acc chap 1-3

Question 1

How do you record prepaid expenses?

Answer 1

Dr expense
Cr asset

Question 2

How do you record depreciation

Answer 2

Dr expense
Cr contra asset

Question 3

How do you record accrued expense

Answer 3

Dr expense
Cr liability

Question 4

How do you record accrued revenue

Answer 4

Dr asset
Cr revenue

Question 5

How do you record unearned revenue

Answer 5

Dr liability
Cr revenue

Question 6

Types of Deferrals

Answer 6

Prepaid expenses – recorded as an asset when purchased
- Expensed when used or expired
Unearned revenue - recorded as a liability when payment is received
- Recorded as revenue when earned

Question 7

Types of Depreciation (a type of deferral)

Answer 7

The allocation of the cost of a property, plant & equipment to expense over the asset’s useful life. - – Represents wear and tear and obsolescence.
- The cost spread over the amount of time you use it

Accumulated depreciation = contra asset account, has a credit balance

Carrying amount = cost - accumulated depreciation

Question 8

Types of Accruals

Answer 8

Accrued expense - record expense before paying cash ex. Salaries, interest taxes
- The term accrued expense refers to a liability that arises from an expense that has not yet been paid

Accrued revenue
- Revenue that is recognized but not yet realized

Question 9

Interest

Answer 9

*INTEREST IS ALWAYS A YEARLY RATE

Principal x interest x time
Ex. 10 200 x 10 % x 4/12 = 725

Question 10

Supplies before and after it gets used up and where its recorded

Answer 10

Supplies is an asset on the balance sheet, when its used up it becomes an expense on the income statement

Question 11

expense recognition principle

Answer 11

• identify expense when incurred
• measure the expense
• recognize along with related revenue

Question 12

revenue recognition principle

Answer 12

• record after revenue is earned (percentage of completion)
• when goods/services have been delivered

Question 13

What accounts get closed at year end and where do they go?

Answer 13

• Revenue, expenses and dividends go into retained earnings

Question 14

How do you close accounts like revenue, expenses and dividends?

Answer 14

If it has a normal credit balance like revenue, debit it and credit retained earnings. If it has a normal debit balance, credit it and debit retained earnings.

Question 15

How Transactions Affect Ratios

Answer 15

• Increase sales to enhance both net income and current assets
• Decrease expenses to improve net income and reduce liabilities
• Sell additional shares to increase cash and shareholders’ equity

Question 16

What is accounting?

Answer 16

the information system that measures business activities, processes data into reports, and communicates results to decision makers

Question 17

What are financial statements?

Answer 17

Business documents that companies use to report their activities to stakeholders. This may include: Income statements, statements of changes in equity, balance sheets (a financial statement that reports a company’s assets, liabilities, and shareholder equity at a specific point in time), statement of cash flow.

Question 18

Those who use accounting information include:

Answer 18

Individuals, managers, investors and creditors (primary users of accounting information), government regulatory agencies, taxing authorities, non-profit organizations (their profit must cover their costs to keep the non-profit running)

Question 20

What are assets?

Answer 20

Products or services that aid in the profit of an organization now or in the future, ex. Company cars

Question 21

What are liabilities?

Answer 21

Debts and loans payable to creditors (Examples include accounts payable, notes payable, salary payable, interest payable, etc)

Question 22

Three ways to organize a business

Answer 22

Proprietorship (sole), partnership, corporation

Question 23

Private vs public companies:

Answer 23

Private companies financial information can’t be accessed by the public so shares are privately held, public companies financial information is available for everyone to see so shares are sold on stock exchange

Question 24

Anatomy of a corporation

Answer 24

Shareholders (owners), board of directors (hire people to run the corporation, supervises activities of the business), chief executive officer (CEO), and vice presidents

Question 25

What is revenue

Answer 25

Money made by selling the product/service

Question 26

Net income

Answer 26

Profit (= revenue - expenses)

Question 27

Current assets

Answer 27

Assets that are short term - usually a year

Question 28

Current liabilities

Answer 28

Accounts payable: bought inventory, supplies, etc, that were bought on account/credit, which the company will pay off later

Question 29

Accounts receivable

Answer 29

products or services sold on account/on credit. Company will receive money later.

Question 30

Shareholders equity

Answer 30

→ Assets = Liabilities + Owners Equity/Shareholders Equity

• Common shares: “Common shares are issued to business owners and other investors as proof of the money they have paid into a company. Of all shareholders, common shareholders have the least claim on a company’s assets.” - bdc
• Share capital: Amounts contributed by shareholders in exchange for shares
• Retained earnings: Money the company has after paying off its expenses, liabilities, etc.

Question 31

Notes to financial statements

Answer 31

• An integral part of the financial statements
• Should be read carefully with financial statements
• provide information on the accounting policies used
• Examples are policies used to account for inventories and depreciation

Question 32

Financial reporting responsibilities

Answer 32

• Company management are responsable for preparing financial statements (companies are required to hire and auditor to conduct an audit)
• Auditor’s responsibility is to gather evidence and decide whether the information reported in the financial statements complies with the applicable GAAP (generally accepted accounting principles).
• Auditor provides a signed report that states its opinion on the fairness of the company’s financial statements relative to GAAP

Question 33

Dividends

Answer 33

“the percentage of a company’s earnings that is paid to its shareholders as their share of the profits”

Question 34

Relationship among the financial statements

Answer 34

income statement –> statement of retained earnings & statement of changes in equity –>
Balance sheet –> Cash flow statement

Question 35

Operating income

Answer 35

Profit a company makes after paying for day-to-day expenses (operating expenses)

Question 36

Accounting’s Conceptual Framework

Answer 36

The overall objective of accounting is to provide financial information that is useful to investors and creditors. Accountants follow professional guidelines found in IFRS and ASPE.

• Information must be useful for decision makers
• Relevance
• Faithful representation
• Comparability
• Verifiability
• Timeliness
• Understandibility
• Cost
• Financial reporting standards

Question 37

Accounting Assumptions:

Answer 37

1. Separate entity assumption → The business is a separate economic unit
2. The Going-Concern Assumption → The business will run in the foreseeable future
3. The Historical Cost Assumption → Assets are recorded at their actual cost, not market value.
4. The Stable Monetary Unit Assumption → Assumes the value of currency is stable

Question 37

Gross profit vs Net profit

Answer 37

Gross profit is profit after paying some costs, net is after paying all costs.

Question 38

Ethical analysis

Answer 38

• Accountant’s goal is to make a decision that fulfills their ethical responsibilities to every stakeholder
• Need to apply relevant accounting standards in a way that reports a faithful representation of the company’s financial position and operating performance

Question 39

types of assets

Answer 39

cash, accounts receivable, land, furniture, tools, supplies

Question 40

types of liabilities

Answer 40

loans, accounts payable, notes payable

Question 41

types of equity

Answer 41

common shares, retained earnings, net income, revenue, dividends, expenses

Shareholders equity = common shares + retained earnings - dividends + revenue - expense

Question 42

What is double-entry bookkeeping?

Answer 42

Double-entry bookkeeping uses debits and credits (credit left debit right) to record the dual effects of each business transaction.

Question 43

Accounting cycle

Answer 43

1. Transaction occurs
2. Analyze the transaction
3. Record in a journal
4. Transfer to the general ledger
5. Trial balance

Question 44

Journal/ledger

Answer 44

• The journal is a chronological record of all transactions listed by date
• The ledger is a grouping of all the accounts
• Data must be copied to the ledger - a process called posting

Question 45

Recording transactions in the ledger

Answer 45

Debit is the left side of T acc, credit is right

Assets have a normal debit balance

Liabilities and shareholders equity have normal credit balances (expenses and dividends though have a normal debit as it decreases equity)

Question 46

Trial balance

Answer 46

A trial balance lists all accounts with their balances - assets, liabilities, and then equity (in that order)

Question 47

Closing the Accounts

Answer 47

Prepares the accounts for the next period’s transactions

Temporary accounts such as revenue, expenses and dividends are set to zero at the end of the accounting period → all turned into retained earnings
- To close debit accounts, credit them and vice versa
- Dividends and expenses decrease retained earnings (R.E. is debited), revenue increases it (R.E. is credited)

Permanent accounts (assets, liabilities, and shareholders equity) are not closed.

Accounts like expenses, revenue and dividends are closed at the period’s end.

Question 48

(Net) Working capital is:

Answer 48

Total current assets – Total current liabilities

It refers to the ability of the company to use its current assets to pay off its current liabilities

• Ratios are used by creditors in deciding whether or not to loan the company money, they must predict whether or not the loan will be repaid along with the interest

Question 49

Current ratio

Answer 49

current assets/current liabilities

• Measures the companies ability to pay short term debt. The higher the number, the better.

Question 50

Debt ratio

Answer 50

total liabilities/total assets

• measures the companies ability to pay all debt. the lower the number, the better

Question 51

How transactions affect ratios

Answer 51

Increase sales to enhance both net income and current assets

Decrease expenses to improve net income and reduce liabilities

Sell additional shares to increase cash and shareholders’ equity