Exam 1

Question 1

On June 25, Tin Roofing extended an offer of $170,000 for land that had been priced for sale at $194,000. On July 9, Tin Roofing accepted the seller’s counteroffer of $185,000. On October 1, the land was assessed at a value of $278,000 for property tax purposes. On December 22, Tin Roofing was offered $296,000 for the land by a national retail chain.
At what value should the land be recorded in Tin Roofing’s records?

Answer 1

$185,000

Question 2

What are the three types of businesses?

Answer 2

1. Service business
2. Retail business
3. Manufacturing business

Question 3

Define service business.

Answer 3

A business providing a service to their customers
- Examples: hair salon, masseuse, law firm, accounting company (freelance)

Question 4

Define retail business.

Answer 4

Business selling products purchased from other business to their customers
- Examples: Starbucks, boutiques, amazon

Question 5

Define manufacturing business.

Answer 5

A business that uses basic goods/raw materials to manufacture into products sold to customers
-Examples: clothing manufacturers (mustard seed, cotton candy), furniture manufacturers, candle makers

Question 6

Which of the following businesses is considered a service business?
A. Walmart
B. Southwest Airlines
C. Ford Motor Company
D. Starbucks

Answer 6

Southwest Airlines

Question 7

Define accounting.

Answer 7

An information system reporting on the economic activities/condition of a business

Question 8

What standards does accounting in the US follow?

Answer 8

GAAP (Generally Accepted Accounting Principles)

Question 9

Who decides the accounting standards within the US?

Answer 9

FASP (Financial Accounting Standards Board)

Question 10

What does the SEC do?

Answer 10

Federal agency over accounting and finances of companies as well as stocks

Question 11

What are the two most important characteristics for financial reports?

Answer 11

1. Relevant information
2. Faithful representation

Question 12

Define fiscal year.

Answer 12

The annual accounting period of a company

Question 13

Define natural business year.

Answer 13

The fiscal year ends when the company is naturally at its lowest operating point
- Example: Swimwear store ends its fiscal year at the beginning of Fall

Question 14

Define business entity assumption.

Answer 14

Accounting principle limiting the accounting of the business to solely the business transactions and not the transactions of the owner(s)

Question 15

Define the going concern assumption.

Answer 15

The assumption while creating financial accounts that the business will continue to be in business.

Question 16

Define proprietorship.

Answer 16

A business owned by a single individual, 70% of businesses in the US

Question 17

Define partnership

Answer 17

A business owned by 2+ individuals, 10% of businesses in the US

Question 18

Define corporation.

Answer 18

A legal business entity that is separate from the owners (shareholders), has stocks, generates 90% of business revenues, used by large businesses (20% of businesses in the US)

Question 19

Define LLC (Limited Liability Company).

Answer 19

An LLC combines a partnership and corporation meaning the owners are not legally liable for the business,10% of businesses within the US,

Question 20

Define the measurement principle.

Answer 20

The principle for the determination of monetary value for assets, liabilities, revenues, and expenses

Question 21

Define the historical cost principle.

Answer 21

The principle that asses are recording at their original cost and not the current market value

Question 22

Define the revenue recognition principle.

Answer 22

The principle stating that revenue should be recognized when it is earned, regardless of when cash it received
- Example: Fees unearned

Question 23

Define expense recognition principle.

Answer 23

Principle that requires expenses to be recognized within the same period as related revenues, AKA the marketing principle

Question 24

What is the accounting equation?

Answer 24

Assets = Liabilities + Equity

Question 25

Define business transaction.

Answer 25

An economic event that changes the business' financial condition/results of the operations

Question 26

Define retained earnings.

Answer 26

The stockholder's equity created from business operations (revenue and expense transactions)

Question 27

What are the required financial statements?

Answer 27

1. Income statement 2. Statement of stockholder's equity 3. Balance sheet 4. Statement of cash flows

Question 28

What does the income statement include?

Answer 28

Fees earned, expenses (rent, salary, insurance, depreciation, etc), total expenses, and net income

Question 29

What does the statement of stockholder's equity include?

Answer 29

Issued common stock, net income, dividends, and balances (beginning and end of the period)

Question 30

What does the Balance sheet include?

Answer 30

Total assets, listed assets (cash, accounts receivable, prepaid insurance, land), total liabilities, listed liabilities (accounts payable, salaries payable, unearned fees), and stockholder's equity (common stock, retained earnings) - Essentially: the accounting equation on a chart

Question 31

What is the purpose of the income statement?

Answer 31

To report the revenues and expenses for a period of time, finds net income and net loss

Question 32

What is purpose of the statement of stockholder's equity and why is it reported after the income statement?

Answer 32

- To report the changes in stockholder's equity for a period of time - It is prepared after the income statement because the net income and net loss for the period is needed for the document

Question 33

What is the purpose of the balance sheet?

Answer 33

To report the amounts of assets, liabilities, and stockholder's equity in a vertical, easy to see format, aka the report form

Question 34

How do income statements and statements of stockholders' equity relate?

Answer 34

The stockholder's equity is affected by the net income or net loss of a business (a number found through the income statement)

Question 35

How do statements of stockholders' equity and the balance sheet relate?

Answer 35

Common stock, retained earnings, and total stockholders' equity are both reported on each documents. This is due to the fact that the total stockholders' equity is reported on the balance sheet.

Question 36

How does the balance sheet and the statement of cash flows relate?

Answer 36

The cash reported on the balance sheet is also recorded on the statement of cash flows

Question 37

What is the equation for the ratio of liabilities to stockholders' equity?

Answer 37

Ratio = Total Liabilities/Total Stockholders' Equity

Question 38

What areas of the chart of accounts are considered assets?

Answer 38

1. Cash 2. Accounts Receivable 3. Supplies 4. Prepaid Insurance 5. Land 6. Office Equipment

Question 39

What areas of the chart of accounts are considered liabilities?

Answer 39

1. Accounts Payable 2. Unearned Rent

Question 40

What areas of the chart of accounts are considered Stockholders' Equity?

Answer 40

1. Common Stock 2. Retained Earnings 3. Dividends

Question 41

What area of the chart of accounts is considered revenue?

Answer 41

Fees earned

Question 42

What areas of the chart of accounts are considered expenses?

Answer 42

Everything with the word 'expense' after it

Question 43

What are the debit and credit rules for revenue accounts?

Answer 43

Debit for decreases; credit for increases

Question 44

What are the debit and credit rules for dividends accounts?

Answer 44

Debit for increases and credit for decreases

Question 45

What are the debit and credit rules for asset accounts?

Answer 45

Debit for increases; credit for decreases

Question 46

What are the debit and credit rules for liability accounts?

Answer 46

Debit for decreases; credit for increases

Question 47

What are the debit and credit rules for stockholders' equity accounts?

Answer 47

Debit for decreases; credit for increases - Because the stockholders' equity is paid out, not the company's

Question 48

What is the process of transferring debits and credits from journal entries into accounts in a ledger?

Answer 48

Posting

Question 49

What is the purpose of the double-entry system for trial balances?

Answer 49

It ensures the detection of errors - if the credit and debit columns do not equal, something is wrong

Question 50

Define accrual basis of accounting.

Answer 50

Revenues are only reported on the income statement in the period of the payment/transaction

Question 51

What is the function of accrued revenues?

Answer 51

Some revenues are recorded only when cash is received, so all other revenue earned throughout the year is accrued revenue - It is recorded as accounts receivable and fees earned (specify accrued fees)

Question 52

At the end of an accounting period, an adjusting entry to record revenue that has been earned but not yet recorded would recorded as affecting what?

Answer 52

Debit an asset account; credit a revenue account

Question 53

Define fixed/plant assets.

Answer 53

Physical resources that are owned and used by the business - Examples: supplies, land, equipment