accounting exam 2

What accounts increase with a DEBIT?

Assets, Expenses, and Dividends

What accounts increase with a CREDIT?

Liabilities, Common Stock/Equity, and Revenues

What is the normal balance of an asset?

Debit

What is the normal balance of an expense?

Debit

What is the normal balance of dividends?

Debit

What is the normal balance of a liability?

Credit

What is the normal balance of common stock?

Credit

What is the normal balance of retained earnings?

Credit

What is the normal balance of revenue?

Credit

What is the expanded accounting equation?

Assets = Liabilities + Common Stock + Retained Earnings + Revenues - Expenses - Dividends

What are the main financial statements on the review?

Income Statement, Statement of Retained Earnings, and Classified Balance Sheet

What does an Income Statement show?

Revenues, expenses, and net income for a period

What does the Statement of Retained Earnings show?

Beginning retained earnings + net income - dividends = ending retained earnings

What does a Balance Sheet show?

Assets, liabilities, and stockholders’ equity at a point in time

What is the Revenue Recognition Principle?

Recognize revenue when it is earned, not necessarily when cash is received

When is revenue recognized in the jumping castle example?

When the party occurs and the service is performed

What is an adjusting entry?

An entry made at the end of the period to update accounts before financial statements are prepared

What are the four main types of adjusting entries?

Prepaid expenses, unearned revenues, accrued expenses, and accrued revenues

What is depreciation?

Allocation of the cost of a long-term asset over its useful life

What is the adjusting entry when supplies are used?

Debit Supplies Expense, Credit Supplies

What is the adjusting entry for depreciation?

Debit Depreciation Expense, Credit Accumulated Depreciation

What is the adjusting entry when prepaid insurance expires?

Debit Insurance Expense, Credit Prepaid Insurance

What is the adjusting entry when unearned revenue becomes earned?

Debit Unearned Revenue, Credit Revenue

What is the adjusting entry for accrued salaries?

Debit Salaries Expense, Credit Salaries Payable

What is the adjusting entry for accrued interest expense?

Debit Interest Expense, Credit Interest Payable

What is the adjusting entry for accrued revenue?

Debit Accounts Receivable, Credit Revenue

What does accrued expense mean?

Expense is recorded before cash is paid

What does accrued revenue mean?

Revenue is recorded before cash is received

What does prepaid expense mean?

Cash is paid before the expense is recorded

What does unearned revenue mean?

Cash is received before revenue is earned

If you fail to record a used prepaid expense adjustment, what happens?

Assets are overstated, expenses are understated, and net income is overstated

If you fail to record accrued expenses, what happens?

Liabilities and expenses are understated, and net income is overstated

If you fail to record accrued revenues, what happens?

Assets and revenues are understated, and net income is understated

If you fail to record earned unearned revenue, what happens?

Liabilities are overstated, revenues are understated, and net income is understated

What is an adjusted trial balance?

A trial balance prepared after adjusting entries are posted

What is the purpose of an adjusted trial balance?

To verify debits equal credits and provide balances for financial statements

What are temporary accounts?

Revenues, expenses, and dividends

What happens to temporary accounts at closing?

Their balances are reduced to zero

What are permanent accounts?

Assets, liabilities, common stock, and retained earnings

Do permanent accounts close?

No

What accounts still have balances after closing?

Permanent accounts only

What is the main result of the closing process?

Temporary accounts start the next period at zero

What is the difference between perpetual and periodic inventory?

Perpetual updates Inventory and COGS continuously; periodic determines Inventory and COGS at the end of the period

Under a perpetual system, how does a buyer record an inventory purchase on account?

Debit Inventory, Credit Accounts Payable

Under a perpetual system, how does a buyer record a purchase return?

Debit Accounts Payable, Credit Inventory

Under a perpetual system, how does a buyer record payment within a discount period?

Debit Accounts Payable, Credit Inventory for the discount, Credit Cash for the amount paid

For the buyer, what account is reduced by a purchase discount?

Inventory

What does 2/10, n/30 mean?

2% discount if paid within 10 days; otherwise the full amount is due within 30 days

If a buyer owes $800 and has a 2% discount, what is the discount?

$16

If a buyer owes $800 and takes a $16 discount, how much cash is paid?

$784

Under a perpetual system, how many entries does the seller make for a sale?

Two

What is the seller's first entry for a sale on account?

Debit Accounts Receivable, Credit Sales

What is the seller's second entry for a sale?

Debit Cost of Goods Sold, Credit Inventory

Why does the seller make two entries for a sale?

One records the revenue and one records the cost of inventory sold

How does the seller record a sales return?

Debit Sales Returns, Credit Accounts Receivable

How does the seller restore returned inventory?

Debit Inventory, Credit Cost of Goods Sold

How does the seller record customer payment within the discount period?

Debit Cash, Debit Sales Discounts, Credit Accounts Receivable

For the seller, what account records the discount?

Sales Discounts

What is the formula for Net Sales?

Sales - Sales Returns - Sales Discounts

What is the formula for Gross Profit?

Net Sales - Cost of Goods Sold

What is the formula for Income from Operations?

Gross Profit - Operating Expenses

What is the formula for Income Before Income Tax?

Income from Operations + Other Revenues - Other Expenses

What is the formula for Net Income?

Income Before Income Tax - Income Tax Expense

What are operating expenses in the review problem?

Rent Expense, Salaries Expense, and Insurance Expense

Is interest expense usually an operating expense in the review problem?

No, it is treated as an other expense

Is interest income usually operating revenue in the review problem?

No, it is treated as other income

Using the review numbers, what are Sales?

$356,000

Using the review numbers, what are Sales Returns?

$3,000

Using the review numbers, what are Sales Discounts?

$4,000

Using the review numbers, what is Net Sales?

$349,000

Using the review numbers, what is Cost of Goods Sold?

$155,000

Using the review numbers, what is Gross Profit?

$194,000

Using the review numbers, what are total operating expenses?

$153,000

Using the review numbers, what is Income from Operations?

$41,000

Using the review numbers, what is Interest Expense?

$3,000

Using the review numbers, what is Interest Income?

$2,000

Using the review numbers, what is Income Before Income Tax?

$40,000

Using the review numbers, what is Income Tax Expense?

$16,000

Using the review numbers, what is Net Income?

$24,000

What is the formula for ending retained earnings?

Beginning Retained Earnings + Net Income - Dividends

Using the review numbers, beginning Retained Earnings is what?

$3,000

Using the review numbers, Dividends are what?

$2,000

Using the review numbers, Net Income is what?

$24,000

Using the review numbers, Ending Retained Earnings is what?

$25,000

What is FIFO?

First-In, First-Out

Under FIFO, which inventory costs are assumed sold first?

The oldest costs