Accounting Exam 2

Question 1

Capitalization cost

Answer 1

(Purchase price of asset) + (All cost incurred in getting asset ready for use)

Question 2

Lump sum purchase

Answer 2

Company purchases more than one asset for a price. Find percent asset takes up of total market value and multiply it by the lump sum purchase

Question 3

Depreciation

Answer 3

Allocation of the cost of plant asset over its useful life (using up the asset) because matching concept.
NOTHING to do with value of asset decreasing
Land does not depreciate

Question 4

How to record depreciation

Answer 4

Debit: Depreciation expense
Credit: Accumulated depreciation

Question 5

Accumulated depreciation is what account?

Answer 5

Contra asset (causes decrease in assets)

Question 6

Book Value

Answer 6

(Cost of asset) - (Accumulated depreciation) = Book Value

Decreases each year because accumulated depreciation increases

Question 7

Straight line depreciation

Answer 7

(Cost - Salvage value) / (Life in years)

Constant depreciation per year

Question 8

Relationship between salvage value and fully depreciated asset

Answer 8

They are equal

Question 9

Sum of the years digits depreciation

Answer 9

(Cost - Salvage value) x (LIFE / SYD)

LIFE: decreases every year
SYD: Ex: 5 = 5+4+3+2+1
Accelerated method: More depreciation in early years

Question 10

Double declining balance depreciation

Answer 10

(Book value at beginning of yr) x (2 / LIFE)

Book value: Changes every year
(2 / LIFE): Constant
Accelerated method: More depreciation in early years

Question 11

Depreciation type differences:
A) Highest income in 1st year?
B) Income tax advantage?

Answer 11

A) Straight line
B) Accelerated methods

Question 12

3 Categories of inflows and outflows

Answer 12

Operating activities
Investing activities
Financial activities

Question 12

Sale of PPE equation

Answer 12

(Book value at date of sale) - (selling price)
Positive is loss (note selling price compared to value)

Question 12

Operating activities section

Answer 12

Inflows/outflows related to normal course of business operations
Revenues and expenses from income statement

Question 12

Accounts ignored in operating activities section

Answer 12

Depreciation expense
Gains
Losses

Question 13

Financing activities section

Answer 13

Involve bank loans (borrowing or repaying funds) (interest in operating activities)
Stockholders’ equity (sale of stock or paying dividends)

Question 14

Investing activities section

Answer 14

Inflows/outflows related to purchase and sale of long term assets and investments
(Buy/Sell: PPE, intangibles, investments)

Question 15

Statement of cash flows

Answer 15

Finds net change in cash by taking sum of each section
Operating activities = should be positive
Investing activities = should be negative (investing in self)
Financing activities = + or -

Question 16

A) How do you record bad debt expense
B) To what methods is bad debt expense estimated from?

Answer 16

A) Debit: Bad debt expense
Credit: Allowance for bad debts
B) Aging method, which conforms to matching concept

Question 17

‘Allowance for bad debts’ is a what type of account

Answer 17

contra asset account (normal = credit)

Question 18

Amount recorded for bad debt expense is an _______ because of the matching concept

Answer 18

Estimate
Matching concept: Expenses are recorded in the same period the revenues are earned

Question 19

Net Realizable Value (NRV)

Answer 19

(Accounts Receivable) - (Allowance for bad debts)

Question 20

Allowance for bad debt T account

Answer 20

Debit: Write offs
Credit: Beginning Balance + Bad debt expense
——————————————————————————-
Credit: Ending Balance

Question 21

FIFO

Answer 21

Assigns oldest inventory cost to COGS
Assigns the newest inventory cost to ending inventory

Question 22

LIFO

Answer 22

Assigns the newest inventory cost to COGS
Assigns the oldest inventory cost to ending inventory

Question 23

Weighted Average

Answer 23

Assigns the same unit cost to both COGS and ending inventory

Question 24

Weighted average cost per unit formula

Answer 24

(Cost of beginning inventory + Cost of purchases) / (Units in beginning inventory + Units purchased)

Question 25

Segregation of duties? What account functions must be separated?

Answer 25

Ensures more than one person involved in transaction from beginning to end
Authorization, Recording, and Custody

Question 26

Sale discounts account type?

Answer 26

Contra revenue account.

Question 27

How is 3/10, n/30 read in terms of discounts

Answer 27

3% discount within 10 days of purchase, after that rest of balance is due within 30 days.

Question 28

Cash received from discount calculation

Answer 28

Discount = (Amount paid in discount period) (% Discount)
Cash Received = Balance - Discount