Accounting 211 exam 1
What is the proper closing entry for dividends? - correct answer *Debit retained earnings, credit
dividends*
Ken just started a business and made the following 3 inventory purchases in November:
-Nov 1- 150 units @ $780
-Nov 8- 200 units @ $1170
-Nov 22- 200 units @ $1260
A physical count of merchandise inventory on Nov 30 reveals that there are 150 units on hand. Using the
average cost method, the amount allocated to ending inventory for November is: - correct answer
150+200+200=550
(150x$780)+(200x$1170)+(200x$1260)= 603,000
Closing entries: - correct answer *Cause the revenue and expense accounts to have zero balances*
Jayson's company began the year by issuing $50,000 of common stock for cash. The company recorded
revenues of $300,000, expenses of $210,000, and paid dividends of $30,000. What was Jayson's net
income for the year? - correct answer net income= revenue- expenses:
300,000- 210,000= *90,000*
Sales revenues are usually considered earned when: - correct answer *Goods have been transferred
from the seller to the buyer*
Which of the following accounts would not likely need to be adjusted for the year?
-Unearned revenue
-prepaid advertising
-cash
-supplies inventory - correct answer *cash*
In the first month of operations, the total of the debit entries to the cash account amounted to $400 and
the total of the credit entries to the cash account amounted to $150. The cash account has a: - correct
answer *$250 debit balance*
An accountant has debited an asset account for $500 and credited a liability account for $200. What can
be done to complete the recording of the transaction? - correct answer *credit a different asset account
for $300*
(because it balances the equation since assets will now equal 200 and so will liabilities)
Outback Kangaroos company showed the following balances at the end of the year:
-cash: $15000
-prepaid rent: $6000
-accounts payable: $4000
-notes payable: $7000
-common stock: $10000
-dividends: $3000
-revenues: $21000
-expenses: $18000
What did Outback show as total credits on its trial balance - correct answer *$42,000*
credits: accounts payable, notes payable, common stock, dividends, expenses
Outback Kangaroos company showed the following balances at the end of the year:
-cash: $15000
-prepaid rent: $6000
-accounts payable: $4000
-notes payable: $7000
-common stock: $10000
-dividends: $3000
-revenues: $21000
-expenses: $18000
What did outback show as total assets on its balance sheet? - correct answer *$21,000*
assets= cash, prepaid rent
Outback Kangaroos company showed the following balances at the end of the year:
-cash: $15000
-prepaid rent: $6000
-accounts payable: $4000
-notes payable: $7000
-common stock: $10000
-dividends: $3000
-revenues: $21000
-expenses: $18000
What did Outback show as total equity on its balance sheet? - correct answer *$10,000*
equity: common stock+revenues-expenses-dividends
Jans decorating purchased $6000 worth of decorating supplies on June 2 and recorded the purchase as
an asset. On June 30, an inventory of the supplies indicated only $2000 on hand. If the accountant fails
to record this adjusting entry what is the impact on:
asset, liabilities, equity, revenue, expense, net income? - correct answer asset: overstated
liabilities: no change
equity: overstated
revenue: no change
expense: understated
net income: overstated
Jans Decorating prepaid $12000 worth of rent on June 1 and recorded the purchase as an asset. This
represents 6 months of rent. If the accountant adjusted for two months instead of one on June 30, how
would this error impact: asset, liabilities, equity, revenue, expense, net income? - correct answer asset:
understated
liabilities: no change
equity: understated
revenue: no change
expense: overstated
net income: understated
Smeal company purchased a computer system for $22,000 on Jan 1. It is estimated the system will last
five years and have a salvage value of 0. If financial statements are to be prepared on Dec. 31, the
company should make the following adjusting entry at year end: - correct answer *DR Depr Exp. $4,400;
CR Accum Depr $4,400*
Cocoa Bar Company took out a 5 year loan on June 1 for $50,000. The loan principle and interest are to
be repaid in 5 years with 6% annual interest. (no interim payments) If financial statements are to be
prepared on Dec 31, and no previous entries for interest were recorded, the company should make the
following adjusting entry at year end: - correct answer debit 1750 interest expense, credit 1750 interest
payable
At the beginning of the year, Tiffany's had $180,000 in liabilities. During the year, assets increased by
$90,000 and at year-end assets totaled at $410,000. Liabilities decreased $50,000 during the year.
Calculate the beginning value of stockholder's equity: - correct answer
Accountants at Nike use the lower of cost or market (LCM) method to value inventory on the balance
sheet in accordance with GAAP. The accountants have gathered the following info:
-Inventory per adjusted trial balance: $200,000
-inventory selling (market) value per mgr: $176,000
-replacement cost: $185,000
-gross profit percentage: 30%
At what amount will inventory be reported on the balance sheet? - correct answer *185,000*
If total liabilities increased by $20,000 during a period of time and owners' (stockholders') equity equity
increased by $5,000 during the same period, the amount and direction (increase or decrease) of the
period's change in total assets is: - correct answer 25000 increase
A business enterprise paid $6000 to a creditor in payment of an amount owed that was previously
accrued. The effect of the transaction on the accounting equation was to: - correct answer decrease an
asset; decrease a liability
Balance sheet - correct answer 1. Assets- economic resources owned or controlled by a company
2. Liabilities- obligations to other businesses or creditors
3. Shareholders equity- owner's claim on the assets of the business
Contributed capital- owner's investment in the company
Retained earnings- earnings of the business that are reinvested into the business
*ONE SPECIFIC DATE*
Income statement - correct answer -Statement of operations or profit and loss statement
-Summary of all revenues and expenses for a company
-Dividends (NOT EXPENSES) are NOT included on income statement
*revenue- expenses= net income*
The statement of changes in owners' equity - correct answer Tells how all parts of owners' equity have
changed during the year. That includes both contributed capital and retained earnings.
*beginning CC + common stock issued = total CC*
*beginning RE + net income - dividends = ending RE*
Gross margin profit and percent - correct answer Gross margin profit= sales- CoGS
percent= gross margin/sales
Statement of cash flows - correct answer Retained earnings= net income- dividends
total retained earnings= beginning retained earnings + retained earnings for the year
*cash from operating activities +/- cash for investing activities +/- cash for financing activities = Net cash
flows for period*
Operating, investing, financing activies - correct answer -*Operating*: cash flows related to general
operations of a business (what you're in business to do)
-*Investing*: cash flows from the sale or purchase of an asset the firm uses for more than a year
(buying/selling long-term assets)
-*Financing*: Cash flows that come from contributions by owners or loans from creditors (how we get
money)
ex. Team shirts pays $50 for advertising brochures - correct answer Assets: (cash)
SE: advertising expense
*increase to an expense DECREASES stockholders' equity*
ex. Team shirts pays a dividend of $100 - correct answer Assets: (cash)
SE: (RE)
Income statement: Multi-step - correct answer sales
-COGS
------------
Gross margin
-Admin exp
-------------
Operating income
-interest expense
-income tax expense
--------------
=NET INCOME
Cash-based accounting - correct answer -We record revenues when we get the cash
-We record expenses when we give the cash
Accrual-based accounting - correct answer -We record revenues when we earn them
-We record expenses when we incur them
-requires adjustments to the books
Cost principle - correct answer When we buy something, we record the asset at the amount we pay for
it. That's its COST.
Revenue Recognition principle - correct answer When we earn revenue, we show it on the income
statement, we don't necessarily wait until we collect the payment. If we've earned it, we put it on the
income statement for that period. "Recognizing the revenue"
Accrual
Deferral - correct answer -Action first, cash later
-Cash first, action later
Interest revenue equation - correct answer Principle x Rate x Time (1/12)
Impact on revenue if adjustment is not made - correct answer -Unearned revenue: Overstated
-Revenue: Understated
Adjustments: Accrued expense and accrued revenue - correct answer -later: decrease liability, decrease
cash; now: increase expense, increase liability
-later: increase cash, decrease asset; now: increase asset, increase revenue
Adjustments: deferred expense, deferred revenue, deferred deprication - correct answer -now: increase
asset, decrease cash; later: increase expense, decrease asset
-now: increase cash, increase liability; later: decrease liability, increase revenue
-now: increase asset, decrease cash; later: increase expense, decrease asset
General Ledger System and Accounting Cycle - correct answer -Record transactions in the journal
-then post to the general ledger
-prepare a trial balance
-record and post adjustments and prepare adjusted trial balance
-close accounts and prepare financial statements
-prepare post-closing trial balance
Closing means.. - correct answer -temporary account balances are brought to zero
-
Operating cycle of a merchandising firm - correct answer 1. cash
2. purchase inventory
3. sells inventory
4. accounts receivable
FOB shipping point
FOB destination - correct answer -buyer owns inventory in transit
-seller owns inventory in transit
2/10, n/30 - correct answer 2% discount if paid within 10 days if we don't pay within 10 days, we owe
the balance within 30 days
Periodic
perpetual - correct answer Periodic: CoGS determined at end of period
Perpetual: CoGS determined at each sale; added p at end of period to get totals
Gross profit method of estimating inventory - correct answer NEED:
-The beginning inventory
-the sales for the period
-historical gross margin percentage (gross margin divided by sales)
-gross margin is sales minus CoGS
Ex. End Inv. for CBCR Co. was overstated by $2000 for the year 2012. What effect did it have on: beg inv,
purch, CGAFS, end inv, CoGS, gross margin, net inc - correct answer beg inv: no effect
purch: no effect
CGAFS: no effect
end inv: overstated
CoGS: understated
Gross margin: overstated
Net inc: overstated
Inventory errors - correct answer -Purchases not recorded correctly
-estimates are incorrect
-failure to count inventory and "catch" errors
-use FIFO when supposed to use LIFO
Long term vs current assets - correct answer current: used with in one year
long term: lasts more than one year
Depreciation, amortization, depletion - correct answer Depr: property, plant, equipment
Am: intangible assets (franchise)
Dep: natural resources
Intangible assets are.... - correct answer -...amortized
-normally the straight-line method is used
Disposable of operation assets- 2 methods - correct answer 1. formula
2. journal entry
Disposal formula - correct answer cash from sale- cv (cost- acc dep)= + "gain", - "loss"
Disposal of operation assets journal entry - correct answer cash
acc dep
loss
long-term asset
gain
Types of business organizations: - correct answer -*Service company*: provides a service..does
something for you instead of providing something for you (lion Tutors)
-*Merchandising company*: buys goods, adds value to the goods, and then resells the goods with added
value (Target)
-*Manufactoring company*: makes goods and then sells them (Boeing)
Securities and Exchange Commission (SEC) - correct answer Government agency that monitors the stock
market and financial reporting
Dividends - correct answer Earnings of a corporation distributed to owners
Principal - correct answer the amount a loan is made for
Financial Accounting Standards Board (FASB) - correct answer Set accounting standards..reasonable for
GAAPP
Public Company Accounting Oversight Board (PCAOB) - correct answer Oversees auditing of public
companies,created by Sarbanes-Oxley Act of 2002
10-K report - correct answer A company's audited financial statements filed with the SEC
Sole proprietorship and Partnerships advantages and disadvantages - correct answer Advantages: easy to
start, not required to make financial information public
Disadvantages: unlimited liability for the owner, owner is personally responsible for all business
decisions
Corporations advantages and disadvantages - correct answer Advantages: limited liability for owners, can
only lose money they invested in the business, can enter into contract just like individuals, investors can
diversify financial risk
Disadvantages: double taxation, conflicts between owners and managers
Which type of business gives the least protection to creditors? - correct answer Corporations
The 4 financial statments - correct answer 1. Balance sheet
2. Income statement
3. Statement of changes in shareholders' equity
4. Statement of cash flows
Assumptions (separate-entity, monetary-unit, time-period, going-concern) - correct answer -*Separate-
entity*- the company's financial records and the owner's financial records are completely separate
-*monetary-unit*- items on financial statements are in amounts of money
-*time-period*- the life of a business can be divided into time periods for financial reporting
-*going-concern*- assumption that a business will continue operations into the foreseeable future
unless there is evidence given that it will not be able to do so
Principles (historical cost, revenue recognition, matching, full disclosure) - correct answer 1. assets are
recorded at their original cost to the company so that information is unbiased and verifiable
2. revenue is recognized when it is earned and collection is reasonably assured
3. expenses are recognized in the same period as the revenue they helped generated
4. a company is required to give information related to any circumstances ore events that would make a
difference to users of financial statements
Constraints (materiality and conservatism) - correct answer 1. relates to the significance of an item or
transaction (something is material if it is of large enough consequence to influence investor's decisions)
2. when there is a question on how to account for a transaction, the accountant should act in a way that
will be least likely to overstate income or assets
Assets in order of liquidity - correct answer cash, short term investments (could be sold at any time),
accounts receivable, inventory, long-term assets
Revenue recognition principle - correct answer revenue is recognized when it is earned and collection is
reasonably assured
-accountants do not follow cash
-when a customer makes a purchase on credit, the earnings process is considered virtually complete,
despite the fact that cash has not been collected
Matching principle - correct answer expenses are recognized in the same period as the revenue they
helped generate
-the cost of unsold inventory is not an expense
-this is why we treat prepaid insurance as an asset until the time it is used
Timing difference - correct answer Difference between when a company earns revenue and cash is
collected and the difference between when a company incurs an expense and cash is disbursed (accrual
and deferral)
3 types of accruals - correct answer 1. interest expense and interest revenue
2. when a firm delivers a good or service before receiving cash
3. when a firm generates a salary expense before paying the employee in cash
Interest expense= - correct answer principle x interest rate x time
revenues - correct answer -accrued revenue- revenue earned for services provided that have not
received payment
-accrued receivables- revenue earned for goods that have been delivered but you have not received
payment on
-realized- when cash is actually collected
unearned revenue - correct answer a liability that represents cash or services owed to a customer
because cash has already been received
4 types of expenses that are typically deferred - correct answer 1. insurance
2. rent
3. supplies
4. equipment
Merchandise inventory - correct answer all goods owned or held by the company that are sold in regular
course of business
*supplies does not equal merch inventory*
Purchase oder - correct answer a record of a company's request to a vendor for goods and services
-2 groups that receive purchase orders:
1. receiving department
2. accounts payable department
FOB shipping point vs. FOB destination - correct answer -shipping point: ownership of the goods changes
over at the shipping point
-buyer- pays shipping costs.. the cost is recorded in inventory account
-vendor does not pay shipping
-destination: ownership of the goods changes over at the destination
-buyer does not pay for shipping
-vendor pays for shipping costs..the cost is recorded as an operating expense
purchase allowance - correct answer when a purchaser keeps damaged or defective goods in exchange
for a cost reduction
purchase return - correct answer when a firm returns goods they purchased
-reasons for a purchase return:
1. firm ordered too much inventory
2. firm ordered wrong items
3. good were damaged
COGAS= - correct answer =beginning inventory+ net purchases + shipping costs
(net purchases= total purchases- returns- allowances- discounts)
contra revenue - correct answer an account that offsets revenue..used to record sales returns and
allowances
Advantages of the perpetual system - correct answer 1. records are always up to date
2. we can compare the physical amount of inventory to our records at any time to be able to tell if there
has been shrinkage
3. allows us to identify shrinkage
Income tax effect (increasing) - correct answer -Increasing inventory costs- FIFO gives us the lowest CoGS
while LIFO gives us the highest
-FIFO gives us the highest net income while LIFO gave us lowest
-LIFO gave us the lowest tax expense while FIFO has given us the highest
-LIFO will give us the largest new cash flow in a period of increasing inventory cash
Lower-of-cost-or-market-rule - correct answer -requires that a firm makes sure that inventory is valued at
either cost or market value, whichever is lower
-replacement cost- the cost of replacing inventory, we use it to determine the market value of inventory
Effects of inventory errors - correct answer -If ending inventory is overstated in period 1, the CGS in
period 1 will be understated and income will be overstated
-This means the beginning inventory in period 2 will be overstated, but ending inventory for period 2
should be correct
-this will make it look like we sold more than we did so CGS in period 2 will be overstated which will
cause the income for period 2 to be understated
Long-term operational assets (prepaid) - correct answer -assets will be used for over a year
-vendor selection is more important because you will usually be working with them for a long period of
time
-long term assets are usually much more expensive
-difficult to dispose of a long term asset if the company makes a bad decision
Long term tangible assets- depreciation and depletion (capitalize, acquisition cost, estimated useful life,
book value, amortization, depletion, depreciable base) - correct answer -*capitalize*: recording a cost as
an asset instead of expense
-*acquisition cost*- amount paid for an asset including all cost related to getting the asset up and
running
-*estimated useful life*: a measure of how long the company plans to use an asset..can be measured in
units or years
-*book value or carrying value*- the difference between the cost of a long term asset and any
depreciation taken to date
-*accumulated depreciation*- a contra asset account that tracks the total amount that has been
depreciated on a long-term asset
-contra asset means that when accumulated depreciation increases, assets will decrease and vice versa
-*amortization*- describes writing off the cost intangible assets
-*depletion*- used to describe the writing off of natural resources
-*depreciable base*= acquisition cost- salvage value
research and development costs - correct answer -These costs are not capitalized as part of the cost of
an asset
-they are expensed when they are incurred until it becomes apparent the product is technologically
feasible
Asset impairment - correct answer -occurs when the market value of the asset declines to a point where
the market value is below the book value of the asset
-could be caused by:
1. trouble in the economy that causes the decrease in the market value of the long-term asset
2. changing the way a company uses an asset
3. a change in the business world that affects the assets value
Expenditures to improve an asset or extend its useful life (capital expenditure and ordinary repairs) -
correct answer -*capital expenditure*- an expenditure that will benefit an asset for more than one
accounting period ( recorded as an asset when it is incurred and then expensed over the accounting
periods it is used) ex. remodeling, replacing light system in a building
-*ordinary repairs*- expensed in the period they are incurred because they do not extend an assets
useful life
Long term assets on the financial statements - correct answer -balance sheet- found in the assets section
under property, plant, and equipment
-income statement- records the use of long term asset through depreciation, depletion, and amortization
expenses that show gains or losses from the sale of an asset
-statement of cash flow- shows the cash spent to acquire long term assets and cash received from the
sale of a long term asset
Gain or lose - correct answer cash from sale- carrying value
carrying/book value= initial cost- accum depreciation
Enterprise-wide resource planning system (ERP) - correct answer improvements in technology now allow
for the management of large amounts of date by a single system
Common accounts in the order they appear on the balance sheet - correct answer 1. cash
2. accounts receivable
3. inventory
4. prepaid insurance
5. equipment
6. accumulated depreciation
7. accounts payable
8. notes payable
9. contributed capital
10. retained earnings
adjusting journal entries - correct answer entries made at the end of the period to adjust for (1) accrued
revenues, (2) accrued expenses, (3) deferred revenues and (4) deferred expenses
salaries or wages payable - correct answer often it is impossible to match an employee's work with a
specific revenue so the cost of the work is put on the income statement in the period the work was done
Temporary accounts - correct answer accounts that are closed out to a balance of $0 at the end of each
accounting period
Closing accounts - correct answer -brings the balance the temporary accounts to $0 with journal entries
1. revenue- closing revenue accounts increases retained earnings
2. expense- closing expense accounts decreases retained earnings
3. dividend- closing dividend accounts decreases retained earnings
A company classifies its assets on its balance sheet as current assets and long-term assets. Which
financial reporting assumption does this best represent? - correct answer going-concern
When a company issues common stock for cash, what section of the statement of cash flows does this
transaction go under? - correct answer financing activities
Which of the following financial statements does not summarize a company's performance over a given
period of time? - correct answer Balance sheet
On January 1, XYZ corporation paid cash for $800,000 worth of inventory. At the end of its fiscal year, it
had $400,000 of revenue from inventory that cost $250,000. According to accrual accounting, how much
should XYZ expense as cost of goods sold for its fiscal year? - correct answer $250,000 According to the
matching principle, expenses should be matched with the revenues
they help generate. Even though the company paid cash for this inventory at the beginning of the year,
they cannot expense it until the inventory is actually sold.
Dividends equation - correct answer Dividends= Net Income- Retained earnings
When should we record revenue? - correct answer When we ship an order
In the beginning of 2006 unearned revenue had a normal balance of $1,000. At the end of 2006
unearned revenue had a normal balance of $7,000. During 2006 there was a credit t unearned revenue
to $50,000. How much revenue did we earn in 2006? - correct answer $44,000; We started 2006 with
$1,000 in the unearned revenue account. Then we increased unearned revenue by $50,000 with a credit
to the account so we had a total of $51,000 in unearned revenue. The only way for the unearned
revenue account to go down is for us to earn the revenue. Since the unearned revenue account had a
balance of $7,000 at the end of 2006 we must have earned $44,000 in revenue in 2006 ($51,000 - $7,000
= $44,000).
Utley and Howard Co. has a weekly payroll of $25,000 for a normal five day work week. Assume that one
work week begins on Monday, Dec. 29, 2005 and ends on Friday, Jan. 2, 2006, which is pay day. Also the
company's fiscal year ends on Dec 31. How will the company recognize salary expense on Dec 31, 2005?
- correct answer Increasing salary payable by $15,00 and increasing salary expense by $15,000
What will happen when the company pays its employees for the week's work on Jan 2, 2006? - correct
answer Cash decreases by $25,000, salary payable decreases by $15,000 and salary expense increases by
$10,000
On July 1, 2006 we issued a note payable for a 3 year, $100,000 note bearing 6% interest. The principal
and interest will not be due until July 1, 2009. How much interest expense should we have on our 2006
income statement? - correct answer 100,000x.06x6/12= 3000
Which of the following can be found on the balance sheet?:
-a loss on selling an asset
-CoGS
-sales revenue
-accumulated depreciation - correct answer accumulated depreciation
What is the proper way to account for research and development costs? - correct answer Expense as
they are incurred, unless the project is considered technologically feasible
At the end of the year we realized we understated our ending inventory by $25,000. What will be the
effect on our total assets and net income? - correct answer Assets are understated; net income is
understated; ------*Inventory is an asset so when we understate ending inventory we are understating
our assets. Additionally if we understate our ending inventory we will overstate our cost of goods sold
which will cause us to understate net income
Which method matches the current cost of sales to current sales revenue? - correct answer LIFO because
it expenses the units most recently purchased
At the end of the year our company's revenues were greater than the expenses we incurred. Which of
the following is correct about the closing entries that will need to be made? - correct answer Debit
revenues, credit expenses and credit retained earnings
Which of the following is incorrect?
-accounts payable is decreased by a debit
-accounts receivable is increased by a debit
-revenues are increased by a credit
-dividends are decreased by debits - correct answer dividends are decreased by debits
Which of the following statements about a trial balance is incorrect?
-it is a list of all accounts and their current balances
-it is the same thing as a balance sheet
-it can be taken at any time
-it is used to make sure debits and credits are equal - correct answer It is the same thing as a balance
sheet
Which of the following is the purpose of closing entries? - correct answer Ensure retained earnings has
the correct balance
At the end of our fiscal year, our company must accrue for $25,000 of our employees' salaries that have
been incurred but have not been paid yet. Which of the following is the correct journal entry for this
transaction? - correct answer Salary expense: $25,000
Salary payable: $25,000
when we accrue an expense, we must set up a liability account. In this case, we create a salary payable
account. Since we are increasing our expenses, we debit salary expense and as we are increasing a
liability, we credit the salary payable account
Which of the following accounts are NOT closed at the end of an accounting period?
-revenues
-expenses
-dividends
-retained earnings - correct answer Retained earnings; because they are considered ongoing accounts
since the ending balance one year becomes the beginning balance the next year. Revenues, Expenses,
and Dividends are not ongoing, and are therefore closed at the end of every accounting period to
Retained Earnings.
At the end of the year, we declare $45,000 in dividends to our shareholders. Which of the following
journal entries shows the correcting entry for this account? - correct answer retained earnings $45,000
dividends $45,000
The trick to this problem is realizing that it is asking about the correcting entry, which is the same thing
as the closing entry. We don't want to record the dividend, we want to close the dividend account to
retained earnings. Dividends is a temporary account, and therefore, it must be closed to Retained
Earnings at the end of an accounting period. We always debit dividends when they are recorded. Thus
we must credit dividends to close the account. We will then debit that amount to retained earnings
which of the following statements is true?
-LIFO is preferred for tax purposes because it usually results in lower net income and thus lower income
taxes
-FIFO is not preferred in times of high inflation since it leads to lower net income
-LIFO is not preferred mostly because it is thought to violate the matching principle and match current
expenses with revenues
-The weighted average cost flow assumption provides a lower cost of goods sold than both LIFO and FIFO
- correct answer LIFO is preferred for tax purposes because it usually results in lower net income and
thus lower income taxes
What is the proper way to account for research and development costs? - correct answer
