Untitled Flashcards Set

Basic Accounting Concepts

1. How do you calculate book value?

   • Book Value = Historical Cost - Accumulated Depreciation

2. What are nominal accounts, and why are they closed at the end of an accounting period?

   • Nominal accounts are temporary accounts (revenues, expenses, and dividends) that are closed to reset balances for the new accounting period.

3. What is the chronological order of the accounting cycle?

   • 1. Analyze transactions

   • 2. Journalize transactions

   • 3. Post to ledger accounts

   • 4. Prepare an unadjusted trial balance

   • 5. Make adjusting entries

   • 6. Prepare an adjusted trial balance

   • 7. Prepare financial statements

   • 8. Close accounts

   • 9. Prepare a post-closing trial balance

4. What is an artificial time period in accounting?

   • A set period (month, quarter, year) used to report financial information, even though business operations continue.

5. What is the time period assumption?

   • The assumption that a company's financial life can be divided into artificial time periods for reporting purposes.

6. What is the difference between the cash basis and the accrual basis of accounting?

   • Cash Basis: Revenues/expenses recorded when cash is received/paid.

   • Accrual Basis: Revenues/expenses recorded when earned/incurred, regardless of cash flow.

7. What is the revenue recognition assumption?

   • Revenue is recorded when it is earned, not when cash is received.

8. What is the expense recognition assumption, and how does it work with the revenue recognition assumption?

   • Expenses are recorded when they are incurred, matching with the revenues they helped generate (Matching Principle).

Financial Calculations & Accounting Cycle

9. How do you calculate interest?

   • Interest = Principal × Rate × Time

10. How do you calculate net income for a merchandising company?

• Net Income = Gross Profit - Operating Expenses

• Gross Profit = Sales Revenue - Cost of Goods Sold (COGS)

11. How do you calculate net income in general?

• Net Income = Revenues - Expenses

12. How do you calculate cost of goods sold (COGS)?

• COGS = Beginning Inventory + Purchases - Ending Inventory

13. How do you calculate operating income?

• Operating Income = Gross Profit - Operating Expenses

14. What does "Sales Revenue - Cost of Goods Sold" equal?

• Gross Profit

15. What do the terms "n/30" mean, and how do you calculate the cost of an item based on these terms?

• "n/30" means net payment is due in 30 days.

• If the invoice is $1,000, the full amount is due within 30 days.

FOB Shipping Point vs. FOB Destination

16. What is FOB Shipping Point, and who pays for the freight?

• Buyer pays shipping. Title transfers at the shipping point.

17. What is FOB Destination, and who pays for the freight?

• Seller pays shipping. Title transfers when goods reach the buyer.

18. How do FOB terms impact financial statements for buyers and sellers?

• FOB Shipping Point: Buyer records inventory at shipment.

• FOB Destination: Seller records sale when the buyer receives goods.

Adjusting & Closing Entries

19. What is required in an adjusting journal entry, and what are the two types (accruals and deferrals)?

• Accruals: Record revenues/expenses before cash moves.

• Deferrals: Record cash received/paid before revenues/expenses are incurred.

20. How do you make adjustments to journal entries? (Practice problems recommended)

• Adjust for prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

21. What is the purpose of an income statement, and how do you close entries?

• It shows revenues and expenses, leading to net income. Close temporary accounts into retained earnings.

22. How do you determine debit and credit when closing accounts?

• Revenues → Debit Revenue, Credit Income Summary

• Expenses → Debit Income Summary, Credit Expenses

• Net Income → Debit Income Summary, Credit Retained Earnings

23. What is a post-closing trial balance, and why is it important?

• A trial balance after closing entries to ensure only permanent accounts remain.

24. What is a classified balance sheet?

• A balance sheet grouped into categories: Assets, Liabilities, and Equity.

Balance Sheet & Business Structures

25. What are the classifications of a balance sheet?

• Assets: Current, Long-term, PPE

• Liabilities: Current, Long-term

• Equity: Common Stock, Retained Earnings

26. What is the difference between a sole proprietorship and a corporation?

• Sole Proprietorship: Single owner, unlimited liability.

• Corporation: Separate legal entity, limited liability.

27. What is a PPE (Property, Plant, and Equipment) account, and how does accumulated depreciation affect it?

• PPE includes land, buildings, equipment. Accumulated depreciation reduces PPE value.

28. What is a contra revenue account, and where is it placed on the financial statements?

• A contra revenue account reduces revenue (e.g., sales discounts, returns). Placed under Revenues in the income statement.

Assets, Inventory, and Liquidity

29. What type of asset is inventory, and how is it classified?

• Current Asset, reported at cost or market value.

30. What is liquidity in terms of assets, and why is it important?

• Liquidity is how quickly an asset can be converted to cash. More liquidity = more financial flexibility.

31. How do you calculate freight costs, and how do terms impact the buyer and seller?

• If FOB Shipping Point: Buyer pays; included in inventory cost.

• If FOB Destination: Seller pays; recorded as an expense.

Worksheets & Trial Balances

32. What are the different columns in a worksheet, and how are they used?

• Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, Balance Sheet.

33. What is the sequence of the accounting cycle?

• See question 3 (analyze transactions → post-closing trial balance).

34. How does the post-closing trial balance differ from other trial balances?

• Only permanent accounts remain, ensuring no temporary accounts carry over.