Intro to Financial Accounting Flashcards
On March 1, 2018, Andrea buys a $2,500 shelf for her business with an estimated 5 years of useful life and a salvage value of $100. On March 31, 2018 and December 31, 2018, respectively, how much depreciation expense does she report based on the straight-line depreciation method?
A. $480, $480
B. $40, $400
C. $40, $200
D. $40, $40
D. $40, $40
To compute for the depreciation through the straight-line depreciation method, we use the general formula (Purchase price – Salvage value) / Useful life. Plugging in the values, we get $280 (($2,500 – $100)/5 years) as the annual depreciation. To get the monthly value, we divide $280 by 12 months ($40). Therefore, the answer is $40. This would be true in both March and December because the depreciation expense does not change per month under straight-line depreciation. Meanwhile, it would be the accumulated depreciation account which would have a balance of $400.
On December 31, 2017, CD Corporation’s merchandise inventory account showed a balance of $1,000. On January 31, 2018, it showed a balance of $500. What is the cost of goods sold for the month of January 2018?
A. 1000
B. 750
C. Cannot be determined
D. 500
C. Cannot be determined
In the given example, the cost of goods sold cannot be determined. One may hastily answer that the cost of goods sold would be $500 ($1,000 – $500). While this is indeed a possible outcome in real life, we cannot be sure because the amount for Purchases was not given in the problem. With a value for the Purchases account, the cost of goods sold could be even higher than $500.
The classification and normal balance of the sales discount account would be:
A. Contra revenue and debit
B. Revenue and credit
C. Expense and debit
D. Contra revenue and credit
A. Contra revenue and debit
Since sales discounts are deductions to sales or revenues, it will be considered as a contra revenue account. Moreover, since the normal balance of revenues is credit (revenues are increased by credits), the normal balance of sales discounts would be the opposite – debit.
An internal audit has revealed that the operations manager overstated the ending inventory of a certain supermarket. What would be the effect on cost of goods sold and gross income?
A. Cost of goods sold would be overstated, gross income would have no effect
B. Cost of goods sold would be understated, gross income would be overstated
C. Cost of goods sold would be overstated, gross income would be understated
B. Cost of goods sold would be understated, gross income would be overstated
An overstatement in the ending inventory would reduce cost of goods sold, causing it to be understated. Meanwhile, since gross income is the difference between sales and cost of goods sold, it would be overstated.
Which of the following expenses are added back to the net income under the indirect cash flow method?
A.Depreciation
B. Advertising
C. Utilities
D. Rent
A. Depreciation
Depreciation is a non-cash expense – you don’t actually spend cash month after month because your equipment and other fixed assets lose their value. This is why depreciation is added back to the net income in order to accurately depict cash flows from operating activities.
In which of the following situations is inventory not recognized from a buyer’s perspective?
A. Goods in a warehouse
B. Goods in transit with terms FOB Destination
C. Goods in transit with terms FOB Shipping Point
D. Goods in a showroom
B. Goods in transit with terms FOB Destination
Goods which have the terms FOB Destination are only recognized as inventory from the buyer’s perspective once it is received by the buyer, not when it is still in transit. This is because FOB Destination means that the buyer is free from the responsibility of the goods until it reaches his or her hands. Therefore, it is not yet recognized as inventory in the buyer’s books.
TLT Merchandising buys 10 bouquets of flowers at $10 and resells them at $15. During the month, TLT was able to sell 5 bouquets? Based on the information given, what would be the effect to revenues and operating expenses?
A. Increase in revenue of $75, no increase in operating expenses
B. Increase in revenue of $75, increase in operating expenses of $100
C. Increase in revenue of $150, increase in operating expenses of $100
D. Increase in revenue of $75, increase in operating expenses of $50
A. Increase in revenue of $75, no increase in operating expenses
Since TLT Merchandising was only able to sell 5 bouquets, the revenue would only increase by $75 ($15 selling price x 5 bouquets). Meanwhile, there is no increase in operating expenses because the $10/bouquet cost would be classified under cost of goods sold since it is directly related with the revenues generated. The cost of goods sold should increase by $50 ($10 purchase price x 5 bouquets sold).
An increase in accounts payable can be considered an:
A. Financing activity
B. Investing activity
C. Operating activity
D. Non-cash transaction
C. Operating activity
Typically, accounts payable are incurred whenever we make a purchase from a supplier on account. This type of transaction is associated with the daily operations of a company, and is therefore classified as an operating activity. Alternatively, we can analyze this transaction through the shortcut we have explained above. Since accounts payable is a current liability, we can conclude that it is an operating activity.
The separate entity concept distinguishes:
A. Assets from liabilities and owner’s/shareholders’ equity
B. Investments from different investors and shareholders
C. Ownership of the owner and ownership of the business
D. Current (short-term) and non-current (long-term)
C. Ownership of the owner and ownership of the business
The accounting entity or separate entity concept is one of the generally accepted accounting principles (GAAP). It states that whatever the owner owns (or owes) is apart and distinct from whatever the company owns (or owes). Therefore, in accounting, personal expenses such as the rent of the owner’s house should not be considered as an operating expense in the books of the company. Whenever the owner would use company funds for personal use, it should be instead be recorded as a withdrawal from the owner’s capital account.
SLA Company purchases office supplies on account. Assuming that SLA Company uses the asset method, when is an Office Supplies Expense recorded?
A. When the office supplies are bought
B. When the office supplies are received
C. When the office supplies are used
D. When the office supplies are paid
C. When the office supplies are used
Using the asset method, when supplies and similar items are bought, they are first recorded as an asset as opposed to an expense. Therefore, an expense is not recorded when the office supplies are paid, neither when they are received or bought. An adjusting entry is to be made by the company (usually at the end of the month, period, or year) when the office supplies are used. Only then would the office supplies that are used be considered as an expense. This would be reflected in the income statement. Meanwhile, the office supplies still unused would remain as an asset.
The Income Statement always shows the results of business operations over a specific period of time including:
A. A Month, a Quarter, or a Year
B. A Quarter, a Year, or 3 Years
C. A Month, a Year, or 5 Years
D. A Week, a Month, or a Year
A. A Month, a Quarter, or a Year
To avoid formatting issues, accountants often use a traditional diagram, or chart, called a:
A. A-Account
B. B-Account
C. T-Account
D. Z-Account
C. T-Account
On the Income Statement, the term which describes when you take the number that appears in the Statement of Owner’s Equity, and combined it into the Final number for Income and Expenses, is always called:
A. “Net Income—Equity Shown”
B. “Owner’s Equity—End of Period”
C. “Final Equity—Owner’s Revenue”
D. “Expense Shown—Revenue Accounted For”
B. “Owner’s Equity—End of Period”
“Owner’s equity—End of period” always appears in which financial statement simultaneously to the Income Statement during a financial period ending?
A. Balance Sheet
B. Expense Report
C. Statement of Cash Flows
D. Debt Ledger
A. Balance Sheet
Deferred Revenues are liabilities that always result from receiving _____ prior to earning the income
A. Cash
B. Assets
C. Property
D. Cars
A. Cash
Gross Profit Formula always derives from the equation:
A. Sales – Costs of Goods Sold = Gross Profit (GP)
B. Costs of Goods Sold - Gross Profit (GP) = Sales
C. Gross Profit (GP) - Sales = Costs of Goods Sold
A. Sales – Costs of Goods Sold = Gross Profit (GP)
Extraordinary gains and losses are events that are both considered:
A. Desired yet Unexpected
B. Normal and Expected
C. Unusual and Infrequent
D. Usual and Often Occurring
C. Unusual and Infrequent
Profitability analysis always permits an anticipation of sales potential specific to such elements as:
A. Urban, Suburban, and Rural Sales
B. Customer Age, Geography, and Product Types
C. Products, People, and Problematic Occurrences
D. Customer Age, Geography, and Investments
B. Customer Age, Geography, and Product Types
