Accounting Exam Review Flashcards
What is the basic accounting equation
Assets - Liabilities = Owners Equity
What is the expanded Accounting equation
Assets = Liabilities + Owner’s Capital - Drawings + profit or (- for loss)
What is the matching principle
According to the matching principle, expenses should be recognized in the same period in which they help to generate revenue.
What is the revenue recognition principle
According to this principle, revenue should be recognized when it is earned and realizable, regardless of when the payment is received
What is the time period assumption
The time period assumption in accounting is the idea that a business’s financial activities can be divided into specific time periods, such as months, quarters, or years. This assumption allows companies to create financial statements that provide useful information for decision-making.
Why are adjusting entries needed?
Adjusting entries are necessary in accounting to ensure that financial statements accurately reflect a company’s financial position and operating results. These entries are made at the end of an accounting period, typically before the preparation of financial statements, and serve several important purposes:
What are prepayments
Accounting prepayments, also known as prepaid expenses, refer to payments made by a company for goods or services that will be received or used in the future. These payments are made in advance of actually receiving the benefits associated with them.
What are unearned revenues
epresents payments that a company has received in advance for goods or services that it has not yet delivered or earned. In simple terms, it’s money that a business has received but has not yet recognized as revenue because it owes something in return.
What are accrued revenues
Accrued revenues in accounting represent revenues that a company has earned but has not yet received payment for. In simple terms, it’s the recognition of revenue before actually receiving the cash.
What are accrued expenses
Accrued expenses in accounting refer to costs or expenses that a company has incurred but has not yet paid. In simple terms, these are expenses that have been accrued or accumulated but have not been settled with a cash payment.
What is depreciation
Depreciation in accounting is a method used to allocate the cost of a long-term asset over its useful life. In simpler terms, it represents the gradual decrease in the value of an asset over time. This decrease reflects the wear and tear, obsolescence, or other factors that affect an asset’s ability to generate economic benefits.
What is the contra account for depreciation
A contra account, specifically “Accumulated Depreciation,” is used in accounting to offset the value of an asset on the balance sheet. It represents the total depreciation expense recognized on an asset over its useful life.
What is net book value
Net book value in accounting refers to the remaining value of an asset on a company’s balance sheet after deducting its accumulated depreciation. It represents the original cost of the asset minus the total depreciation recognized up to a specific point in time.
What is the purpose of closing entries
Closing entries serve the purpose of resetting temporary accounts in a company’s accounting records at the end of an accounting period. These temporary accounts include revenue, expense, and dividend accounts. The primary goals of closing entries are to prepare the accounts for the next accounting period and to accurately measure the net income or loss for the current period.
What are the accounts you close and in what order
REID
Revenues
Expenses
Income summary
Drawings
What are permanent Accounts
Permanent accounts, in accounting, are the accounts that carry over from one accounting period to the next and do not get closed at the end of each period. Unlike temporary accounts (such as revenue, expense, and dividends accounts), which are reset to zero to measure performance for a specific period, permanent accounts maintain their balances continuously.
What are temporary accounts
Temporary accounts in accounting are those that record specific financial activities for a limited period, typically within a single accounting cycle. These accounts include revenue accounts, which capture income generated from sales and services, and expense accounts, which track the costs incurred to operate the business.
What are some examples of Permanent Accounts
Asset Accounts:
Cash
Accounts Receivable
Inventory
Property, Plant, and Equipment (e.g., buildings, machinery)
Investments
Liability Accounts:
Accounts Payable
Loans Payable
Accrued Liabilities
What are some examples of Temporary Accounts
Revenue Accounts:
Sales
Service Revenue
Interest Income
Rental Income
Expense Accounts:
Rent Expense
Salaries Expense
Utilities Expense
Advertising Expense
what is the differences between a trial balance, an adjusted trial balance, and post-closiing trial balance
Trial Balance:
Purpose: A trial balance is a list of all the accounts in a company’s general ledger and their respective balances. It is created at the end of the accounting period to ensure that the total debits equal the total credits, serving as an initial check on the accuracy of the accounting records.
Timing: Prepared before any adjustments are made.
Adjusted Trial Balance:
Purpose: An adjusted trial balance is created after adjusting entries have been made to the accounts. Adjustments are necessary to recognize accruals, prepayments, and other adjustments to ensure that financial statements reflect the true financial position of the company.
Timing: Prepared after adjusting entries are applied.
Post-Closing Trial Balance:
Purpose: A post-closing trial balance is compiled after the closing entries have been made. Closing entries involve resetting temporary accounts (revenue, expense, and dividends) to zero, and the post-closing trial balance ensures that only permanent accounts (assets, liabilities, equity) are considered. It serves as a starting point for the next accounting period.
Timing: Prepared after closing entries are applied.
What is the current ratio and how can it be calculated
The current ratio is a financial metric used to assess a company’s short-term liquidity or its ability to cover its short-term liabilities with its short-term assets. It provides a snapshot of a company’s ability to meet its short-term obligations.
The formula for calculating the current ratio is:
Current Ratio = Current Assets/Current Liabilites
What is liquidity
In accounting, liquidity refers to the ability of a company to meet its short-term financial obligations or, in simpler terms, how easily it can convert its assets into cash to cover its immediate liabilities.
How should physical inventory be taken
- the counting should be done by employees who are not responsible for custody of the inventory, or keeping the records
- Each counter should confirm that each inventory item actually exists, how many there are of it, and what condition each item is in
- There should be a second count by another employee to ensure that all inventory items are counted, and only once
How is ownership determined?
By answering the follwing questions:
- Do all the goods included in the count belong to the company?
- Does the company own any goods that were not included in the count?
What are consigned goods?
Consigned goods in accounting refer to products or inventory that are placed at a location (e.g., a store or warehouse) by the owner, known as the consignor, for the purpose of sale. However, the consignee, the entity at the location where the goods are placed, does not own the goods; they only facilitate the sale on behalf of the consignor. Here’s a simple breakdown:
Ownership: The consignor (owner) retains ownership of the goods even though they are physically located at the consignee’s premises.
Arrangement: The consignor and consignee typically have a consignment agreement outlining terms such as the consignment period, sales commission, and return policy.
Recording in Books:
Consignor’s Books: The consignor continues to record the consigned goods in their books as part of inventory.
Consignee’s Books: The consignee may not record the consigned goods as part of their inventory because they don’t own them.
Explain FOB Shipping Point
With FOB Shipping Point, ownership of the goods transfers from the seller to the buyer at the moment the goods are shipped. This means that the buyer assumes ownership and the associated risks once the goods leave the seller’s premises.
Explain FOB Destination
“Destination” means the goods are considered owned by the seller until they reach the buyer’s specified destination.
Explain Specific Identification
The specific identification method is an accounting approach used to track the cost of individual items in inventory separately. Instead of applying a general cost average or using the first-in-first-out (FIFO) or last-in-first-out (LIFO) methods, specific identification identifies and matches the actual cost of each specific item sold. Here’s a simple explanation:
Identification of Items:
Each individual item in inventory is assigned a unique identifier, such as a serial number, batch number, or other distinguishing feature.
Tracking Costs:
The actual cost of each specific item is recorded and tracked separately in the accounting records. This includes the purchase cost, any additional costs (e.g., shipping), and related expenses.
Matching Costs to Sales:
When a sale occurs, the specific identification method matches the cost of the sold item to the revenue generated from that sale. This means the exact cost of the particular item sold is used for cost of goods sold (COGS).
Accuracy and Precision:
The specific identification method provides a highly accurate and precise way of determining the cost of goods sold. It is particularly useful for businesses dealing with unique or high-value items.
Common in Certain Industries:
This method is commonly used in industries where items have distinct and traceable characteristics, such as jewelry, artwork, or customized products.
explain the inventory turnover ratio
It indicates how many times a company sells and replaces its average inventory during a specific period. A higher inventory turnover ratio generally suggests better inventory management.
COGS/Avg Inventory = Inventory turnover
What are NSF Cheques?
NSF (Not Sufficient Funds) checks, in accounting, refer to checks that are returned by a bank because the account holder does not have enough funds to cover the check amount.
What is day sales in inventory
It converts the inventory turnover ratio into a measure of the average age of the inventory on hand.
Days in year/Inventory Turnover = Days Sales in inventory
What is the point of internal control
- Ensure reliable financial reporting
- Effective and efficient operations
- Compliance with laws & regulations
What are the 5 basic internal control systems
- Control Environment
- Risk Assessment
- Control Activities
- Information & Communication
- Monitoring
What are over the counter receipts
Over-the-counter (OTC) receipts in accounting refer to payments or transactions that take place directly at a physical location, such as a retail store or a service provider’s office, rather than through electronic or online channels.
What are mail in receipts
Mail-in receipts in accounting refer to physical or electronic receipts that are sent to a business by mail or through electronic means. These receipts provide evidence of financial transactions and are important for record-keeping and accounting purposes.
What are the limitations of internal control
Reasonable assurance: costs of internal control should NOT outweigh the benefits
Human Element: Fatigue, Carelessness, lack of training
Collusion: 2 or more employees trying to circumvent the controls
Size of business: Internal control is more effective in smaller businesses
What is a receivable
in accounting, a receivable refers to the amount of money that a business is entitled to receive from its customers or other parties due to the sale of goods or services on credit. It represents a claim or right to receive payment in the future.
what is the allowance method of valuing receivables
The allowance method is an accounting approach used to estimate and record uncollectible accounts receivable. It involves creating an “allowance for doubtful accounts” on the balance sheet to reflect the anticipated portion of receivables that may not be collected.
what is the form of the adjusting entry that is made at the end of an accounting period to record estimates of bad debt
Bad Debt Expense:
Debit (Increase): An adjusting entry is made to increase the “Bad Debt Expense” account on the income statement. This reflects the estimated amount of uncollectible accounts for the period.
Allowance for Doubtful Accounts:
Credit (Increase): A corresponding adjusting entry is made to increase the “Allowance for Doubtful Accounts” account on the balance sheet. This account represents the estimated amount of uncollectible accounts and serves as a contra-asset to reduce the reported value of accounts receivable.
How do you record writing off uncollectible accounts
DEBIT: Allowance for doubtful accounts
CREDIT: Accounts Receivable
What is Bad Debt
In accounting, bad debt refers to the portion of accounts receivable that a business expects will not be collected from its customers. It represents money owed by customers that the company anticipates will not be recovered.
what are 2 ways of estimating uncollectibles
- percentage of receivables approach
- Aging Schedule
What is a long lived asset
A long-lived asset in accounting refers to a tangible or intangible asset that a company owns and expects to use for an extended period, typically more than one accounting period. These assets are not intended for immediate sale but are held for long-term use in the business.
Examples include buildings, machinery, vehicles, and land. These assets have a physical existence and are used in the day-to-day operations of the business.
Name the full accounting cycle
- Identify Transactions
- Recording Transactions
- Post To ledger
- Adjusting Entries
- Trial Balance
- Financial Statements
- Closing Entries
- Post Closing Trial Balance
What are the 3 different ways to calculate depreciation
- Straight Line
- Diminishing Balance
- Units Of Production
How does management choose a depreciation method
Choosing a depreciation method in accounting is a strategic decision that involves careful consideration of various factors by the management of a company. One crucial factor is the nature of the asset itself. Different assets exhibit distinct characteristics, and the choice of a depreciation method should align with the specific features of each asset. For instance, assets used in production may be more accurately depreciated using units of production, while office buildings might be better suited for the straight-line method.
The usage pattern of the asset over time is another critical consideration. If an asset is expected to generate more revenue in its early years, an accelerated method like double-declining balance might be chosen to front-load depreciation expenses. On the other hand, if the asset’s usage is consistent, the simplicity of the straight-line method may be preferred.
The financial goals of the company play a significant role in the decision-making process. The chosen depreciation method can impact financial statements and profitability. Accelerated methods may lead to higher expenses and lower reported income in the early years, which could be advantageous for tax purposes or to align with the actual wear and tear of the asset.
What is a cash flow statement
A cash flow statement is a financial statement that provides a summary of how a company generates and uses cash over a specific period of time. It is useful for understanding a company’s ability to generate cash, meet its short-term obligations, and fund its ongoing operations.
What is Accrual Based Accounting
Events are recorded in the period when they occur, not when cash is paid
What is cash based accounting
Revenue is recorded when cash is received, expenses recorded when cash is paid
When is revenue recognized
Revenue is recognized when there is an increase in assets or a decrease in liabilities as a result from a business activity with customers
What are the three things in the fraud triangle
Rationale, opportunity, motive
What are the 3 main types of workplace fraud
theft or misappropriation of assets, corruption or conflict of interest, and fraudulent reporting.
