Exam 2, Ch 4-5

Question 1

Defn: A liability that does not need to be paid within one year or within the entity’s operating cycle, whichever is longer.

Answer 1

Long-term liability

Question 2

Defn: Entries that transfer the revenues, expenses, and Owner, Withdrawals balances to the Owner, Capital account to prepare the company’s books for the next period.

Answer 2

Closing entries

Question 3

Who pays for the shipping of goods when the transportation term is “FOB destination”?

Answer 3

The seller pays for shipping costs

Question 4

A bill is another term for what?

Answer 4

Invoice

Question 5

Defn: A discount that businesses offer to purchasers as an incentive for early payment.

Answer 5

Purchase discount

Question 6

Defn: A balance sheet that places each asset and each liability into a specific category.

Answer 6

Classified balance sheet

Question 7

Defn: A list of the accounts and their balances at the end of the period after journalizing and posting the closing entries. It should include only permanent accounts.

Answer 7

Post-closing trial balance

Question 8

________________ shows how capital changed during the period due to owner contributions, net income (or net loss), and owner withdrawals.

Answer 8

Statement of owner’s equity

Question 9

Formula: Gross Profit Percentage

Answer 9

= Gross Profit / Net Sales Revenue

Question 10

How are assets organized on a balance sheet?

Answer 10

In order of “liquidity”

Question 11

What reports assets, liabilities, and owner’s equity as of the last day of the period?

Answer 11

Balance sheet

Question 12

What is the order for preparing financial statements:

Answer 12

1. Income statement
2. Statement of owner’s equity
3. Balance sheet

Question 13

Defn: Expenses related to marketing and selling the company’s goods and services

Answer 13

Selling expenses

Question 14

What account is used to summarize the net income or net loss for an accounting period?

Answer 14

Income summary

Question 15

All accounts on the balance sheet are ____________ accounts.

Answer 15

Permanent accounts

Question 16

Formula: Current ratio

Answer 16

= Total current assets / Total current liabilities

Question 17

______ is the most liquid asset.

Answer 17

Cash

Question 18

Formula: Net Sales Revenue

Answer 18

= Sales Revenue - (Sales Rtns & Allowances + Sales Discounts)

Question 19

Defn: Measures the profitability of each sales dollar above the cost of goods sold.
[= gross profit / net sales revenue]

Answer 19

Gross Profit percentage

Question 20

Defn: A measure of how quickly an item can be converted to cash.

Answer 20

Liquidity

Question 21

Defn: Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals

Answer 21

Single-Step Income Statement

Question 22

How are liabilities classified on the balance sheet?

Answer 22

As either “current” or “long-term”

Question 23

Who pays for the shipping of goods when the transportation term is “FOB Shipping Point”?

Answer 23

The buyer pays for shipping costs

Question 24

Defn: Long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business.

Answer 24

Plant asset

Question 25

Defn: The cost of the merchandise inventory that the business has sold to customers

Answer 25

Cost of Goods Sold

Question 26

Defn: Reduction in the amount of cash received from a customer for early payment

Answer 26

Sales discount

Question 27

Formula: Gross Profit

Answer 27

= Sales Revenue - Cost of Goods Sold

Question 28

Defn: An account that is NOT closed at the end of the period - the asset, liability, and Owner, Capital accounts.

Answer 28

Permanent accounts

Question 29

Defn: A liability that must be paid with cash or with goods and services within one year or within the entity’s operating cycle if the cycle is longer than a year.

Answer 29

Current liability

Question 30

Defn: An account that relates to a particular accounting period and is closed at the end of that period - the revenues, expenses, Income Summary, and Owner, Withdrawals accounts

Answer 30

Temporary accounts

Question 31

Formula: Operating Income

Answer 31

= Gross Profit - Operating Expenses

Question 32

Defn: An asset that is expected to be converted to cash, sold, or used up during the next 12 months or within the business’s normal operating cycle if the cycle is longer than a year

Answer 32

Current asset

Question 33

Defn: Decreases in the seller’s receivable from a customer’s return of merchandise or from granting the customer an allowance from the amount owed to the seller.

Answer 33

Sales returns and allowances

Question 34

Defn: The amount a company has earned on sales of merchandise inventory after returns, allowances, and discounts have been taken out.

Answer 34

Net Sales Revenue

Question 35

Defn: Measures the company’s ability to pay current liabilities from current assets.

Answer 35

Current ratio

Question 36

Defn: Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.

Answer 36

Multi-Step Income Statement

Question 37

Defn: The time span during which cash is paid for goods and services, which are then sold to customers from whom the business collects cash.

Answer 37

Operating cycle

Question 38

Defn: An asset that will not be converted to cash or used up within the business’s operating cycle or one year, whichever is greater.

Answer 38

Long-term asset

Question 39

__________ account balances are carried forward into the next time period after the end of a specific accounting period.

Answer 39

Permanent accounts

Question 40

Defn: Expenses, other than cost of goods sold, that are incurred in the entity’s major ongoing operations.

Answer 40

Operating expenses

Question 41

Defn: Measures the results of the entity’s major ongoing activities.
[= gross profit - operating expenses]

Answer 41

Operating income

Question 42

Defn: Expenses incurred that are not related to marketing the company’s goods and services

Answer 42

Administrative expenses

Question 43

Defn: A temporary account into which revenues and expenses are transferred prior to their final transfer into the Owner, Capital account. Summarizes net income (or net loss) for the period.

Answer 43

Income Summary

Question 44

Defn: An asset with no physical form that is valuable because of the special rights it carries.

Answer 44

Intangible asset

Question 45

Defn: A step in the acocunting cycle that occurs at the end of the period consisting of journalizing and posting the closing entries to set the balances of the revenues, expenses, Income Summary, and Owner, Withdrawals accounts to zero for the next period.

Answer 45

Closing process

Question 46

A balance sheet lists liabilities in what order?

Answer 46

The order in which they must be paid.

Question 47

Defn: revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense

Answer 47

Other Revenues and Expenses

Question 48

Defn: Investments in bonds (debt securities) or stocks (equity securities) in which the company intends to hold the investment for longer than one year.

Answer 48

Long-term investment

Question 49

Defn: The payment terms of purchase or sale as stated on the invoice.

Answer 49

Credit Terms

Question 50

Defn: A seller’s request for payment from the purchaser.

Answer 50

Invoice

Question 51

What are the (2) purposes of Closing Journal Entries?

Answer 51

1. To make all of the Owner, Withdrawal, Expense, and Revenue accounts equal to zero
2. To update the Owner’s Equity Account

Question 52

What are the (2) types of asset categories as reported on a balance sheet?

Answer 52

1. Current assets

2. Long-term assets

Question 53

What usually makes up long-term assets? (3)

Answer 53

1. Long-term investments
2. Plant assets
3. Intangible assets

Question 54

___________ reports revenues and expenses and calculates net income or net loss for the time period.

Answer 54

Income Statement