Exam 1
The accounting cycle consists of 3 steps in what order
1. Analyze, 2. Record, 3. Summarize the transactions
3 common misconceptions of the net income statement
1. Net income does it include estimates 2. Net income reports all changes of the value that incurred during the accounting period, net income = cash
Companies typically prepare ______ financial statements each accounting period.
4; Income statement, balance statement, retained earnings, cash flows
A company issued $10,000 of commons stock to its owners for cash. It recorded the transaction by increasing the assets and increasing the liabilities. Which is correct about? Liabilities will be too high Assets will be too high Stockholders equity will be too low Assets will be too low Stockholders equity will be too high Liabilities will be too low
Liabilities will be too high AND SE will be too low
What lines appear on the balance sheet?
Liabilities, Assets, SE. not Revenues or Expenses as they appear on the income statement
____ measures a company's ability to pay liabilities as they come due in the short run.
Liquidity
What are possible effects on the accounting equation when recording a transaction that affects two accounts?
One asset account increases and one SE account increases, One asset account increases and one asset account decreases
The statement of retained earnings..
One of the four financial statements
Collecting cash from customers for services provided is a _____ activity
Operating
______ activities are the primary source for revenues and expenses and affect whether a company earns a profit or incurs a loss
Operating
Stockholders' Equity
Owners of the company; can buy/sell stock privately or publicly on a stock exchange if the company is legally registered to do so
Net Income
Profit, by generating NI a company increases its SE
Account _____ is an asset on the balance sheet that reports the amounts owed by customers for sales or services provided on credit.
Receivable
All accounting systems____
Record and summarize the financial effects of transactions, follow accounting cycle, and combine beginning balances with the activity during the accounting cycle to yield the ending balances for each amount.
Which of the following statements are true regarding the Income Statment?
Report revenues minus expenses, are sometimes called the statement of operations. They do not report the increase of cash! Nor do they report assets, liabilities, and SE
purpose of balance sheet
Reports assets, liabilities, and equity at a specific date. Provides information about resources, obligations to creditors, and equity in net resources. Helps in predicting amounts, timing, and uncertainty of future cash flows.
Retained Earnings Statement outline
Retained earnings as of the beginning of the month, net income, dividends, retained earnings as of the end of the month
If a company issues money to common stock, the common stock t account will have a credit on the ____ side.
Right and Credit
Accounts payable is increased with an entry on the ____ Sid of the T-account.
Right, credit, credit or credits
Which of the following are external users of the company's financial statements
SEC, Creditors, Stockholders, government aganecies
Business earnings profits by___
Selling goods or services at more than the cost to provide the service or deliver goods; having revenues higher than expenses
Purpose of GAAP (Generally Accepted Accounting Principles)
Sets out to standardize the classifications, assumptions and procedures used in accounting industries across the US
Identify the primary ways in which a business may be organized
Sole propietorship, coroperation, partnership
A transaction that involves an exchange of assets, liabilities and or stockholders equity between the company and someone else is called a ______ exchange
external
All transactions ______
have at least two effects on the accounting equation affect assets, liabilities, and/or stockholders' equity A=L+SE
Expenses appear on the ______.
income statement
A debit to cash and a credit to common stock is recorded when a company ____.
incorporates and its owners contribute cash
Liabilities
measurable amounts that the company owes to creditors
Investing activities are concerned with acquiring long-term assets; financing activities provide the money needed to operate the business and to provide capital for investing activities; and ______ activities are involved with providing goods and services to the customer
operating
On the balance sheet, equipment is reported at its
original cost, not high current value
Which type of accountant is hired by a business as an employee and provides accounting services for that particular business
private accountant
The statement of Retained Earnings reports the ______.
profits that have accumulated in the company over time
The statement of retained earnings reports the ______.
profits that have accumulated in the company over time
Which type of accountant is contracted by variety of different companies for advice and other services?
public accountant
The unit-of-measure assumption states that ______.
results of business activities should be reported in an appropriate monetary unit
single-step income statement includes
revenues-expenses=net income
A corporation earns profits for its stockholders by
selling goods at more than their cost providing services at more than cost
What are the three forms of business organization?
sole proprietorship, partnership, corporation
Which financial statement reports the accumulation of profits kept by the business during the current accounting period with that of prior periods?
statement of retained earnings
A classified balance sheet shows the
subtotals for current assets and current liabilities
The primary goal of most companies is to
to make a profit
The purpose of the Board of Directors is
to make certain the investors and/or owners interests are protected. Oversee company's managers. Use financial statements to ensure the companies manages are making Rt decisions that are in the best financial interest of the company stockholders
Retained Earnings Equation
total assets - total liabilities - common stock
Accounts are
used to accumulate and report the effects of each different business activity
Creditors want to see that a company that owes them money has ______.
assets that are greater than its liabilities
Assets have a normal ______ balance
Debit or debits
If a company collected $1000 from its customers in advanced and then full-filled $800 of its obligation and incurred expenses of $700 of which it paid $300, using accrual basis accounting, it would report net income equal to
$100; NI equals $800 revenue - $700 of expenses incurred. In accrual accounting, revenue is the amount form providing goods or services regardless of the amount collected and expenses are incurred regardless of amount paid
The statement of cash flows shows
- cash flows from investing activities - cash flows from financing activities - cash flows from operating activities
The beginning balance of a business cash account is 100,000. During the month the business issued $25,000 of common stock for cash. The balance of the business Cash account now is_________.
A debit of 125,000
A business issued 20,000 of stock in exchange for cash. The journal entry to record this transaction will include _________of $20,000.
A debit to cash and a credit to stock. More than one answer
Assets
A resource the company controls and expects to benefit from in the future; ie; cash, machine, equipment, software, building, inventory
Financial information needed to manage a company is provided by an __ system
Accounting
What is referred to as the language of business because it is such a key part of business, and its terms are typically used in discussing business?
Accounting
dividends equal
Amount shared/distributed during a period/month
Which of the following are possible effects on the accounting equation when recording a transaction that increases a liability by $100?
Another asset increases by $100; A stockholders' equity account decreases by $100
Which of the following is another way to express the expanded accounting equation Assets + Liabilities = common stock + retained earnings Assets = Liabilities - common stock + retained earnings Assets - Liabilities = common stock + retained earnings
Assets - Liabilities = common stock + retained earnings; reason: assets equal liabilities plus SE
What is the basic accounting equation?
Assets = Liabilities + Stockholders' Equity
Which of the following are ways of expressing the basic accounting equation?
Assets = Liabilities + Stockholders' Equity Assets - Stockholders' Equity = Liabilities Assets - Liabilities = Stockholders' Equity
A classified balance sheet shows subtotals are current ______ and current_____
Assets and Liabilities
The proper heading on a financial sheet
Business name, Financial Report name, time period
When revenue is credited, the possible three debits are;
Cash, Accounts Receivable, Deferred Revenue
Dividends
Company's share profits to the shareholders based on the corporation's performance. Comp profit - accumulated - retained earnings. Decision to distribute stockholders. Retained earnings is decreased by dividends
Accounts payable would record an increase with a ____
Credit
Liabilities have a normal ___ balance
Credit
The retained earnings is increased with an entry on the ___ side of the account.
Credit
If you pay cash for supplies, the entry to record this transaction would include _______ to cash
Credit as that decreases the cash
A company would record an increase in common stock on the ____ side
Credit, right side
Which of the following are the main groups of external investors?
Creditors, investors, government agencies
A debit or decrease to liabilities would be recorded with a _______ to notes payable
Debit
Equipment account is increased with an entry on the ___ side
Debit
A company received $2k of equipment and promised to pay next month. The increase in equipment would be recorded with a ____to the equipment account.
Debit, because it's an asset that is increased by debits
Retained earnings are_________
Decreased by dividends, and increased by net income
Which are true about the income statement?
Each major caption has an underline subtotal, such as total expenses, Net income has a double underline, revenues are listed before expenses, a dollar sign is only at the top and bottom of the column numbers
Managerial accounting reports are used by the company's
Employees and managers
A trial balance is an internal report used to determine whether total debits ____ total credits.
Equal
True of False; Financial statements must have a year end of December 31st
False, can be as of any date
Which group is responsible for creating the US GAAP?
Financial Accounting Standards Board (FASB)
The management of Acme, INC. prepared a statement for comp external users that listed the company's assets, liabilities and SE as of the last day of the year. This statement is an
Financial statements
What are the correct terms for the 3 activities found on the statement of cash flows?
Financing, Investing, Operating
The underlying rules of accounting in the US are called ______.
Generally Accepted Accounting Principles (GAAP)
The duality effects refers to the fact that each transaction______.
Has at least two effects on the accounting equation
The heading of an income statement____.
Includes the time period covered, the name of the company, and indicates if the reported numbers are rounded to the nearest thousand or million. This is for larger businesses
The financial statement that records revenues and expenses is the ___
Income Statement
Which financial statement records revenues and expenses
Income statement
If a company paid $200 cash for supplies that were purchased last month, but the company recorded it a debit to AP and a credit to cash $20, the accounting records are __
Incorrect because the credit doesn't equal the debit
A company receives money in common stock to its owners, what effect would this have on the accounting equation?
Increase SE and increase Assets. It will not effect retained earnings
A company receives $10,000 from issuing common stock to its owners. The effect of the accounting equation is a _____________.
Increase in assets and increase in SE
A financial statement heading states that it was prepared: "For the year End of December 31, 2020". What types of financial statements could this be?
Statement of cash flows, statement of retained earnings, income statement, but NOT the balance sheet because the balance sheet heading would read "December 31, 2020" or "at December 31, 2020". The balance sheet is not : for the year ended" butt at a point in time
Which of the following are external users of the company's financial statements?
Stockholders, SEC, creditors
What is the income statement?
Summarizes the financial impact of the operating activities undertaken by the company during the accounting period. It includes three main sections; revenues, expenses, and net income
Accounts Payable
Supplies to be purchased on credit said to be on account
An income statement is referred to as a single-step income statement because_____
The format separates total revenues from expenses and reports a single measure of income.
Stockholders' Equity
The owners' claim to assets after creditors claims have been fulfilled
The heading of a balance sheet should include?
The title, at what date, the name of the business
If a company sol merchandise to a foreign company, what is the unit of measure assumption?
The unit of measure assumption assumes the transaction of were in US dollars, thus sales in euros are translated to US dollars for reporting services
The net income margin ratio is calculated by dividing net income by ______.
Total revenue
Business activities that affect the basic accounting equation and are recorded in the accounting system are called_____
Transactions
True or false: a fiscal year can end on a date other than December 31. A calendar year ends on December 31
True
retained earnings increases when
a company earns and keeps its profit
The unit of measure concept is the idea that a company should report its financial results on its financial statements using ______.
a single monetary unit, such as the US dollar
______ are used to accumulate and report the effects of each different business activity separately rather than combining the various types of activities together
accounts
All transactions ______
affect assets, liabilities, and/or stockholders' equity have at least two effects on the accounting equation
Wages Expense is ________ while Wages payable is ________
an expense on the income statement; a liability on the balance sheet
A balance sheet reports
assets, liabilities, stockholders equity during the accounting period
Which financial statement reports the financial position of the business at a point in time?
balance sheet
The main goal of an accounting system is to
capture information about a business so that it can be reported to decision makers
What does a business typically receive when it issues stock to owners?
cash
A company typically receives ____ an asset, when it issues stock to its owners.
cash or money
The formula for calculating the current ratio is ____
current assets divided by current liabilities
The totals on a trial balance reveal whether the total ______ equal the total ______.
debits and credits
Revenues
earned by selling goods or services to customers
