accn final (ch1,8)

accounts on the income statement are

revenue and expense accounts

the purpose of the income statement is to

determine net income/loss

accounts on the statement of stockholders equity are

beginning RE, net income/loss, and dividends

the purpose of the statement of stockholders equity is to

determine ending RE

accounts of the balance sheet are

asset, liability, and SHE accounts

asset accounts on the balance sheet are divided into which categories?

current assets, long term investments, PPE, and intangibles

liability accounts on the balance sheet are divided into which categories?

current and long term liabilities

SHE accounts on the balance sheet are divided into which categories?

common stock and retained earnings

what do profitability ratios do?

measure operating success for a given period of time

earnings per share ratio

(net income - preferred dividends)/ average outstanding CS

numerator of EPS ratio

net income - preferred dividends

denominator of EPS ratio

average outstanding CS

what is the purpose of liquidity ratios?

determine the company’s ability to pay debts within a year or the operating cycle

working capital =

current assets - current liabilities

current ratio =

current assets / current liabilities

what is the purpose of solvency ratios?

determine the company’s ability to survive over a long period of time

debt to assets ratio =

total liabilities / total assets

relevance is

information that would make a difference in a financial decision

the components of relevance are

predictive and confirmatory value

faithful representation is

accurate, complete, and neutral portrayal of information

the monetary unit assumption is that

only things which can be expressed in money are included in accounting record

the economic entity assumption is that

every entity can be accounting for separate form any owners or other personal transactions

the periodic assumption is that

the life of a business can be divided into period and each can be covered by financial records

the going concern assumption is that

the company will remain in operation for the foreseeable future

the historical cost principle dictates that

companies record assets at their cost (at the time the asset is purchased, does not change as over the time the asset is held)

the fair value principle says that

assets and liabilities must be reported at fair value, the price that would be received if the asset was sold

the full disclosure principle

requires that companies disclose sufficient details regarding circumstances and events that would make a difference to financial users in the notes to the financial statements

the cost constraint

weighs the cost that companies incur to provide a type of information against its benefit to financial statement users

retained earnings is increased (credited) when

the company recognizes a revenue

retained earnings is decreased (debited) when

the company incurs an expense or pays dividends

retained earnings =

revenues - expenses - dividends

the revenue recognition principle requires that companies

recognize revenue in the accounting period in which the performance obligation was satisfied

under the revenue recognition principle, if a service was performed but cash was not received, would would be the journal entires?

D to A/R

C to Service Revenue

the expense recognition principle requires that companies

recognize expenses in the accounting period in which they make efforts to generate revenue

accural-basis accounting means that

transactions that change a company’s financial stamens are recorded int he periods in which the events occur, even if cash was not exchanged

cash-basis accounting means that

companies record revenue at the time they receive cash and an expense at the time they Pau cash out

what would adjusting entires for a prepaid expense be?

an increase (debit) to the expense account and a decrease (credit) in the asset account

assets under prepaid expenses that need to be adjusted include

supplies, insurance, depreciation

adjusting entry for prepaid insurance

increase (debit) Insurance Expense and decrease (credit) the asset Prepaid Insurance ***for the cost of insurance that has expired during the period***

book value is

the difference between the cost of any depreciable asset and its accumulated depreciation

what kind of account is Unearned Revenue

a liability account

the adjusting entry for when unearned revenues are

D to Unearned Revenue account or related liability account

C to Service Revenue

accrued revenues are

revenues for services performed by not yet recorded at the statement date

accused revenue accounts can include

interest revenue, A/R

the adjusting entry for accord revenues are

D to the asset account

C to a revenue account

accrued expenses are

expenses incurred but not yet paid or recorded at the statement date

a journal provides

a chronological record of transactions

a company received a utility bill not doesn’t pay it right away. what are the journal entires?

D to Utilities Expense

C to Accounts Payable

the purpose of the ledger is to

keep in one place all information about changes in specific account balances

serviced rendered means

services performed

if a company receives cash for services it has not yet performed, what should it journalize?

D to Cash the amount paid

C to Unearned Service Revenue the amount paid

investments by stockholders in a business increases which accounts?

assets (cash increases ) and stock holders equity (common stock increases)

when a company buys equipment on credit, does this affect the income statement or balance sheet?

balance sheet because buying on credit would increase accounts payable, a liability account (so not in income statement)

what increases when cash is received in advance from a customer?

liabilities will increase

ending retained earnings =

beginning retained earnings (+ net income / - net loss) - dividends

if the next payment date for a company’s employees is after the end of this period, but there has been time between the last one, what is the journal entry?

find the amount of salaries accrued in the period so far:

D to Salaries and Wages Expense

C to Salaries and Wages Payable

adjusting entires are made in order to

ensure that the revenue&expense recognition principles are followed and that financial statements conform to GAAP

prepaid expenses are expenses that are

a. incurred and already paid or received

b. paid and recorded in an asset account after they are used or consumed

c. paid and recorded in an asset account before they are used or consumed

d. incurred but not yet paid

c. paid and recorded in an asset account before they are used or consumed

book value is

purchase price - accumulated depreciation

ex. an adjusting entry to a Prepaid Rent asset account for (ex.) 3 months of use after (ex.) 1 month of use would be

divide the total amount prepaid (in the prepaid asset account originally) by 3 to get amount used in the one month →

D to Rent Expense amt for 1 month

C to Prepaid Rent amt for 1 month

if a business received cash before a service was performed and credits a liability account (Unearned Revenue), what would the adjusting entry be AFTER services are performed?

D to Unearned Revenue

C to Service Revenue

what kind of account is Unearned Revenue?

liability account

failure to prepare an adjusting entry at the end of the period to record an accord expense would cause

an understatement of expenses and an understatement of liabilities

if a business performed a service before receiving cash but has not billed the client as of the end of the accounting period, what adjusting entry would be made?

D to A/R

C to Service Revenue

net income =

revenues - expenses

a post-closing trial balance will show

a. only income statement accounts

b. zero balances for all accounts

c. zero balances for balance sheet accounts

d. only balance sheet accounts

d. only balance sheet accounts

arnings management is

the use of accounting techniques to produce financial statements that present an overly positive view of a company's business activities and financial position

what is the accounting concept on which adjustments for prepayments and accruals are based?

expense recognition

the matching principle requires that

any business expenses incurred must be recorded in the same period as related revenues

ex. at the beginning of the period you purchased $100 of supplies, and at the end, at $40 left of hand. what os the adjusting entry needed?

$100 originally - $40 left = $60 used

D to Supplies Expense

C to Supplies (to decrease the account)

what is the sequence of events for a prepaid expense?

pay, record in an asset account, use, decrease the asset account and increase a related expense account as it is used

accruals are when payment happens **after** a good or service is delivered

ex. a customer has been billed before $6,000 cash is received

deferrals are when payment happens **before** a good or service is delivered

ex. $4,500 cash is paid for next quarter’s insurance

ex. on Dec1, 2022, Escobar Consulting signs a $4,000, 12%, four-month note payable. What would be the journal entry for the payment of the note and entire interest in April 1, 2023?

D to Notes Payable $4,000 (debt to decrease the payable because paid; debit by cost without interest)

\
D to Interest Payable $40 ($4,000 x 12% x 1/12months)

\
D to Interest Expense $120 ($40 x 3 months of year)

\
C to Cash $4,160 (total amount)

which document is most important to complete before the company’s financial statements can be prepared?

the adjusted trial balance

what is the final step in the accounting cycle?

prepare a post-closing trial balance

retailers

purchase merchandise and sell directly to consumers

wholesalers

sell merchandise to retailers

cost of goods sold is

the total cost of merchandise sold during the period; this expense is directly related to the revenue recognized from the sale of goods

operating expenses are incurred

in the process of earning sales revenue

gross profit is

the difference between sales revenue and cost of goods sold

gross profit =

sales revenue - cost of goods sold

net income / loss =

gross profit - operating expenses

goods available for sale =

beginning inventory + goods purchased

goods sold =

goods available for sale - ending inventory

goods that are sold are assigned to

cost of goods sold

in a perpetual inventory system, companies

keep detailed records of the cost of each inventory purchase and sale

when is the cost of goods sold calculated in a perpetual inventory system?

every time a sale occurs

in a periodic inventory system, companies

do not keep detailed inventory records of the goods on hand throughout the period; they instead determine the COGS at the end of the period

to determine the cost of goods sold under a periodic inventory system:

1. determine the cost of goods on hand at the beginning of the period
2. add the cost of goods purchased


1. subtract the cost of goods on hand as determined by the physical inventory count at the end of the period

a purchase invoice to a buyer is a ________ to a seller

is a sales invoice to a seller

FOB shipping point means that ownership of goods

passes to the buyer when the public carrier accepts the goods from the seller; is responsible for paying all freight costs

FOB destination means that ownership of goods

remains with the seller until the goods reach the buyer

a purchase return is when

a purchaser returns the goods for credit if the sale was made on a credit, or cash if the sale was made on cash a

a purchase allowance is when

a purchaser chooses to keep the merchandise if the seller is willing to grant an allowance (deduction) from the purchase price

ex. when a purchaser returns goods of Inventory for $300, what would the journal entires be?

D to Accounts Payable $300

C to Inventory $300

a purchase discount is

a cash discount to the purchaser in return for prompt payment

credit terms ex. 2/10, n/30

2 : 2% cash discount on the invoice price less any returns or allowances

\
10 : if the payment is made within 10 days

\
n/30 : if not paid in the discount period, the invoice price less any returns or allowances is due in 30 days from the invoice date

from the sellers perspective, Sales Returns and Allowances are journalizes as

D to Sales Returns and Allowances (contra account to Sales Revenue)

C to A/R by the amount received back

when a seller accepts goods back, what journal entires does this require?

D to Inventory amount received (because more inventory back)

C to COGS because less goods sold