Exam 2, ch. 4-5

Question 1

Revenue recognition principle

Answer 1

Revenues are recognized in the accounting period in which the performance obligation is satisfied

Question 2

Expense recognition principle

Answer 2

Expenses are matched with revenues

Question 3

Accrual-basis accounting

Answer 3

Transactions that change a company’s financial statements are recorded in periods in which the events occur

Question 4

Cash-basis accounting

Answer 4

Companies record revenue when they receive cash (not in accordance with GAAP)

Question 5

Adjusting entries

Answer 5

Ensure that the revenue recognition and expense recognition principles are followed; every adjusting entry includes one income statement and one balance sheet account

Question 6

Deferrals

Answer 6

Prepaid expenses, unearned revenues

Question 7

Accruals

Answer 7

Accrued revenues, accrued expenses

Question 8

Prepaid expenses

Answer 8

Expenses paid in cash before they are used or consumed; costs that expire either with the passage of time or through use

Question 9

Deferrals: supplies

Answer 9

Dr. Supplies expense Cr. Supplies

Question 10

Deferrals: prepaid insurance

Answer 10

Dr. Insurance expense Cr. Prepaid insurance

Question 11

Accumulated depreciation

Answer 11

Contra asset account

Question 12

Deferrals: depreciation

Answer 12

Dr. Depreciation expense Cr. Accumulated Depreciation

Question 13

Book value

Answer 13

The difference between the cost of any depreciable asset and its related accumulated depreciation

Question 14

Deferrals: unearned service revenue

Answer 14

Dr. Unearned service revenue Cr. Service revenue

Question 15

Accruals: accrued revenues

Answer 15

Dr. Accounts receivable Cr. Service Revenue

Question 16

Formula for computing interest

Answer 16

Face value of note x Annual interest rate x Time in terms of one year = Interest

Question 17

Accruals: accrued interest

Answer 17

Dr. Interest expense Cr. Interest payable

Question 18

Accruals: accrued salaries

Answer 18

Dr. Salaries and wages expense Cr. Salaries and wages payable

Question 19

Closing entries

Answer 19

Dr. Service Revenue Cr. Expenses Cr. Retained Earnings Cr. Dividends

Question 20

Merchandising company

Answer 20

Sells merchandise rather than performs services

Question 21

Retailers

Answer 21

Merchandising companies that sell directly to consumers

Question 22

Wholesalers

Answer 22

Merchandising companies that sell to retailers

Question 23

Perpetual inventory system

Answer 23

Records continuously show inventory on hand

Question 24

Periodic inventory system

Answer 24

Cost of goods sold is determined at the end of the accounting period

Question 25

Periodic COGS

Answer 25

Cost of goods on hand beg. + Cost of goods purchased - Cost of goods on hand end.

Question 26

Journal entry: purchase of merchandise perpetual

Answer 26

Dr. Inventory Cr. Accounts Payable

Question 27

FOB shipping point

Answer 27

Buyer pays freight costs

Question 28

FOB destination

Answer 28

Seller pays freight costs

Question 29

Journal entry: freight costs incurred by buyer perpetual

Answer 29

Dr. Inventory Cr. Cash

Question 30

Journal entry: freight costs incurred by seller perpetual

Answer 30

Dr. Freight-out Cr. Cash

Question 31

Journal entry: purchase returns perpetual

Answer 31

Dr. Accounts Payable Cr. Inventory

Question 32

2/10 n/30

Answer 32

2% discount if paid within 10 days, otherwise must be paid within 30 days

Question 33

Journal entry: purchase discounts perpetual

Answer 33

Dr. Accounts Payable Cr. Cash Cr. Inventory

Question 34

Journal entry: sale of merchandise perpetual

Answer 34

Dr. Accounts Receivable Cr. Sales revenue Dr. Cost of goods sold Cr. Inventory

Question 35

Journal entry: sales returns perpetual

Answer 35

Dr. Sales Returns and Allowances Cr. Accounts Receivable Dr. Inventory Cr. Cost of goods sold

Question 36

Sales returns and allowances, Sales discounts

Answer 36

Contra revenue accounts

Question 37

Journal entry: sales discounts perpetual

Answer 37

Dr. Cash Dr. Sales discounts Cr. Accounts receivable

Question 38

Multiple-step income statement

Answer 38

1. Net sales - COGS = gross profit 2. Gross profit - operating expenses = income from operations 3. Add/subtract results of activities not related to operations = net income

Question 39

Other revenues and gains

Answer 39

Interest revenue, dividend revenue, rent revenue, gain from the sale of PPE

Question 40

Other expenses and losses

Answer 40

Interest expense, casualty losses, loss from the sale or abandonment of PPE, loss from strikes by employees and suppliers

Question 41

Cost of goods sold (periodic)

Answer 41

Beginning inventory + Cost of goods purchased = Cost of goods available for sale - Ending inventory = Cost of goods sold

Question 42

Gross profit rate

Answer 42

Gross profit / Net sales

Question 43

Purpose of gross profit rate

Answer 43

Measures the margin by which selling price exceeds cost of goods sold

Question 44

Purpose of profit margin

Answer 44

Measures the extent by which selling price covers all expenses

Question 45

Profit margin

Answer 45

Net income / Net sales

Question 46

Journal entry: purchase of merchandise periodic

Answer 46

Dr. Purchases Cr. Accounts payable

Question 47

Journal entry: freight costs periodic

Answer 47

Dr. Freight-In Cr. Cash

Question 48

Journal entry: purchase returns and allowances periodic

Answer 48

Dr. Accounts payable Cr. Purchase returns and allowances

Question 49

Journal entry: purchase discounts periodic

Answer 49

Dr. Accounts payable Cr. Purchase discounts Cr. Cash

Question 50

Journal entry: sale of merchandise periodic

Answer 50

Dr. Accounts receivable Cr. Sales revenue

Question 51

Journal entry: sales returns and allowances periodic

Answer 51

Dr. Sales returns and allowances Cr. Accounts receivable

Question 52

Journal entry: sales discounts periodic

Answer 52

Dr. Cash Dr. Sales discounts Cr. Accounts receivable