Accounting 201 Exam 2

When should a company record revenues

at the time goods and services are provided to customers.

When should a company record expenses

at the time costs are used/incurred in running the company

What is accrual-basis accounting

record revenues when goods and services are provided to customers, and expenses when costs are used/incurred, regardless of when cash is paid

What is cash-basis accounting

companies record revenues and expenses only when they receive or pay cash.

Why are adjusting entries necessary under accrual-basis accounting?

Timing differences between cash inflows and their related revenues, and between cash outflows and their related expenses

What is a prepaid expense

when a company pays cash to acquire an asset that will be used in future periods

Describe the adjusting entry associated with a prepaid expense.

decrease the asset’s balance to its remaining (unused) amount and (b) recognize an expense for the cost of the asset used in the current period

What is an accrued expense

When a company has used/incurred costs in the current period, but the company hasn’t yet paid cash for those costs

What types of transactions do not require adjusting entries?

For transactions that do not involve revenue or expense activities, and transactions that result in revenues or expenses being recorded at the same time as the cash flow.

Why do companies need to prepare closing entries?

Closing these accounts reduces the balances of these temporary accounts to zero to prepare them for the next period.

Which account types are closes at end of period?

Temporary accounts (revenues, expenses, and dividends)

What are revenues?

amounts an entity is entitled to receive from customers for providing goods or services in the current period as part of its core operations

What is the core revenue recognition principle?

Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services.

What criteria must be met for an entity to recognize revenue over a period of time?

If the customer consumes the benefit of the seller’s work as it is performed (ex cleaning service)

What is Deferred Revenue

When a company receives cash before providing goods or services to customers, it owes the customer a good or service in return

What journal entries are associated with deferred revenue?

In the period those goods or services are provided, a journal entry is needed to:

• decrease the liability to its remaining amount owed (or zero if none)

• recognize revenue.

What is accounts receivable?

An asset that represents the company's right to collect cash from customers for goods and/or services previously provided on account.

At what value are accounts receivable reported at in the balance sheet?

Measured at net realizable value: the amount the company actually expects to collect from the customers.

Provide an example of an accrued revenue.

When a company provides a good or service before receiving cash from the customer

How does a company estimate the accounts receivable that will not be collected?

economic conditions, company history, customer demographics, and industry guidelines to estimate the part of accounts receivable that will not be collected.

What is a contra-asset?

an account used to indirectly reduce its related asset's balance

Does a contra-asset usually have a debit or credit balance?

Because it exists to reduce an asset's balance, it will have a credit balance.

When/how do uncollectible accounts impact the income statement?

Reduce net income in the period when companies estimate uncollectible accounts through Bad Debt Expense

What is inventory?

Items a company intends to sell to customers in the ordinary course of business

Advantages of FIFO

ending inventory balance close to current cost

Disadvantages to FIFO

fails to match current costs against current revenues on the income statement, which can inflate net income

Advantages to LIFO

matches current costs against current revenues on the income statement.

Disadvantages to LIFO

ending inventory balance not close to current cost.

What is gross profit?

Sales Revenue - COGS

What does gross profit show

margin/profit a company is earning on each item sold

What is a perpetual inventory system?

a company records all changes to an inventory account as they happen

What is a periodic inventory system?

a company records the reduction of inventory from units sold and the related cost of goods sold (COGS) only once at end of period

What is FIFO and how do you calculate it?

Assumes the oldest inventory is sold first, so COGS uses the oldest costs and ending inventory uses the newest costs.

What is LIFO and how do you calculate it?

Assumes the newest inventory is sold first, so COGS uses the newest costs and ending inventory uses the oldest costs.

What is weighted average cost flow and how do you calculate it?

Assumes all inventory items have the same average cost per unit, calculated by dividing the total cost of goods available for sale by the total units available.

What is the LIFO conformity rule?

requires a company that uses LIFO for tax reporting to also use LIFO for financial reporting.

Why is there a LIFO conformity rule?

so companies can't get the benefits of LIFO for tax purposes and then switch to FIFO in the 10K

What is a LIFO reserve?

Companies that report ending inventory using LIFO must also report the difference between the LIFO amount and what that amount would have been if they had used FIFO

Which Inventory cost flow assumption more realistically matches the current cost of inventory with current sales revenue in the income statement.

LIFO

A company sold inventory on account for $1,000 that was previously purchased for $400. The sale will have what effect on the financial statements using a perpetual inventory system.

Increase Assets, increase expense, increase revenue, and increase equity

During a period of rising prices, which inventory cost flow assumption would result in the highest cost of goods sold. and thereby the lowest net income

LIFO

A company has the following inventory transactions:

Jan. 1 Beginning inventory 100 units @ $4 each

Jan. 15 Purchase 100 units @ $5 each

Jan. 31 Purchase 100 units @ $6 each

What would be the cost of goods sold under the FIFO method if 120 units were sold in January?

$500

Which of the following is true regarding Allowance for Uncollectible Accounts?

a. It is a liability account.

b. It is added to the total of Sales Discounts, Sales Returns, and Sales Allowances.

c. It is subtracted from the balance of Accounts Receivable in the balance sheet.

d. It appears in the income statement as an expense

c. It is subtracted from the balance of Accounts Receivable in the balance sheet.

Using a balance sheet approach to estimate bad debts involves calculating the desired ending balance in which account?

Allowance for Uncollectable Accounts

Which of the following accounts will not be closed at the end of

the year: Service revenue, Cost of goods sold, Deferred revenue, or Rent expense

Deferred Revenue

A company has the following three events in December:

December 1 - Pay last month's rent (November), $1000.

December 15 - Pay rent for the current month (December), $1000.

December 31 - Pay rent for the following year, $12,000.

How much would be recorded as Rent Expense for the month of December using accrual-basis accounting

1,000

A company owes employee salaries of $ 16,000 at the end of the year. These salaries will be paid in the following year. What is the effect on the accounting equation, if any, of the adjusting journal entry needed at the end of the year

Increase Labilities, Decrease Equity

Which of the following is recorded with an adjusting entry associated with a prepaid expense?

Credit an asset, Debit a liability, Credit an expense, or Debit an asset

Credit an Asset

Which financial statement would include a line for net income?

Income Statement and Balance Sheet

When would Allowance for Uncollectible Accounts have a debit Balance?

The allowance for uncollectible accounts at the end of last year may have been too low.

When would Allowance for Uncollectible Accounts have a credit Balance?

The allowance for uncollectible accounts at the end of last year may have been too high.