Exam 2 Flashcards
(44 cards)
What are the normal balances of each of the 5 account types + dividends?
- Assets = Debit
- Liability = Credit
- Equity = Credit
- Revenue = Credit
- Expenses = Debit
- Dividends = Debit
What are some of the accounts under assets and state whether the debit/credits increase or decrease?
Accounts receivable, investments, inventory, cash, prepaid expenses, petty cash, payroll fund, tax fund, notes receivable, PPE, intangibles (copyright, patents, leasing rights)
- Debit: Increase
- Credit: Decrease
What are some of the accounts under liabilities and state whether the debit/credits increase or decrease?
Accounts payable, notes payable, income tax payable, accrued expenses, unearned revenue
- Debit: Decrease
- Credit: Increase
What are some of the accounts under stockholders’ equity and state whether the debit/credits increase or decrease?
Capital stock, retained earnings, paid-in capital, common stock and treasury stock
- Debit: Decrease
- Credit: Increase
What are some of the accounts under revenue and state whether the debit/credits increase or decrease?
retained earnings, fees earned, sales, sales returns and allowances, rent income, investment income, royalties
- Debit: decrease
- Credit: increase
What are some of the accounts under expenses and state whether the debit/credits increase or decrease?
Cost of sales (purchases, freight in), advertising expense, bank services charge, delivery expense, depreciation expense, salaries expense
- Debit: Increase
- Credit: decrease
What are accrued expenses (aka accrued liability)?
Expenses that are recognized when the incur and journalized to the book before they are actually paid
- Examples: wages expense, payments owed to vendors for supplies or land, loan interest, taxes
Is put onto the adjustments sheet, in the reverse order
What is a contra-asset?
An account that shows the depreciating value for an asset, recorded as an asset account on classified balance sheets
- is a credit account
typically a depreciation of anything (land,supplies,building)
What accounts are present in a statement of stockholders’ equity? List them in order.
- Beginning balance of stockholders’ equity
- Common Stock
- Paid-in Capital
- Retained earnings
- Dividends
- Ending balance of stockholders’ equity
Do dividends negatively affect retained earnings and overall net income?
Yes, it decreases the total overall income for a company
Define the difference between current assets and long-term assets?
How quickly they can be liquidated
- Current: prepaid insurance, supplies, accounts receivable, inventory, or cash
- Long-term: Land, office equipment, buildings
What are the steps of the accounting cycle in order?
- Journalize transactions
- Post to the generl ledger
- Prepare a trial balance
- Make adjusting entries
- Prepare an adjusted trial balance
- Prepare financial statements (income statement, statement of stockholders’ equity, balance sheet, and cash flow statement)
- Make closing entries
- Prepare post-closing trial balance
- Reverse entries when necessary
What is the GAAP required method for financial reporting?
Accrual accounting
What are the five sections of choice for businesses within the GAAP?
- Inventory valuation
- FIFO, LIFO, weighted average cost - Depreciation methods
- Revenue Recognition
- Accounting for leases
- Investment accounting
Define the expense recognition principle.
Expenses are recognized within the same accounting period as the revenues they help to generate (even if hey have not been paid for)
- Example: Supplies bought for next year will be recorded within that year
Define the revenue recognition principle.
Revenue should be recognized within the same accounting period that it is earned (even if the cash has not been received)
- Example: a service has been provided (replacing an AC unit) but the customer has not paid yet (they will pay the next month), the earning is still recognized in the period that the service was provided
Blake Corporation uses the accrual basis of accounting. Its fiscal year is from January through December. On July 1 of the current year, the company receives rental income of $12,000 for a 1–year lease of office space in its building. At the end of the fiscal year, what amount of rental income is reported on its income statement? Why is the total lower than 12,000?
$6,000, because this follows the revenue recognition principle
What is working capital?
Working capital = Current assets - current liabilities
- measures the company’s ability to cover short-term liabilities using short-term assets, hence working capital
What is the current ratio formula and what is it for?
Current assets/current liabilities
- The current ratio is used to assess a companies ability to cover its short-term liabilities (lower the ratio, worse position)
- The quick ratio is similar but uses even easier assets to liquify (does not include pre-paid anything and inventory)
What are the adjustments on the spreadsheets used for?
To prepare adjusting journal entries
What accounts are closed at the end of an accounting period? What are their balances?
- Revenue accounts (debit)
- Expense accounts (Credit)
- Income summary account (Debit if net income, credit if net loss)
- Dividends account (credit)
- Income summary and dividends account contribute to the retained earnings summary
- Revenue accounts, expense accounts, and income summary contribute to the income summary
What accounts is COGS reported under?
Expense
What are the steps of the operating cycle?
- Purchase activity: the act of buying inventory/raw materials
- Inventory preparation/production
- Sales acitivity: the act of selling goods/services
- Collection activity: the act of receiving cash
- Cash available to businesses
What is the formula for gross profit?
GP = Sales revenue - COGS
