ACCT 2000 Lowe-Ardoin Exam 2

With ______________ ___________ Accounting, transactions are recorded in the period in which the event occurs, not when the cash is received.

Accrual Basis

The ____________ Recognition Principle reuqires companies to recognize revenue in the accounting period in which it is earned.

revenue

Adjusting entries should be prepared every time _____________ ________________ are issued in order to ensure all accounts are correctly reported.

financial statements

From what document are financial statements prepared?

adjusted trial balance

Which account is never affected by adjusting entries?

cash

Accumulated Depreciation is what type of account?

contra asset

What financial statement would include this account?

balance sheet

An accrued expense adjusting entry records amounts owed (or incurred), but not yet paid. Prior to completing this type of adjusting entry, which accounts are understated?

expense and liability (payable)

Temporary accounts are closed at the end of each _________.

year

What are the three types of temporary accounts?

revenues, expenses, and dividends

Which two accounts are closed directly into retained earnings?

income summary and dividends

What is the first step in the accounting cycle?

analyze transactions

What is the last step in the accounting cycle?

prepare a post-closing trial balance

Net Sales - Cost of Goods Sold =

Gross Profit

Which inventory method maintains continuous records of inventory every time a purchase or sale is made?

perpetual

With the _____________ inventory method, Cost of Goods Sold and Inventory are determined at the end of the accounting period by a physical count.

periodic

When a purchaser buys inventory (on credit), _______________ is debited and _______________ _____________ is credited.

inventory; accounts payable

When the seller completes a sales transaction (on credit), a two part entry is required. Accounts Receivable is debited and Sales Revenue is credited for the _______ __________. In addition, Cost of Goods Sold is debited and Inventory is credited for the _______.

sales price; cost

Operating Income is calculated in a Multiple Step Income Statement by subtracting _____________ ______________ from Gross Profit.

Operating Expenses

What are two Contra Revenue Accounts?

sales returns and allowances and sales discounts

Which operating cycle generally takes more time, service company or merchandising company?

merchandising company

What are the normal balances of the sales returns and allowances and sales discounts contra revenue accounts?

debit

Both interest revenue and gains on sales would be included in what section of a multi-step income statement?

other revenues and gains

The Profit Margin Ratio may be calculated by dividing ______________________ by ___________________.

net income; net sales

When a merchandise return is accepted by the seller, which two accounts are debited?

sales returns and allowances and inventory

Which account will have a zero balance after a company has journalized and posted closing entries?

service revenue

Deposits held by a bank are considered what type of account for the bank?

liability

Electronic payments made out of a bank account are recorded by the bank with a __________.

debit

The return of an NSF check to the bank would show as a reconciling item for the bank or the book?

book

What account is always affected by bank reconciliation adjusting entries?

cash

What are the only accounts that appear on the post-closing trial balance?

permanent

What account would be credited by the company to record interest earned on an account from the bank?

interest revenue

In a bank reconciliation, deposits in transit are:

added to the bank balance

In a bank reconciliation, outstanding checks are:

deducted from the bank balance

To record the adjusting entry for an NSF check received by the bank, a company would:

debit accounts receivable

Why should a bank reconciliation be prepared?

To explain any difference between the depositor's balance per books and the balance per bank

Which type of accounting is approved by GAAP, cash or accrual basis?

Accrual Basis

Adjusting entries ___________ involve cash.

never

What are the two types of adjusting entries?

deferrals and accruals

One side of the adjusting entry must come from the _____________ _____________ and the one side must come from the ______________ ___________________.

balance sheet; income statement

Adjusting entries are necessary every time a company prepares a ______________ ________________.

Financial Statement

Which accounts are adjusted in deferral adjusting entries?

prepaid expenses and unearned revenue

What are examples of prepaid expenses?

insurance, supplies, and depreciation

What are examples of unearned revenue?

unearned service revenue

If there are no adjusting entries for prepaid expenses, ___________ are overstated and _____________ are understated.

assets; expenses

Journal entries for prepaid expense adjustments debit ___________ accounts and credit ___________ accounts.

expense; asset

If there are no adjusting entries for unearned revenue, ______________ are overstated and _____________ is understated.

liabilities; revenue

____________ accounts are debited and ____________ accounts are credited in the adjusting journal entries for unearned revenue.

liability; revenue

What are the two types of accrual adjusting entries?

accrued revenue and accrued expenses

Adjusting entries are needed to ensure that the ____________ and ___________ principles are followed.

expense; revenue

Expenses paid in cash and recorded as assets before they are used or consumed are called ____________ ______________.

Prepaid Expenses

Cash received and reported as liabilities before revenue is earned is called _____________ ____________.

Unearned Revenue

Revenues earned but not yet received in cash or recorded are called ___________ _____________.

Accrued Revenue

Expenses incurred but not yet paid in cash or recorded are called ______________ ______________.

Accrued Expenses

If there are no adjusting entries for accrued revenue, ______________ and ____________ are understated.

revenues; assets

If there are no adjusting entries for accrued expenses, ______________ and ____________ are understated.

expenses; liabilities

____________ accounts are debited and ____________ accounts are credited in the adjusting journal entries for accrued revenue.

receivable; revenue

____________ accounts are debited and ____________ accounts are credited in the adjusting journal entries for accrued expenses.

expense; payable

When closing the books, we close the ________________ (RED) accounts.

temporary

The balance of the Income Summary should equal _________ ___________.

Net Income

What is the permanent account?

retained earnings

What formula do we use to calculate interest?

principle x rate x time

The ________ __________ is prepared from the ledger accounts after all adjusting entries are journalized and posted.

trial balance

The purpose of the adjusted trial balance is to prove the equality of _________ and __________ balances in the ledger.

debit; credit

The adjusted trial balance is the _____________ basis for the preparation of the financial statements.

primary

Which financial statements are preparted directly from the Adjusted Trial Balance?

income statement, retained earnings statement and balance sheet

At the end of the accounting period, companies transfer the ______________ account balances to the _______________ stockholder's equity accounts -- Retained Earnings.

temporary; permanent

In addition to updating Retained Earnings to its correct ending balance, closing entries produce a _______ balance in each ________________ account.

zero; temporary

What are the (permanent) balance sheet accounts?

assets, liabilities, and stockholder's equity

The purpose of the post-closing trial balance is to prove the ____________ of the _______________ account balances that the company carries forward into the next accounting period.

equality; permanent

In the post-closing trial balance, all _______________ accounts have a zero balance.

temporary

What are the two types of inventory system?

perpetual and periodic

What are the three important line items in a multistep income statement?

gross profit, income from operations and net income

In perpetual inventory systems, the company determines cost of goods sold _______ _______ a sale occurs.

each time

In periodic inventory systems, cost of goods sold is determined by a ____________ _________ at the end of the accounting period.

physical count

What are the advantages of a single step income statement?

easy to read and simple to prepare

What type of income statement do most companies prefer?

multi-step

What are the advantages of a multi-step income statement?

highlights the components of net income

What is the formula for net sales?

sales revenue - sales returns and allowances - sales discounts

Gross profit - total operating expenses =

income from operations

Income before income tax - income tax expense =

net income

Which non-operating activities are classified as other revenues and gains?

interest revenue, dividend revenue, rent revenue, and gain

Which non-operating activities are classified as other expenses and losses?

interest expense, casualty losses, and loss

What is the gross profit rate formula?

gross profit/net sales

What is the profit margin formula?

net income/net sales

What does profit margin mean?

percent of sales keep as net income

What are three types of adjustments made to the book?

unreported payments, unrecorded receipts, and bank errors

What are the three types of adjustments made to the bank?

deposit in transit, outstanding checks, and book errors

What are examples of unreported payments?

NSF checks and bank service charges

What is a check called when a company does not have sufficient funds to make a payment?

NSF check

What are checks that do not clear the bank are called?

outstanding checks

What are the two causes for reconciliation?

time lags and errors

________ _______ prevent one of the parties from reading the transaction in the same period.

time lags

True or False: Book value is equal to cost minus accumulated depreciation.

True

True or False: The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received.

False

True or False: The expense recognition principle requires that expenses be recognized in the same period that they are paid.

False

What is the periodicity assumption?

the economic life of a business can be divided into artificial time periods

Which principle dictates that efforts (expenses) be matched with results (revenues)?

expense recognition principle

True or False: The cash-basis of accounting is in accordance with generally accepted accounting principles.

False

If revenues are recognized only when a customer pays, what method of accounting is being used?

Cash-Basis