Exam 2 Flashcards
What is the formula for Gross Margin?
Gross Margin = Sales Revenue - Cost of Goods Sold (COGS)
How do you calculate Gross Margin Percentage?
Gross Margin % = (Gross Margin / Sales Revenue) × 100
What is the Basic Accounting Equation?
Assets = Liabilities + Equity
What are Temporary Accounts in accounting?
Temporary accounts are Revenue, Expense, and Dividend accounts that are closed at the end of the period.
What are Permanent Accounts in accounting?
Permanent accounts are Assets, Liabilities, and Equity accounts that carry balances into the next period.
What is the purpose of Closing Journal Entries?
Closing journal entries transfer the balances from temporary accounts (Revenue, Expense, Dividend) to the Retained Earnings account.
How do you calculate Net Income on a Multistep Income Statement?
Net Income = Gross Profit - Operating Expenses + Other Income/Expenses
What is the formula for Gross Profit on a Multistep Income Statement?
Gross Profit = Sales Revenue - Cost of Goods Sold (COGS)
What is the formula for Operating Income on a Multistep Income Statement?
Operating Income = Gross Profit - Operating Expenses
What items are added or subtracted in a Bank Reconciliation on the bank side?
Add: Deposits in transit
Subtract: Outstanding checks
What items are added or subtracted in a Bank Reconciliation on the book side?
Add: Bank collections, interest
Subtract: NSF checks, bank fees
What is the formula for Gross Margin Percentage?
Gross Margin % = (Gross Margin / Sales Revenue) × 100
How do you account for Accrued Revenues?
Debit: Accounts Receivable
Credit: Revenue
How do you account for Accrued Expenses?
Debit: Expense
Credit: Accounts Payable
How do you account for Deferred Revenues?
Debit: Cash
Credit: Unearned Revenue
How do you account for Deferred Expenses?
Debit: Prepaid Expense
Credit: Cash
What is the purpose of Internal Controls in accounting?
Internal controls are designed to ensure accurate financial reporting, prevent fraud, and ensure compliance with laws and regulations.
What are the key components of Internal Control?
Control environment
Risk assessment
Control activities
Information and communication
Monitoring
What accounts are closed during the closing journal entries?
Revenue accounts
Expense accounts
Dividend accounts
These accounts are closed to Retained Earnings at the end of the period.
How do you record the closing of a Revenue account?
Debit: Revenue
Credit: Retained Earnings
How do you record the closing of an Expense account?
Debit: Retained Earnings
Credit: Expense
How do you record the closing of a Dividend account?
Debit: Retained Earnings
Credit: Dividends Payable
What are the key components of a Multistep Income Statement?
Gross Profit
Operating Income
Non-operating Income/Expenses
Net Income
What is the formula for the Adjusted Trial Balance?
It is the trial balance after adjusting entries have been made, ensuring that debits equal credits before preparing financial statements.
What is the difference between an Adjusted Pre-Close and Post-Close Trial Balance?
Pre-Close Trial Balance: Includes balances of temporary accounts.
Post-Close Trial Balance: Includes only permanent accounts (assets, liabilities, equity) after closing entries are made.
What is the purpose of a Bank Reconciliation?
A bank reconciliation ensures that the company’s cash balance matches the bank’s records, accounting for discrepancies like outstanding checks and deposits in transit.
What happens to Deposits in Transit in a bank reconciliation?
Deposits in transit are added to the bank statement balance because they have been recorded in the company’s books but not yet processed by the bank.
What happens to Outstanding Checks in a bank reconciliation?
Outstanding checks are subtracted from the bank statement balance because they have been recorded in the company’s books but have not yet cleared the bank.
How does the Internal Control system help in safeguarding assets?
Internal control minimizes risks of fraud and errors, ensuring assets are properly safeguarded and financial records are accurate through policies like segregation of duties and access controls.
What is the principle of Segregation of Duties in internal control?
Segregation of duties divides responsibilities among different employees to reduce the risk of errors or fraud (e.g., one person approves payments, another records them).
What is the formula for calculating Net Income on a Multistep Income Statement?
Net Income = Gross Profit - Operating Expenses + Other Income/Expenses
How do you handle Bank Fees during a bank reconciliation?
Subtract the bank fees from the company’s book balance, as they have been charged by the bank but not recorded in the company’s books.
What is Accrual Accounting?
Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash transactions occur.
What is the journal entry for Accrued Revenues?
Debit: Accounts Receivable
Credit: Revenue
What is the journal entry for Accrued Expenses?
Debit: Expense
Credit: Accounts Payable
What is the journal entry for Deferred Expenses (Expense paid but not yet incurred)?
Debit: Prepaid Expense
Credit: Cash
What is the journal entry for Deferred Revenues (Revenue received but not yet earned)?
Debit: Cash
Credit: Unearned Revenue
What is the formula for Gross Margin?
Gross Margin = Sales Revenue - Cost of Goods Sold (COGS)
What is the formula for Gross Margin Percentage?
Gross Margin % = (Gross Margin / Sales Revenue) × 100
What is the formula for Operating Income on a multistep income statement?
Operating Income = Gross Profit - Operating Expenses
What is the formula for Net Income on a multistep income statement?
Net Income = Operating Income + Non-Operating Income - Non-Operating Expenses
What is the formula for Total Assets?
Total Assets = Liabilities + Equity
How do you calculate Retained Earnings?
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
What is the formula for Basic Earnings Per Share (EPS)?
EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding
What is the formula for Current Ratio (Liquidity Ratio)?
Current Ratio = Current Assets / Current Liabilities
What is the formula for Quick Ratio (Acid-Test Ratio)?
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
What is the formula for Accounts Receivable Turnover?
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
What is the formula for Inventory Turnover?
Inventory Turnover = Cost of Goods Sold / Average Inventory
What is the formula for Days Sales Outstanding (DSO)?
DSO = 365 / Accounts Receivable Turnover
What is the formula for Debt to Equity Ratio?
Debt to Equity Ratio = Total Liabilities / Total Equity
What is the formula for Return on Assets (ROA)?
ROA = Net Income / Average Total Assets
What is the formula for Return on Equity (ROE)?
ROE = Net Income / Average Shareholders’ Equity
What is the formula for Price-to-Earnings (P/E) Ratio?
P/E Ratio = Market Price Per Share / Earnings Per Share (EPS)
What is the formula for Cash Flow from Operating Activities using the indirect method?
A:
Cash Flow from Operating Activities = Net Income + Depreciation + Changes in Working Capital
What is the formula for Operating Cash Flow Ratio?
Operating Cash Flow Ratio = Cash Flow from Operating Activities / Current Liabilities
