Financial Accounting Midterm
What boards does the SEC oversee?
Financial Accounting Standards Board (FASB)- sets generally accepted accounting principles Public Company Accounting Oversight Board (PCAOB)- sets auditing standards for independent auditors (CPAs) of public companies
Gross Profit Percentage
Gross Profit / net sales measure's a company's ability to charge premium prices and produce goods and services at low cost
List the steps in the accounting cycle in chronological order
1) Analyze transactions 2) Record journal enteries in the general journal 3) Post amounts to the general ledger 4) Prepare an unadjusted trial balance 5) Adjust revenues and expenses in the journal and post to the ledger 6) Prepare financial statements
Estimating Bad Debts
1) a percentage of total credit sales for the period ... simpler 2) an aging of accounts receivable ... more accurate
During the period:
1) analyze transactions 2)record journal enteries in general journal 3)Post amounts to general ledger
Deferred expense
previously recorded assets, such as prepaid rent, supplies, and equipment, that were created when cash was paid in advance and that must be reduced for the amount of expense actually incurred during the period through the use of the asset
Statement of Cash Flows
divides cash inflows and outflows into the three primary categories of cash flows in a typical business: cash flows from operating, investing, and financing activities
Summarizing in ledger accounts
dollar amounts from journal entries are copied (posted) to the appropriate accounts in the ledger, so that account balances can be totaled
Accrued expense
expenses that have been incurred but not yet recorded because cash will be paid after the goods or services are used
True or False: revenues earned are equal to the total cash collected during the accounting period
false
Par value of common stock is the:
minimum amount to be contributed per share, amount established by the board of directors
Sales Returns and Allowances
must be deducted for gross sales revenue in determining net sales
Adjusting enteries
necessary at the end of the accounting period to measure all revenues and expenses of that period
Property and plant equipment is reported on the balance sheet at the
net book value
Retained earnings represent...
net income generated by the company through profitable operations that has not been distributed to stockholders, amounts earned and kept by the company
Earnings per Share
net income/ weighted average number of shares of stock outstanding
Total Asset Turnover ratio=
net sales (operating revenues)/ average total assets
Gross Profit (Gross Margin)
net sales revenue - cost of goods sold
Earnings Per Share appear:
on the income statement
Expenses
outflows or the using up of assets or increases in liabilities from ongoing operations incurred to generate revenues during the period; represents the dollar amount of resources the entity used to earn revenues during the period
What items are used to reconcile the correct cash balance per bank account?
outstanding checks and deposits in transit
Deferred revenue
previously recorded liabilities that were created when cash was received in advance, and that must be reduced for the amount of revenue actually earned during the period
Assets
probable future economic benefits owned or controlled by an entity as a result of past transactions or events ... the economic resources the entity acquired to use in operating the company in the future
Liabilities
probable future sacrifices of economic benefits arising from preset obligations of a businesses a result of past transactions or events
What is true about rent paid in advance?
rent expense is on the income statement and reports the amount of rent used during the period, prepaid rent is on the balance sheet and reports the amount paid in advance, prepaid rent is an asset because cash has been paid in advance for future use
T-account
represents a ledger account and is a tool used to understand the effects of one or more transactions
expense matching principle
requires that expenses be recorded when incurred in earning revenue
Elements of Statement of Stockholder's Equity
retained earnings (net income for previous period), subtract dividends
Accrual basis accounting
revenues are recognized when they are earned and expenses are recognized when they are incurred
Cash basis accounting
revenues are recorded when cash is received and expenses are recorded when cash is paid
Accrued revenue
revenues that have been earned but not yet recorded because cash will be received after the services are performed or the goods are delivered
Elements of the Income Statement
revenues, expenses, net income
Accumulated amortization
similar to depreciation except it is netted against intangible assets instead of tangible assets, a contra-asset account similar to accumulated depreciation
The _______ monetary unit assumption states that financial statement elements should be measured in terms of the US dollar, without any adjustments for changes in purchasing power (e.g. inflation).
stable
Ending retained earnings appears on the:
statement of stockholder's equity, balance sheet
Net income (or loss) is recorded in the retained earnings account when the ______ and _________ accounts are closed and transferred into retained earnings.
Revenue & Expense
For Common Stock, increases are shown on the left or right in a T-account?
Right (decreases on left)
True or false: Income tax expense may also be called Provision for Income Tax
True
When a company earns net income, its retained earnings:
increase
Revenues
increases in assets or settlements of liabilities from ongoing operations of the business; usually amounts expected to be received for goods and services that have been delivered to a customer
Revenues may result in ____
increases in cash, increases in accounts receivable
Transactions are classified as
internal or external
Net income
net income= revenue-expenses
Net income appears as a line on the:
statement of stockholder's equity, income statement
_____ adjustments are used when cash has not been exchanged in a prior transaction, and ______ adjustments are used when cash has been exchanged in a prior transaction.
Accrual, deferral
How do accrual adjustments affect liabilities and expenses?
Accural adjustments can increase liabilities and increase expenses
Acme Enterprises issued shares of common stock for an amount in excess of par value. The journal entry to record this transactions includes a credit to:
Additional paid-in capital, common stock
examples of Assets on the Balance Sheet
CURRENT: cash, short-term investments, accounts receivable, supplies, prepaid expenses OTHER: inventories, property, plant, and equipment, long-term equipment
In May, Sea the World Cruises collected $1000 cash from a customer for services to be performed in June. When should revenue be recorded?
June, when services are performed, regardless of when cash is received
What if cash is received before goods and services are delivered?
ON RECIEPT OF PAYMENT debit: cash credit: unearned revenue ON DELIVERY debit: unearned revenue credit: sales revenue
Increases in liability and stockholder's equity accounts are on the right or left?
Right bc they are on the right side of the equation A=L+SE
When a business issues stock, what does it give to its owners?
Stock certificates
Z Best, Inc. issued 1,000,000 shares of $1 par value common stock for $20,000,000 in cash. The effect on the accounting equation is:
Stockholder's equity is increased by $20,000,000 Common stock is increased by $1,000,000 Additional Paid-in Capital is increased by $19,000,000 Cash is increased by $20,000,000
The SEC
The Securities and Exchange commission is the US agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements.
A chart of accounts is...
a list of account titles with corresponding reference numbers used by companies so that transaction items are consistently named
The ending cash balance on the balance sheet equals the sum of ..?
beginning of the year cash balance +the change in cash on the statement of cash flows for the year ended
Profit is:
called net income, a measure of performance
What does a business typically receive when it issues stock to owners?
cash
A list of all account names used to record transactions of a company is referred to as the
chart of accounts
The adjusting entry for supplies used during the period requires a ______ (credit or debit) to Supplies and a ______ (credit or debit) to Supplies expense.
credit, debit
J.Jackson invested $1000 in his business. Show how to use T-accounts to record this transaction in Jackson Company's books.
debit Cash; credit Common Stock
The adjusting entry for interest earned on a note receivable includes a
debit to Interest Receivable credit to Investment income
What if cash is paid in the same period as the expense is incurred to generate revenue?
debit: expense account credit: cash
The two sources of stockholder's equity are amounts
earned by the corporation, paid in from shareholders
The adjusting entry to recored accrued expenses requires debiting...
the expense account and crediting Accrued Expenses Payable
During the closing process, the closing entries to individual expense accounts will be recorded with a ______ journal entry to reduce the account balance to zero. (Credit or debit?)
Credit
What happens if cash is received in the same period that goods and services are delivered?
Debit: cash Credit: sales revenue
In April, Pizza Aroma hired a new employee at a rate of $1000/month to start work at the beginning of May. In April, Pizza Aroma should record...
Nothing, because an exchange of promises is not a transaction
For accounting information to be relevant, what qualities must it possess?
able to be used to confirm past events of the business, capable of influencing decisions
The notes to financial statements may include:
accounting policies applied, revenues broken out by geographic region, segment information, relevant information not disclosed on the statements
Adjusting entries are required to ensure:
all expenses incurred are reported on the income statement, all assets are reported at their proper balances on the balance sheet, all liabilities are properly reported at their proper balances on the balance sheet, all revenues earned are reported on the income statement
Unqualified (Clean) Audit Opinion
an auditor's statement that the financial statements are fair presentations in all material respects in conformity with GAAP
Paying cash for an expense incurred in the same period has what affect on the accounting equation?
assets decrease, stockholder's equity decreases
The line item Trade accounts receivable, net of allowances will be found on the
balance sheet
Allowance method
bases bad debt expense on an estimate of uncollectible assets
Under the going-concern or _______ assumption, a business normally is assumed to exist long enough to meet its contractual obligations and plans.
continuity
Sales to customers in which the customers pay within 30 days are referred to as
credit sales, sales on account
On May 1, Buy and Large had a supplies balance of $100. During May, it purchased $500 of supplies on credit. At the end of May, there were $200 of supplies on hand. The entry to record the adjusting entry for supplies used during the period includes:
credit supplies for $400 debit supplies expense for $400
When Diva, Inc. declared a $10,000 cash dividend, it recorded a $10,000 ...
credit to dividends payable, debit to retained earnings
The bank will show interest earned on bank statements as a ______
credit, because a deposit is a liability from the bank's point of view
From the banks perspective, the bank will show a bank service charge as a ____.
credit, because a withdrawal increases its liability from the banks part of view
Accumulated Depreciation has a normal ______ balance which indicates that it _______ Total assets.
credit, decreases
writing of specific uncollectible accounts
debit allowance for doubtful accounts credit accounts receivable
X Company sold$2000 of merchandise on account with credit terms of 2/10, n/30. The journal entry to record the initial sale will include a:
debit to Accounts receivable of $2000 credit to Sales revenue of $2000
Management estimates that 1% of the $100,000 credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a:
debit to Bad expense of $1000 credit to Allowance for doubtful accounts of $1000
The Allowance for Doubtful Accounts, a contra-asset, is ______ when specific, uncollectible accounts are written off.
debited; the Allowance for Doubtful Accounts is a contra-asset account, its normal balance is a credit. Thus, debits, not credits, decrease this account
Expenses ________ stockholder's equity, so expenses are increased with a ______ .
decrease; debit
Deposits in transit are
deposits sent to the bank and recorded by the company but have not yet been recorded by the bank
On a trial balance, which of the following would indicate that an error has been made? -salary expense has a debit balance -Unearned revenue has a credit balance -accounts payable has a debit balance -service revenue has a debit balance -salary payable has a credit balance
*accounts payable has a debit balance *service revenue has a debit balance
4 criteria that must be met for revenues to be recorded:
1. Persuasive evidence of an arrangement for customer payment 2. Goods are delivered or services performed 3. Price is fixed or determinable 4. Collection is reasonably assured
Average collection period =
365/ receivables turnover
At the end of the period:
4) prepare a trial balance (check if debits=credits) 5)adjust revenues and expenses (record in journal and post to ledger) 6) prepare financial statements 7) close revenues, expenses, gains, and losses to retained earnings (record in journal and post to ledger)
What is the correct journal entry when a customer returns a product that was purchased on account?
A debit to Sales returns and allowances credit to Accounts receivable debit to Inventory credit to Cost of goods sold
What type of account is Accounts Receivable?
Asset
Elements of the Balance Sheet
Assets, Liabilities and Stockholder's Equity
5 elements of the accounting equation
Assets= Liabilities + Stockholder's Equity + revenue - expenses
Delectable Inc.'s unadjusted trial balance includes Accounts receivable of $10,000; Allowance for doubtful accounts of $(50); and Credit sales of $100,000. Based on an aging of its receivable, management estimates that $1000 of receivables will be uncollectible. Delectable's financial statements will show ______.
Bad debt expense of $950 Allowance for doubtful accounts of $(1000)
Financial Statements
Balance Sheet, Statement of cash flows, Statement of stockholder's equity, Income statement
The ending balance on the balance sheet equals the sum of...?
Beginning of the year cash balance, the change in cash on the statement of cash flows for the year ended
examples of Liabilities on the Balance Sheet
CURRENT: Accounts payable, accrued expenses payable, unearned revenue OTHER: notes payable
examples of Stockholder's Equity on the Balance Sheet
Common stock, Additional paid-in capital, retained earnings
Current Ratio=
Current Assets / Current Liabilities
What sides of the T account do debit and credit refer to?
Debit refers to left Credit refers to right
What is the ratio reported on the income statement?
Earnings per share
The principle components of the 10-K
Item 1. Business: description of business operations and strategy Item 6. Selected Financial Data: summarized financial data for a 5 year period Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: Management's views on the causes of its successes and failures during the reporting period and the risks it faces in the future Item 8: Financial Statements and Supplemental Data: the four basic financial statements and related notes, the report of management, and the auditors report (Report of Independent Registered Public Accounting Firm)
For Cash, increases are shown on the left or right in a T-account?
Left (decreases on right)
Increases in asset accounts are on the right or left?
Left bc they are on the left side of the equation A=L+SE
Assets=
Liabilities + Stockholder's Equity
On May 1, Ace Electronics ordered office equipment. The equipment was delivered to Ace on May 15, and Ace agreed to pay for it by the end of the month. Ace paid for the equipment on May 31. When will Ace make the first entry in its accounting system for this purchase?
May 15
What affect does the allowance method have on net income?
No effect
What if cash is received after the goods and services are delivered?
ON DELIVERY debit: accounts receivable credit: sales revenue ON RECIEPT OF PAYMENT debit: cash credit: accounts receivable
What if cash is paid before the expense is incurred to generate revenue?
ON PAYMENT debit: supplies credit: cash ON USE debit: expense account credit: supplies
What if cash is paid after the expense is incurred to generate revenue?
ON USE debit: expense account credit: accrued expenses payable ON PAYMENT debit: accrued expenses payable credit: cash
Allowance for doubtful accounts
a contra-asset account containing the estimated uncollectible accounts receivable always subtracted from the balance of the asset accounts receivable
Trial balance
a list of all accounts with their balances to provide a check on the equality of the debits and credits
Bad Debt Expense
the expense associated with estimated uncollectible accounts receivable debit to bad debt expense credit to allowance for doubtful accounts
Temporary accounts are found on _____
the income statement
When using the indirect method to prepare the operating activities section the statement of cash flows, the first amount listed is
the net income
Depreciation
the process of allocating the cost of buildings, vehicles, and equipment to expense over time as they are used
Transaction analysis
the process of studying a transaction to determine its economic effect on the entity in terms of the accounting equation TWO PRINCIPLES *every transaction affects at least two accounts; correctly identifying those accounts and the direction of the effect is critical. *the accounting equation must remain in balance after each transaction
bank reconciliation
the process of verifying the accuracy of both the bank statement and the cash accounts of a business LOOK FOR *outstanding checks *deposits in transit *bank service charges *NSF checks *interest *errors
Stockholder's Equity
the residual interest in the assets of the entity after subtracting liabilities. It is a combination of the financing provided by the owners and by business operations
Expenses report:
the resources used to earn revenue during the accounting period
The income statement reports:
the revenues minus the expenses for the accounting period, how well the company performed during the accounting period,the profitability of the company for the accounting period
the primary objective of financial reporting
to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity
The purpose of the Balance Statement
to report the financial position of a business at a particular point in time
