Accounting Exam 2

Question 1

Matching Principle

Answer 1

Record expenses in the same period, matched with the recording of related revenues

Question 2

Deferral Adjusting Entries

Answer 2

Prepaid Expenses and Unearned Revenues

they are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.

Question 3

Accrual Adjusting Entries

Answer 3

Accrued Revenues and Accrued Expenses

Question 4

Merchandising vs Manufacturing Inventory Classification

Answer 4

Merchandising: Inventory
Manufacturing: Raw Materials, WIP, Finished Goods

Question 5

Periodic Inventory System and formula

Answer 5

Inventory is Tracked Monthly
Beg. Inv. + Purchases = Cost of Goods Available for Sale

Then Cost of Goods Available for Sale - Ending Inventory = COGS

Question 6

First in First Out (FIFO)

Answer 6

Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.

Often parallels actual physical flow of merchandise

Question 7

Last-In, First-Out (LIFO)

Answer 7

Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold.

Seldom coincides with actual physical flow of merchandise.

Exceptions include goods stored in piles, such as coal or hay.

Question 8

Average Cost Method

Answer 8

Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.

Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.

Question 9

Example of Average Cost Calc

Answer 9

See session 6 slide 18

add multiple each batch of purchases by their independent unit cost. Add all the total dollar cost of those and divide by the number of total units.
This equals your Average Unit Cost

Question 10

FIFO: FINANCIAL STATEMENT AND TAX EFFECTS

Answer 10

Results in:

1. highest ending inventory (positive)
2. lowest COGS expense (positive)
3. highest Tax expense (negative)
4. highest net income (positive)

Question 11

LIFO: FINANCIAL STATEMENT AND TAX EFFECTS

Answer 11

Results in:

1. lowest ending inventory (negative)
2. highest COGS expense (negative)
3. lowest tax expense (positive)
4. lowest net income (negative)

Question 12

AVERAGE COST: FINANCIAL STATEMENT AND TAX EFFECTS

Answer 12

Middle of the road for all four: inventory, COGS, tax expense and net income

Question 13

Inventory Turnover Ratio

Answer 13

COGS/Avg. Inventory

Question 14

Days in Inventory Calc

Answer 14

365/Inventory Turnover, results in the approximate time it takes a company to sell the inventory

Question 15

Accounts Receivable are recorded at what?

Answer 15

Net Realizable Value, which is the collectable amount

Question 16

GAAP AR method is called?

Answer 16

Allowance Method

Results in better matching and receivables stated at NRV

Question 17

Allowance Method Procedures

Answer 17

1. Companies Estimate uncollectable AR
2. DR Bad Debt Expense, CR Allowance for the estimate
3. To write off you DR Allowance and CR AR

Question 18

AR Turnover Ratio

Answer 18

Net Sales Revenue/Avg AR

Question 19

Days in AR Calc

Answer 19

365/AR Turnover, represents the average collection period

Question 20

Cost vs Depreciable Cost

Answer 20

Cost = historical cost of asset

Depreciable cost = Cost minus Salvage value (use this cost to divide the useful life by)

Question 21

Salvage Value

Answer 21

value of the asset at the end of its useful life

Question 22

Expense difference between Straight line and Declining Balance

Answer 22

Straightline expense = same expense amount each year
Declining balance = takes much heavier expense at the beginning of the assets life, vs much smaller expense towards the end of the assets life

Question 23

Accrual Basis Accounting

Answer 23

Record transactions in period in which event occurs
Recognize revenues when services are performed
Recognize expenses when incurred
Allowed by GAAP

Question 24

Cash basis Accounting

Answer 24

Revenues are recorded when cash is received
Expenses recorded when cash is paid
Not in accordance with GAAP

Question 25

Adjusting Entries

Answer 25

necessary to keep trial balance up to date
required every time a company prepares financial statements
always affects on P&L account and one Balance sheet account

Question 26

4 reasons to use allowance method?

Answer 26

• Losses are estimated
• Better Matching
• Receivables stated at net realizable value
• Required by GAAP

Question 27

Book value

Answer 27

the difference between the cost of any depreciable asset and its accumulated depreciation
note: not the same as FMV

Question 28

Notes Payable and Interest expense entry

Answer 28

Cash
N/P
Interest Expense
Int. Payable

to get monthly interest multiply APR interest rate x principle and divide by 12 months

Question 29

Bonds Payable definition

Answer 29

interest bearing notes payable
sold in smaller denominations
corporation is borrowing money when they issue bonds.
Generally a non-current asset

Question 30

Stockholder rights

Answer 30

VOTE in the election of the BOD and on actions that require stockholder approval
SHARE in the corporate earnings through receipt of dividends

Question 31

Preemptive right

Answer 31

still keep the same percentage of ownership when new shares of stocks are issued (does not dilude your value)

Question 32

Residual claim

Answer 32

proportionate shares in assets upon liquidation

Question 33

Authorized stock

Answer 33

amount of stock a corporation is authorized to sell and reported in stockholders equity section

Question 34

Ways to issue stock

Answer 34

direct to investors

indirectly through an investment banking firm (more popular)

Question 35

Par value stock vs No Par value stock

Answer 35

par values is assigned a value per share vs no par value does not but is fairly common

Question 36

Record stock with par and no par value:
example with $1 par value:
a) 1000 shares at $1 per share
b) 1000 shares at $5 per share

Answer 36

a) cash $1000
common stock $1000

b) cash $5000
common stock $1000
APIC $4000

Question 37

Treasury Stock

Answer 37

corporations own stock that has been reacquired by the corporation and is being held for future use

Question 38

Rationale behind treasury stock purchases

Answer 38

1. Bonus and Stock Comp Plans for employees
2. Increase trading of the stock
3. Aditional shares to Acquiring other companies
4. Increase EPS
5. Prevent hostile takeovers

Question 39

Treasury Stock recording rules and example:

a) $4000 shares at $8 per share

Answer 39

DR treasury stock for price paid, recorded at cost method, and contra-equity account.

DR Treasury Stock $32000
CR Cash $32000

Question 40

Difference between shares issued and outstanding

Answer 40

The amount of treasury stock purchased by the company