Accounting 201 Midterm Flashcards
Consistency
The use of similar accounting procedures either over time for the same company, or across companies at the same point in time.
Corporation
An entity that is legally separate from its owners.
Cost effectiveness
Financial accounting information is provided only when the benefits of doing so exceed the costs.
Decision usefulness
The ability of the information to be useful in decision making.
Dividends
Cash payments to stockholders. Distributions by a corporation to its stockholders.
Economic entity assumption
All economic events with a particular economic entity can be identified.
Ethics
A code or moral system that provides criteria for evaluating right and wrong behavior.
Expenses
Costs of providing products and services.
Faithful representation
Accounting information that is complete, neutral, and free from material error.
Financial accounting
Measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes.
Financial Accounting Standards Board (FASB)
An independent, private body that has primary responsibility for the establishment of GAAP in the United States.
Financial statements
Periodic reports published by the company for the purpose of providing information to external users.
Financing activities
Transactions involving external sources of funding.Includes cash transactions resulting from the external financing of a business.
Generally accepted accounting principles (GAAP)
The rules of financial accounting.
Going concern assumption
In the absence of information to the contrary, a business entity will continue to operate indefinitely.
Income statement
A financial statement that reports the company’s revenues and expenses over an interval of time.
International Accounting Standards Board (IASB)
An international accounting standard-setting body responsible for the convergence of accounting standards worldwide.
Investing activities
Transactions involving the purchase and sale of (1) long-term resources such as land, buildings, equipment, and machinery and
(2) any resources not directly related to a company’s normal operations. Includes cash transactions involving the purchase and sale of long-term assets and current investments.
International Financial Reporting Standards (IFRS)
The standards being developed and promoted by the International Accounting Standards Board.
Liabilities
Amounts owed to creditors.
Materiality
The impact of financial accounting information on investors’ and creditors’ decisions.
Monetary unit assumption
A unit or scale of measurement can be used to measure financial statement elements.
Net income
Difference between revenues and expenses. Difference between all revenues and all expenses for the period.
Operating activities
Transactions involving the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. Includes cash receipts and cash payments for transactions relating to revenue and expense activities.
Partnership
Business owned by two or more persons.
Periodicity assumption
The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting.
Relevance
Accounting information that possesses confirmatory value and/or predictive value.
Retained earnings
Cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. Represents all net income, less all dividends, since the company began.
Revenues
Amounts earned from selling products or services to customers.
Sarbanes-Oxley Act
Known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX ; the act established a variety of new guidelines related to auditor-client relations and internal control procedures.
Sole proprietorship
A business owned by one person.
Statement of cash flows
A financial statement that measures activities involving cash receipts and cash payments over an interval of time. A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing activities.
Statement of stockholders’ equity
A financial statement that summarizes the changes in stockholders’ equity over an interval of time. Summarizes the changes in the balance in each stockholders’ equity account over a period of time.
Stockholder’s equity
Stockholders’, or owners’, claims to resources, which equal the difference between total assets and total liabilities.
Timeliness
Information being available to users early enough to allow them to use it in the decision process.
Understandability
Users must understand the information within the context of the decision they are making.
Verifiability
A consensus among different measurers.
Accounting
A system of maintaining records of a company’s operations and communicating that information to decision makers.
Accounting equation
Equation that shows a company’s resources (assets) equal creditors’ and owners’ claims to those resources (liabilities and stockholders’ equity).
Assets
Resources owned by a company.
Auditors
Trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company’s financial statements.
Balance sheet
A financial statement that presents the financial position of the company on a particular date.
Business Activities to Measure?
Business Activities
1) Transactions in primary operations of business.
2) Financing activities = funding from external sources.
3) purchase and sale of long-term resources.
Comparability
The ability of users to see similarities and differences between two different business activities.
Define “communicating through financial statements” and what four statements are used?
- a. Financial statements are periodic reports published by the company for the purpose of providing information to external users.
- a. Income Statement
- b. Statement of Stockholder’s Equity
- c. Balance Sheet
2d. Statement of Cash Flows
Define an “Income Statement” what it tells, and what it determines.
- a. Financial statement that reports thecompany’s revenues and expenses overan interval of time. 2.a. Shows whether the company was able togenerate enough revenue to cover theexpenses of running the business.
- a. If Revenues > Expenses then Net IncomeIf Revenues < Expenses then Net Loss.
Define “Statement of Stockholder’s Equity” what it tells and what two elements Stockholder’s Equity consists of:
- a. Financial statement that summarizes the changes in stockholders’ equity over an interval of time.
- a. Common Stock + Retained Earnings
Define a “Balance Sheet” and Summarize the basic accounting equation:
- a. Financial statement that presents the financialposition of the company on a particular date.
- a. Assets = Liabilities + Stockholders’ Equity
Define a “Statement of Cash Flow” and what three categories they can be classified as:
- a. Financial statement that measures activities involving cash receipts and cash payments over an interval of time.
- a. Operating cash flows
- b. Investing cash flows
- c. Financing cash flows
What is the “Importance of Financial Accounting” and break down the processing of the information:
- a. Financial accounting information is essential to making good business decisions.
- a. Investors and creditors review the information then decide whether to invest their money into Company A or Company B.
Define “GAAP” and it’s role or rule:
- a. GAAP = Generally Accepted Accounting Principles.
- b. Investors & Creditors make their decisions based on Financial Accounting Information, Should be based on formal standard: Generally Accepted Accounting Principles, (GAAP).
- Break down a career in Public Accounting and your role as a Public Accountant: Then:
- Break down a career as a Private Accountant and your role as a Public Accountant:
- a. Public Accounting Clients are : (Big 4 and Non - Big 4) = Corporations, Governments, Nonprofit Organizations, Individuals.
- b. Traditional roles: Auditors, Tax preparers/planners, Business consultants.
- a. Private Accounting: Clients: Your employer.
- b. Traditional roles: Financial accountants, Managerial accountants, Budget analysts, Internal auditors, Tax preparers, Payroll managers.
True or False?
Investors and creditors of business firms are two groups who need accounting information.
T
True or False?
Transactions that can be measured in dollars and cents are recorded in the financial accounting information system.
T
True or False?
The purchase of office equipment is an economic event recorded by the financial accounting information system.
T
True or False?
Management of a business enterprise is the major external user of information.
F
True or False?
Accounting communicates financial information about a business enterprise to both internal and external users.
T
True or False?
External users of financial statements include labor unions, management and regulatory agencies.
F
True or False?
Financial statements are the major means of communicating accounting information to interested parties.
T
True or False?
Bookkeeping and accounting are one and the same because the bookkeeping function includes the accounting process.
F
True or False?
The origins of accounting are attributed to Leonardo DiVinci, a famous mathematician.
F
True or False?
The study of accounting will be useful only if a student is interested in working for a corporation.
F
Accountants refer to an economic event as a
a. purchase.
b. sale.
c. transaction.
d. change in ownership.
C
The process of recording transactions has become more efficient because:
a. fewer events can be quantified in financial terms.
b. computers are used in processing business events.
c. more people have been hired to record business transactions.
d. business events are recorded only at the end of the year.
B
Communication of economic events is the part of the accounting process that involves:
a. identifying economic events.
b. quantifying transactions into dollars and cents.
c. preparing accounting reports.
d. recording and classifying information.
C
Which of the following events is not an accounting transaction?
a. Purchasing an office building.
b. Selling a delivery truck.
c. Paying income taxes.
d. Hiring a payroll clerk.
D
Which of the following would be considered an internal user of accounting data for the Raintree Company?
a. Staff accountant for the Securities Exchange Commission
b. Production manager
c. Credit analyst for Bank
d. President of the employees’ labor union
B
Which of the following would be considered an external user of accounting data for the Raintree Company?
a. Internal Revenue Service Agent
b. Vice-president of finance
c. Production supervisor
d. Cost accountant
A
Which of the following would not be considered internal users of accounting data for a company?
a. The president of a company
b. The controller of a company
c. Creditors of a company
d. Salesmen of the company
C
The private sector organization involved in developing financial accounting principles is the:
a. Securities Exchange Commission.
b. Internal Revenue Service.
c. Financial Accounting Standards Board.
d. Accounting Principles Board.
C
The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that:
a. they are both governmental agencies.
b. the SEC is a private organization of accountants.
c. the SEC often mandates guidelines when no accounting principles exist.
d. the SEC and FASB rarely cooperate in developing accounting standards.
C
GAAP stands for:
a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.
B
Ample Company has total assets of $100,000 and total liabilities of $60,000. The company’s stockholders’ equity is
a. $40,000.
b. $60,000.
c. $100,000.
d. $160,000.
A
The basic accounting equation may be expressed as:
a. Assets = Equities.
b. Assets – Liabilities = Stockholders’ Equity.
c. Assets = Liabilities + Stockholders’ Equity.
d. all of these.
D
Liabilities are:
a. are future economic benefits.
b. are existing debts and obligations.
c. possess service potential.
d. are things of value used by the business in its operation.
B
Best Enterprises reports total assets of $200,000, total liabilities of $125,000 and stockholders’ equity of $75,000. The company’s accounting equation can be stated all of the following ways except:
a. $200,000 = $125,000 + $75,000
b. $200,000 – $75,000 = $125,000.
c. $75,000 + $125,000 = $200,000.
d. $200,000 + $125,000 = $325,000.
D
If Carmine Company purchases goods on account for $4,000, then:
a. assets and liabilities both decrease by $4,000.
b. stockholders’ equity increases by $4,000.
c. assets increase by $4,000 and liabilities decrease by $4,000.
d. assets and liabilities both increase by $4,000.
D
What is the basic understanding of Accounting?
Accountants communicate information to people, people make decisions about companies, companies report information to accountants. Full Circle.
Account
A summary of the effects of all transactions related to a particular item over a period of time.
Chart of accounts
A list of all account names used to record transactions of a company.
External transactions
Transactions the firm conducts with a separate economic entity.
General ledger
All accounts used to record the company’s transactions.
Internal transactions
Events that affect the financial position of the company but do not include an exchange with a separate economic entity.
Journal
A chronological record of all transactions affecting a firm.
Posting
The process of transferring the debit and credit information from the journal to individual accounts in the general ledger.
T-account
A simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits.
Roles of Financial Accounting
1) Measure business activities of the company.
2) Communicate those measurements to external parties for decision-making purposes.
List the purpose of a Trial Balance:
a) A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.
b) Another purpose of the trial balance is to assist us in preparing adjusting entries (for internal transactions).
c) It is not a published financial statement to be used by external parties, there is no required order for listing accounts in the trial balance.
d) The trial balance is used for internal purposes only and provides a check on the equality of the debits and credits.
Which of the following transactions will increase total assets?
A) Provide services to customers on account. B) Purchase supplies for cash.
C) Collect cash from customer for services provided on account last month.
D) Pay dividends to current stockholders.
A
Which of following transactions represents an external transaction?
A) Prepaid rent is used up through the passage of time.
B) Depreciation for office equipment is recorded.
C) Stockholders are paid a quarterly dividend.
D) Supplies purchased last month are used up.
C
Which of the following decreases total stockholders’ equity?
A) Issuing common stock.
B) Purchasing equipment for cash.
C) Purchasing supplies on account.
D) Paying employees current month wages and salaries.
D
Which of the following accounts is increased by a credit? A) Accounts Receivable. B) Cash. C) Accounts Payable. D) Salaries Expense.
C
Which of the following shows a chronological record of all transactions? A) The general ledger. B) The chart of accounts. C) The trial balance. D) The general journal.
D
A credit to Service Revenue will: A) Increase stockholders' equity. B) Decrease stockholders' equity. C) Increase liabilities. D) Decrease assets.
A
Which of the following accounts normally has a credit balance? A) Cash. B) Accounts Receivable. C) Dividends. D) Retained Earnings.
D
Measuring external transactions typically involves: A) Four steps. B) Five steps. C) Six steps. D) Seven steps.
C
Which of the following correctly describes a list of accounts and their balances, showing that debits equal credits? A) General ledger. B) Trial balance. C) Journal. D) Chart of accounts.
B
Which of the following mistakes would cause the accounting equation NOT to balance?
A) Increase in expenses, increase in cash.
B) Increase in assets, increase in liabilities.
C) Decrease in assets, decrease in liabilities. D) Increase in assets, increase in stockholders’ equity.
A
What is the ultimate effect of recording expenses on stockholders’ equity?
A) Stockholders’ equity increases.
B) Stockholders’ equity decreases.
C) Stockholders’ equity is not affected.
D) The effect on stockholders’ equity depends on whether or not cash is paid.
B
When a company provides services to a customer for cash, which of the following would be recorded? A) Debit Cash. B) Debit Service Revenue. C) Credit Service Revenue. D) Both a and c.
C
Trial balance
A list of all accounts and their balances at a particular date, showing that total debits equal total credits.
Accrual-basis accounting
Record revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).
Accrued expense
When a company has incurred an expense but hasn’t yet paid cash or recorded an obligation to pay.
Accrued revenue
When a company has earned revenue but hasn’t yet received cash or recorded an amount receivable.
Adjusted trial balance
A list of all accounts and their balances after we have updated account balances for adjusting entries.
Adjusting entries
Entries used to record events that occur during the period but that have not yet been recorded by the end of the period.
Cash-basis accounting
Record revenues at the time cash is received and expenses at the time cash is paid.
Classified balance sheet
Balance sheet that groups a company’s assets into current assets and long-term assets and that separates liabilities into current liabilities and long-term liabilities.
Closing entries
Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained Earnings account.
What involves Revenue Recognition Principle:
Recognize revenue when it is earned.
Matching Principle is when:
Expenses are reported with the revenues they help to generate
What elements are involved with “Point of Difference”?
Revenue Recognition
recording Expenses
GAAP
What elements are involved with “Accrual Basis.”
When revenue is earned
with related revenues
Part of GAAP
What elements are involved with “Cash Basis.”
When Cash is Received
When Cash is Paid
Not Part of GAAP.
Contra account
An account with a balance that is opposite, or “contra,” to that of its related accounts.
Matching principle
Recognize expenses in the same period as the revenues they help to generate.
Operating cycle
The average time between purchasing or acquiring inventory and receiving cash proceeds from its sale.
Permanent accounts
All accounts that appear in the balance sheet; account balances are carried forward from period to period.
Post-closing trial balance
A list of all accounts and their balances at a particular date after we have updated account balances for closing entries.
Prepaid expenses
The costs of assets acquired in one period that will be expensed in a future period.
Revenue recognition principle
Record revenue in the period in which it’s earned.
Temporary accounts
All revenue, expense, and dividend accounts; account balances are maintained for a single period and then closed (or zeroed out) and transferred to the balance of the Retained Earnings account at the end of the period.
What are the step involved Adjusting Entries and the Accounting Cycle?
a. Measurement Process = External Transactions, record and Post External Transactions.
b. Adjusting Entries, Record and post Adjusting Entries.
c. Reporting Process = Prepare Financial Statements
d. Closing Process = Report and Post closing entries.
Define Post Adjusting Entries
a. Post adjusting entries To the T-accounts in the general ledger.
b. To update the account balances.- Prepare an adjusted trial balance.- an adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.
Name the financial statements used in the reporting process.
adjusted trial balance - Income Statement - Statement of Stockholders’ Equity - Classified balance Sheet
Define Closing Entries
- Transfer the balance of all revenue, expense, and dividend accounts To the balance of retained earnings.
- Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.
- the balance of each revenue, expense, and dividend account equals zero after closing entries.
- Do not affect the balances of permanent accounts other than retained earnings.
On November 30, Meier Company received $3,000 from a customer for services to be performed during December and recorded unearned revenue. The adjusting entry that Meier Company should make on December 31 includes a: A) Credit to Unearned Revenue. B) Credit to Service Revenue. C) Debit to Service Expense. D) Debit to Retained Earnings.
B
Which of the following accounts is not listed in a post-closing trial balance? A) Dividends. B) Accounts Receivable. C) Accumulated Depreciation. D) Interest Payable.
A
The financial statements are prepared using the amounts listed in the: A) Unadjusted trial balance. B) Post-closing trial balance. C) Accounting balance. D) Adjusted trial balance.
D
Recording salaries earned by the employees that will not be paid by the company until the following accounting period is an example of a(n): A) Prepaid expense. B) Unearned revenue. C) Accrued expense. D) Accrued revenue.
C
Which of the following is an example of a prepaid expense?
A) Utilities have been incurred but not yet recorded.
B) Part of the useful life of equipment has expired.
C) Service was provided to a customer but not yet billed.
D) Interest is incurred through the passage of time.
B
Which of the following is an example of an accrued expense?
A) Insurance has been prepaid for the next 12 months.
B) Interest on an outstanding loan will not be paid until next accounting period.
C) Depreciation is recorded to reflect the machine’s decrease in usefulness.
D) Service was performed for a client but has not yet been billed.
B
Closing entries are:
A) Optional.
B) Made to transfer the balances of temporary accounts to retained earnings.
C) Made to record events that occurred during the period but have not yet been recorded.
D) Made to transfer the balances of permanent accounts to retained earnings.
B
Which of the following is an example of an accrued revenue?
A) Insurance coverage was prepaid for the next 12 months.
B) Interest on an outstanding loan will not be paid until the next accounting period.
C) Depreciation is recorded to reflect the machine’s decrease in its usefulness.
D) Service was performed for a client but cash has not yet been collected.
D
Which of the following describes the information reported in the income statement?
A) Net income for the period is calculated by subtracting expenses from revenues.
B) Total assets are equal to total liabilities and stockholders’ equity.
C) Changes in stockholders’ equity are shown through changes in common stock and retained earnings.
D) All accounts and account balances are shown.
A
Which of the following describes the information reported in the balance sheet?
A) Net income for the period is calculated by subtracting expenses from revenues.
B) Total assets are equal to total liabilities and stockholders’ equity.
C) Changes in stockholders’ equity are shown through changes in common stock and retained earnings.
D) All accounts and account balances are shown and all debits equal all credits.
B
After the closing entries are posted to the accounts, all temporary accounts
A) Have zero balances.
B) Have balances equal to the amounts shown in the unadjusted trial balance.
C) Have balances equal to the amounts shown in the adjusted trial balance.
D) Are open.
A
Unearned revenues
When a company receives cash in advance from a customer for products or services to be provided in the future.
Bank reconciliation
Matching the balance of cash in the bank account with the balance of cash in the company’s own records.
Cash
Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), and cash equivalents.
Cash equivalents
Short-term investments that have a maturity date no longer than three months from the date of purchase.
Checks outstanding
Checks the company has written that have not been subtracted from the bank’s record of the company’s balance.
Collusion
Two or more people acting in coordination to circumvent internal controls.
Deposits outstanding
Cash receipts of the company that have not been added to the bank’s record of the company’s balance.
Earnings quality
The ability of net income to help predict future performance of the company.
Free cash flow
Operating cash flows plus investing cash flows during the period.
Internal controls
A company’s plans to (1) safeguard the company’s assets and (2) improve the accuracy and reliability of accounting information.
NSF checks
Checks drawn on nonsufficient funds, or “bad” checks from customers.
Occupational fraud
The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources.
Petty cash fund
Small amount of cash kept on hand to pay for minor purchases.
Sarbanes-Oxley Act (SOX)
Formally titled the Public Company Accounting Reform and Investor Protection Act of 2002, this act provides regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators.
Discuss the Impact of Accounting Scandals and the Passage of the Sarbanes-Oxley Act.
- Managers are entrusted with the resources ofboth the company’s lenders (liabilities) andowners (stockholders’ equity).
- Managers of the company act as stewards orcaretakers of the company’s assets.
- In recent years some managers have shirkedtheir et
What is Sarbanes-Oxley Act of 2002
Congress passed the Sarbanes-Oxley Act, alsoknown as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX.
Identify the Components, Responsibilities,and Limitations of Internal Control. From a financial accounting perspective,internal control is a company’s plan to?
Safeguard the company’s assets.
- Improve the accuracy and reliability of accounting information
- Effective internal control builds a wall to prevent misuse of company funds by employees and fraudulent or errant financial Reporting.
Define Cash and Cash Equivalents
Cash
- includes currency, coins, and balances insavings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers.
Cash equivalents
- short-term investments that have a maturity date no longer than three months from the date of purchase.
Understand Controls over Cash Receipts and Cash Disbursements.
Cash Controls -
management must safeguard all assets against possible misuse. Again, because cash is especially susceptible to theft, internal control of cash is a key issue.
Cash Receipts -
most businesses receive payment from the sale of products and services either in the form of cash or as a check received immediately or through the mail.
Reconcile a Bank Statement
- A bank ________________ matches the balance of cash in the bank account with the balance of cash in the company’s own records.
- A company’s cash balance as recorded in its books rarely equals the cash balance reported in the bank statement.
- Differences in these balances occur because of either timing differences or errors.
- It is the possibility of these errors, or even out right fraudulent activities, that make the banker conciliation a useful cash control tool.
Account for Petty Cash
Companies like To keep a small amount of cash on hand at the company’s location for minor purchases such as postage, office supplies, delivery charges, and entertainment expense
- To pay for these minor purchases, Companies keep some minor amount of cash on hand in a petty cash fund.
- Management writes a check for cash against the company’s checking account and puts that amount of withdrawn cash in the hands of an employee who becomes responsible for it. This employee is often referred To as the petty-cash custodian.
Identify the Major Inflows and Outflows of Cash.
Companies report cash in two ways.
- First, it is reported as an asset in the balance sheet under current assets and represents cash available for spending at the end of the reporting period. It provides only the final balance for cash.
- Secondly, reports information about cash receipts and payments during the period in a statement of cash flows.
- From the statement of cash flows, investors know a company’s cash inflows and cash outflows related operating, investing and financing activities.
The Sarbanes-Oxley Act of 2002 applies to:
A) All companies that use accrual-basis accounting.
B) All companies that use either cash or accrual-basis accounting.
C) All companies that file reports with the SEC.
D) All companies that file their tax return with the IRS.
C
Who is ultimately responsible for the establishment and success of a company's internal control system? A) The company's top executives. B) The company's stockholders. C) The company's external auditors. D) The company's board of director.
A
Effective internal control over cash includes the requirement that:
A) Only checks are used for payment of purchases.
B) The same person who makes deposits should also record the deposits.
C) The person who makes deposits should NOT record the deposits.
D) a and b.
C
Consistent with the COSO framework, an effective internal control system includes the control environments. The control environment refers to:
A) The ethical tone set by top management.
B) Accountability through separation of duties. C) The risk of failing to achieve company objectives.
D) The reliability of financial information.
A
Which of the following is considered cash for financial reporting purposes?
A) Prepaid insurance.
B) Credit card purchases.
C) Investments in a 6-month Certificate of Deposit.
D) Checks received from a customer from the sale of merchandise
D
Which of the following adjusts the bank's balance of cash in a bank reconciliation? A) Interest on bank deposit. B) NSF check. C) Deposits outstanding. D) Bank service fees.
C
Which of the following adjusts the company's balance of cash in a bank reconciliation? A) Interest on bank deposit. B) Checks outstanding. C) An error by the bank. D) Deposits outstanding.
A
Investing cash flows include the following:
A) Cash received from a customer.
B) Cash paid for supplies.
C) Cash received from the sale of a used company truck.
D) Cash received from the issuance of common stock.
C
Financing cash flows include the following:
A) Cash received from a customer.
B) Cash paid for supplies.
C) Cash received from the sale of a used company truck.
D) Cash received from the issuance of common stock.
D
Operating cash flows include the following:
A) Cash received from a bank loan.
B) Cash paid for supplies.
C) Cash received from the sale of a used company truck.
D) Cash received from the issuance of common stock.
B
When expenditures from the petty cash fund are recorded: A) Cash is debited. B) Expenses are debited. C) Retained Earnings is debited. D) Receivables are debited.
B
A company’s quality of earnings is assumed to be high when
A) Operating cash flows are positive.
B) Operating cash flows are negative.
C) Net income provides a good predictor of the company’s success.
D) Net income is positive.
C
Separation of duties
Authorizing transactions, recording transactions, and maintaining control of the related assets should be separated among employees.
Accounts receivable
The amount of cash owed to the company by its customers from the sale of products or services on account.
Aging method
Using a higher percentage for “old” accounts than for “new” accounts when estimating uncollectible accounts.
Allowance for uncollectible accounts
Contra asset account representing the amount of accounts receivable that we do not expect to collect.
Allowance method
Recording an adjustment at the end of each period to allow for the possibility of future uncollectible accounts. The adjustment has the effects of reducing assets and increasing expenses.
Average collection period
Approximate number of days the average accounts receivable balance is outstanding. It equals 365 divided by the receivables turnover ratio.
Bad debt expense
The amount of the adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period.
Contra revenue account
An account with a balance that is opposite, or “contra,” to that of its related revenue account.
Credit sales
Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.
Direct write-off method
Recording bad debt expense at the time we know the account is uncollectible.
Net accounts receivable
The difference between total accounts receivable and the allowance for uncollectible accounts.
Net realizable value
The amount of cash the firm expects to collect.
Net revenues
A company’s total revenues less any discounts, returns, and allowances.
Notes receivable
Formal credit arrangements evidenced by a written debt instrument, or note.
Percentage-of-receivables method
Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected.
Receivables turnover ratio
Number of times during a year that the average accounts receivable balance is collected (or “turns over”). It equals net credit sales divided by average accounts receivable.
Sales allowance
Seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s product or service.
Sales discount
Reduction in the amount to be paid by a credit customer if payment on account is made within a specified period of time.
Sales return
Customer returns a product.
Trade discount
Reduction in the listed price of a product or service.
Uncollectible accounts
Customers’ accounts that no longer are considered collectible.
What will you learn in Accounting Chapter 5?
Receivables and SalesRecognition of Accounts ReceivableRecognize Accounts ReceivableValuation of Accounts ReceivableNotes Receivable
Define Credit sales
Common for large business Transactions inwhich buyers don’t have sufficient cashavailable or where credit cards cannot be usedbecause the transaction amount exceedstypical credit card limits.- revenue is recognized at the time of a creditsale.- an asset (accounts receivable) is recognizedat the time of a credit sale.
Record an allowance for future uncollectible accounts.
the right To receive cash from a customer is a valuable resource for the company. This is why accounts receivable is an asset, reported in the company’s balance sheet.
- To be useful To decision makers, accounts receivable should be reported at the amount of cash the firm expects To collect, an amount known as net realizable value.
What is the upside of companies selling goods and services to their customers on account and not just accepting cash payments at the time of purchase?
the upside, allowing customers theability To purchase on account andpay cash later boosts sales.
- the downside of extending credit tocustomers is that Not all customerswill pay fully on their accounts.
What is The Allowance Method
Involves allowing for the possibility that some accounts will be uncollectible at some point in future.Uncollectible accounts have the effect of:- reducing assets (accounts receivable) by an estimate of the amount we don’t expect to collect and- increasing expenses (bad debt expense) to reflect the cost of offering credit to customers.
Explain the process of Estimating Uncollectible Accounts and what method you use and how you record it.
A company specializes in emergency outpatient care. It doesn’t verify the patient’s health insurance, It knows that a high proportion of fees for emergency care provided will not be collected.
- Performed an amount of services.
- Only collected a partial amount of payments by the end of the year.
- X amount remains due from customers.
-Of this amount, you estimates that 30%is likely to be uncollected.
- you use the “Percentage-of receivablesmethod” to allow for these future uncollectible accounts is as follows:
Recorded as: Bad Debt Expense as a Debit Allowance for Uncollectible Accounts as a Credit
Apply the procedure to write off accounts receivable as uncollectible
Receives notice one your former patients has filed for bankruptcy.
You believe it is unlikely they will pay their account.
Remember, you previously allowed for the likelihood that some of your customers would not pay.
Now you know a specific customer will not pay, you can adjust the allowance and reduce the accounts.
Makes the following entry:Allowance for Uncollectible Accounts as a Credit Accounts Receivable as Debit
Contrast “the allowance method” and “direct write off method” when accounting for uncollectible accounts. Explain how they are recorded.
Recording bad debt expense at the time we know the account To be uncollectible.
- the direct write-off method is used for tax purposes but is generally Not permitted for financial reporting.Bad debt expense as Debit Accounts receivable as credit
Apply the procedure to account for notes receivable, including interest calculation.
Notes receivable are similar To accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note.
- Notes receivables are classified as either Current or Non current depending on the expected collection date.
- if the time to maturity is longer than oneyear, the note receivable is a long-termasset.
Define Recognize Accounts Receivable
credit sales Transfer products and services To a customer today while bearing the risk of collecting payment from that customer in the future.- Even though the seller does Not receive cash at the time of the credit sale, the firm records revenue immediately, as long as future collection from the customer is reasonably certain.- Along with the recognized revenue, at the time of sale the seller also obtains a legal right To receive cash from the buyer. the legal right To receive cash is valuable and represents an asset of the company.
Define “Percentage-of-receivables method.”
Percentage-of-receivables method Based on the estimate of bad debts on a balance sheet amount—accounts receivable or called the Balance sheet method.
The allowance method is required under Generally Accepted Accounting Principles, because it is consistent with:
A) The revenue recognition principle.
B) Properly recognizing the net realizable value of assets.
C) Good business practice.
D) Cash-basis accounting.
B
If a company uses the allowance method of accounting for uncollectible accounts and writes off a specific account,
A) Net accounts receivable increase.
B) Net accounts receivable decrease.
C) Net accounts receivable do not change.
D) The effect on net account receivables depends on the relationship between the allowance account balance and the amount of the write off
C
Which of the following is true for a company who uses the allowance method of accounting for uncollectible accounts?
A) Bad debt expense is recorded during the year of the credit sale.
B) Bad debt expense is recorded when a specific account is know to be uncollectible.
C) Bad debt expense is recorded after all of the current year’s credit sales are collected.
D) Bad debt expense is only recorded if they exceed 10% of credit sales.
A
Weiner Company's net credit sales were $500,000 during 2010. On December 31, the Accounts Receivable ending balance is $80,000. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a debit of $500 and that Weiner estimates that 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be: A) $5,000. B) $5,100. C) $5,600. D) $6,100.
D
Refer to the information in the previous question. Assume that the unadjusted balance of Allowance for Uncollectible Accounts is a credit of $500 and that Weiner estimates that 7% of the accounts receivable will not be collected. The amount of bad debt expense recorded on December 31 will be: A) $5,000. B) $5,100. C) $5,600. D) $6,100.
B
A sales discount is recorded by the seller as A) An expense. B) A contra asset. C) A contra revenue. D) A liability.
C
On April 1, 2012, Nelsen Inc. accepts a $100,000, 8% note. The note receivable and interest are receivable on March 31, 2013. On March 31, 2013, Nelson Inc. will record interest revenue of: A) $8,000. B) $6,000. C) $2,000. D) $0.
C
Refer to the information in the previous question. On December 31, 2012, Nelsen will accrue interest revenue of: A) $8,000. B) $6,000. C) $2,000. D) $0.
B
The entry to record the estimate for uncollectible accounts includes:
A) A debit to Allowance for Uncollectible Accounts.
B) A credit to Accounts Receivable.
C) A debit to Sales Revenue.
D) A debit to Bad Debt Expense.
D
Schmidt Company's accounts receivable balance is $100,000, its adjusted balance in Allowance for Uncollectible Accounts is $4,000, and its bad debt expense is $3,800. The net realizable value of accounts receivable is: A) $ 96,000. B) $ 96,200. C) $100,000. D) $104,000.
A
When a company collects a previously written off account:
A) The balance of Accounts Receivable will increase.
B) The balance of Allowance for Uncollectible Accounts will increase.
C) The balance of Bad Debt Expense will decrease.
D) The balance of Service Revenue will increase.
B
Define Sales Return
If a customer returns a product it is _______ _______. After a ________ _______. - We owe reduce the customer’s account balance if the sale was on account or - We owe issue a cash refund if the sale was for cash.
Define Sales Allowances
If a customer does not return a product, but the seller reduces the customer’s balance owed or provides at least a partial refund because of some deficiency in the company’s product or service, we call that a ______ _____________.
Define “Percentage-of-Credit Sales Method.”
Percentage-of-Credit sales method is Based on the estimate of bad debts on an income statement amount—credit sales or called the Income statement method.
Average days in inventory
Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.
Cost of goods sold
Cost of the inventory that was sold during the period.
Finished goods
Inventory items for which the manufacturing process is complete.
First-in, first-out method (FIFO)
Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out).
Freight-in
Cost to transport inventory to the company, which is included as part of inventory cost.
Freight-out
Cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense.
Gross profit
The difference between sales revenue and cost of goods sold.
Gross profit ratio
Measure of the amount by which the sale price of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales.
Income before income taxes
Operating income plus nonoperating revenues less nonoperating expenses.
Inventory
Items a company intends for sale to customers.
Inventory turnover ratio
The number of times a firm sells its average inventory balance during a reporting period. It equals cost of goods sold divided by average inventory.
Last-in, first-out method (LIFO)
Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out).
LIFO adjustment
An adjustment used to convert a company’s own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements.
LIFO conformity rule
IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting.
Lower-of-cost-or-market (LCM) method
Method where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost.
Multiple-step income statement
An income statement that reports multiple levels of income (or profitability).
Net income
Difference between revenues and expenses. Difference between all revenues and all expenses for the period.
Operating income
Profitability from normal operations that equals gross profit less operating expenses.
Periodic inventory system
Inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.
Inventory
Includes items a company intends for sale to customers. for example, clothes at the Limited,shoes at Payless Shoe Source, building suppliesat Home Depot, and so on.
- also Includes items that are not yet finished products. for instance, lumber at a cabinet manufacturer, and rubber at a tire manufacturer are Part of Inventory because the firm will usethem To make a finished product for sale to customers.
Trace the flow of inventory costs from manufacturing companies to merchandising companies
Inventory Merchandise company or Manufacturing company- Merchandise company goes to Wholesaler or Retailer - Manufacturing company goes to Raw material,Work in progress, or Finished goods
Inventory represents:Cost of goods sold represents:
Inventory represents: the COST of Inventory Not sold.
- COST of Goods Sold represents: the COST of Inventory sold.
- also referred To as COST of sales,
COST of merchandise Sold, or COST of products sold.- the costs of beginning Inventory plus additional purchases make up the COST of goods (or Inventory) available for sale.- beginning Inventory + purchases = COST of Goods available for sale which equates to Ending Inventory then COST of Goods Sold
Perpetual inventory system
Inventory system that maintains a continual record of inventory purchased and sold.
Raw materials
Components that will become part of the finished product but have not yet been used in production.
Replacement cost
The cost to replace an inventory item in its identical form.
Specific identification method
Inventory costing method that matches or identifies each unit of inventory with its actual cost.
Define a “Prepare a multiple-step incomestatement.”
for merchandising Companies, sales and purchases of Inventory are most important set of Transactions , Companies report revenues and expenses from these separately from other revenues and expenses.
- It makes easier for investors and other financial statement users to determine the profitability of a company’s Inventory transactions.
- Use the information for Incredible to calculate gross profit on the sale and purchase of inventory.
Define the steps in a “multiple-step incomestatement.”
Net sales $12,000 Cost of goods sold $ 8,046 Gross profit $ 3,954 Selling expenses $ 950 General and administrative expenses $ 804 Operating income $ 2,200 Non-operating revenues $ 100 Non-operating expenses ($ 300)Income before income taxes $ 2,000 Income tax expense $ 800 Net income $ 1,200
Weighted-average cost method
Inventory costing method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale.
Work-in-process
Products that have started the production process but are not yet complete at the end of the period.
What are the four means to determine the cost of goods sold and ending inventory? Different inventory cost methods.
Specific Identification- First in, First out. (FIFO)- Last in, First out (LIFO)- Average COST
In times of rising inventory costs, which inventory method generally results in the highest ending inventory? A) FIFO. B) LIFO. C) Weighted-average. D) Lower-of-cost-or-market.
A
Winner Company purchases 100 units of inventory from Neue Company for $1,000 on account. To encourage early payment, Neue Company offers the terms 2/10, n/30. If Winner pays nine days after the purchase, the cost of its purchase will be: A) $1,080. B) $1,020. C) $1,000. D) $ 980.
D
Which of the following generally is found in the balance sheet of a manufacturing company?
A) Finished goods.
B) Work in process.
C) Raw materials.
D) All three accounts are found in a manufacturer’s balance sheet.
D
Suppose that Witchel Company’s ending inventory is understated by $500 at the end of the year. If the error is not discovered, the company’s gross profit for the year will be
A) Overstated.
B) Understated.
C) Stated correctly.
D) The effect of the error will depend on the sales price of the inventory.
B
Snow Company's net sales revenue is $200,000, its cost of goods sold is $110,000 and its operating income is $20,000. How much are Snow Company's operating expenses? A) $90,000. B) $70,000. C) $50,000. D) $20,000.
B
At the end of the year, Marline Corporation determines that its ending inventory has a cost of $2,000 and a market value of $1,900. What would be the effects(s) of the adjustment to write-down inventory to market value?
A) Decrease in net income.
B) Increase in net income.
C) Increase in cost of ending inventory.
D) No effect on net income and ending inventory.
A
Which cost flow assumption generally results in the lowest reported amount of net income in periods of rising inventory costs?
A) LIFO.
B) FIFO.
C) Weighted-average.
D) Income will be the same under each assumption.
A
Weichtel Company’s beginning inventory was $20,000. During the year, Weichtel purchases inventory costing $100,000. Based on a physical count at the end of the year, Weichtel determines that the ending inventory is $28,000. How much was cost of goods sold for the year? A) $148,000.
B) $108,000.
C) $100,000.
D) $ 92,000.
D
Schnell Company purchases inventory for $100,000 on account. Shipping terms are FOB destination; Schnell pays shipping cost of $5,000. Prior to paying for the purchase, Schnell discovers that some of the inventory was damaged and receives an allowance of $7,000. Net purchases are: A) $107,000. B) $105,000. C) $100,000. D) $ 98,000.
D
Weiss Company’s beginning inventory was $10,000. During the year, Weichtel purchases inventory costing $100,000. Based on a physical count at the end of the year, Weichtel determines that the ending inventory is $8,000. How much is cost of goods available for sale? A) $110,000.
B) $100,000.
C) $102,000.
D) $ 98,000
A
For a manufacturing company, the cost of items not yet complete at the end of the period are shown in the A) Cost of goods sold account. B) Raw materials account. C) Work in process account. D) Finished goods account.
C
Fan Company purchases inventory on account for $2,500. The entry to record this purchase using a perpetual inventory system would include a: A) Debit to Purchases. B) Debit to Inventory. C) Credit to Accounts Receivable. D) Debit to Accounts Payable
B
Valance Company purchased a 2-year insurance policy on April 1, 2010 and debited Prepaid Insurance for $3600.
$3600/24= $150 per month
Insurance Expense $150
Prepaid Insurance $150
On April 1, 2010 a tenant in an apartment building owned by the Valance Company paid $4500, which represents three months’ rent in advance. The amount revised was credited to the Unearned Rent account.
$4500/3 = $1500
Unearned Rent $1500
Rent Revenue $1500
On March 31, 2010, the Valance Company purchased a delivery van for $30,000. It is estimated that the annual depreciation will be $7,500.
$7500 / 12 = $625 per month Depreciation Expense $625 Accumulated Depreciation $625
Valance Company has two office employees who earn $100 and $125 per day, respectively. They are paid each Friday for a five-day work week that begins each Monday. June 30 is a Wednesday in 2010.
$225 @ 3Days = $675 Salaries Expense $675 Salaries $675
The accumulated Depreciation account is an(a)a. contra asset
b. liability
c. asset
d. operating expense
A
Define “Specific Identification.”
This method you might think of as the most logical.- It matches or identifies each unit of Inventory with its actual cost.- Practicable only for Companies selling unique, expensive products.
Transactions are initially recorded in the
a. ledger
b. trial balance
c. journald. balance sheet
C
A credit will reduce _____________, but increase _____________.
a. accounts receivable; accounts payable
b. expenses; accounts receivable
c. accounts payable; common stock
d. common stock; prepaid insurance
A
An accrued expense account represents expenses that have
a. that have been used and paid
b. been paid but not used
c. not been used or paid
d. been used but not paid
D
The book value of a depreciable asset is defined as the asset’s
a. cost less accumulated depreciation
b. current market value
c. replacement cost
d. cost
A
A business pays weekly salaries of $15,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on Thursday is:
a. Debit Salaries Payable, $12,000; credit cash $12,000
b. Debit Salaries Expense, $12,000; credit cash $12,000
c. Debit Salaries Expense, $12,000; credit accounts payable $12,000
d. Debit Salaries Expense, $12,000; credit Salaries Payable $12,000
D
. What a customer returns goods for credit, the seller should
a. Credit Accounts Receivable
b. Credit Accounts Payable
c. Debit accounts Receivable
d. Credit Merchandise Inventory
A
Credit terms of 3/10, n/30 means that a(n)
a. 10% cash discount may be taken if payment is made immediately; a 3% discount if paid
b. 3% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise the full amount is due within 30 days.
c. 3% cash discount may be taken if payment is made within 10 days of the invoice data; otherwise the full amount is due at the end of the month.
d. Additional amount equal to 3% of the invoice price must be paid if payment is not received within 10 days; the account is overdue after 30 days.
B
In accordance with the revenue recognition principle, sales revenues are recorded when
a. Earned, which typically occurs when the goods are transferred from the seller to the buyer
b. Cash is received from the customer for items already delivered.
c. An order received from a customer with delivery of the product expected to take within the next 30 days.
d. The accountant determines which period’s income statement “needs” more revenue.
A
Which of the following items would appear in the income statement of both a merchandising company and a service company?
a. Cost of goods sold
b. Gross profit
c. Operating expenses
d. Sales
C
Fright terms of FOB destination point mean that the
a. buyer must bear the freight costs.
b. seller must debit fright out
c. goods are placed free on board at the buyer’s place of business.
d. it is not decided who will pay the freight cost.
C
A corporation with total stockholder’s equity of $75,000 paid a $12,000 business debt. As a result of this transaction, total stock holder’s equity:
a. Did not change
b. Increased by $12,000
c. Decreased by $12,000
d. Increased to $75,000
A
The Sales Returns and Allowances account
a. Normally has a credit balance.
b. Should not be closed at the end of the period.
c. Is a contra account to Accounts Receivable
d. Is a contra Sales account.
D
An entry debiting Accounts payable and crediting Inventory indicates a
a. Sale on account to the customer
b. LCM is an example of the revenue recognition principle.
c. Return of goods originally sold on account to a customer.
d. Return of good originally purchased on account to the supplier
C
On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. How would Flores record the sales on November 10?
a. Accounts Receivable 7,840 Sales Revenue 7,840
b. Accounts Receivable 8,000 Sales Revenue 8,000
c. Accounts Receivable 7,840 Cash Discounts 160 Sales Revenue 8,000
d. Accounts Receivable 8,000 Cash Discounts 160 Sales Revenue 7,840
B
- Baker Fine Foods has beginning inventory for the year of $12,000. During the year, Baker purchases inventory for $150,000 and ends the year with $20,000 of inventory. Baker will report cost of goods sold equal to:
a. $150,000
b. $158,000
c. $142,000
d. $170,000
C $ 12,000 + $150,000 = $162,000 - $20,000 = $142,000
Define “First in, first out. (FIFO)”
matches physical flow for most companies.- Results in higher assets and net income when Inventory costs are rising.- Has a balance sheet focus.
Define “Last in, first out (LIFO)”
Results in tax savings when Inventory costs are rising.- Has an income statement focus.
Define “the lower-of-cost-or market method” for inventories.
when the value of Inventory falls below its COST, Companies are required To report Inventory at the LOWER MARKET value. and It is considered To be the replacement cost.- Once It Has determined both the COST and MARKET value of Inventory, the company reports Ending Inventory in the balance sheet at the LOWER of the two amounts.
Define management of inventory using the inventory turnover ratio and gross profit ratio.
if managers purchase too much Inventory, the company runs the risk of the Inventory becoming obsolete and MARKET value falling below cost.- Analysts as well as managers often Use the Inventory turnover ratio To evaluate a company’s effectiveness in managing its investment in inventory.- investors often rely on the gross profit ratio To determine the core profitability of a company’s operations.
Inventory turnover ratio shows the number of times the firm sells its average inventory balance during a reporting period. what’s the math?
Inventory turnover ratio = Cost of goods sold/Average inventory
Average days in inventory indicates the approximate number of days the average inventory is held. What’s the math?
Average days in inventory = 365/Inventory turnover ratio
The procedure of transferring journal entries to ledger accounts is calleda. journalizingb. ledgeringc. recordingd. posting
D
