NEW Exam 1

Question 1

The Accounting Cycle

Answer 1

1. Record data necessary to do our accounting
2. Determine whether we need to record a transaction
3. Journalize it
4. Summarize into t-accounts/ledger
5. Create unadjusted trial balance
6. Post adjusting entries
7. Adjusted Trial Balance
8. Create financial statements
9. Post closing entries
10. Post-close Trial Balance

Question 2

Assets

Answer 2

Resources of the firm

Question 3

Liabilities

Answer 3

Future sacrifice of assets

Question 4

Stockholder’s Equity

Answer 4

Everything else (Assets - Liabilities)

Question 5

Defer

Answer 5

Payment for a good or service that has not yet been delivered

Not immediately reported

Question 6

Accrual

Answer 6

The good/service was performed but the money hasn’t come yet

Question 7

Two Primary Principles that apply to accrual accounting

Answer 7

Revenue Recognition and Expense Recognition

Question 8

Revenue Recognition

Answer 8

Revenues are recorded when earned, not necessarily when cash is received

Question 9

Expense Recognition

Answer 9

Expenses are recorded in the same period as the revenue to which they relate.

Question 10

What is the income statement and what does it involve

Answer 10

Measures of profitability

Operating versus non-operating

Question 11

What is the statement of stockholders’ equity and why is it a thing

Answer 11

Transactions that affected the equity accounts during the year

Difficult for investors/ creditors to understand why equity amounts change

Question 12

What is a balance sheet and what does it involve

Answer 12

Fundamental Accounting Equation (A = L + SE)

Current and non-current assets and liabilities

Assess liquidity and solvency

Question 13

Purpose of the statement of cash flows

Answer 13

Organize cash in-flows and out-flows into operating, investing, and financing

Provides context that helps investors/ creditors understand the other financial statements - > accruals are subject to manipulation

Question 14

What do you do in Step 9 of the accounting equation

Answer 14

Reset temporary accounts to zero to get ready for the next accounting period

Question 15

Financial Accounting

Answer 15

summarizing economic transactions (of a firm) to create useful
information, external parties: investors and creditors

Question 16

2 Fundamental Characteristics of Useful Information

Answer 16

Relevance and Faithful Representation

Question 17

Relevance (Def. and includes)

Answer 17

capable of making a difference in a user’s decision Predictive or Confirmatory Material

(Predictive, Confirmatory, Material)

Question 18

Faithful Representation (Def. and includes)

Answer 18

summarizing economic phenomena in words and numbers

(Neutrality, Completeness, Free from error)

Question 19

Predictive

Answer 19

Information is useful in predicting the future

Question 20

Confirmatory

Answer 20

Provides feedback on prior evaluations/predictions

Question 21

Material

Answer 21

Important enough to matter

Question 22

Neutrality

Answer 22

Without bias

Question 23

Completeness

Answer 23

All necessary information is depicted

Question 24

Free from error

Answer 24

There are no errors or omissions in the description of the phenomenon

Question 25

4 Enhancing Characteristics

Answer 25

1) Timeliness 2) Comparability 3) Verifiability 4) Understandability

Question 26

Timeliness

Answer 26

Having information available to be capable of influencing their decisions

Question 27

Comparability

Answer 27

Information is comparable if it helps evaluate information across firms or over time

Question 28

Verifiability

Answer 28

Different, knowledgeable observers would reach similar conclusions

Question 29

Understandability

Answer 29

Information can be understood when diligently reviewed by reasonably informed users

Question 30

4 Financial Reporting Assumptions

Answer 30

1) Economic Entity 2) Going concern 3) Monetary Unit 4) Periodicity

Question 31

Economic Entity

Answer 31

Entities are separate from their owners

Question 32

Going Concern

Answer 32

Firm is expected to continue operating/not go bankrupt

Question 33

Monetary Unit

Answer 33

Economic activities reported in dollars

Question 34

Periodicity

Answer 34

Time is cut into reportable units

Question 35

4 Accounting Principles

Answer 35

1) Revenue Recognition 2) Expense Recognition 3) Measurement Principles 4) Full Disclosure

Question 36

Measurement principles

Answer 36

Historical Cost Fair Value – Investments

Question 37

Full Disclosure

Answer 37

All relevant and necessary information for the understanding of a company's financial statements must be included in public company filings.

Question 38

Things that are debited

Answer 38

Assets Expenses Dividends

Question 39

Expenses occur when

Answer 39

A company pays a 3rd party for a service

Question 40

Dividends occur when

Answer 40

A business distributes cash to its owners

Question 41

Things that are credited

Answer 41

Equity Liabilities Revenue

Question 42

Easy way to remember accounting equation

Answer 42

DEA LER

Question 43

Revenue is

Answer 43

Money generated from normal business operations

Question 44

Adjusting entries are necessary under

Answer 44

Accrual Accounting

Question 45

Accrued interest=

Answer 45

Face Value * interest rate * Length of time (X/12)

Question 46

Expense accounts are

Answer 46

Contra Equity

Question 47

Accumulated Depreciation is a

Answer 47

Contra Asset

Question 48

Allowance for doubtful accounts is a

Answer 48

Contra Asset Money that won't be collected

Question 49

Cost Constraint

Answer 49

Costs to report information are justified by the benefits of reporting that information

Question 50

Income Statement Format

Answer 50

Sales Revenue -Cost of goods sold ----------------------------- (Gross Profit) [Operating Expenses] ----------------------------- (Total Operating Expenses) (Operating Income (GP-TOE)) [Other Revenues & Gains] [Other Expenses & Losses] (Income Before Taxes (OI + OR&G - OE&L)) -Income Tax Expense ----------------------------- Net Income

Question 51

Ending Retained Earnings Formula

Answer 51

Beginning Retained Earnings + Net Income - Dividends

Question 52

Statement of Stockholders' Equity Format

Answer 52

Beginning Balance Net Income Dividends Issuance of Common Stock ----------------------------- Ending Balance

Question 53

Net Income increases

Answer 53

Retained Earnings

Question 54

Dividends decrease

Answer 54

Retained Earnings

Question 55

Balance Sheet format

Answer 55

-Current Assets -Long-term assets -Current Liabilities -Long-term Liabilities -Equity

Question 56

Operating

Answer 56

"normal" things to do in our business

Question 57

Investing

Answer 57

Inflows or outflows related to investments, generally long-term in nature

Question 58

Financing

Answer 58

Raising capital for our firm, issuing or repaying debt or common stock

Question 59

3 Types of Activities

Answer 59

Operating, Investing, Financing

Question 60

3 Step process to perform closing entries

Answer 60

Close Revenues Close Expenses Close Dividends

Question 61

How to close revenues

Answer 61

Debit Revenue Credit Retained Earnings

Question 62

How to close Expenses

Answer 62

Debit Retained Earnings Credit Expenses

Question 63

How to close dividends

Answer 63

Debit Retained Earnings Credit Dividends

Question 64

Cost of goods sold is an

Answer 64

Expense