Which is the correct sequence for the accounting cycle?
Trial balance, closing entries, adjustments, financial statements
b. Journal, general ledger, trial balance, financial
General ledger, trial balance, journal, financial statements
Opening balances, adjustments, income summary, financial statements
Just keep pedaling the cycle until you reach your destination
- Journal, general ledger, trial balance, financial
1. The accounting equation, for an incorporated
business entity, can be best expressed as
a. Assets+ Liabilities = Shareholders’ Equity.
b. Liabilities– Shareholders’ Equity = Assets
c. Shareholders' Equity = Assets- Liabilities
d. None of these
e. All of these.
- a. Shareholders' Equity = Assets
- - Liabilities
The best interpretation of the word debit is the
a. left side of an account.
b. right side of an account.
c. offset side of an account.
d. increase side of an account.
e. decrease side of an account.
left side of an account.
1. Prepaid expenses are
a. paid and recorded in an asset account before
they are used or consumed.
b. paid and recorded in an asset account after they are used or
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.
e. Always created through an adjusting entry process.
- paid and recorded in an asset account before
- they are used or consumed.
1. The accountant at Graham Inc. failed to make the
adjusting entry to record amortization for the current year. The effect of this error is
a. Assets, net
income, and shareholders’ equity are all overstated
b. Assets are overstated; net income and shareholders’
equity are understated
c. Assets and net income are overstated; shareholders’
equity is understated.
d. Net income is overstated and liabilities are
e. Net income is overstated and liabilities are
a. Assets, net income, and shareholders’ equity are all overstated
a. are not reported on the balance sheet because they are expensed.
b. are not reported on the balance sheet because they lack physical substance.
c. since 2005 have been eliminated to prevent “Big Bath” accounting.
d. should be reported as Current Assets on the balance sheet.
e. should be reported as a separate classification on the balance sheet
should be reported as a separate classification on the balance sheet
From a liquidity standpoint, it is more desirable for a company to have
a. Current assets equal current liabilities.
b. Current liabilities equal equity
c. Current liabilities exceed current assets.
d. Current assets exceed current liabilities.
e. Current liabilities exceed long-term liabilities.
Current assets exceed current liabilities.
preparing her financial statements, Mary showed only cash actually received from customers as sales. Which of the
following generally accepted accounting principles was Mary in contravention of?
a. Going-concern principle
b. Revenue recognition principle
c. Cost principle
d. Business entity principle
e. Monetary unit principle
Revenue recognition principle
The general ledger
a. is the set of balance sheet accounts
b. contains all the accounts
c. is the set of accounts which deal with revenues and expenses
d. is also known as a “synoptic”
e. only contains the journal entries made in a specific accounting period
contains all the accounts
Purchased inventory on account 1,300
Debit inventory; credit A/P
Paid part time employee 730
Wage expense debit 730; credit cash
Sold goods for cash 1,940
Debit cash; Credit revenues (sales)
Sold goods on credit, 1,810
Debit accounts receivable; credit revenue (sales)
Overhead and other expenses paid in cash, 900
Debit overhead (misc/other) expenses; credit cash
Collection of some of the accounts receivable 1,510
Debit cash; credit accounts receivable
Paid some of the accounts payable 1,720
Debit accounts payable; credit cash
Had a customer pay in advance for goods to be shipped in November
Debit cash; credit unearned revenue (deferred revenue)
Physical inventory count on september 30 shows a balance of 1750
Debit cost of goods sold 1280, credit inventory 1280
Depreciation expense for september is estimated to be 300
Debit depreciation expense (or amortization) 300; credit accumulated depreciation on furniture and fixtures 300
Dividends paid to shareholders - 500$
Dividends paid (or retained earnings) is debited; cash is credited 500
What are some additional adjustments that could be made?
- Set up/adjust allowance for
- doubtful accounts and estimate the bad debt expense for the fiscal period in
- Estimate unpaid wages (set up
- Accrued Wages Payable and adjust wage expense account accordingly)
- Estimate interest expense (or
- revenue) on debt (or investments). Set
- up Accrued Interest Payable account and adjust interest expense account
- Estimate any prepaids that have
- been used up/consumed (e.g. rent, insurance etc.)
- Estimate any unearned that have
- been earned
Income statement (details)
- Name of company
- Income statement
- For month ended September 30, 2013
- Sales xx
- Cost of goods sold Beginning inventory
- cost of goods available for sale (+two above
- less ending inventory
- Cost of goods sold
- Gross profit (margin)
- Operating expenses wage expenses
- overhead expenses
- depreciation expense
- total operating expenses
Operating income/net income (gross profit - operating expenses)
What is on an income statement? sections.
TITLE - company name, income statement, for date range
- Gross profit (Sales - cost of goods sold)
- Operating expenses
Operating income (net income) (Gross profit - expenses)
What does a statement of retained earnings look like?
- Company TITLE, Statement of Retained Earnings, Date range
- Beginning retained earnings
- Net income
- Less dividends (subtracted)
- Ending retained earnings
What does a balance sheet have on it ? Sections
- Current assets (Cash/accounts receivable/inventory)
- Non-current assets (furniture and fixtures, less depreciation)
- Current liabilities (notes payable, accounts payable, unearned revenue)
Shareholders equity (Shareholders equity; common shares; returned earnings)
What is GAAP? What are the two sets of standards?
Generally accepted accounting principles
IFRS - Applicable to public reporting entities/federally regulated institutions (public, needed for comparability)
ASPE - private companies. Allowed to use CRA rules.
What is managements responsibility?
- Fair presentation
- Be prepared according to GAAP rules
- Certify that there are adequate control systems
What are qualitative characteristics of useful financial information?
- Faithful representation (and reliable)
- Comparability and consistency
What is on a balance sheet VS income statement?
- Balance Sheet - Assets, liability, equity
- Income Statement - Income (revenues and gains), expenses/loses
When should we record something in accounting?
- 1. If it's probable that we will see economic gain/benefit
- 2. If the item has a cost or value that can be measured with reliability
- If we can't put something in the statement because it cant be recognized (i.e. lawsuit) we could put it in hte notes
What are the four options for measuring the value of an item?
- Historical cost... (unless it's things like property)
- Current cost (fair market replacement value)
- Realized value (what the goods could be sold for)
- Present value (i.e. if promised 1,000 in ten years, taking a smaller amount now (i.e. 100$), and invest it)
What is the matching principle?
Matching revenue (income) with the expenses incurred in earning that income (revenue).... "Was it worthwhile incurring that expense"?
What is the purpose of an income statement??
For management mainly... Make/buy, to show performance and continuing performance... to show below the net income line.
How is the balance sheet ordered? What is on it?
- By liquidity (if I needed cash... where would I get it from?)
- 1. Assets (current assets - money in the bank, inventory accounts receivable, etc), (non-current assets - property/plant and equipment, patents, long term investments)
- loans, taxes, accounts payable within the next 12 months) (Non-current
- loans payable after 12 months)
3.Shareholders equity or capital accounts (shareholder investment and retained profits; these are kept seperately because the owners change over time)
How do you tell if something is a business event?
- Past evidence
- External Exchange of Economic Substance
Is this a financial transaction? Payroll department issues a cheque to pay an
Is this a financial transaction? A customer orders a machine to be delivered in six months from now
Is this a financial transaction? Real estate reports indicate the company's land has gone up in value by 14% since last year
NO. No economic substance was exchanged.
Is this a financial transaction? A customer pays in cash an account owing since last month and gets a receipt
What term do you use when double entry applies to two accounts? How about more than two?
- Two = simple
- More than two = compound
How do you tell the difference between credits and debits? How do you remember which side they are on?
- Increases and decreases are called debits and credits.
- CRedits are on the RIGHT
debits are on the left.
Which accounts are increased by debiting?
Assets and expenses
Which accounts are increased by crediting?
Liabilities and revenues
What is the accounting equation?
Assets = equity + liabilities
How do you draw a super T account?
Assets on the left; Liabilities and shareholders equity on the right
What are some adjusting entries?
- Cost of goods sold
- Wages payable
- Interest payable
- Interest expense
- Accumulated amortization
- Accrued interest payable
What does "contra" mean?
The opposite/compliment account.
What are retained earnings?
Retained Earnings are
- Savings/earnings from the years gone by. In a startup business probably has nothing in
- it…. Revenue/expense info has to go in there
The percentage of net earnings not paid out as dividends, but retainedby the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet.
What are closing entries?
Zeroing out the account (add debit or credit balance the exact amount. Create a temporary account called the income summary.)
Closing Entries Closing entries are the journal entries used to transfer the balances of these temporary accounts to permanent accounts. After the closing entries have been made, the temporary account balances will be reflected in the Retained Earnings (a capital account)