Accounting 260 - Exam One

Question 1

What is the basic accounting equation?

Answer 1

Assets = Liabilities + Stockholders’ Equity (+ Revenues - Expenses)

Question 2

How do you find Net Income?

Answer 2

Net Income = Revenues - Expenses

Question 3

What are current assets and current liabilities?

Answer 3

current assets are assets that businesses will use up or turn into cash within 12 months on the balance sheet date; current liabilities are debts and other obligations that will be paid or fulfilled within 12 months of the balance sheet date

Question 4

Current ratio?

Answer 4

current ratio = current assets / current liabilities; tells us whether current assets are sufficient to pay current liabilities, evaluate liquidity, high current ratio is good; usually range 1,0 -2,0

Question 5

quick ratio?

Answer 5

quick ratio = cash + short-term investments + accounts received / current liabilities; measure companys capacity to pay its current liabilities without needing to sell inventory or obtain additional financing

Question 6

Debt-to-Asset ratio?

Answer 6

debt-to-asset ratio = total liabilities / total assets; shows how much a business is owned by creditors compared with how much the company’s assets are owned by shareholders

Question 7

Gross profit %?

Answer 7

Gross profit % = Net sales - COGS / Net sales - compare company’s production efficiency over time

Question 8

profit margin %

Answer 8

net income / sales (revenue) (multiple by 100 to get percentage)

Question 9

working capital equation

Answer 9

working capital = current assets - current liabilities

Question 10

Income statement

Answer 10

financial performance of the business during the current accounting period; Revenues - Expenses = Net income; sales revenue, wages expense, rent expense, etc.

Question 11

Statement of Retained Earnings

Answer 11

earnings retained in the business during the current accounting period added to those of prior periods; beginning of RE + Net income - Dividends = Ending RE; NI comes from income statement; Retained earnings are the amount of profit a company has left over after paying all its direct costs, indirect costs, income taxes and its dividends to shareholders.

Question 12

Balance Sheet

Answer 12

the financial position of a business at a point in time! Assets = Liabilities + Stockholders’ Equity; Assets, current assets, total assets, Liabilities, current L, total L, SE, total L & SE; cash, receivables, supplies, etc.

Question 12

Statement of Cash Flows

Answer 12

Activities that caused increases and decreases in cash during the current accounting period ; Cash collected from customers, cash paid to suppliers, cash paid for equipment

Question 13

What is debited?

Answer 13

Assets (cash, A/R, Supplies, Inventory, prepaid expenses, investments, PPE, Intangible assets) Expenses, Dividends increase with assets

Question 14

What is Credited?

Answer 14

Liabilities (A/P, Rent payable, Income tax payable, Salaries & Wages Payable, Deferred Revenue, N/P,) Stockholders’ Equity (common stock, preferred stock, retained Earnings) Revenue increase with credit

Question 15

” Is she B/S?”

Answer 15

1. Income statement 2. Statement of Stockholders’ Equity (RE) 3. Balance sheet

Question 16

Accounting Process (start to finish)

Answer 16

Analyze Transactions –> JE –> General Ledger (T-accounts) –> Unadjusted TB –> adjust JE –> T account edit –> adjusted trial balance –> create financial statements –> closing JE –> close out T accounts –> Post closing trial balance

Question 17

What are temporary accounts and what are examples?

Answer 17

accounts where balance is not carried forward ; revenue, expense (COGS, supplies, salaries), gain and loss, interest

Question 18

what is cash basis accounting? (don’t really use)

Answer 18

only record when tangible cash is involved; recognizes revenues and expenses at the time cash is received or paid out

Question 19

what is accrual basis accounting?

Answer 19

recognizes income at the time the revenue is earned and records expenses when liabilities are incurred regardless of when cash is received or paid; also during the time the service happens (even if tangible cash isn’t involved)

Question 20

Earnings per Share?

Answer 20

EPS = Net income / average # of common shares outstanding

Question 21

Receivables turnover? (not as important)

Answer 21

Net sales revenue / avg. net receivables

Question 22

Inventory turnover? (not as important)

Answer 22

COGS / avg. inventory

Question 23

what is and what ratios are included in Profitability ratios?

Answer 23

indicate how efficiently a company generates profits/ income; Net profit, gross profit and earnings per share

Question 24

what is and what ratios are included in Liquidity ratios?

Answer 24

measures company’s ability to pay debt obligations with current assets; current ratio, quick ratio, turnovers

Question 25

what is and what ratios are included in Solvency ratios?

Answer 25

measures the extent to which assets cover commitments for future payments, the liabilities; debt-to-asset ratio

Question 26

what is never apart of an adjusted journal entry?

Answer 26

cash because its an transaction point

Question 27

what is a revenue?

Answer 27

when a service or good has been provided / work has been done!; recognize revenue when we satisfy a liability (unearned revenue –> revenue) or when we create an asset (sales!)

Question 28

what is an expense?

Answer 28

usage of an asset (inventory decrease –> COGS expense) or incur an liability (salaries payable –> salaries expense)

Question 29

How do we record PPE?

Answer 29

with its historical cost - what we paid for it (not value gain or loss)

Question 30

what is depreciation expense?

Answer 30

based on usage (not loss of value)

Question 31

what is SEC?

Answer 31

Security and exchange commission; regulates publicly traded companies, power over financial statements and financial reports - companies have to submit (congress control, but we vote in congress)

Question 32

GAAP?

Answer 32

Generally Accepted Accounting Principles; standards for companies to follow; GAAP different of US and rest of world

Question 33

FASB?

Answer 33

Financial Accounting Standards Board: writes accounting standards; private organization (not for profit)

Question 34

depreciation expense

Answer 34

cost of an asset that has been depreciated for a single period, shows how much of that assets value has been used up in that year (begin on debit) ; recorded on the income statement as an expense or debit, reducing net income; gets closed out (temporary account)

Question 35

accumulated depreciation

Answer 35

total amount of depreciation expense that has been allocated for an asset since the asset was out to use (begin in credit) ; subtract from assets as an asset ; is not temporary