Lecture 5

Question 1

depreciation = ?

Answer 1

breaks up the up-front cost of a long-term asset over its useful life

Question 2

what type of account is depreciation?

Answer 2

expense

Question 3

what are the 2 important dates for recording depreciation?

Answer 3

asset purchase date

adjustment date

Question 4

what is straight-line depreciation?

Answer 4

allocation of a fixed asset’s value over time in equal amounts

Question 5

how do you record depreciation?

Answer 5

initial purchase (debit fixed asset, credit cash)

adjustment (debit depreciation expense, credit accumulated depreciation)

Question 6

accumulated depreciation = ?

Answer 6

a contra-asset account that accumulates depreciation expenses over the asset’s useful life

Question 7

contra-account = ?

Answer 7

have an opposite balance of the typical account

e.g., contra-asset account has a credit balance

Question 8

what is a businesses main aim?

Answer 8

to maximise profits

Question 9

what does accounting for profit help businesses do?

Answer 9

plan

obtain loans

show success

accurately calculate tax liability

Question 10

gross profit = ?

Answer 10

sales - cost of sales

the excess of sales revenue over the cost of sales in the period

Question 11

net profit = ?

Answer 11

revenue - expenses

the excess of operating profit over the operating expenses in the period

Question 12

what does ‘on time’ mean?

Answer 12

paid by credit

Question 13

trader = ?

Answer 13

someone mainly concerned with buying & selling goods

Question 14

what do traders identify?

Answer 14

revenue & expenses

Question 15

what two accounts make up the income statement?

Answer 15

trading account
profit & loss account

Question 16

what is the purpose of the two accounts?

Answer 16

trading account = calculate gross profit

profit & loss account = calculate net profit

Question 17

how do you account for COGS?

Answer 17

debit COGS, credit inventory

Question 18

how do you calculate the trading account?

Answer 18

the sales & purchases account balances are transferred to the trading account to close the accounts for the period

debit sales, credit trading account
debit trading account, credit purchases

Question 19

after all accounts have been balanced off with the trading account, what do you do?

Answer 19

close off the trading account by debiting closing inventory and crediting trading account

Question 20

what is the format of a trading account?

Answer 20

revenue
-cost of sales (opening stock + purchases - closing stock)
= gross profit

Question 21

what does the profit & loss account show?

Answer 21

revenue - expenses

Question 22

trading account & profit & loss account format = ?

Answer 22

sales
- cost of sales
= gross profit
- expenses
= net profit

Question 23

income statement = ?

Answer 23

a summary of the revenue and expenses for a specific period of time

Question 24

matching concept = ?

Answer 24

concept applied by matching expenses with the revenues they generated, only during the period that those revenues were generated

Question 25

when is revenue deemed to have been earned?

Answer 25

when the firm have completed a substantial portion of the production/sales effort

when the risks of ownership have been shifted to the customer

Question 26

accrued expenses = ?

Answer 26

when the expenses for the period exceed the cash paid during the period and is carried over to the next period

Question 27

what element of accrued expenses are shown on the income statement?

Answer 27

amount paid + amount outstanding is shown in the income statement

Question 28

what element of accrued expenses are shown on the balance sheet?

Answer 28

the accrued expense amount outstanding is shown on the balance sheet as a current liability

Question 29

how are accrued expenses portrayed on the SOCF?

Answer 29

the amount paid will be reduced from cash outflows in the cash flow statement

Question 30

prepaid expenses = ?

Answer 30

when amount paid exceeds the expense required for the period

Question 31

how are prepaid expenses portrayed on the income statement?

Answer 31

total amount paid - amount paid in advance at the end of the period is shown on the income statement

Question 32

how are prepaid expenses portrayed on the balance sheet?

Answer 32

amount paid in advance is represented as a current asset

Question 33

how are prepaid expenses portrayed on the SOCF?

Answer 33

amount prepaid is reduced from cash outflows in the socf

Question 34

what factors affect depreciation calculation?

Answer 34

cost of asset
estimated useful life
residual value
depreciation method