Exam 2 Flashcards by Dylan Talbot

Which assumption requires accountants to divide the economic life of a business in to time periods called?

Periodicity Assumption

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When do companies recognize revenue in the normal accounting period? When it is earned or when it is received?

When it is earned

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What are the 2 main types of accounting?

Accrual based accounting and Cash-basis accounting

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In accrued based accounting, revenues are recognized when ___________ and expenses are recognized when ___________

When they are earned; When they are incurred

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In cash-basis accounting, revenues are recognized when ___________ and expenses are recognized when _____________

When cash is received; when cash is paid

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Which type of accounting is NOT allowed under GAAP?

Cash basis accounting

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What type of entry makes it possible to report correct amounts on the balance sheet and the income statement?

Adjusting Entries

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Adjusting entries make it possible to report the correct amount on the:

A) Balance sheet
B) Ledger
C) Income statement
D) A and C
E) None of the above
F) All of the above

D) A and C

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Companies make adjusting entries every time they prepare __________________

Financial statements

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What are the 2 types of adjusting entries?

Deferrals and accruals

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Expenses paid in cash and recorded as assets before they are used or consumed are called ____________

Prepaid expenses (e.g. insurance, supplies, depreciation)

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Cash received and reported as liabilities before revenue is earned are called ___________

Unearned revenue

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Prepaid expenses are a type of adjusting entry that results in a _________ (credit/debit) to an expense and a __________ (credit/debit) to an asset account

Debit; credit

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Accumulated depreciation is known as a ____________

Contra asset

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Adjusting entries that have been made to record the revenue earned and to show the liability that remains are called ___________

Unearned revenues

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Unearned revenues are types of adjusting entries that result in a _________ (credit/debit) to a liability account and a ________ (credit/debit) to a revenue account)

Debit; credit

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Unearned revenues result in debits (decreases) in a __________ account and credits (increases) in a _________ account

Liability; revenue

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Prepaid expenses result in debits (increases) in an _______ account and credits (decreases) to a __________ account

Expense; asset

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Deferrals include 2 types of adjusting entries: __________ and _________

Prepaid expenses and unearned revenue

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_____________ (Accruals or deferrals) is revenue earned / expenses incurred that have not yet been received or paid

Accruals

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Revenues earned but not yet received are called _____________

Accrued Revenues

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Expenses incurred but not yet paid are called _____________

Accrued Expenses

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What type of adjusting entry shows the receivable that exists and records the revenue earned?

Accrued Revenues

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Accrued revenue adjusting entries result in a debit to a __________ account and a credit to a _________ account

Receivable (asset); revenue

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What type of adjusting entry records the liability and recognizes the expense?

Accrued Expenses

Accrued expense adjusting entries result in a debit to ________ account and a credit to a ____________ account

Expense; Payable (liability)

Adjusting entries are made for prepaid expenses because _____________ are overstated and _____________ are understated

Assets; expenses

Adjusting entries are made for unearned revenue because _____________ is overstated and ____________ is understated

Liability; revenue

Adjusting entries are made for accrued revenues because ____________ is understated and ____________ is understated

Assets; revenue

Adjusting entries are made for accrued expenses because ______________ is understated and _______________ is understated

Expenses; liability

**** IMPORTANT***** | What is the primary basis for the preparation of the financial statements?

The adjusted trial balance

What is the order of the t-accounts on the adjusted trial balance?

Assets, liabilities, Stockholder's equity, Revenues, expenses

What is the last step in the accounting cycle?

To prepare the closing trial balance

Which 3 financial statements are prepared directly from the adjusted trial balance?

1) Balance sheet 2) Income statement 3) Retained earnings statement

True or False: At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholder's equity account

True -- all temporary accounts are then transferred to the retained earnings account at the end of the accounting period

What are the 3 temporary accounts that get transferred to retained earnings at the end of the accounting period?

1) Revenue accounts 2) Expense accounts 3) Dividends

*** IMPORTANT **** | Which 2 accounts get closed directly in to retained earnings?

Dividends and income summary

Income summary is a temporary account used at the end of the accounting period where ________ and ________ accounts feed in to

Revenue and expense

All temporary accounts have a _______ balance at the end of the accounting period

Zero

What type of company deals with products?

Merchandising company

What is the primary source of revenue for merchandising companies?

Sales Revenue

Which type of company has a longer operating cycle?

Merchandising

What 2 types of inventory systems can a company use?

Perpetual or periodic

The perpetual method of inventory is also known as the __________ method

Scanner

What type of inventory method maintains detailed records of the cost of each inventory purchase or sale?

Perpetual inventory method

True or False: A company that uses the perpetual inventory method determines cost of goods sold each time a sale occurs

True

The periodic inventory method is also known as the _____________ method

Mom and Pop

True or False: The periodic inventory method keeps detailed records of the goods on hand

False -- It does NOT keep detailed records on hand

How is the cost of goods sold determined for the periodic inventory method?

By a count at the end of the accounting period

If a purchaser buys something from another company, the purchaser would debit _________ and credit __________

Inventory; accounts payable

If the purchaser pays freight charges, the purchaser would debit _________ and credit _________

Inventory; cash

When a purchaser returns goods to the company which they bought them from, the purchaser debits ________ and credits ________

Accounts payable; inventory

If a purchaser pays within the discount period of the other company's credit terms, the purchaser would record that as a debit to ________ and a credit to _________ and _________

Accounts payable; cash, inventory

If a purchaser pays after the discount period of another company's credit terms, the purchaser would debit ________ and credit _________

Accounts payable; cash

If the seller records the sale of goods to a purchaser, the seller would debit ______, credit ________, then in a separate entry, would debit ________ and credit _________

Accounts receivable; sales revenue; cost of goods sold, inventory

If the seller records the credit for returned goods from the purchaser, the seller would debit ________, credit _______, then in a separate entry, would debit _________ and credit __________

Sales returns and allowances; accounts receivable; | inventory; cost of goods sold

If the seller records the entry for money received from a purchaser who paid within the discount period, the seller would debit ________ and __________ and credit ________

Cash and sales discounts; accounts receivable

Advantages of the _________________________ is that it is simple and easy to read

Single step income statement

Advantages of the __________________________ are that it highlights the components of net income, and contains gross profit, income from operations, and net income

Multiple step income statement

On a multiple step income statement, normal operations take place where? Above or below the line?

Above the line

On a multiple step income statement, unusual operations take place where? Above or below the line?

Below the line

Interest revenue, dividend revenue, rent revenue, and gains go under the _____________ category on the multiple step income statement

Other revenues and gains

Interest expense, casualty losses, and other losses go under the ______________ category on the multiple step income statement

Other expenses and losses

Profit margin measures the ______________________

Percent of sales kept as net income

What are the 3 classifications of the inventory of a Manufacturing company?

- Raw materials - Works in Progress - Finished Goods

Taking a physical inventory involves _____________, _______________, and __________________ each kind of inventory on hand

Weighing, counting, and measuring

How does a company determine ownership of goods?

By counting all the goods for which the company has legal title

Goods purchased, but not yet received are called OR sold goods that haven't been delivered yet are called...

Goods in Transit

FOB shipping point means that the ________ owns the goods while they are on the truck (in transit)

Buyer / purchaser

FOB destination means that the ______ owns the goods while they are on the truck (in transit)

Seller

In which transit method does the seller own the goods while on the truck?

FOB Destination

In which transit method does the buyer own the goods while on the truck?

FOB Shipping Point

Goods held for sale by one party, but are owned by another party are known as...

Consigned goods

The _________ is the owner of the goods that are being held by a company

Consignor

The _________ is the one holding the goods for another party, although they do not own the goods

Consignee

True or False: The consignor does not include the consigned goods in his / her inventory count

False -- the consignor is the owner of the goods, and although the goods are not in their possession at the time, the ownership still belongs to them

True or False: The consignee does not include the consigned goods in his / her inventory count

True -- the consignee is merely a holder of the goods, but they do not own the goods.

The amount of items left over after all sales have been made is referred to as ______________

Ending inventory

What cost flow assumption is being described: "Earliest goods purchased are the first to be sold"

First In First Out (FIFO)

Which cost flow assumption is generally used because it is the best business practice?

FIFO -- it is better to sell oldest units first

What cost flow assumption is being described: "Latest goods purchased are the first to be sold"

Last In First Out (LIFO)

What cost flow assumption is being described: "allocates cost of goods available for sale on the basis of weighted average"

Average Cost

In periods of rising prices, FIFO reports lowest _______________, while LIFO reports lowest ___________

Cost of goods sold; net income and ending inventory

In periods of rising prices, FIFO reports highest ______________, while LIFO reports highest _______________

Ending inventory and net income; cost of goods sold

Lost sales could be a result of ____________

Low inventory levels

High carrying costs could be a result of _____________

High inventory levels

The market value of an object is also its __________________

Replacement cost (occurs mostly during price declines)

What is the term for the allowing of the transfer of funds without paper (deposit tickets, checks, etc.)

Electronic Funds Transfer (EFT)

Many employers send __________ through the EFT

Payroll

Deposits received by a bank are recorded with _________

Credits

Deposits received by a bank ___________ the bank's liability

Increase

Payments and other deduction taken out of a bank account are recorded with __________

Debits

Payments and other deduction taken out of a bank account ______________ the bank's liability

Decrease

Deposits to a bank are considered ____________ to the bank

Liabilities

______________ prevent one of the parties from recording the transaction in the same period

Time lags

________ can be made by either party (bank or company)

Errors

When reconciling a bank account, you reconcile the balance per _____ and the balance per _____

Bank; books

What are the adjustments made to the bank balance? (start with beginning and then add/subtract)

Cash balance per bank statement + Deposits in transit - Outstanding checks +/- Bank errors

What are the adjustments made to the book balance?

``` Cash balance per books + EFT - NSF checks - Service charges +/- Company errors ```

The adjusted cash balance per bank and adjusted cash balance per books must be _________

Equal

What is used to record transactions included in the company's books?

Journal entries

To record the collection of EFT (electronic funds transfer), you: Debit ______ Credit ________

Cash; accounts receivable

To record NSF check, you: Debit ________ Credit ______________

Accounts receivable; cash

To record bank service charges, you: Debit _________ Credit ________

Bank service charge expense; cash

What do you always subtract from the bank statement balance?

Outstanding checks

What do you always add to the bank statement balance?

Deposits in transit