midterm

Question 1

what are activities in the accounting process?

Answer 1

identifying economic events -> record economic events -> communicate info via financial experts

Question 2

who are internal users of financial statements?

Answer 2

marketing/sales managers, human resources, production supervisors, c-suite executives

Question 3

who are external users of financial statements?

Answer 3

investors, creditors, customers, tax authorities, regulators, labor unions

Question 4

what is GAAP?

Answer 4

generally accepted accounting principles which is the common set of accounting standards in the US

Question 5

who overseas GAAP?

Answer 5

FASB (financial accounting standards board), nongovernmental

Question 6

who overseas FASB?

Answer 6

the SEC (securities and exchanges commission)

Question 7

what is the historical cost principle?

Answer 7

record assets at cost

Question 8

what is the fair market principle?

Answer 8

assets or liabilities are reported at current market price

Question 9

what is the monetary unit assumption?

Answer 9

only data that can be expressed in monetary terms should be included

Question 10

what is the economic entity assumption?

Answer 10

activities of the entity should be separate from its owner

Question 11

what is the accounting equations?

Answer 11

assets = liabilities + stockholders’ equity

Question 12

what are assets?

Answer 12

resources that a business owns (cash, building, equipment, inventory)

Question 13

what are liabilities?

Answer 13

claims against assets (notes payable, wages payable)

Question 14

what is stockholders’ equity?

Answer 14

ownership claim on a corporation’s total assets; made up of common stock and retained earnings

Question 15

what is retained earnings made up of?

Answer 15

revenues - expenses - dividends

Question 16

what are transactions?

Answer 16

economic events recorded by accountings; what needs to be identified is the specific items affected & the amount of the change

Question 17

what is the income statement?

Answer 17

recorded for a specific period of time (annual); summarizes all revenues and expenses and net income/loss for the period

Question 18

what is the retained earnings statement?

Answer 18

shows R/E balance during period of time; shows cumulative earnings of the business

Question 19

what is the balance sheet?

Answer 19

shows assets, liabilities, and stockholders’ equity as of a specific date (snapshot)

Question 20

what is the statement of cash flows?

Answer 20

provides information about cash receipts and cash payments; indicates an increase/decrease in cash balance as well as an ending cash balance

Question 21

what is the relationship between statements?

Answer 21

income statement (net income) -> statement of retained earnings (ending R/E) -> balance sheet (cash balance) -> statement of cash flows

Question 22

what is a t-account?

Answer 22

an individual record of increases and decreases in a specific asset, liability, or stockholders’ equity item

Question 23

what happens when debits > credits?

Answer 23

the account has a debit balance

Question 24

what happens when debits < credits?

Answer 24

the account has a credit balance

Question 25

what is the general journal?

Answer 25

where transactions are recorded in chronological order; includes a complete list of all transactions, a chronological record of transactions

Question 26

cash basis accounting

Answer 26

revenue is recognized when cash is received, expense are recognize only when paid; leaves out revenues that have been earned but not received and expenses that have been incurred but not paid

Question 27

what is journalizing?

Answer 27

the act of entering the transaction data into an entry

Question 28

accrual basis accounting

Answer 28

recognize revenues when earned, not when cash is received; recognize expenses when incurred, not when paid in cash

Question 29

revenue recognition principle

Answer 29

required that companies recognize revenue in the accounting period in which the performance obligation is satisfied

Question 30

expense recognition principle

Answer 30

requires that companies recognize expenses in the period in which they made efforts to generate revenue (consume assets/incur liabilities) regardless of when cash is paid

Question 31

what are adjusting entries?

Answer 31

adjusting entries are needed to follow the revenue recognition and expense recognition principle; needed to record revenues/expenses in their proper time period

Question 32

what are characteristics of adjusting entries?

Answer 32

they are recorded at the end of the accounting period and have no affect on the cash account

Question 33

what types of adjusting entries are there?

Answer 33

deferrals (cash change hands first) and accruals (cash changes hands later)

Question 34

what type of deferrals are there? what type of accruals are there?

Answer 34

D: prepaid expenses & unearned revenue A: accrued revenues & accrued expenses

Question 35

what are prepaid expenses?

Answer 35

expenses paid before they are used or consumed (supplies, insurance, rent (renter), depreciation) ASSETS OVERSTATED, EXPENSES UNDERSTATED

Question 36

what are unearned revenues?

Answer 36

cash received before the service is performed (subscription, customer deposit, rent (landlord)) LIABILITIES OVERSTATED, REVENUES UNDERSTATED

Question 37

what are accrued revenues?

Answer 37

revenue for services performed but not yet paid in cash or records (interest (revenue), services) ASSET UNDERSTATED, REVENUES UNDERSTATED

Question 38

what are accrued expenses?

Answer 38

expenses that are incurred but not yet paid in cash or recorded (interest (expense), wages & salaries, tax) LIABILITIES UNDERSTATED, EXPENSES UNDERSTATED

Question 39

what are temporary accounts?

Answer 39

revenues, expenses, dividends

Question 40

what are permanent accounts?

Answer 40

assets, liabilities, stockholders' equity

Question 41

what are closing entries?

Answer 41

entries that transfer net income/loss and dividends to retained earnings

Question 42

what steps are there in closing entries?

Answer 42

1. determine the ending balance in each revenue, expense, and dividend account 2. debit each revenue account and credit the amount in income summary 3. debit income summary and credit each expense account 4. debit income summary and credit retained earnings for net income (flip this for net loss) 5. debit retained earning and credit dividends

Question 43

what is the post-closing trial balance?

Answer 43

prepared after all closing entries are complete; proves debits=credits for permanent accounts ONLY, these are carried forward to the next period

Question 44

what are current assets?

Answer 44

assets the company expects to convert to cash or use up within one year

Question 45

what are long term investments?

Answer 45

investments in stocks and bonds of other companies that are held for many years

Question 46

what is property, plant, and equipment?

Answer 46

assets with long useful lives that a company uses in its operations

Question 47

what are intangible assets?

Answer 47

assets without physical substance

Question 48

what are current liabilities?

Answer 48

obligations the company expects to pay within one year

Question 49

what are long term liabilities?

Answer 49

obligations the company expects to pay after one year

Question 50

how do you calculate net sales?

Answer 50

revenue - sales returns & allowances - sales discount

Question 51

what are sales returns and allowances?

Answer 51

accept the goods back or give a reduction in the purchase price (contra-revenue account)

Question 52

what is a sales discount?

Answer 52

incentive offered for prompt payment on credit sales (contra-revenue account)

Question 53

what is cost of goods sold?

Answer 53

total cost of merchandise sold

Question 54

how is gross profit calculated?

Answer 54

net sales - cost of goods sold

Question 55

what are operating expenses?

Answer 55

expenses incurred in the process of earning revenue

Question 56

how is income from operation calculated?

Answer 56

gross profit - operating expenses