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accounting final Flashcards

1
Q

What is the difference between a bank’s statement and a company’s recorded book?

A
  • what to the bank is a debit is to the company a credit
  • to the bank, your account is a liability
  • example: if company writes a cheque, bank’s liability goes down/is debited
  • example: if company deposits money into bank, bank’s liability goes up/is credited
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2
Q

Explain deposits in transit.

A
  • affects bank statement
  • deposits that were recorded in the company’s books but have not yet been recorded by the bank
  • positive adjustment
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3
Q

Explain outstanding cheques.

A
  • affects bank statement
  • cheques written and distributed by the company that have not been processed by the bank
  • negative adjustment
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4
Q

Explain bank errors.

A
  • affects bank statement
  • positive or negative adjustment (to determine, consider what the bank balance would have been had the error not been made)
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5
Q

Explain electronic fund transfer.

A
  • affects company’s book
  • deposits recorded by the bank but not recorded by the company
  • positive adjustment
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6
Q

Explain bank hidden fees.

A
  • affects company’s book
  • service charges processed by the bank that have yet to be recorded by the company
  • negative adjustment
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7
Q

Explain non-sufficient fund cheque.

A
  • affects company’s books
  • customer’s cheque that has been deposited but subsequently returned by the bank because the customer had insufficient funds in their account to cover the cheque
  • negative adjustment
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8
Q

Explain book errors.

A
  • affects company’s books
  • positive or negative adjustment (to determine, consider what the book balance would have been had the error not been made)
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9
Q

Describe the journal entries for bank reconciliation.

A
  • no entries for bank side
  • the bank cannot correct a company’s errors on its books (and vice versa)
  • for positive adjustment, cash is debited
  • for negative adjustment, cash is credited
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10
Q

What are cash equivalents?

A
  • turns into cash within 3 months (if within 3 months = cash equivalents)
  • if not within 3 months, but less than 1 year = short-term investment
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11
Q

Bad debt expense is also called…

A
  • credit losses
  • impairment losses
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12
Q

When using the aging method, how do you calculate the bad debt expense?

A
  • bad debt expense = required ending AFDA - existing AFDA
  • existing AFDA = balance that is already on the trial balance
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13
Q

When using the aging method, how do you calculate the carrying amount of accounts receivable?

A

carrying amount of accounts receivable = accounts receivable - required ending AFDA

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14
Q

When using the aging method, how do you calculate the required ending AFDA?

A

required ending AFDA = accounts receivable balance x % of uncollectibility

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15
Q

What is the journal entry for write-off?

A
  • debit AFDA
  • credit accounts receivable
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16
Q

What are the journal entries for recovery?

A

To reverse the write-off entry:
- debit accounts receivable
- credit AFDA
Receivable is collected:
- debit cash
- credit accounts receivable

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17
Q

What does the cost of land include? What does it not include?

A

Includes:
- purchase price
- legal fees
- costs for preparing the land
- costs to demolish and remove unwanted structures on the land
Does not include:
- land improvements

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18
Q

What does the cost of a bought building include?

A
  • purchase price
  • legal fees
  • any costs required to make the building ready for its intended use
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19
Q

What does the cost of a constructed building include?

A
  • contract price
  • architects fees, building permits, excavation costs
  • loan obtained to finance a construction project
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20
Q

What does the cost of equipment include?

A
  • purchase price
  • all costs that are necessary to get the equipment ready for its intended use
  • costs related to assembly, installation, testing
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21
Q

Explain operating expenditures vs. capital expenditures.

A

Operating expenditures:
- benefit only the current period
- example: cleaning floor
- expense account
Capital expenditures:
- benefit more than one period
- example: major renovation
- asset account

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22
Q

How do you calculate depreciation expense using the straight-line method?

A
  • depreciation expense = (acquisition cost - residual value)/(useful life in years)
  • (acquisition cost - residual value) is the depreciable amount
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23
Q

How do you calculate depreciation expense using the double-declining method?

A
  • depreciation expense = (book value - accumulated depreciation at beginning of period) * depreciation rate
  • depreciation rate = straight-line depreciation rate x multiplier
  • book value always the same
  • substract residual value for last year depreciation expense
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24
Q

How do you calculate the straight-line depreciation rate?

A

100/(useful life)

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25
Q

How do you calculate the double-declining balance rate?

A

2*(1/useful life)

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26
Q

What increases accumulated depreciation? What decreases it?

A

Increasing factors:
- PPE
- impairment
Decreasing factor:
- sale

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27
Q

How do you calculate depreciation expense using the units-of-production method?

A
  • depreciation expense = (acquisition cost - residual value)/(estimated total units of output)
  • estimated total units of output = estimated useful life in units
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28
Q

How do you calculate depreciation expense if useful life changes?

A

depreciation expense = (book value - residual value)/(new useful life)

29
Q

Explain writedown/impairment loss. How do you calculate it?

A
  • when asset’s fair value is less than its carrying amount (decline in the asset’s value)
  • can be due to flooding, for example
  • impairment loss = carrying amount - fair value
  • carrying amount = (cost - accumulated depreciation)
30
Q

What is the journal entry for writedown/impairment loss?

A
  • debit impairment loss
  • credit accumulated depreciation
31
Q

How do you calculate the gain/loss from selling PPE?

A
  1. depreciation expense/accumulated depreciation = (book value - residual value)/(new useful life)
  2. carrying amount (net PPE) = cost - accumulated depreciation
  3. gain/loss = proceeds - carrying amount
    - proceeds is the money obtained from selling
32
Q

What is the journal entry for gain/loss from selling PPE?

A
  • debit cash (or other asset account)
  • debit accumulated depreciation
  • debit loss on disposal OR credit gain on disposal
  • credit PPE account
33
Q

When do we do amortization? How do you calculate it?

A
  • when we know the useful life of an intangible asset (such as development costs, research, patents, copyrights)
  • amortization expense = cost/(useful life OR legal life)
  • shorter period between useful life and legal life should be used
34
Q

What is the journal entry for amortization?

A
  • debit amortization expense
  • credit accumulated amortization
35
Q

What are current liabilities? What are non-current liabilities?

A
  • current liabilities are liabilities that are paid within one year
  • non-current liabilities are liabilities that are due beyond one year
36
Q

What is the journal entry for sales taxes.

A
  • debit cash
  • credit amount earned from sales
  • credit sales tax payable (amount earned from sales x rate)
37
Q

What is the difference between certain liabilities and uncertain liabilities?

A
  • certain liabilities are liabilities with a known payee, due date, and amount payable
  • uncertain liabilities arise when a company is not certain to whom it owes an obligation, when it will settle that obligation, and/or what amount it will pay to settle the obligation
38
Q

What are the two types of uncertain liabilities?

A
  • provisions
  • contingent liabilities
39
Q

Describe provisions.

A

recorded when a present obligation exists, an outflow of resources to settle that obligation is likely, and the amount can be estimated reliably

40
Q

Describe contingent liabilities.

A
  • opposite of provisions, when the outcome is not determinable
  • liability is dependent on whether some uncertain future event occurs that will confirm either its existence or the amount payable, or both
41
Q

What happens if the contingent loss is probable (more than 50%), and the amount is reasonably estimated? What is the journal entry?

A
  • the company should recognize the contingent loss in its financial statements AND disclose
  • debit lawsuit settlement
  • credit provision for liability
42
Q

What happens if the contingent loss is probable, but the amount is not reasonably estimated? What is the journal entry?

A
  • no journal entry
  • company should disclose
43
Q

What happens if the contingent loss is possible, and the amount is reasonably estimated? What is the journal entry?

A
  • no journal entry
  • company should disclose
44
Q

What happens if the contingent loss is possible, but the amount is not reasonably estimated? What is the journal entry?

A
  • no journal entry
  • company should disclose
45
Q

What happens if the contingent loss is remote (less than 10%), and the amount is reasonably estimated? What is the journal entry?

A
  • no journal entry
  • company should not disclose
46
Q

What happens if the contingent loss is remote (less than 10%), but the amount is not reasonably estimated? What is the journal entry?

A
  • no journal entry
  • company should not disclose
47
Q

Explain how to calculate cash payment, interest expense, reduction of principal and principal balance given an instalment payment schedule.

A
  • cash is always the same for each period (given)
  • interest expense = principal balance x annual interest rate x time period in years
  • principal = cash - interest expense
  • balance = principal balance - reduction of principal
48
Q

What happens if there is a change in principal given an instalment payment schedule?

A

use the new principal

49
Q

What is the difference between common shares and preferred shares?

A
  • common shareholders have voting rights (preferred shareholders do not)
  • preferred shareholders have priority over common shareholders with regard to dividend payments
  • preferred shareholders have a priority claim over the company’s assets upon liquidation
50
Q

What is the journal entry for stock repurchase below average cost?

A
  • debit common shares (number of repurchased common shares x average cost of common shares)
  • credit contributed surplus (difference between the average cost of repurchased shares and repurchase price)
  • credit cash (number of repurchased common shares x repurchase price)
51
Q

What is the journal entry for stock repurchase above average cost?

A
  • debit common shares (number of repurchased common shares x average cost of common shares)
  • debit contributed surplus (same number as below average cost)
  • credit cash (number of repurchased common shares x repurchase price)
  • debit retained earnings (difference between cash and the sum of common shares and contributed surplus)
52
Q

What is stock dividend? What is the journal entry when the stock dividend is declared? What is the journal entry when the stock dividend is issued?

A
  • distribution of the corporation’s own shares rather than cash to shareholders
  • does not impact assets, liabilities or equity (because no cash is involved)
  • increases share capital (either common or preferred shares are increased)
  • decreases retained earnings (because dividends are declared), ending retained earnings = beginning retained earnings + net income - dividend
  • when stock dividend is declared, dividends declared is debited and stock dividends distributable is credited (the amount is number of shares issued x % x share price on declaration date)
  • when stock dividend is issued, stock dividends distributable is debited and common shares is credited (same amount as when stock dividend is declared)
53
Q

What is stock split? What is the journal entry?

A
  • the issue of additional shares to shareholders according to their percentage ownership
  • for example, after a 2 for 1 stock split, the number of shares will double and the share price will halve
  • no journal entry
54
Q

Explain how to prepare the operating activities section of the statement of cash flows using the indirect method.

A
  1. Determine net income/profit
  2. Determine noncash expenses (positive), gains (negative), losses (positive)
  3. Determine the positive and negative adjustments to net income
  4. Determine the net cash provided/used by operating activities

Beware of signs!
- Current assets = opposite sign
- Current liabilities = same sign

To calculate depreciation expense (buildings/equipment):
- use gain/loss = proceeds - carrying amount and work backwards

55
Q

Explain how to prepare the investing activities section of the statement of cash flows.

A
  1. Determine PPE activities + proceeds
  2. Determine the net cash provided/used by investing activities

To calculate proceeds:
1. Ending balance = beginning balance + increasing factor - decreasing factor
2. Proceeds = gain/loss + carrying amount

56
Q

Explain how to prepare the financing activities section of the statement of cash flows.

A
  1. Determine increasing and decreasing factors (borrowing money from bank and issuing stock to investors)
  2. Determine net cash provided/used by financing activities
  • Use ending balance = beginning balance + increasing factor - decreasing factor
  • Use ending retained earnings = beginning retained earnings + net income - dividend
57
Q

What is the formula for change in cash?

A

change in cash = operating cash flow + investing cash flow + financing cash flow

58
Q

What is the journal entry for when the buyer does not pay immediately but instead agrees to pay at a later date?

A
  • debit accounts receivable
  • credit revenue
  • credit refund liability
  • debit COGS
  • debit estimated inventory return
  • credit inventory
59
Q

What is the journal entry for when the buyer returns the inventory?

A
  • debit refund liability
  • credit accounts receivable
  • debit inventory
  • credit estimated inventory return
60
Q

What effect will an understatement of inventory have on COGS, gross profit, income before income tax and retained earnings?

A
  • overstate COGS
  • understate gross profit
  • understate income before income tax
  • understate retained earnings
61
Q

What effect will an overstatement of inventory have on COGS, gross profit, income before income tax and retained earnings?

A
  • understate COGS
  • overstate gross profit
  • overstate income before income tax
  • overstate retained earnings
62
Q

What effect will recording inventory too early have on inventory, accounts payable, COGS, net income and retained earnings?

A
  • overstate inventory
  • overstate accounts payable
  • not affect COGS
  • not affect net income
  • not affect retained earnings
63
Q

What effect will recording inventory too late have on inventory, accounts payable, COGS, net income and retained earnings?

A
  • understate inventory
  • understate accounts payable
  • not affect COGS
  • not affect net income
  • not affect retained earnings
64
Q

What are the limitations of the financial ratio analysis?

A
  • diversification of companies
  • different accounting policies (different net income if using FIFO vs. average cost formula)
65
Q

Which two financial ratios do not follow the typical “higher is better” rule?

A
  • average collection period
  • debt to total assets
66
Q

What is the error correction journal entry if the company wrongly records more when receiving a check?

A

debit accounts receivable and credit cash

67
Q

What is the error correction journal entry if the company wrongly records more when writing a check?

A

debit accounts payable and credit cash

68
Q

How do you calculate depreciation expense using the diminishing balance method?

A
  • book value at beginning year x depreciation rate
  • depreciation rate = multiplier x (1/useful life)
  • book value for second year = book value first year - depreciation expense

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