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Accounting > Chapter 7,8,9 - Accounting > Flashcards

Chapter 7,8,9 - Accounting Flashcards

1
Q

What is a merchandising business?

A

Any business that buys and sells product for the purpose of making a profit.

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2
Q

What do common shares in a corporation represent?

A

Money directly invested in a company by its owner.

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3
Q

What does retained earnings in a corporation represent?

A

Profits that the business has retained over the year.

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4
Q

In a perpetual inventory system, how often are inventory levels updated?

A

Daily - every purchase and every sale.

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5
Q

Define inventory in the context of a merchandising corporation.

A

Products purchased by a business for resale.

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6
Q

What does gross profit equal?

A

Revenue - cost of goods sold = profit

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7
Q

Define operating expenses.

A

Expenses incurred in promoting and selling products or services and in running the operations that make and sell the products or services.

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8
Q

Define current assets.

A

Assets that are most likely to turn into cash or used up in 1 yr. Ex. accounts receivable and inventory, prepaid expenses.

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9
Q

Define non-current assets.

A

Assets used to operate a business and are not expected to turn into cash or be used up within the next 12 months unless they are sold for reasons other than the day to day operations of the business. Ex. property, plant, and equip. Long term assets.

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10
Q

What are current liabilities? Provide two examples of current liabilities.

A

Amounts due to be paid within the next 12 months. Accounts payable and interest payable are examples.

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11
Q

What are non-current liabilities? Provide two examples of non-current liabilities.

A

Amount due to be paid after 12 months. Bank loans and mortgages are examples.

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12
Q

What is one difference between a non-classified balance sheet and a classified balance sheet?

A

Classified is going to group assets and liabilities into current or long term. A non classified does not do this grouping.

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13
Q

How do you calculate the current ratio and what does it measure?

A

Divide current assets by current liabilities. The current ratio measures a company’s ability to pay off short term debt.

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14
Q

What is one difference between a non-multistep income statement and a multistep income statement?

A

More detail in multistep. Divides revenue and expenses further to show subtotals such as gross profit, operating expenses and operating income.

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15
Q

What are administrative expenses?

A

Those related to running the business, but not directly related to selling.

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16
Q

In a typical multistep income statement, which category will items such as interest revenue and loss from a lawsuit fall under?

A

Other income and expenses.

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17
Q

Gross profit:

A

Dollars (Revenue-COGS=gross profit).

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18
Q

Gross Margin:

A

Percentage (Gross profit/revenue).

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19
Q

Working capital:

A

Current assets-current liabilities

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20
Q

Working capital ratio:

A

Current Assets/Current Liabilities

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21
Q

Net income:

A

Gross profit-operating expenses=net income

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22
Q

Define inventory -

A

The value of items purchased or made for the purpose of selling to customers.

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23
Q

How often are inventory records updated in a perpetual inventory system?

A

Immediately

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24
Q

What are some reasons purchase returens occur?

A

incorrect product, over shipments, or inferior product quality.

25
Q

When does a purchase allowance occur?

A

When the buyer agrees to keep the undesirable goods at a reduced cost.

26
Q

Provide 3 common reasons why a seller gives a discount?

A
  • avoid changes in a price catalogue.
  • apply price discrimination.
  • hide the true invoice price from competitors.
27
Q

If a discount term is written as 3/10,n/30, what does this mean?

A

3% off if paid within 10 days from invoice, or net amount must be paid within 30 days.

28
Q

What are the 2 possible Freight on Board (FOB) points?

A

FOB shipping point-buyer pays

FOB destination point-seller pays

29
Q

What does FOB shipping point indicate?

A

That ownership of the items being purchased changes when the goods leave the seller’s place of business. Ownership changes at the point when shipping begins.

30
Q

What does FOB destination indicate?

A

That the ownership of the items being purchased changes when the goods arrive at the buyers place of business. Ownership changes at the point of destination.

31
Q

What type of account is sales returns and allowances and what is it used for?

A

Contra revenue account. It is generally used to record both sales returns and sales allowances.

32
Q

Sales returns-

A

When undesirable products are returned to the seller. Contra revenue account.

33
Q

Sales allowances-

A

When a customer decides to keep such undesirable products at a reduced price. Contra revenue account.

34
Q

What is the formula for gross profit margin?

A

Gross profit/net sales revenue=%

35
Q

List three possible methods used to determine the value of inventory.

A
  1. Specific Identification
  2. First in First out (FIFO)
  3. Weighted Average Cost - When a business simply applies an average cost to all its inventory.
36
Q

What does FIFO assume?

A

First in first out - When a business assumes that the first items received in inventory are also the first items moved out of inventory.

37
Q

Under the weighted average cost method, how do you determine the cost per unit?

A

When a business simply applies an average cost to all its inventory.

38
Q

In a period where the cost of purchases increases over time, will FIFO or weighted average method result in the higher value of ending inventory?

A

FIFO

39
Q

What is a bank reconciliation?

A

The process of comparing your records with items shown on the bank statement to account for any differences.

40
Q

List three typical reasons for the bank making additional deductions from the company’s cash?

A
  1. Service charge
  2. payment of interest
  3. principal payment
41
Q

What are two typical reasons for the bank making additional deposits to the company’s cash account?

A
  1. Interest income, credit from a customer making a payment.
42
Q

In a typical bank reconciliation, what are the titles of the two column headers?

A

Ledger and Bank

43
Q

What are non-sufficient funds (NSF) checks?

A

Payments made to the company by a costumer that does not have sufficient funds in their bank account to cover the amount of the check.

44
Q

What is an outstanding deposit? (Deposit in transit)

A

A deposit that has been recorded in the company’s general ledger but not shown on the bank statement.

45
Q

When is a journal entry required during a bank reconciliations?

A

Whenever there is an adjustment in the Ledger side of the bank reconciliation.

46
Q

How are outstanding checks recorded on the bank reconciliation?

A

They are subtracted from the bank balance.

47
Q

What is an imprest system (in the context of petty cash)?

A

Ensures that spending is limited to the amount that is available in the petty cash fund.

48
Q

Briefly describe the responsibilities fo the petty cash custodian.

A

Assure that the fund is safeguarded.

49
Q

What does an employee that requires petty cash need to present to the petty cash custodian?

A

Supporting documentation (a receipt).

50
Q

What is a petty cash summary sheet?

A

A detailed list of funds reimbursed.

51
Q

Why do petty cash overages or shortages occur?

A

Human error - miscounting, stealing.

52
Q

When does the cash over and short account behave like an expense account?

A

When there is a shortage.

53
Q

Internal controls-

A

Policies and procedures that companies follow to assure that:

  1. Assets are protected
  2. Information is accurate
  3. Assure that laws and regulations are followed.
54
Q

What are the only 2 times that the petty cash account in the ledger is debited or credited?

A

When we initially establish the fund, when we add to the fund it is debeted. If we lower the fund it is credited.

55
Q

List 2 general controls that can be used for petty cash.

A
  1. Establish guidelines

2. Maintain/Require documentation

56
Q

List 2 controls that can be used to prevent the misuse of cash?

A
  1. Record cash when it is received
  2. Protect cash while it is on the premises.
    .
57
Q

Accounting Definition:

A

Accounting is an information system which provides a report to users about economic conditions and financial activity of a business or organization.

58
Q

Accounting equation:

A

Assets = Liabilities + O.E.

Accounting (3 decks)

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