Applying Principles

Question 1

Cost benefit principle

Answer 1

Benoit derived from putting fourth an effort or expenditure should exceed cost
Depreciation in a small waste basket would violate this

Question 2

Consistency

Answer 2

Ability to validly say whether a company good or worse (compare among year)
Used one year to the next to accounting methods
Changes can be made if justified but it still violates

Question 3

Faithful representation

Answer 3

Financial information is complete neutral and free from material error

• complete - all info necc. For reliable decision
• neutral - free from bias
• free from material error- minimum level of accuracy

Question 4

Relevance

Answer 4

Info should have direct bearing on decision.
To be relevant it must have predictive value or comfirmitive value A
* if info wasn’t available a different decision would be made*

Question 5

Predictive value

Answer 5

Helps capital providers make decc about future.

-such as statement of cash flows whether company has suff. Funds to provide for future or needs invest

Question 6

Confirmatory value

Answer 6

Determines if expectations have been met

- ex ) income statement meets whether company met earning expectations

Question 7

Confirmative and predictive

Answer 7

Statement of cash flows not only helps to project future cash flows but also confirms expectations bout prior actions

Question 8

Conservatism

Answer 8

When faced with choosing between two equally acceptable procedures or estimates accountants should choose the one that’s least likely to overstate assets and income
- most common - used in lower-of-cost-or-market method
Purpose - to not produce lowest net income and lowest asset value

Question 9

Compatibility (qualities characters)

Answer 9

Equality that enables users to identify similarities and differences between two sets of financial data

Question 10

Qualitative characteristic

Answer 10

By which to judge the information

to facilitate interpretation of accounting information

Question 11

Materiality

Answer 11

Refers to relative importance of an item or event.

• it is material if there is reasonable expectation that knowing about it would influence decisions of users of financial statements.
• when item is worth 5% or more of net income, act must treat as material.

Question 12

Accrual accounting

Answer 12

Revenues and expenses are recorded in the periods in which they occur rather than in periods in which they are received or paid.

• • recognizing revenues when they are earned*
• -recognizing expenses when they are incurred*
• -adjusting the accounts*

Question 13

Depreciation

Answer 13

Allocate the cost of the asset over its estimated useful life

• incurred during the acc period which is long term asset to bring back revenues.
• must be estimated *

Question 14

Related in with depreciation

BOOK VALUE

Answer 14

Amount cost in asset less the accumulated depreciation applicable to the asset.
Amount of owners or stock hikers equity
The amount that you’d have when you sell your assets
BV=A-L

Question 15

Matching principle

Answer 15

Expenses are recorded when incurred not when cash is paid

Match expenses when times period to generate revenues

Question 16

Real accounts

Answer 16

Reported in balance sheet that is the summary of assets, liabilities, and s/e.
-active from first day of business to last
Usually doesn’t carry a zero balance

Question 17

Nominal accounts

Answer 17

Reported in the income statement
Summary of revenues and expenses of a period of time
Become cumulative
It determines net profit or net loss
Become closed
To make way for sales and exp for next year
Everything a company owns and owes

Question 18

Perpetual inventory system

Answer 18

Continuous records are kept of the quantity and usually the cost of individual items as they are brought and sold.
Cost of item is recorded in merchandise inventory —when purchased when sold transfer to cost of goods sold
Accounted for when sold
Used with companies with high vol
Not required to close entries

Question 19

Periodic inventory system

Answer 19

Inventory sold or on hand not yet recorded
- physical account is taken at end of accounting period.
Not detailed on hand during period
Accurate only on balance sheet
When purchases or sales made inventory figure becomes historical.
It is cheap
Used by smaller companies
Used by compan w/ high unit value (car)
Must determine final cost of good

Question 20

Adjusting entries

Office supplies consumed

Answer 20

Dr- Office supplies expense

Cr-Office supplies

Question 21

Adjusting entries

Depreciation

Answer 21

Dr- Depreciation expense
Cr- accumulated depreciation, equip-
Is a contra asset

Question 22

Contra account

Answer 22

Separate account that’s paired with related account

Question 23

Adjusting entries

Prepayment expired

Answer 23

Rent, insurance etc..)
Insurance expense -
Cr- prepaid insurance

Question 24

Adjusting entries: 
Accrued taxes (income, income prop tax)

Answer 24

Dr- Property tax expense

Cr-Property tax payable

Question 25

Adjusting entries:

Accrued interest expense

Answer 25

Dr-Interest expense-

CR- interest payable -

Question 26

Adjusting entries:

Accrued interest revenue

Answer 26

Dr-Interest receivable
CR- interest revenue-
could also be interest income/ earned

Question 27

Adjusting entries:

Revenues earned, cash not received

Answer 27

Accounts receivable

Cr- revenues from services

Question 28

Adjusting entries

Revenue earned, cash received in advance

Answer 28

Unearned revenue ( decrease In liabilities)
Cr- revenue from services- increase in revenue
( must show what has been earned )

Question 29

Examples of contra accounts

Answer 29

Accumulated depreciation
Discounts allowed
Allowance for bad debts bad debt expense

Question 30

Single step income statement

Answer 30

Has advantage of showing
Sole proprietorship/ partnerships use
Lines expenses to net income

Question 31

Multi step income statement

Answer 31

Includes various sources of coma oboes various sources and expenses
Reveals gross profit
Investors choose this statement for overall health such as gross profit and margin

Question 32

Three entry systems for purchases and sales under the PERPETUAL INVENTORY SYSTEM

Answer 32

Purchase of goods on credit or cash  -
Merchandise inventory 
     Accounts payable (cash) 
Record SALES on credit -
   Accounts receivable (cash) 
            Sales 
Or 
Cost of goods sold 
       Merchandise inventory

Question 33

All of the PERIODIC INVENTORY SYSTEM JOURNAL entries

Answer 33

Inventory purchases on credit (cash): 
Purchases 
   A/P ( cash) - 
Purchase discounts on credit (cash): 
A/P (cash) 
     Purchase discounts - 
PURCHASE RETURN 
A/R or A/P 
      Purchase returns 
INVENTORY SALE 
A/R  
    Sale 
SALE DISCOUNT 
A/R 
sales discount 
            Sales 
SALES RETURN 
Sales return 
            A/R or A/P

Question 34

Operating expense

Examples and what makes it

Answer 34

Selling expense- cost of storing and prepping them for sale
Ex - advt. displays, delivering good

General and administrative expense -
Expenses for accounting, personnel, collections
Rent, insurance, utilities.

Question 35

General and administrative expenses

Answer 35

Accounting and stuff wages 
Building rent 
Consulting expense 
Depreciation of office equip 
Legal staff wages and benefits 
Subscription

Question 36

Operating expenses example

Answer 36

Sales commission 
Legal fees 
Property taxes 
Advertising 
Entertaining cost travel cost

Question 37

Classified balance sheet

Why it’s useful and its usefulness

Answer 37

Information is more organized with simple listings

Makes it less overwhelming to view

Question 38

What is current asset on classified balance sheet

Answer 38

Cash it any other asset a company will be Turing into cash within one year

Question 39

Current liab in classified balance sheet

Answer 39

Obligation die within one year of balance sheet date

Typically paid out with current asset or incite another short term liab

Question 40

Long term liab in classified balance sheet

Answer 40

Debts that fall die more than one year in the future of beyond normal operating system and then paid out of non current assets.

Question 41

Purpose of post closing trail balance

Answer 41

Determine all temporary accounts have zero balances and to check that total debits equal total credit