UARK ACCT 1 Final Exam

What belongs on the balance sheet?

Assets, liabilities, & stockholders equity.

(shows financial position of company on a particular date)

What belongs on the income statement?

Revenues - Expenses.

(on heading - company's name, title of financial statement, time period covered by statement)

What are Current Assets or Current Liabilities?

Things that will be used up/paid/received within one year.

(CA: cash, short-term investments, accounts receivable, supplies, inventory, prepaids.

CL: accts payable, salaries payable, accrued expenses, deferred revenue)

What are Long-Term Assets or Long-Term Liabilities?

Will be used for longer than one year.

(LTA: land, equipment, buildings, cars)

LTL: Notes & Bonds Payable)

What are Contra-Accounts?

Think about DEA LOR

Contra-Accounts do the opposite. For example, Cash is an asset, so it increases with a debit. Accumulated depreciation is a contra asset account, so it increases with a credit.

What are Accounts Receivable?

Cash owed to the company by its customers from sales or services on account.

Deferred Revenue AKA Unearned revenue =

liability

Accrual Basis Accounting

records revenues in the period that goods and services are provided to customers.

(GAAP Approved)

Cash-Basis Accounting

records revenues when cash is received and expenses only when cash is paid.

Cash Basis vs. Accrual Basis

Cash Basis: the revenues & expenses are recorded only at the time the cash is exchanged.

In contrast, Accrual Basis records revenues & expenses. before, after, and during the company receives cash from its customers.

Accruals

cash flow occurring after revenue & expenses have been recorded

Revenue Recognition Principle

requires that companies recognize revenue in the accounting period in which g & s are provided to customers.

Matching Principle

expenses are reported in the same period as the revenues they help to generate

Exteral vs. Internal Transactions

External: Serving & providing services to customers
Internal: Need to adjust prepaids

Which of the following is true about a debit?

a. it represents an increase to assets.
b. it represents a decrease to liabilities.
c. it is part of the double-entry procedure that keeps the accounting equation in balance.
d. all of the above

all of the above

When preparing a bank reconciliation, a check outstanding would be

Subtracted from the bank's cash balance.

On March 1, a company paid $24,000 for 12 months of rent in advance. How should the company record this transaction?

Debit Prepaid Rent $24,000 ;
Credit Cash $24,000

Debit

Left side of an account. Indicates an increase to asset, expense, or dividend accounts, and a decrease to liability, stockholders' equity, or revenue accounts.

Credit

Right side of an account. Indicates a decrease to asset, expense, or dividend accounts, and an increase to liability, stockholders' equity, or revenue accounts.

Accumulated Depreciation has a normal _______ balance, which indicates that it ______ total assets.

Credit ; Decreases

Internal Control

Refers to a company's plan to improve accuracy & reliability of accounting info. & safeguard the company's assets. The 5 Key components to an internal control system are:
1) control environment
2) risk assessment
3) control activity
4) monitoring
5) information & communication

What are Nontrade Receivables?

Receivables that originate from sources other than customers.

--- Tax refund claims
--- Interest receivable
--- Loans by the company to employees or stockholders

Petty Cash Fund

small amount of cash kept on hand to pay for minor purchases

What are Notes Receivable?

Written promises (a formal document) that require another party to pay the business under specified conditions (amount, time, interest)

--- Normal debit balance
--- Typically involves interest

What is a Sales Return?

When a customer returns a product.

--- Cash refund (if original sale was for cash)

--- Reduces balance of accounts receivable (if OG sale was on account)

--- Contra-Revenue Account:

Debit sales allowances

Credit accounts receivable

What is a Sales Allowance?

Customer does not return a product, but is not satisfied.

--- Cash refund (if original sale was for cash)
--- Reduces balance of accounts receivable (if OG sale was on account)

What is Sales Discount?

Reduction if payment is made w/in a specified period of time.

-- Contra Revenue Account:

----- Debit cash

----- Debit sales discount

----- Credit accounts receivable.

What is Net Realizable Value?

the amount of cash the company expects to collect

What is Allowance for Uncollectible Accounts?

Contra asset.

What is the Allowance Method?

Estimate future uncollectible accounts and record these estimates in the current year.

--- Reduce assets (Accounts receivable)
--- Increase expenses (Bad debt expense)

What is the Percentage-of-Receivables Method?

Bases the estimate of bad debts on account in accounts receivable.

--- Debit Bad debt expense

--- Credit Allowance for uncollectible accounts

What is the Aging Method?

Considers the age of accounts receivable; older accounts are more likely uncollectible; more accurate than using a single percentage.

--- Debit bad debt expense

--- Credit Allowance for uncollectible accounts

What is a Write-Off?

When it becomes clear that the customer will not pay.

--- Debit Allowance for uncollectible accounts

--- Credit Accounts Receivable

No effect on total assets or total expenses; negative effects of bad debts already recorded.

What is Inventory?

Items a company intends to sell to customers; current asset.

What is Cost of Goods Sold (COGS)?

Cost of inventory sold during the period; expense.

What is Specific Identification?

Matches each unit of inventory with its actual cost.

What is FIFO?

Assumes first units purchased are first ones sold.

--- Matches physical flow.
--- Ending inventory reflects current cost.
--- Balance-sheet approach.
--- Results in higher income when inventory costs are rising.

What is LIFO?

Assumes last units purchased are last ones sold.

--- COGS reflects current cost.
--- Income-statement approach.
--- If LIFO is used for tax reporting it must also be used for financial reporting.
--- Results in lower income and lower taxes when inventory costs are rising.

What is Weighted-Average Cost?

Assumes units sold comes from random mixture.

On November 1, 2018, Knomark, Inc. signed a $100,000, 6%, six‐month note payable with the amount borrowed plus accrued interest due six month slater on May 1, 2019. Knomark should report interest payable at December 31, 2018, in the amount of

(100,000 x .06)(2/12)= 1,000

(Nov and Dec=2 months)

What is the Perpetual Inventory System?

Maintains a continual record of inventory & helps a company better manage inventory levels.

What is the Periodic Inventory System?

Does not maintain a continual record of inventory & periodically adjusts for purchases and sales of inventory at the end of the reporting period.

Adjustments for Inventory Sales

Debit A/R (if sale is made on acct.)

Debit Cash (if sale is made w/ cash)

Credit Sales Revenue

Debit COGS

Credit Inventory

LIFO Reserve

Difference in reported inventory when using LIFO instead of FIFO

Purchase Discounts

Discount offered by seller to buyer for quick payment

Purchase Returns

Buyer returns unwanted or defective inventory.

Tangible Assets

physical assets, such as:
-- real estate
-- automobiles
-- Land
-- Land Improvements
-- Buildings
-- Equipment
-- Natural Resources

Property, plant, and equipment are recorded at the:

Orignial cost of the asset + all expenditures necessary to get the asset ready for use:

-- Real estate commission & fees
-- Property Taxes
-- Inspection costs
-- remodeling costs
-- sales tax
-- shipping
-- assembly

Intangible Assets

Aassets that do not have physical substance, existence often based on legal contract.

-- Patents
-- Trademarks
-- Copyrights
-- Franchises
-- Goodwill

Basket Purchases

purchase of more than one asset at the same time for one purchase price

(allocate the total purchase price based on the relative fair values of the individual assets)

Patent

Exclusive right to manufacture a product or to use a process,

granted for a period of 20 years.

Copyrights

Exclusive right of protection given to the creator of a published work,

granted for life of the creator + 70 years.

Trademarks

a word, slogan, or symbol that distinctively identifies a company, product, or service.

renewed for an indefinite number of 10-yr periods.

Franchise

Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area

Goodwill

Recorded only when one company acquires another company.

Portion of purchase price that exceeds the fair value of identifiable net assets.

Recording Depreciation

Debit Depreciation Expense;

Credit Accumulated Depreciation (contra-asset acct)

Amortization

Allocating the cost of intangible assets to expense

-- patents
-- copyrights
-- trademarks (w/ finite life)
-- franchises

Loss is... (Dr/Cr?)

Debited

Gain is... (Dr/Cr?)

Credited

Fringe Benefits

Additional employee benefits paid for by the employer.

-- health, dental, disability, life insurance

-- contributions to retirement or savings plans

Debit Salaries Expense;

Credit Accounts Payable

Salary Expense (employee side)

Debit Salary Expense;

Credit Income tax payable, FICA tax payable, Accounts Payable, & Salaries Payable

Payroll Tax Expense (employer side)

Debit Payroll tax expense;

Credit FICA tax payable & unemployment tax payable

Recording Sales Tax

Debit Cash

Credit Sales Revenue

Credit Sales Tax Payable

Contingent Liability

Uncertain situation that might result in a loss.

-- recorded if probable and reasonably estimable.

Debit Loss;

Credit Contingent Liability

Estimating Warranty Costs

Debit Warranty Expense

Credit Warranty Liability

Actual Warranty Costs

Debit Warranty Liability

Credit Cash

Capital Structure

mixture of liabilities and stockholders' equity a business uses

Debt Financing

borrowing money

Equity Financing

Obtaining investment from stockholders

Operating Lease

Owner owns the asset and is leasing it out temporarily.

Capital Lease

Lessee buys an asset & borrows the money through a lease to pay for the asset.

Secured Bond

Backed by collateral (asset)

Unsecured Bond

Not backed by collateral - backed by full faith & credit

Term Bond

Requires payment of full principal amount at a single maturity date

Serial Bond

bond issue matures in installments. payment over a series of time.

Callable Bond

Borrower can pay off bond early at a specified call price

Convertible Bond

Lender can convert bonds to common stock.

Bond Issued at a Discount

- Carrying value increases over time.
- Issue Price < Face Value
- Stated interest rate < market interest rate.

Carrying Amount

Value of bond payable today.

Bond Issued at a Premium

- Carrying value decreases over time.
- Issue Price > Face Value
- Stated interes rate > market interest rate.

Bond Retirements at Maturity

Debit Bonds Payable

Credit Cash

1. Fleming Corp. provided services on account. The transaction would be recorded with a debit to:

Accounts Receivable

-----> Service Revenue

2. When customers purchase products on account, Spitz Mfg. offers them a 2% reduction in the amount owed if they pay within 10 days. This is an example of a:

Sales Discount

Cash

------> A/R

4. A company collects a customer's account within the discount period. Indicate how this transaction would affect
(1) assets,
(2) Stockholders' Equity, and
(3) revenues

(1) Decrease
(2) Decrease
(3) Decrease

5. The wrong material was shipped to a customer who refused to accept the order. Upon receipt of the material, we should credit Accounts Receivable and debit:

Sales Returns

-------> Accounts Receivable

7. The percentage-of-receivables method for estimating uncollectible accounts is sometimes described as:

The balance sheet method

8. Shupe Inc. estimates uncollectible accounts based on the percentage of accounts receivable. What effect will recording the estimate of uncollectible accounts have on the accounting equation?

Decrease assets & decrease S.H.E

12. The distinction between operating and non operating relates to:

Principal activities of the reporting entity

18. Which of the following is true regarding LIFO & FIFO?

In a period of rising costs, LIFO results in lower net income than FIFO.

19. If A sells to B, and B obtains title while goods are in transit, the goods were shipped ________. If C sells to D, and C maintains title until the goods arrive at D's door then the goods were shipped ________.

FOB shipping point;
FOB destination

22. The exclusive right to benefit from a creative work, such as a film, is a:

Copyright

26. The purchase of a new cooling system for $150,000 to upgrade an office building owned by the company would be accounted for as:

An addition in the Buildings account

29. Which of the following intangible assets is not amortized?

Goodwill

(unlimited life is not amortized)

30. Which of the following amortization methods is most commonly used?

Straight-line

33. Which of the following is not an employer payroll cost?

Federal & State Income Taxes

36. Sales taxes collected by a company on behalf of the state & local government are recorded by:

A credit to a liability account.

38. United Supply has a $5 million liability at Dec. 31, 2018, of which $1 million is payable in each of the next 5 years. United reports the liability on the balance sheet as a:

$1 million current liability and a $4 million long-term liability.

(longer than 1 year = LTL)

41. In each succeeding payment on an installment note

The amount of interest expense decreases

42. Which of the following is NOT a reason why some companies lease rather than buy?

a. leasing may allow you to borrow with little or no down payment

b. leasing can improve the balance sheet by reducing long-term debt.

c. leasing can lower income taxes

d. leasing transfers the title to the lessee at the beginning of the lease.

leasing transfers the title to the lessee at the beginning of the lease.

43. Which of the following definitions describes a secured bond?

Supported by specific assets pledged as collateral by the user.