What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at the end of the year?

Goodwill is the excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities). Goodwill is the value paid above the net worth of the company's assets and liabilities. Goodwill is not amortized. Instead, the acquiring company measures the fair value of its goodwill each year. If the goodwill has increased in value, there is nothing to record. But if goodwill's value has decreased, then the company records an impairment loss and writes the goodwill down.

What is the difference between gross pay and net pay?

Gross pay is the total amount of salary, wages, commissions, and bonuses earned by the employee during a pay period, before taxes or any other deductions. Gross pay is an expense to the employer. Net pay is the amount the employee gets to keep. Net pay equals gross pay minus all deductions paid by the employee such as income tax withheld.

How is gross profit calculated, and what does it represent?

Gross profit is calculated as net Sales Revenue minus Cost of Goods Sold and it represents the mark-up on the merchandise inventory. It is the extra amount the company receives from the customer over what the company paid to the vendor.

.If a business had a net loss for the year, what would be the closing entry to close Income Summary and transfer the net loss to the Retained Earnings account?

If a business has a net loss, the closing entry to close Income Summary would be a debit to Retained Earnings and a credit to Income Summary.

If an accrued expense is not recorded at the end of the year, what is the impact on the financial statements?

If an accrued expense is not recorded at the end of the year, the financial statements will be inaccurate. On the balance sheet, liabilities will be understated and equity will be overstated. On the income statement, expenses will be understated (thus net income will be overstated).

If total debits equal total credits on the trial balance, is the trial balance error-free? Explain your answer.

If total debits equal total credits on the trial balance, it does not mean that the trial balance is error-free. An incorrect amount could have been used, an entry could have been completely missed, or the wrong account title could have been debited or credited

What is a classified balance sheet?

In a classified balance sheet, each asset and each liability is classified into specific categories. Assets are classified as current assets; long-term investments; property, plant, and equipment; and intangible assets. Liabilities are classified as either current or long-term liabilities.

List the four financial statements. Briefly describe each statement.

Income Statement - Shows the difference between an entity's revenues and expenses and reports the net income or net loss for a specific period. Statement of Retained Earnings - Shows the changes in retained earnings for a specific period including net income (loss) and dividends. Balance Sheet - Shows the assets, liabilities, and stockholders' equity of the business as of a specific date. Statement of Cash Flows - Shows a business's cash receipts and cash payments for a specific period.

Describe the various types of individuals who use accounting information and how they use that information to make important decisions.

Individuals use accounting information to help them manage their money, evaluate a new job, and better decide whether they can afford to make a new purchase. Business owners use accounting information to set goals, measure progress toward those goals, and make adjustments when needed. Investors use accounting information to help them decide whether or not a company is a good investment and once they have invested, they use a company's financial statements to analyze how their investment is performing. Creditors use accounting information to decide whether to lend money to a business and to evaluate a company's ability to make the loan payments. Taxing authorities use accounting information to calculate the amount of income tax that a company has to pay.

What is an intangible asset? Provide some examples.

Intangible assets are assets that have no physical form. Instead, these assets convey special rights from patents, copyrights, trademarks, and other creative works.

What is the difference between an internal auditor and external auditor?

Internal auditors are employees of the business who ensure that the company's employees are following company policies, that the company is meeting legal requirements, and that operations are running efficiently. External auditors are outside accountants, completely independent of the business, who monitor the controls to ensure the financial statements are presented fairly in accordance with GAAP.

What is internal control?

Internal control is the organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records.

List internal control procedures related to e-commerce.

Internal control procedures related to e-commerce are encryption and firewalls.

What is inventory shrinkage? Describe the adjusting entry that would be recorded to account for inventory shrinkage.

Inventory shrinkage is the loss of inventory that occurs because of theft, damage, and errors. The adjusting entry for shrinkage would be a debit to Cost of Goods Sold and credit to Merchandise Inventory.

What types of transactions are reported in the non-cash investing and financing activities section of the statement of cash flows?

Investing and financing transactions that do not involve cash are called non-cash investing and financing activities. Examples of these non-cash investing and financing activities include issuing stock in exchange for plant assets, retirement of debt by issuing stock, or purchasing plant assets with long-term notes payable.

How do land improvements differ from land?

Land improvements are depreciable improvements to land, such as fencing, sprinklers, paving, signs, and lighting. Land is not depreciated.

What are some limitations of internal controls?

Limitations to internal controls relate to cost and benefit. The better the controls, the more they can cost, so a company needs to determine the best balance of cost and benefit. It can also be difficult for a business to prevent collusion―when two or more people work together to circumvent internal controls and defraud the company.

What does liquidity mean?

Liquidity measures how quickly and easily an account can be converted to cash, because cash is the most liquid asset.

Discuss some measures that should be taken to maintain control over merchandise inventory.

Maintaining goods controls over merchandise inventory is very important for a merchandiser. Good controls ensure that inventory purchases and sales are properly authorized and accounted for by the accounting system. This can be accomplished by taking the following measures: Ensure merchandise inventory is not purchased without proper authorization, including purchasing only from approved vendors and within acceptable dollar ranges. After inventory is purchased, the order should be tracked and properly documented when received. At time of delivery, a count of inventory received should be completed and each item should be examined for damage. Damaged inventory should be properly recorded and then should be used, disposed of, or returned to the vendor. A physical count of inventory should be completed once a year to track inventory shrinkage due to theft, damage, and errors. When sales are made, the inventory sold should be properly recorded and removed from the inventory count. This will reduce the likelihood of stockouts.

What financial statement is merchandise inventory reported on, and in what section?

Merchandise inventory is shown as a current asset on the Balance Sheet.

What are the two types of merchandisers? How do they differ?

Merchandisers are often identified as either wholesalers or retailers. A wholesaler is a merchandiser that buys goods from a manufacturer and then sells them to retailers. A retailer buys merchandise either from a manufacturer or a wholesaler and then sells those goods to customers.

What is a mortgage payable?

Mortgages payable is a long-term debt that is backed with a security interest in specific property.

What is a natural resource? What is the process by which businesses spread the allocation of a natural resource's cost over its usage?

Natural resources are assets that come from the earth that are extracted or cut down. Examples include iron ore, oil, natural gas, diamonds, coal, and timber. Depletion is the process by which businesses spread the allocation of a natural resource's cost over its usage.

Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?

Once the bank reconciliation is complete, all items that affect the book side of the reconciliation need to be recorded with journal entries. This ensures the cash balance agrees with the reconciled amount. This also updates the Cash account for unrecorded transactions.

What types of accounts are listed on the post-closing trial balance?

Only assets, liabilities, and stockholders' equity accounts including the Common Stock and Retained Earnings accounts (permanent accounts) appear on the post-closing trial balance.

What are the four parts of a journal entry?

Part 1: Date of the transaction. Part 2: Debit account name and dollar amount. Part 3: Credit account name and dollar amount. The credit account name is indented. Part 4: Brief explanation.

How does preferred stock differ from common stock?

Preferred stock gives its owners certain advantages over common stock. It receives dividend preference over common stockholders. It also receives assets before common stockholders if the corporation liquidates.

What type of account is Premium on Bonds Payable? What is its normal balance? Is it added to or subtracted from the Bonds Payable account to determine the carrying amount?

Premium on Bonds Payable is an adjunct account to Bonds Payable. The normal balance of the Premium on Bonds Payable is a credit, and it is added to the Bonds Payable account to determine the carrying amount.

What financial statement are property, plant, and equipment reported on, and how?

Property, plant and equipment are reported at book value on the balance sheet. Companies may choose to report PP&E as a single amount, with a note to the financial statements that provides detailed information, or companies may provide detailed information on the face of the statement. The cost of the asset and the related accumulated depreciation should be disclosed.

Define property, plant, and equipment. Provide some examples.

Property, plant, and equipment are long-lived, tangible assets used in the operation of a business. Examples include land, buildings, equipment, furniture, and automobiles.

How does retained earnings increase? What are the two ways that retained earnings decreases?

Retained earnings increases with revenues. Retained earnings decreases with expenses and dividends.

How is sales tax recorded? Is it considered an expense of a business? Why or why not?

Sales tax is recorded as a liability when it is charged to the customer; it is usually calculated as a percentage of the amount of the sale. It is not considered an expense to the business, but a current liability. Companies collect the sales tax and then forward it to the state at regular intervals.

What is separation of duties?

Separation of duties limits fraud and promotes the accuracy of the accounting records by dividing responsibility between two or more people. The two main areas of separation are separating operations from accounting and separating the custody of assets from accounting.

What do short-term notes payable represent?

Short-term notes payable represent a written promise by the business to pay a debt, usually involving interest, within one year or less.

What are source documents? Provide examples of source documents that a business might use.

Source documents provide the evidence and data for accounting transactions. Examples of source documents a business would have are: bank deposit slips, purchase invoices, bank checks, and sales invoices

Explain the five steps in journalizing and posting transactions.

Step 1: Identify the accounts and the account type. You need this information before you can complete the next step. Step 2: Decide if each account increases or decreases, then apply the rules of debits and credits. Reviewing the rules of debits and credits, we use the accounting equation to help determine debits and credits for each account. Step 3: Record transactions in the journal using journal entries. Step 4: Post the journal entry to the ledger. When journal entries are posted from the journal to the ledger, the dollar amount is transferred from the debit and credit columns to the specific accounts in the ledger. The date on the journal entry should also be transferred to the accounts in the ledger. Step 5: Determine whether the accounting equation is in balance. After each entry the accounting equation should always be in balance.

What are the steps in the closing process?

Step 1: Make the revenue accounts equal zero via the Income Summary account. This closing entry transfers total revenues to the credit side of the Income Summary account. Step 2: Make expense accounts equal zero via the Income Summary account. This closing entry transfers total expenses to the debit side of the Income Summary account. Step 3: Make the Income Summary account equal zero via the Retained Earnings account. This closing entry transfers net income (or net loss) to the Retained Earnings account. Step 4: Make the Dividends account equal zero via the Retained Earnings account. This entry transfers the dividends to the debit side of the Retained Earnings account.

For each account listed, identify whether the account is a temporary account (T) or a permanent account (P). a. Rent Expense b. Prepaid Rent c. Equipment d. Common Stock e. Salaries Payable f. Dividends g. Service Revenue h. Supplies Expense i. Office Supplies

T P P P P T T T P

What are temporary accounts? Are temporary accounts closed in the closing process?

Temporary accounts (also known as nominal accounts) are accounts that relate to a particular accounting period and are closed at the end of that period. All temporary accounts (dividends, revenues, Income Summary and expenses) are closed (zeroed).

What is the role of the Financial Accounting Standards Board (FASB)?

The FASB oversees the creation and governance of accounting standards. They work with governmental regulatory agencies, congressionally created groups, and private groups.

Explain the role of the International Accounting Standards Board (IASB) in relation to International Financial Reporting Standards (IFRS).

The IASB is the organization that develops and creates IFRS which are a set of global accounting standards that would be used around the world.

How is the Income Summary account used? Is it a temporary or permanent account?

The Income Summary account summarizes the net income (or net loss) for the period by collecting the sum of all the expenses (a debit) and the sum of all the revenues (a credit). The Income Summary account is like a temporary "holding tank" that shows the amount of net income or net loss of the current period. Its balance—net income or net loss—is then transferred (closed) to the Retained Earnings account (the final account in the closing process). Income Summary is a temporary account.

What account is debited when recording a purchase of inventory when using the perpetual inventory system?

The Merchandise Inventory account is debited when recording the purchase of inventory using the perpetual inventory system.

How does the Sarbanes-Oxley Act relate to internal controls?

The Sarbanes-Oxley Act requires public companies to issue an internal control report, which is a report by management describing its responsibility for and the adequacy of internal controls over financial reporting. Additionally, an outside auditor must evaluate the client's internal controls and report on the internal controls as part of the audit report.

What account is used to record the premium when issuing common stock? What type of account is this?

The account used to record the premium when issuing common stock is the Paid-In Capital in Excess of Par—Common. It is an equity account.

What does the balance sheet report?

The balance sheet reports assets, liabilities, and stockholders' equity as of the last day of the period.

What is the carrying amount of a bond?

The carrying amount of a bond is the bond payable minus the current balance in the discount account or plus the current balance in the premium account.

Which principle states that businesses should use the same accounting methods and procedures from period to period?

The consistency principle states that businesses should use the same accounting methods and procedures from period to period.

What would the credit terms of "2/10, n/EOM" mean?

The credit terms "2/10, n/EOM" means that the purchaser can deduct 2% from the total bill excluding freight if the company pays within 10 days of the invoice date. Otherwise the full amount is due by the end of the month.

Where is the current portion of notes payable reported on the balance sheet?

The current portion of notes payable is reported in the current liability section of the balance sheet.

What does the disclosure principle require?

The disclosure principle requires that a company must report enough information in its financial statements for outsiders to make knowledgeable decisions about the company.

Which concept states that accounting information should be complete, neutral, and free from material error?

The faithful representation concept states that accounting information should be complete, neutral, and free from material error.

What document are financial statements prepared from?

The financial statements are prepared from the adjusted trial balance or worksheet.

Why are financial statements prepared in a specific order? What is that order?

The financial statements are prepared in a specific order because net income from the income statement is used on the statement of retained earrings to determine ending retained earnings. Ending retained earnings is then transferred to the balance sheet to determine total stockholders' equity. The income statement is prepared first, then the statement of retained earnings, and then the balance sheet.

What are the five components of internal control? Briefly explain each component.

The five components of internal control are: control procedures, risk assessment, information system, monitoring of controls, and environment. Control procedures are designed to ensure that the business's goals are achieved. The company's business risk, as well as the risk over individual accounts, must be assessed. The higher the risk, the more controls must be in place to safeguard the company's assets. Information system controls must be in place to ensure appropriate authorizations and approvals are used and that accurate information is produced. Monitoring of controls is performed by both internal and external auditors to determine whether the company and employees are following company policies and that operations are running efficiently. The environment is the "tone at the top" of the business. Members of management must behave honorably to set a good example for company employees.

What are the four basic rights of stockholders?

The four basic rights of a stockholder are to do the following: Participate in management by voting on corporate matters. Receive a proportionate part of any dividend that is declared and paid. Receive a proportionate share of any assets remaining after the corporation pays its debts and liquidates. Maintain their proportionate ownership in the corporation (a preemptive right).

Under a perpetual inventory system, what are the four inventory costing methods and how does each method determine ending merchandise inventory and cost of goods sold?

The four inventory costing methods are specific identification, FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted-average. The specific identification method uses the specific cost of each unit of inventory to determine cost of goods sold and ending merchandise inventory. The FIFO method assumes that the first costs into merchandise inventory are the first costs out to cost of goods sold. Ending merchandise inventory is based on the costs of the most recent purchases. The LIFO method assumes that the last costs into merchandise inventory are the first costs out to cost of goods sold. This method leaves the oldest costs—those of beginning inventory and the earliest purchases of the period—in ending merchandise inventory.

What are the four steps involved in the closing process for a merchandising company?

The four-step closing process for a merchandising company are: Step 1: Make the revenue accounts equal zero via the Income Summary account. Step 2: Make expense accounts equal zero via the Income Summary account. Step 3: Make the Income Summary account equal zero via the Retained Earnings account. Step 4: Make the Dividends account equal zero via the Retained Earnings Account.

Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the organization currently responsible for the creation and governance of these standards.

The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule book and is currently created and governed by the FASB. Investors and lenders must have information that is relevant and has faithful representation in order to make decisions and GAAP provides the framework for this financial reporting.

What does the income statement report?

The income statement reports revenues and expenses and calculates net income or net loss for the time period.

What is the journal entry to retire bonds at maturity?

The journal entry to retire bonds at maturity is a debit to Bonds Payable and a credit to Cash.

A business purchases an acre of land for $5,000. The current market value is $5,550, and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and which accounting principle supports your answer?

The land should be recorded at $5,000. The cost principle states that assets should be recorded at their historical cost.

What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?

The long-term asset accounts must be evaluated when completing the investing activities section of the statement of cash flows.

What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?

The long-term liability accounts and the equity accounts must be evaluated when completing the financing activities section of the statement of cash flows.

Discuss the materiality concept. Is the dollar amount that is material the same for a company that has annual sales of $10,000 compared with a company that has annual sales of $1,000,000?

The materiality concept states that a company must perform strictly proper accounting only for significant items. Information is significant—or, in accounting terms, material—when it would cause someone to change a decision. The amount that is material for a company with annual sales of $10,000 is not the same as the amount that is material for a company with annual sales of $1,000,000. For example, $1,000 is 10% of $10,000 but is only 0.1% of $1,000,000. Thus, $1,000 is material for a company with annual sales of $10,000 but not for a company with annual sales of $1,000,000.

Financial statements in the United States are reported in U.S. dollars. What assumption supports this statement?

The monetary unit assumption states that items on the financial statements should be measured in terms of a monetary unit.

What should the net change in cash section of the statement of cash flows always reconcile with?

The net change in the cash section of the statement of cash flows reconciles the statement of cash flows. It is computed by combining the cash provided for or used by operating, investing, and financing activities. This amount should equal the change in cash on the balance sheet.

If a business had a net loss for the year, where would the net loss be reported on the worksheet

The net loss amount should be entered in the credit column of the income statement (to balance out) and in the debit column of the balance sheet (to balance out).

Describe the operating cycle of a merchandiser.

The operating cycle of a merchandiser is as follows: It begins when the company purchases inventory from a vendor, the company then sells the inventory to a customer, and finally, the company collects cash from customers.

What are permanent accounts? Are permanent accounts closed in the closing process?

The permanent accounts (also known as real accounts)—the assets, liabilities, common stock and retained earnings—are not closed at the end of the period. Permanent account balances are carried forward into the next time period. All accounts on the balance sheet are permanent accounts.

Coltrane Company has a $5,000 note payable that is paid in $1,000 installments over five years. How would the portion that must be paid within the next year be reported on the balance sheet?

The principal amount that will be paid within one year will be reported in the current liabilities as current portion of notes payable.

What is the process of allocating the cost of a plant asset over its useful life called?

The process of allocating the cost of a plant asset over its useful life is called depreciation.

Describe the single-step income statement.

The single-step income statement is the income statement format that groups all revenues together and all expenses together without calculating other subtotals.

What is the difference between the stated interest rate and the market interest rate?

The stated interest rate is the interest rate that determines the amount of cash interest the borrower pays and the investor receives each year. The stated rate is the rate of interest actually designated on the face of a bond. The market interest rate is the rate that investors demand to earn for loaning their money. The market interest rate varies constantly.

How does the statement of cash flows help users of financial statements?

The statement of cash flows helps users do the following: Predict future cash flows. Evaluate management decisions. Predict ability to pay debts and dividends.

What does the statement of cash flows report?

The statement of cash flows reports on a business's cash receipts and cash payments for a specific period.

What does the statement of retained earnings show?

The statement of retained earnings shows how retained earnings changed during the period due to net income (or net loss) and dividends.

List the steps of the accounting cycle.

The steps of the accounting cycle are: Step 1. Start with beginning account balances. Step 2. Analyze and journalize transactions as they occur. Step 3. Post journal entries to the accounts. Step 4. Compute the unadjusted balance in each account and prepare the unadjusted trial balance. Step 5. Enter the unadjusted trial balance on the worksheet and complete the worksheet (optional). Step 6. Journalize and post adjusting entries. Step 7. Prepare the adjusted trial balance. Step 8. Prepare the financial statements. Step 9. Journalize and post the closing entries. Step 10. Prepare the post-closing trial balance.

In regard to a bond discount or premium, what is the straight-line amortization method?

The straight-line amortization method allocates an equal amount of bond discount or premium to each interest period over the life of the bond. The calculation is the amount of the discount or premium over the number of interest payments over the bond's term.

Describe the three basic types of cash flow activities.

The three basic types of cash flow activities are: operating, investing, and financing. Operating activities are ones that create revenue or expenses in the entity's business. Investing activities increase or decrease long-term assets. Financing activities include cash inflows and outflows involved with long-term liabilities and equity.

Identify the three categories of the accounting equation, and list at least four accounts associated with each category.

The three categories of the accounting equation are assets, liabilities, and equity. Assets include Cash, Accounts Receivable, Notes Receivable, Prepaid Expenses, Land, Building, Equipment, Furniture, and Fixtures. Liabilities include Accounts Payable, Notes Payable, Accrued Liability, and Unearned Revenue. Equity includes Common Stock, Dividends, Revenue, and Expenses.

What are the three main characteristics of liabilities?

The three main characteristics of liabilities are: They occur because of a past transaction or event. They create a present obligation for future payment of cash or services. They are an unavoidable obligation.

What are the three relevant dates involving cash dividends? Describe each.

The three relevant dates involving cash dividends are the declaration date, date of record, and payment date. On the declaration date the board of directors announces the intention to pay the dividend. The declaration of a cash dividend creates an obligation (liability) for the corporation. Date of record is the date the corporation records the names of stockholders that receive dividend checks. Payment of the dividend usually follows the record date by a week or two.

Which accounting concept or principle requires companies to divide their activities into small time segments such as months, quarters, or years?

The time period concept requires companies to divide its activities into small time segments such as months, quarters, or years.

If stock is issued for assets other than cash, describe the recording of this transaction.

The transaction is recorded at the market value of the stock issued or the market value of the assets received, whichever is more clearly determinable.

What is the purpose of the trial balance?

The trial balance is used to prove the equality of total debits and total credits of all accounts in the ledger; it is also used to prepare the financial statements.

What are the two basic categories of adjusting entries? Provide two examples of each.

The two basic categories of adjusting entries are deferrals and accruals. Two examples of deferrals are prepaid expenses (such as Prepaid Rent and Office Supplies) and unearned revenues (such as Unearned Service Revenue). Two examples of accruals are accrued expenses (such as Accrued Salaries Expense) and accrued revenues (such as Accrued Service Revenue).

What are the two basic sources of stockholders' equity? Describe each source.

The two basic sources of stockholders' equity are paid-in capital and retained earnings. Paid-in capital represents amounts received from stockholders in exchange for capital. Common stock is the main source of paid-in capital. Retained earnings is equity earned by profitable operations that is not distributed to stockholders.

What are the two categories of liabilities reported on the balance sheet? Provide examples of each.

The two categories of liabilities reported on the balance sheet are current and long-term. Accounts payable, payroll-related liabilities, or the current portion of long-term debt are all examples of a current liability. An example of a long-term liability is mortgages payable or bonds payable.

What are the two journal entries involved when recording the sale of inventory when using the perpetual inventory system?

The two journal entries involved when recording the sale of inventory when using the perpetual inventory system are first the debit to Cash or Accounts Receivable and credit to Sales Revenue. The second entry debits Cost of Goods Sold and credits Merchandise Inventory.

What are the two rules to remember about adjusting entries?

The two rules to remember about adjusting entries are: Adjusting entries never involve the Cash account. Adjusting entries either Increase a revenue account (credit revenue) or Increase an expense account (debit expense).

What are the two types of inventory accounting systems? Briefly describe each.

The two types of inventory accounting systems are the periodic inventory system and the perpetual inventory system. The periodic inventory system requires businesses to obtain a physical count of inventory to determine the quantities on hand. It is normally used for relatively inexpensive goods. The perpetual inventory system keeps a running computerized record of merchandise inventory, including inventory units and dollars amounts.

How could a worksheet help in preparing financial statements?

The worksheet contains columns for the income statement and the balance sheet and calculates net income.

When granting a sales allowance is there a return of merchandise inventory from the customer? Describe the journal entry(ies) that would be recorded.

There is not a return of merchandise when a sales allowance is granted. The journal entry would debit Refunds Payable and credit Cash or Accounts Receivable.

Where are transactions initially recorded?

Transactions are first recorded in a journal, which is the record of transactions in date order.

What is treasury stock? What type of account is Treasury Stock, and what is the account's normal balance?

Treasury stock is a corporation's own stock that it has previously issued and later reacquired. Its normal balance is a debit. Treasury stock is a contra-equity account.

Where and how is treasury stock reported on the balance sheet?

Treasury stock is reported beneath retained earnings on the balance sheet as a reduction to total stockholders' equity.

Under the matching principle, when are expenses recorded?

Under the matching principle, expenses are linked to the revenues they generate. Expenses are recorded in the same period as the revenues generated by the expenses.

Under the new revenue recognition standard, what must companies do at the end of the period related to sales returns? Describe the journal entries that would be recorded.

Under the new revenue recognition standard, companies must estimate the amount of returns that the company will have. The first journal entry would debit Sales Revenue and credit Refunds Payable. The second journal entry would debit Estimated Returns Inventory and credit Cost of Goods Sold.

Under the revenue recognition principle, when is revenue recorded?

Under the revenue recognition principle, revenue is determined using a five step process: Step 1: Identify the contract with the customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies each performance obligation. In essence, the company records revenue when the entity satisfies each performance obligation.

How do unearned revenues arise?

Unearned revenue arises when a business has received cash in advance of providing goods or performing work and, therefore, has an obligation to provide goods or services to the customer in the future.

When a bond is issued, what is its present value?

When a bond is issued, its present value is the bond's market price. The price is equal to the present value of the principal plus the present value of the stated interest payments.

What does it mean when a company calls a bond?

When a company calls a bond, it means they pay it off before maturity at a specific price.

What is the effect on the accounting equation when cash dividends are declared? What is the effect on the accounting equation when cash dividends are paid?

When cash dividends are declared, a current liability increases (Dividends Payable is credited) and Stockholder's Equity decreases (Cash Dividends is debited). When cash dividends are paid, there is a decrease in both assets (Cash) and liabilities (Dividends Payable).

What is involved in the posting process?

When transactions are posted from the journal to the ledger, the dollar amount is transferred from the debit and credit columns to the specific accounts in the ledger. The date of the journal entry is also transferred to the accounts in the ledger. The posting reference columns in the journal and ledger are also completed. In a computerized system, this step is completed automatically when the transaction is recorded in the journal.

Accounting uses a double-entry system. Explain what this sentence means.

With a double-entry you need to record the dual effects of each transaction. Every transaction affects at least two accounts.

How does cumulative preferred stock differ from noncumulative preferred stock?

With cumulative preferred stock, the owners must receive all dividends in arrears before the corporation pays dividends to the common stockholders. For noncumulative preferred stock, the corporation is not required to pay any passed dividends.

Bond prices depend on the market rate of interest, stated rate of interest, and time. Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount: a. The market interest rate is 8%. Idaho issues bonds payable with a stated rate of 7.75%. b. Austin issued 9% bonds payable when the market interest rate was 8.25%. c. Cleveland's Cars issued 10% bonds when the market interest rate was 10%. d. Atlanta's Tourism issued bonds payable that pay the stated interest rate of 8.5%. At issuance, the market interest rate was 10.25%.

a- discount b- premium c-face value d- discount

a. Increase to Accounts Receivable b. Decrease to Unearned Revenue c. Decrease to Cash d. Increase to Interest Expense e. Increase to Salaries Payable f. Decrease to Prepaid Rent g. Increase to Common Stock h. Increase to Notes Receivable i. Decrease to Accounts Payable j. Increase to Interest Revenue

a- dr b- dr c- cr d- dr e- cr f- cr g- cr h- dr i- dr j- cr