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Financial Accounting > Pre Assesment Prep > Flashcards

Pre Assesment Prep Flashcards

1
Q

Balance sheet

A

Used to evaluate a company’s financial position by comparing the assets and liabilities

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2
Q

Common assets

A

Cash, AR, inventory, and infrastructure

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3
Q

Common liabilities

A

AP, taxes, mortgage, unearned revenue

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4
Q

Sources of owners equity

A

Capital stock and retained earnings

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5
Q

What types of accounts are included in the balance sheet?

A

Assets, liabilities, and owners equity accounts

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6
Q

How to calculate net income

A

Sales revenue - COGS - expenses

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7
Q

Single step income statement

A

Revenues and expenses are grouped together and net income is the difference between the revenue and expenses. Taxes are shown separately

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8
Q

Multiple step income statement

A

Emphasizes presentation of gross profit and operating income

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9
Q

What accounts are found in the multiple step income statement?

A

selling and admin
cost of sales
operating income
Research and development
net income

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10
Q

Gross profit calculation

A

Sales - COGS

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11
Q

Operating profit calculation

A

Gross profit - operating expenses

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12
Q

What accounts are used in computing a company’s net income?

A

Sales
COGS
income tax expense

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13
Q

What is reported in a multiple step income statement that is not reported in the single step?

A

Gross profit

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14
Q

What cash flow category contains activities whereby cash is obtained from or repaid to creditors and owners?

A

Financing

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15
Q

What accounts are used in computing a company’s financing cash flow for the year?

A

Cash paid for dividends, and cash received as investments

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16
Q

What accounts are used in computing a company’s ending cash balance for the year?

A

Cash balance at beginning of year
and cash flow from operating, investing, and financing activities

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17
Q

How is revenue typically recorded in terms of debits and credits?

A

As a credit representing an increase of equity

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18
Q

What items are found on the statement of cash flows?

A

Operating, investing, and financing activities - it is an extension of the income statement

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19
Q

How do the financial statements relate to each other?

A
  1. Income statement helps explain
    changes in the retained earnings balance in the balance sheet
  2. statement of cash flows explains change in the cash balance in the balance sheet
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20
Q

4 steps in the accounting cycle

A
  1. Analyze transactions
  2. Record the effects of transactions
  3. Summarize effects of transactions
  4. Prepare reports
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21
Q

Asset accounts

A

Cash, inventory, equipment

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22
Q

Liability accounts

A

AP, Notes payable

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23
Q

Assets (DR/CR)

A

Increase with debits
Decrease with credits

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24
Q

Liabilities (DR/CR)

A

Increase with credits
Decrease with debits

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25
Q

Owners Equity (DR/CR)

A

Increase with credits
Decrease with debits

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26
Q

Do dividends increase or decrease owners equity?

A

Decrease —> increased by a debit and decreased by a credit

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27
Q

What does a debit entry to a liability account represent?

A

Decrease

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28
Q

What does a debit entry to an equity account represent?

A

A decrease

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29
Q

Revenue recognition principle

A
  1. Cash has been collected or reasonably assured
  2. Earnings process is substantially complete
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30
Q

Matching principle

A

Expenses are recorded in the same period in which corresponding revenue is recorded

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31
Q

What is the proper way to record an increase in an asset account and an increase in an equity account?

A

Asset: debit
Equity: credit

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32
Q

How are expenses typically recorded with debits and credits?

A

As a debit, representing a decrease in equity

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33
Q

Why is accrual based accounting preferred over cash basis accounting?

A

Accrual based accounting provides a more accurate picture of a company’s economic profitability

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34
Q

Accrual based accounting

A

Process of recording revenues and expenses when earned and incurred regardless of when cash is received

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35
Q

Cash basis accounting

A

Process where revenues and expenses are recognized only when cash is received or paid

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36
Q

How to calculate interest rates

A

(Simple interest X 100) / (principle X time)

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37
Q

Special journal vs general journal

A

General = one journal
Special = multiple journals

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38
Q

When does an accountant perform transaction analysis?

A

When recording items in the journal

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39
Q

3 steps of a JE

A
  1. Identify accounts
  2. Determine increase / decrease for each
  3. Determine how much increase / decrease
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40
Q

What kind of accounts are expense accounts?

A

Equity accounts

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41
Q

What does journalizing mean?

A

Recording a transaction

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42
Q

Current Asset accounts

A

Cash
AR
Inventory
notes receivable
supplies

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43
Q

Long term asset accounts

A

Land, buildings, equipment

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44
Q

Current liability accounts

A

Notes payable
AP
salaries
interest payable
income taxes

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45
Q

Long term liability accounts

A

Mortgage payable

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46
Q

What are some of the Expense accounts (equity)

A

advertising
utilities
travel
office supplies
COGS
admin salaries
rent
payroll taxes

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47
Q

Chart of accounts sequence

A
  1. Assets
  2. Liabilities
  3. Owners equity accounts
  4. Revenues
  5. Expenses
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48
Q

At the end of the year before any closing entries are made, which account has a debit balance?

A

COGS

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49
Q

What is a nominal account?

A

Temporary accounts that are closed to a zero balance at the end of each accounting period appearing on the income statement

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50
Q

What is a real account?

A

Permanent accounts that are not closed to a 0 balance at the end of each accounting period - appear on balance sheet

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51
Q

What accounts are nominal accounts?

A

Revenues, expenses, dividends, COGS, and capital stock

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52
Q

What accounts are real accounts?

A

Cash, AR, AP, retained earnings

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53
Q

In preparing bank reconciliation, what is the proper treatment of a deposit in transit?

A

Add it to the reported cash balance in the bank statement

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54
Q

Why are daily cash deposits important?

A

They prevent the accumulation of a large amount of cash

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55
Q

Periodic reporting criteria

A
  1. Financial position from balance sheet
  2. Relative success or failure from income statement
  3. Nature and extent of cash flows form statement of cash flows
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56
Q

How does the time period concept impact the process of financial reporting?

A

Financial statements are provided on a regular basis at least once a year

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57
Q

What kind of account is a dividend account?

A

Equity

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58
Q

Where and when should an expense already paid in cash be reported if it cannot be directly matched with an associated revenue?

A

I’m the income statement as an expense in the accounting period in which it occurred

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59
Q

Unrecorded liabilities JE

A

DR expense
CR payable

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60
Q

Prepaid balances JE

A

DR prepaid account
CR cash

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61
Q

Unearned revenue JE

A

DR cash
CR unearned revenue

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62
Q

2 steps for adjusting JEs

A
  1. does not involve cash
  2. Each entry involves a balance sheet account and an income statement account
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63
Q

What are balance sheet accounts?

A

Cash
AR/AP
Equity
short term assets
prepaid expenses
intangible assets

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64
Q

What are some income statement accounts?

A

TRACED

Taxes
Revenue
Amortization
COGS
Expenses
Depreciation

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65
Q

Calculating expense totals

A

(total / months) x time left in year

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66
Q

Closing retained earnings to dividends JE

A

DR RE
CR dividends

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67
Q

Are balance sheet accounts closed at the end of the year?

A

No, only income statement accounts are closed at the end of the year

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68
Q

Which account is shown in a post closing trial balance?

A

Cash

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69
Q

How is the ending retained earnings balance computed?

A

Beginning RE + net income - dividends

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70
Q

At the end of the year what account is reflected in the retained earnings balance before the closing entries are made?

A

Net income

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71
Q

What accounts have debit balances on the trial balance?

A

Expense accounts

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72
Q

What accounts have credit balances on the trial balance?

A

Revenue accounts

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73
Q

Adjusted trial balance steps

A
  1. Refer to last 5 lines on adjusted trial balance
  2. Data validation tool - list - highlight ALL account titles - ok
  3. Add last 5 lines to closing entries
  4. Add RE as the 6th line
  5. Calculate RE (revs - exps)
  6. Indent all credit items
  7. Skip line under RE and add another RE line and dividends under RE
  8. BOTH will be the total shown in the dividends column
  9. Indent dividends and credit balance
  10. Add balances to RE beginning balance, net income, dividends, and calculate ending RE balance
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74
Q

Post closing trial balance set up

A
  1. Data validation tool for all lines
  2. Select only real trial balance accounts
  3. Copy all adjusted balances except RE into post closing
  4. Pull bottom RE balance into RE on post closing
  5. Use auto-sum to tally debits and credits
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75
Q

What are the real trial balance account titles?

A

Cash
Inventories
Receivables
PPE
Intangible assets
Other assets
AP
Loans payable
Capital lease liabilities
Deferred income tax
Accrued expenses and other liabilities
Capital stock and other
Accumulated other comprehensive loss
Retained earnings

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76
Q

If an expense is improperly recorded as an asset what impact does this have on the income statement?

A

Net income is overstated

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77
Q

What is the impact of posting the CORRECT amount to the WRONG expense amount?

A

Incorrect totals for individual expense accounts

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78
Q

What are the 5 internal controls?

A
  1. Control environment
  2. Risk assessment
  3. Control activities
  4. Information and communication
  5. Monitoring
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79
Q

3 functions of segregation of duties

A
  1. Authorization
  2. Record keeping
  3. Custody of assets
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80
Q

What are control activities?

A

Policies and procedures that provide reasonable assurance that the company’s established objectives will be met

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81
Q

How to reconcile bank statements

A

Begin with balance per bank (ending balance)
+ deposits in transit
- outstanding checks
= correct balance
Then take balance per books
+ interest earned
- bank service charges
MAKE SURE THEY MATCH

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82
Q

How to read sales discounts

A

x/10 is the % discount and n/x are the payment terms

Customer will receive X discount if they pay within N terms

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83
Q

What accounts are contra accounts?

A

Sales discounts, returns, and allowances

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84
Q

What is a contra account?

A

An account that is offset or deducted from another account

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85
Q

How to calculate gross sales

A

Total recorded sales before discounts, returns and allowances

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86
Q

How to calculate net sales

A

Gross sales - sales discounts, returns and allowances

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87
Q

Direct write off method

A

Recording of losses from uncollectible accounts as expenses during the period in which they are deemed uncollectible

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88
Q

Allowance method

A

Recording of estimated losses due to uncollectible accounts as expenses during the period in which the sale occurred

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89
Q

Write off of specifically identified bad accounts JE

A

DR allowance
CR accounts receivable

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90
Q

Net sales on the income statement computed as

A

Gross sales - sales discounts - sales returns and allowances

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91
Q

Net AR in the balance sheet is computed as

A

Gross AR - allowances

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92
Q

FOB destination

A

Seller owns merchandise from the time it is shipped until it is delivered to buyer

93
Q

FOB shipping point

A

buyer owns merchandise at the time merchandise is shipped

94
Q

Perpetual inventory system

A

Inventory records are updated whenever a purchase or sale is made - most often used when each item has a relatively high value

95
Q

Periodic inventory system

A

Only the dollar amount of the sale is recorded - most often used when inventory comprises a large number of diverse items each with a relatively low value

96
Q

2 steps of physical counting of inventory

A
  1. Quantity count
  2. Inventory costing
97
Q

Computing inventory and COGS for periodic system

A

Beginning inventory
+ net purchases
= COGS available for sales
- ending inventory

98
Q

Computing inventory and COGS for perpetual system

A

Beginning inventory
+ net purchases
= COGS available for sale
- prelim COGS
= ending inventory predicted
- ending inventory actual
= Cost of moving inventory

99
Q

Inventory shrinkage

A

Inventory lost or stolen during a period

100
Q

Obsolescence

A

Notable decrease in the worth or utility of an inventory item

101
Q

How is inventory shrinkage typically reported in the financial statements?

A

As part of COGS

102
Q

FIFO

A

First in first out - assumes oldest units are sold first and new units remain in inventory

103
Q

LIFO

A

Last in first out - assumed newest units are sold first

COGS = new units
Inventory = old units

104
Q

When to capitalize

A

When costs are expected to benefit future periods

105
Q

Salvage value

A

The amount expected to be received when an asset is sold at the end of its useful life

106
Q

Straight line depreciation METHOD

A

assumes an asset will benefit all periods equally and that the cost of the asset should be assigned on a uniform basis for all accounting periods

107
Q

Annual Straight line depreciation calculation

A

(Cost - salvage value) / estimated useful life in years

108
Q

Depreciation expense JE

A

DR depreciation expense
CR accumulated depreciation

109
Q

Double Declining - balance depreciation calculation

A

((100 / years) x 2) x book value

110
Q

Disposal JE

A

DR accumulated depreciation
CR (item)

111
Q

Trademark JE

A

DR trademark
CR cash

112
Q

Patent JE

A

DR patent
CR cash

113
Q

Franchise JE

A

DR franchise
CR cash

114
Q

Amortization

A

To periodically lower the book value of a loan or an intangible asset over a set period of time.

115
Q

Amortization JE

A

DR amortization expense
CR patent/TM etc

116
Q

What is the difference between depreciation and amortization?

A

Depreciation is for tangible assets and amortization is for intangible assets

117
Q

Amortization expense calculation

A

Cost / useful life

118
Q

Federal payroll JE

A

DR federal withholding
CR cash

119
Q

State payroll JE

A

DR state withholding and state unemployment
CR cash

120
Q

Salary JE

A

DR salaries payable
CR cash

121
Q

Salary expense vs salary payable

A

expenses are tax withholding
payable amount paid

122
Q

Sick day JE

A

DR salaries expense
CR sick days payable

123
Q

Which principle required that the expense associated with a compensated absence be accounted for in the period in which it is earned by the employee?

A

Matching

124
Q

Property tax JE

A

DR property tax expense
CR prepaid property taxes

125
Q

Contingency

A

An uncertain circumstance involving potential gain or loss that will not be resolved until some future event occurs

126
Q

Probable contingency

A

Future event is likely to occur and should be disclosed on the balance sheet

127
Q

Reasonably possible contingency

A

Chance of future event is more than remote but less than likely and should be disclosed on the balance sheet

128
Q

Remote contingency

A

Chance of future event occurring is slight and does not need to be disclosed on the balance sheet

129
Q

Discounting

A

Reducing a future value to its present value

130
Q

When computing present and future values what does compounding refer to?

A

Frequency with which interest is added to the principle

131
Q

Loan payment JE

A

DR loans payable
CR interest expense

132
Q

Prospectus

A

Report provided to investors that represents a company’s financial statements and explains its business plan, sources of financing, and significant risks

133
Q

Corporate charter

A

Written doc filed by founders detailing the major components of a company like objectives, structure, and planned operation

134
Q

Par value

A

Face value of a single share of stock

135
Q

Stock issuance JE

A

DR cash
CR common stock

136
Q

How does the amount in retained earnings change from one year to another?

A

Increased by net income
decreased by dividends and net loss

137
Q

Retained earnings
calculation

A

Beginning retained earnings
+net income
-dividends

138
Q

Cash dividends

A

Cash distribution of earnings to stockholders

139
Q

3 important dividend dates

A
  1. Declaration date
  2. Date of record
  3. Payment date
140
Q

What happens to dividends accounts at the end of the year?

A

Closed to the retained earnings account

141
Q

Declared dividends JE

A

DR dividends
CR dividends payable

142
Q

COGS JE

A

DR COGS
CR inventory

143
Q

Which financial statement provides a detailed explanation of one component in the year-to-year change in the retained earnings balance?

A

Income statement

144
Q

What is an expense?

A

The amount of assets consumed through business operations

145
Q

What is an example of an investing activity?

A

Buying buildings

146
Q

A company issued capital stock to new investors in exchange for $100,000 cash. What is the effect of this transaction on the accounting equation?

A

Total assets and owners’ equity increase

147
Q

What does a debit entry to a liability account represent?

A

A decrease

148
Q

How are dividends typically recorded with debits and credits?

A

As a a debit, representing a decrease in equity

149
Q

When does an accountant perform transaction analysis?

A

When recording items in the journal

150
Q

When making a journal entry, why is it important to know whether in account increased or decreased?

A

To determine whether the account should be debited or credited

151
Q

Time period concept

A

Financial statements are provided on a regular basis, at least once a year

152
Q

In which type of business would accrual basis accounting result in the same income measure as cash basis accounting?

A

A small business, in which all sales amounts are collected in cash at the time of the sale and all expenses are paid in cash immediately

153
Q

Wages expense JE

A

DR wages expense
CR wages payable

154
Q

Initial Prepaid expenses JE

A

DR prepaid account
CR cash

155
Q

Initial Office supplies JE

A

DR supplies
CR cash

156
Q

Adjusting office supplies JE

A

DR supplies expense
CR supplies

157
Q

Adjutsting prepaid expense JE

A

DR prepaid account expense (insurance)
CR prepaid account (insurance)

158
Q

Initial Unearned revenue JE

A

DR cash
CR unearned revenue

159
Q

Adjusting unearned revenue JE (after revenue is earned)

A

DR unearned revenue
CR revenue

160
Q

Adjusting rent expense JE

A

DR rent expense
CR prepaid rent

161
Q

Adjusting interest JE

A

DR interest receivable
CR interest revenue

162
Q

What kind of control activity is the policy requiring employees to take mandatory vacations?

A

Independent check

163
Q

In a corporation who has the power to properly authorize the payment of dividends?

A

The board of directors

164
Q

Why is the separation of duties control so important with cash?

A

Without separation of duties, an employee who takes cash can cover up the shortage by adjusting the accounting records

165
Q

What are three specific functions that should be kept separate when setting up more sophisticated internal controls?

A

approving
recording
physical possession

166
Q

Who makes up the audit committee in a public company?

A

Outside directors

167
Q

What is the impact of posting an expense amount as an asset in the general ledger?

A

Expenses are too low,
Reported net income is too high

168
Q

Sales discounts JE

A

DR cash
DR sales discounts
CR AR

169
Q

Return of merchandise JE

A

DR sales returns and allowances
CR cash
CR AR

170
Q

Bad debt expense JE

A

DR bad debt expense
CR allowance

171
Q

Specifically identified uncollectible accounts (allowance) JE

A

DR allowance
CR AR

172
Q

What kind of account is sales returns and allowances?

A

A contra-revenue account

173
Q

With respect to bad debts what is the direct write off method?

A

Recognizing bad debt expense after confirming that a specific customer is not going to pay

174
Q

How to calculate net AR

A

Sales - allowance

175
Q

What kind of contra account is sales discounts?

A

revenue

176
Q

3 different types of inventory

A
  1. Raw materials
  2. Work in process
  3. Finished goods
177
Q

What is the proper accounting for the inbound inventory shipping cost called
“freight in”?

A

Add to inventory cost

178
Q

Periodic vs Perpetual systems inventory JE

A

Periodic:
DR Purchases (freight in)
CR AP

Perpetual:
DR inventory
CR: AP

179
Q

What is the proper accounting for purchasing discounts?

A

Subtract from inventory cost

180
Q

Periodic vs Perpetual system inventory return JE

A

Periodic:
DR AP
CR purchase returns

Perpetual:
DR AP
CR inventory

181
Q

Periodic vs. Perpetual inventory shrinkage closing JE

A

Periodic:
DR COGS
CR inventory

Perpetual:
DR AP
CR inventory

182
Q

Periodic inventory calculation

A

Beginning inventory
+ purchases
= GAFS
- ending inventory
=COGS

183
Q

What caution needs to be exercise when using a declining balance depreciation method to compute depreciation expense during the final years of an assets life?

A

Cannot reduce book value below salvage value

184
Q

What accounting action is necessary when an asset becomes worthless and must be scrapped?

A

must be removed from the books 

185
Q

What happens to any remaining un-depreciated cost when an asset is scrapped?

A

It is recorded as a loss

186
Q

What legal right belongs to the owner of a patent?

A

Protection from others using or selling the product for a specified number of years

187
Q

Patent amortization JE

A

DR amortization expense
CR patent

188
Q

With respect to a valuable trademark that a company has internally developed, which costs are capitalized?

A

The legal filing cost associated with registration

189
Q

What is the proper accounting for most costs associated with developing a patent?

A

Expense

190
Q

What is the proper accounting treatment if the market value of a franchise exceeds its cost at the time of acquisition?

A

Record the franchise asset at cost

191
Q

What is the relationship between the cash balance in the amount of retained earnings?

A

There is not direct relationship

192
Q

Dividend payment JE

A

DR dividends payable
CR cash

193
Q

Gross profit percentage calculation

A

Gross profit / sales

194
Q

How to calculate EPS (earnings per share)

A

Net income / # of outstanding shares

195
Q

2 EPS reported figures

A
  1. Basic - # actually outstanding
  2. Diluted - # that could be if stock was exercised
196
Q

Operating activities inflows/outflows

A

Inflow: cash receipts, interest and dividend revenue
Outflow: cash payments, salaries and taxes

197
Q

Financing activities cash inflows and outflows

A

Inflow: issuance of notes, bonds, and common stock
Outflow: repayment of loans, repurchase of stock

198
Q

Articulation

A

The interrelationships between the financial statements

199
Q

Are dividends included in net income calculations?

A

No!

200
Q

General ledger vs general journal

A

Ledger: identifies what page the entry appears
Journal: identifies the account

201
Q

5 categories of control activities

A
  1. Segregation of duties
  2. Proper procedures for authorizations
  3. Physical control over assets
  4. Adequate documents
  5. Independent checks
202
Q

What control activities are preventative controls?

A

Segregation of duties
Proper procedures for authorizations
Physical control of assets

203
Q

What control activities are considered detective controls?

A

Adequate documents
Independent checks

204
Q

FIFO/LIFO COGS calculation

A
205
Q

Average cost flow assumption

A

COGS and ending inventory are determined by using an average cost of all merchandise

206
Q

Average cost flow assumptions calculation

A
207
Q

Book value of long term intangible assets calculation

A

Cost - accumulated depreciation

208
Q

What does MORE expenses equal?

A

Less retained earnings

209
Q

Utilities expense JE

A

DR utilities expense
CR cash

210
Q

Adjusting unrecorded receivables JE

A

DR AR
CR revenue

211
Q

What accounts are credited when making closing entries?

A

Revenues

212
Q

Adjusted unearned service revenue JE

A

DR unearned service revenue
CR service revenue

213
Q

Percentage of AR method formula

A

(Bad debt / AR) x 100

214
Q

What is one cash management tool?

A

Minimum amount in non-interest accounts

Maximum amount in higher yielding investments

215
Q

Cash collection JE

A

DR cash
CR AR

216
Q

Credit sale JE

A

DR AR
CR sales

217
Q

Adjusting bad debt expense JE

A

DR bad debt expense
CR allowance

218
Q

Who retains ownership with respect to goods on consignment?

A

Supplier maintains ownership until it is sold even though the inventory is at the seller’s location

219
Q

With FIFO cost flow assumption, which units are assumed to be sold first?

A

The old units

220
Q

Does the AP account get closed at the end of the period?

A

No!

221
Q

Are revenues debited or credited when closing to retained earnings?

A

Credited

222
Q

What is the closing entry for sales revenue?

A

DR sales revenue
CR retained earnings

223
Q

What is the closing entry for COGS?

A

DR retained earnings
CR COGS

224
Q

Unearned rent revenue JE

A

DR unearned rent revenue
CR rent revenue

225
Q

Interest expense JE

A

DR interest expense
CR interest payable

226
Q

Initial prepaid rent JE

A

DR prepaid rent
CR cash

227
Q

Adjusting prepaid rent JE

A

DR rent expense
CR prepaid rent

228
Q

Delivery revenue JE

A

DR AR
CR delivery revenue

Financial Accounting (1 decks)

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