Financial Accounting Flashcards
The basic accounting equation is:
Assets = Liabilities + Equity
Formula for Equity
Assets - Liabilities
Assets are the _______
resources an organization owns (and does not have any dept on them!)
Accounts Receivable
Amounts to be received from customers
Examples of assets:
- Cash
- Inventory
- Buildings
- Machines
- IT systems
- Patents
- Trademarks
- Accounts Receivable
Accounts Receivable are the amounts to be ______ from ______
received; customers
Liabilities are the ______ an organization _______
resources; owes
Equity is the differences between what the corp. owns and what it _____
owes
__________ equity is the term used to describe the value of a corp. to its owners or what belongs to the owners
Owners’/ Shareholder’s Equity
List a few Interested Users apart from the owners of a company:
- Potential Owners
- Creditors (e.g. Banks)
- Suppliers
- Customers
- NPO’s
- Government Agencies
- Tax Authorities
The value of a corporations equity can change in two ways :
- Operations; revenues and expenses resulting a net income (or a net loss
- Transactions with owners: - Shareholders can invest in the firm (buy shares)- Shareholders can be paid by the firm (dividends)
Dividends is the distribution of _______
cash or assets to other shareholders
The process of registering transactions is called _______
bookkeeping
The difference between the revenues and expenses in a period is referred to as ______
the net income of that period
Give an example of an intangible asset:
Intellectual property
Taipei Pizza, for instance, purchases cheese, sausage, fl our, and beverages on credit
from suppliers. These obligations are called ________
accounts payable
Taipei Pizza may also have ________ payable to employees and sales and
_______ payable to the local government
wages; taxes
________ is the term used to describe the amounts paid in by shareholders for the ordinary shares they purchase.
Share-capital ordinary
What can increase equity ?
- investments by shareholders
- revenues
This is a type of financial statements that records transactions for a specific date rather than a period of time
balance sheet !!!!
Liabilities are listed on the balance sheet in the order of their
maturity
Retained Earnings is classified as which type of account?
stockholder’s equity
A company sold 10,000 shares of its common stock for a total of $45,000. What two accounts are affected by the transaction?
cash and contributed capital
The matching principles matches revenue with _______
expenses
Retained earnings is determined by three items :
dividends, revenues and expenses
_________ are the gross increases in equity resulting from business activities entered into for the purpose of earning
Revenues
Revenues usually result in an increase in _______
assets
Sources of revenue common to many businesses are:
- Sales
- Fees
- Services
- Commissions
- Interest
- Dividends
- Royalties
- Rent
_____ are decreases in equity that result from operating the business
Expenses
The distribution of cash or other assets to shareholders is called a _______
dividend
DIVIDENDS ARE NOT ______
EXPENSES
The principles sources of equity are :
- investments by shareholders
- revenues from business operations
External transactions involve economic events between the _______and some outside _______
company and outside enterprise
In an economic transaction credits refer to the —-
SOURCE
In an economic transaction debits refer to the —–
DESTINATION
Destinations that economic benefit can flow to AKA debits include :
- assets
- expenses
- dividends
Sources that economic benefit can flow from AKA credits include :
- owner’s equity
- liabilities
- revenue
Dividends + Expenses + Assets =
Debits
Liabilities + Owner’s Equity + Revenue =
Credits
DEALER
Dividends
Expenses
Assets (DEBITS) +
Liabilities
Equity
Revenue (CREDITS)
Stuff the Business owns (assets) =
stuff the business owes (liabilities)
revenues and expenses are changes in _____ NOT in _____
equity , NOT in cash
Revenue should be recognized in the accounting period in which the performance obligation is
fullfiled
performance obligation of a seller is essentially shifting goods to the
CONSUMERS
What is the expense recognition principle?
Expenses are recognized in the accounting period in which the company generates revenues because of these expenses
When should revenue of a transaction in a restaurant be recognized?
as soon as the customer pays for the good
When is revenue for renting a house ( monthly) recognized?
rent is paid at the beginning of the month
total revenue is taken at the end of the year
revenue recognition is spread over time
prepaid expenses are payments made in
advance
Examples of prepaid expenses:
-insurance
-supplies
-depreciation of non-current asset
when buying the insurance initially an _____ is created
asset
accrued expenses
expenses that belong to a period but which have not been paid yet
deferred revenue refers to
refers to advance payments a company receives for products or services that are not yet delivered/shipped/rendered
another term for deferred revenue is _____
unearned revenue
on the income statement deferred revenue is recorded as a ______ until the product is shipped
liability
The principle of revenue recognition states that payments can only be recognized as revenue once a
payment is made and the service has been complete
Examples of deferred revenue are
- rent payments received in advance
- prepayment received for newspaper subscriptions
- annual prepayment
An accrued expense is an expense that hasn’t been _____ or _____ yet.
recorded; paid for
A good example of an accrued expense are water bills since
they are billed in longer periods or yearly and therefore water consumer throughout a longer period is an expense that hasn’t been recorded or paid yet.
Are accrued expenses a liability?
Yes and for that reason credits increase accrued expenses and debits decrease accrued expenses
In “DEALER” the debits include:
DIVIDENDS
EXPENSES
ASSETS
In “DEALER” the credits include:
LIABILITIES
EQUITY
REVENUE
An increase in equity requires a ______ entry
credit
A decrease in equity requires a ______ entry
debit
Both Dividends and Expenses require a ______ entry
debit
why do expenses require a debit entry?
This is because expenses cause owner’s equity to decrease and equity is a credit entry
when equity increases what entry occurs
a credit entry
Since accounts payable are a part of liabilities account payable has a _______ balance
credit
Unearned revenue is a _________ for the recipient of the payment
liability
The 3 inventory cost flow assumptions are:
-LIFO
- FIFO
- AVCO
what does LIFO stand for?
Last In First Out
Formula for the the average-cost inventory
method?
total cost of goods available for sale/quantity of goods available for sale
Steps for the average cost inventory method:
- Sum up total units and total costs
- Then divide total costs by total units to get weighted cost per unit
- Then multiply sold items by the weighted cost per unit
- Subtract the total cost by total sales to get new reported inventory using AVCO
How is this read : 2/10, n/30
two ten, net thirty
When you buy inventory on account you _____ inventory
debit inventory
2/10,n/30 means that you have
a 2 percent discount if you pay within 10 days otherwise full amount within 30
Uncle Tupelo’s Gifts signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $150,000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest?
Dr-Interest Expense 3,000
Cr-Interest Payable 3,000
A company shows a balance in Salaries and Wages Payable of $19,000 at the end of the month. The next payroll amounting to $24,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries?
Dr-S+W Expense 5,000
Dr-S+W Payable 19,000
Cr-Cash 24,000
The cost flow method that often parallels the actual physical flow of merchandise is the
FIFO method
In a periodic inventory system the COGS is determined when???
ONLY at the end of the accounting period
When are the COGS determined in a perpetual inventory system?
Each time a sale occurs
Typical journal entry for a purchase on account:
Dr. Inventory
Cr. Accounts Payable
Typical journal entry for a cash purchase:
Dr. Inventory
Cr. Cash
Net 10 means that a company has to pay for a good in ____
10 days
Net EOM 10 means that a company has to pay within ______
10 days after the end of the month
The procedure of transferring journal entries to the ledger accounts is
called
posting
Formula for Gross Profit:
Net Sales Revenue - COGS
a firm that sells and buys at a higher price later is called a ________
merchandising firm
Gross profit - operating expenses
Larger firms use only ______ inventory system
periodic
small shops/boutiques are more likely to use _______ inventory systems
perpetual
What do periodic systems not do?
Directly record transactions
FOB shipping point means that the good belongs to the owner in the moment that good is ______________
shipped
FOB Destination means that the good becomes the possession of the owner in the moment it ____________
reaches the buyer
In FOB shipping point who pays the freight costs?
the Buyer
In FOB Destination who pays the freight costs?
the Seller
When buyers pay shipping costs these costs are usually considered part of ____________
purchased inventory
In a perpetual accounting system everything goes through the __________
inventory account (super important)!!!
Sellers generally record sales returns and allowances using a specific contra-revenue account called the
Sales Returns and Allowances
sales returns and allowances has a _______ balance
debit
A contra-sales revenue account such as Sales Allowances, Cash Discounts etc. has a debit balance because it is contrary to a regular _________
sales revenue account (which has a credit balance)
Whenever a seller grants an allowance to the buyer we record it as a debit on :
sales returns and allowances
Under the periodic inventory system, all purchases made between physical inventory counts are recorded in a
purchases account
Using the FIFO approach formula for COGS=
COGS available for sale - ending inventory
Using the FIFO approach the formula for ending inventory is:
Units available for sale - units sold * cost of last unit sold
Using the LIFO approach the formula for ending inventory is:
Units a company owns - units sold * cost of first unit sold
what are the 4 possible transactions connected to inventory?
- Sales of inventory
- Purchase of inventory
- Returns and allowances on purchased inventory
- End-of-period accounting activities
What do u do when u sell inventory (perpetual system)?
There are 2 entires!
- You recognise the revenue so: Dr. Cash Cr. Sales revenue
- You recognise change in inventory: Cr. inventory Dr. Cost of goods sold
What do u do when u sell inventory (periodic system)?
Dr. cash/accounts payable Cr. Sales revenue
purchase of inventory entires (perpetual)
Dr. Inventory Cr. cash/acc payable
Purchase of inventory entires (periodic system)
NEVER FCKING EVER INVENTORY ACC!
You should: Dr. Purchases Cr. Cash/acc payable OR Dr. Freight-in Cr. Cash/acc payable
Returns and discount allowances entries (perpetual)
Dr. cash/acc payable Cr. Inventory
Returns and discount allowances entries (periodic)
Dr. cash Cr. Purchase returns/purchase discounts
End-of-period accounting entires (perpetual)
NOTHING LMAOOO
End-of-period accounting entires (periodic)
We need to perform a stock count, determine the “cost of goods sold”, units sold and purchased and total sales revenue. We also get gross profit. We can calculate profit and cost of goods sold using different methods.
The LIFO method assumes that the last goods purchased are the ___________ to be sold
first
Why in periods of inflation do firms prefer the LIFO method
Lower income taxes and higher cash flow (hell yeah)
TRUE OR FALSE : Transactions that affect inventories on hand have an effect on both the statement of
financial position and the income statement.
True
TRUE OR FALSE : The more inventory a company has in stock, the greater the company’s profit.
False
TRUE OR FALSE: Goods out on consignment should be included in the inventory of the consignor.
True
TRUE OR FALSE: The average cost method costs units using a weighted-average unit cost
True
TRUE OR FALSE: The first-in, first-out (FIFO) inventory method results in an ending inventory valued at the
most recent cost.
True
TRUE OR FALSE: If the unit price of inventory is increasing during a period, a company using the averagecost inventory method will show less gross profit for the period, than if it had used the
FIFO inventory method.
True
TRUE OR FALSE: Use of the FIFO inventory valuation method enables a company to report higher net
income when in a period of falling prices.
False
TRUE OR FALSE: If a company changes its inventory valuation method, the effect of the change on net
income should be disclosed in the financial statements.
True
TRUE OR FALSE: An error that overstates the ending inventory will also cause net income for the period to
be overstated.
True
TRUE OR FALSE: If an error understates the beginning inventory, net income will also be understated.
false
TRUE OR FALSE: If a company uses the FIFO cost assumption, the cost of goods sold for the period will be the same under a perpetual or periodic inventory system.
True
TRUE OR FALSE: In all cases when average-costing is used, the cost of goods sold would be the same
whether a perpetual or periodic system is used.
False
TRUE OR FALSE: Under the FIFO method, the costs of the earliest units purchased are the first charged to
cost of goods sold.
True
TRUE OR FALSE: In a period of falling prices, the average-cost method results in a lower cost of goods sold than the FIFO method.
true
TRUE OR FALSE: Inventories affect both financial statment and statement of financial position (aka balance sheet)
True
Merchandise inventory is reported as a ________ on the statement of financial position
current asset
Items not placed into production are considered to be :
raw materials
If goods in transit are shipped FOB destination the ________ has legal title to the goods until they are delivered
seller
The term ‘FOB” denotes:
free on board
As a result of a thorough physical inventory, Hastings Company determined that it had
inventory worth $620,000 at December 31, 2017. This count did not take into
consideration the following facts: Carlin Consignment store currently has goods worth
$104,000 on its sales floor that belong to Hastings but are being sold on consignment by
Carlin. The selling price of these goods is $150,000. Hastings purchased $40,000 of
goods that were shipped on December 27 FOB destination, that will be received by
Hastings on January 3. Determine the correct amount of inventory that Hastings should
report.
724 000 USD
Bellingham Inc. took a physical inventory at the end of the year and calculated that
£1,750,000 of goods were on hand. Bellingham determined that £25,000 of goods were in
transit. The goods were shipped f.o.b. shipping point and were received by Bellingham
two days after the inventory count. The company also had £275,000 of goods out on
consignment. What amount should Bellingham report for inventory on its statement of
financial position?
£2,050,000.
A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending
inventory will approximate ______________
their current cost.
Why do firms use AVCO in times of rising prices (inflation)
Because AVCO results in lower income taxes, which directly corresponds to the lower net income
The entire group of accounts that are maintained by a company is called a ____________
ledger
What are the differences between Journal and Ledger?
The journal consists of raw accounting entries that record business transactions, in sequential order by date. The general ledger is more formalized and tracks five key accounting items: assets, liabilities, owner’s capital, revenues, and expenses.
Is it possible to prepare the balance sheet directly from the journal?
No, however this can be done from the ledger
What is the difference between an error and irregularity?
Error is a result of an unintentional mistake whereas an irregularity is a result of an intentional misstatement and it is viewed as UNETHICAL
Accounting time periods are generally:
a month, a quarter, or a year
Monthly and quarterly time periods are called ________ periods
interim
How do we call accounting systems that register changes in the value of equity (revenues and expenses) in addition to, and seperately, from cash flows?
Accrual-basis accounting
How do we call an accounting system that records revenue at the time they receive cash?
Cash-basis accounting
Accrual-basis accounting is in accordance with which accounting standard?
International Financial Reporting Standards (IFRS)
When a company agrees to perform a service or sell a product to a customer it has a ___________ obligation
performance
When it comes to accruals cash is paid before or after?
after
When it comes to deferrals is cash paid before or after?
Before
How do accountants deal with complications caused by either deferrals or accruals?
- At the moment of the first transaction, an asset or liability is created
- At the end of the period, an adjusting entry is made
An adjusting entry for prepaid expenses results in a :
debit to a prepaid expense account and a credit to an asset account
Using WHICH account is depreciation recorded?
Using a contra-asset account
A contra-asset account has a _________ balance
credit
Formula for book value of an asset=
Total value of an asset - accumulated depreciation - other expenses
The cost of carrying an asset on a company’s balance sheet refers to ________
book value
The adjusting entry for unearned revenue results in a
dr. Unearned revenue account
cr. sales revenue
Petty cash has a _____ balance
debit
Cash over and short is an income statement account that records a _______
shortfall of cash or an oversupply of cash
Cash over and short has a ________ balance
debit
Internal control serves 4 purposes:
- safeguard assets
- enhance accuracy of accounting records
- ensure compliance with laws and encourage employees to follow rules
Larceny is _______________
taking cash or property from the business
Embezzlement concern
theft of cash by someone in a position of trust like a bookkeeper or manager
Income summary balance for revenue is _________ from the income summary balance for expenses
different !!!!
Formula for retained earnings
Net income - dividends =
= Revenue - expenses - dividends
The matching principle holds that…
expenses should always be
recorded in the same period as the revenues that they have helped to
generate.
Monetary unit assumption states that….
only transactions which can be measured in monetary terms are recorded in a company’s books of accounts
Comprehensive income includes:
-net income
-unrealized income
-unrealized gains and losses
-foreign transactions gains and losses
Determination of net income vs comprehensive income statement
Determination of net income includes only the net gains/losses through recording revenues, expenses and profitability whereas comprehensive income statement includes all additional things like unrealized gains/losses or unrealized income or gains/losses from foreign transactions
The three steps in the accouting process are:
identification, recording, communication
Which accounting standard is used by most companies in the US?
FASB
Which accouting standard-setting body is most common (used in 130 countries except the US)
IASB, which is determined by IRFS
Historical cost principle is also known as the
cost principle
The Fair value principle states that ___________
assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
The monetary unit assumption holds that companies should include in the accouting records only transaction that can be recorded in _________
monetary terms
What does convergence refer to?
To efforts to reduce differences between U.S. GAAP and IRFS
With accounting’s economic entity assumption should the personal expenses of the owner be seperated from those of the economic entity
YES
describes the amounts paid in by shareholders for the ordinary shares they purchase.
Share-capital ordinary
What does the statement of cash flows convey?
summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.
This document reports the assets, liabilities, and equity of a company at a specific date. (Sometimes referred to as a balance sheet.)
statement of financial position
Gross profit rate =
Revenue - COGS/ Revenue * 100 or Total Sales - COGS/Total Sales * 100
This statement summarizes the changes in retained earnings for a specific period of time.
Retained Earnings Statement
This statement presents other comprehensive income items that are not included in the determination of net income in 1.
Comprehensive Income Statement
When is the statement of financial position usually written up>
Usually the month-end or year-end
What is the structure of the statement of financial position?
Lists assets at the top, followed by equity and then liabilities
Forensic Accounting
Investigate theft and fraud using accounting, auditing, and investigative skills
Governmental Accounting
Tax authorities, local governments, law enforcement agencies, company regulators, accounting educators at public colleges and universities
Private Accounting
Individuals in private accounting are employees of for-profit companies and not-for-profit organizations. Choices: Cost accounting, budgeting, accounting information system design and support, tax planning and preparation, internal auditing
Public Accounting
Individuals in public accounting offer expert service to the general public, in much the same way that doctors serve patients and lawyers serve clients. Choices: Auditing, taxation, management consulting
What is a compound entry?
An entry that requires three or more accounts. The standard format requires that all debits be listed before the credits.
The entire group of accounts maintained by a company is called a
ledger
What journal entry is made when a firm wants to create an allowance for doubtful accounts?
Dr. Bad debt expense
Cr. Allowance for doubtful accounts
When a firm that owes you money files for bankrupcy (so they won’t pay u!) what hournal entry will you make?
Dr. Allowance for doubtful accounts
Cr. Accounts receivable
General journal definition
a book of original entries, in which accountants and bookkeepers record raw business transactions, in order according to the date events occur.
What are T-accounts
A term for a type of finantial records that use debit and credit balance
REMEMBER THAT SUPPLIES AND EQUIPMENT ARE NOT THE SAME
ENTRY
What is chart of accounts
Chart of accounts is the index/list of all accounts used by a firm. It usually provides every accounts with its unique number
order of accounts in the trial balance:
ASSETS
LIABILITIES
EQUITY
REVENUE
EXPENSES
An accouting period that is one year in length is referred to as the :
fiscal year
The principle that states that expenses should be matched with revenues is called the ____________ principle
expense recognition principle
Cash-basis accounting applies to companies that _______
record revenues when they receive cash and record expenses when they pay out cash
managerial accaounting is…
method of accounting that creates statements, reports, and documents that help management in making better decisions related to their business’ performance
For information in accouting statements to be relevant it should have ______
predictive value; confirmatory value; and be material
This refers to the quality of information that gives assurance the information accurately depicts what really happened
Faithful Representation
This means using the same accounting principles and methods from year to year
Consistency
Dividends increase/decrease equity?
decrease
What is a worksheet accounting?
An accounting worksheet is a tool used to determine the accuracy of the financial statements prepared by a company at the end of the accounting period
Steps in using a worksheet :
- Prepare a trial balance on the worksheet
- Enter adjustment data
- Enter adjusted balances
- Enter adjusted balances to appropriate statement columns
- Total the statement columns, compute net income, and complete the worksheet
Income statement only features :
Revenues and Expenses
Statement of financial position only features:
ALE aka assets, liabilities, equity
Comprehensive income statements has 2 main sections:
Net income and Other comprehensive income (hedges, unrealized gains/losses, foreign currency cransactions)
Why is property or land not an asset but equipment is?
Assets are things that you can earn money on/sell em
When u deposit cash to a bank account in exchange for shared capital what will be the journal entry?
Dr. cash Cr. share capital - ordinary
What type of company reports gross profit?
A merchandising company
Which type of company has a shorter operating cycle
Service company as opposed to a merchandising company
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:
Inventory
What are non-current assets?
company’s long-term investments that are not easily converted to cash or are not expected to become cash within an accounting year. For example: investments, intelectual property, real estate and some equipment.
How do companies allocate the costs of long-term assets?
Costs are spread over the amount of year an asset will be used instead of allocating the entire cost to one single accounting period
The account: Property, plant and equipment refers to what asset?
Long-term / non-current assets of the firm
What are non-current liabilities?
The non-current liabilities definition refers to any debts or other financial obligations that can be paid after a year
What are current liabilities?
Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle.
