Class 4

Which of the following statements is incorrect?
a. Adjusting journal entries normally impact the Cash account.
b. An adjusting entry for accrued expenses debits an expense account.
c. Accruals increase both a statement of financial position account and an income
statement account.
d. An adjusting entry for prepaid expenses credits an asset account.

Which of the following is not true of adjusting entries? Adjusting entries:
a) Affect at least one statement of income account and one statement of financial
position account when recording deferrals and accruals.
b) Are made periodically, usually when the financial statements are about to be
prepared.
c) Are used to record transactions.
d) Improve the matching of revenues and expenses to a particular period.
e) None of the above.

a. Adjusting journal entries normally impact the Cash account.

c) Are used to record transactions.

On April 1, 2022, Lansing Corporation opened for business and paid $600 in insurance to cover the next 12 months. The corporation is preparing financial statements for the period ending December 31, 2022. What amount of insurance expense should be recognized for Lansing’s first year of operations?
a. $600
b. $0
c. $450
d. $150

c. $450

Insurance exp=(600/12) * 9 (Apr1 to Dec31)=450

On July 1, East Lake, Inc. purchased a 2-year insurance policy for $12,600 cash. Prepaid Insurance was debited for the entire amount. On December 31, when the year-end financial statements are prepared, assuming adjusting entries are made annually, the appropriate adjusting journal entry to be made would be to
a. debit Prepaid Insurance $2,100; credit Insurance Expense $2,100.
b. debit Insurance Expense $9,450; Credit Prepaid Insurance $9,450.
c. debit Prepaid Insurance $12,600; credit Insurance Expense $12,600.
d. debit Insurance Expense $3,150; credit Prepaid Insurance $3,150.

d. debit Insurance Expense $3,150; credit Prepaid Insurance $3,150.
insurance exp=(12600/24)*6=3150

Equipment costing $6,000 had a useful life of five years. The adjusting journal entry to record the depreciation for one month would consist of
a. a debit to Depreciation Expense for $1,200 and a credit to Equipment for $1,200
b. a debit to Depreciation Expense for $100 and a credit to Accumulated depreciation-Equipment for $1200.
c. a credit to Depreciation Expense for $100 and a debit to Accumulated Depreciation—Equipment for $100.
d. a debit to Depreciation Expense for $100 and a credit to Accumulated Depreciation—Equipment for $100.

d. a debit to Depreciation Expense for $100 and a credit to Accumulated Depreciation—Equipment for $100.
Monthly dep exp=6000/(5*12)=100

On June 1, 2022, RentMe Inc. agreed to rent a building to Thomlinson Corp. for a 12-month period. Thomlinson Corp. paid $20,000 upfront as a rental fee. RentMe Inc. is preparing financial statements for the period ending December 31, 2022. What amount of rent should be
reported as deferred revenue at year end?
a. $20,000
b. $0
c. $8,333
d. $11,667

c. $8,333

Deferred revenue=20,000-(20,000/12)*7(Jun1-Dec31, 2022)=8,333

Selcomm Communications received cash of $12,000 on October 1, 2022 as prepayment for 12 months’ rent. The accountant recorded the cash receipt as a credit to Rent Revenue and a debit to Cash. What is the year-end adjusting entry on December 31, assuming adjusting entries are prepared annually?
a. a debit to Rent Revenue and a credit to Deferred Rent, $3,000
b. a debit to Rent Revenue and a credit to Deferred Rent, $9,000
c. a debit to Deferred Rent and a credit to Rent Revenue, $3,000
d. a debit to Cash and a credit to Deferred Rent, $9,000

Error entry recorded on Oct 1, 2022
Dr. cash 12,000
Cr. Rent revenue 12,000
On Dec 31, the expected balance of rent revenue= (12,000/12) * 3=3,000
Thus the adjusting entry is to adjust Rent revenue from Cr. 12000 to Cr. 3000
Dr. Rent revenue 12000-3000=9000
Cr. Deferred revenue 9000

Which of the following account does NOT appear in closing journal entries?
a) Deferred revenue.
b) Cost of goods sold.
c) Dividend.
d) Retained earnings.
e) Income tax expense

An adjusting entry that expenses part of an insurance policy that was purchased earlier in the year is an example of a/an:
a) Prepayment.
b) Accrual.
c) Recognition.
d) Revenue.
e) Expense

a) Deferred revenue.

a) Prepayment.

What are the two main types of investments?

What are common investment payoffs?

Formula for Return?

What does investment risk mean?

Equity (shares, options) and Debt (bonds, loans).

Dividends, capital gains, interest revenue

Return = Payoff ÷ Investment amount.

Distribution of possible payoffs and their probabilities.

When is accounting information useful?

What have studies shown about ratios?

When it predicts future returns and risks.

Ratios predict bankruptcy/CEO changes, are used by analysts, and link income to future stock returns.

What do profitability ratios measure?

Formula for Gross Profit Margin?

Formula for Profit Margin?

Why use average balances in ratios?

A company’s operating success in a period.

(Sales – COGS) ÷ Sales.

Net income ÷ Sales.

Income is over time, assets/equity are at points in time.

Formula for Asset Turnover?

Formula for ROA?

Formula for ROE?

Formula for EPS?

Formula for Price-Earnings Ratio?

Formula for Dividend Yield?

Sales ÷ Avg. total assets.

Net income ÷ Avg. total assets.

Net income ÷ Avg. shareholders’ equity.

Net income ÷ Weighted avg. common shares.

Market price per share ÷ EPS.

Dividends per share ÷ Market price per share.

What do liquidity ratios measure?

Formula for Current Ratio?
Formula for Receivable Turnover?

Formula for Inventory Turnover?

Short-term ability to pay obligations.

Current assets ÷ Current liabilities.

Net credit sales ÷ Avg. accounts receivable.

COGS ÷ Avg. inventory.

What do solvency ratios measure?

Formula for Debt to Total Assets?

Formula for Times Interest Earned?

Ability to meet total long-term obligations.

Total liabilities ÷ Total assets.

(Net income + Interest + Taxes) ÷ Interest expense.

What is horizontal analysis?

Formula for % of base period?

Formula for % change?

Compares items over time.

Analysis-period ÷ Base-period.

(Analysis – Prior) ÷ Prior.

What is vertical analysis?

Formula for vertical analysis?

Expresses items as % of a base amount.

Item amount ÷ Base amount.

How to calculate Profit Margin if NI and Sales are given?

How to calculate Times Interest Earned?

Example of unethical behavior with ratios?

Profit Margin = Net income ÷ Sales.

(Net income + Interest + Taxes) ÷ Interest expense.

Shifting sales into current period to inflate profits and secure loans.