Exam 3 lock In
a. Acquisition of equipment by issuance of note payable NIF b. Purchase of long-term investment with cash I – c. Issuance of long-term note payable to borrow cash F + d. Increase in prepaid expenses O – e. Decrease in accrued liabilities O – f. Loss on sale of equipment O + g. Decrease in accounts receivable O + h. Depreciation of equipment O + i. Increase in accounts payable O + j. Amortization of intangible assets O + k. Purchase of treasury stock F – l. Payment of long-term debt F – m. Increase in salary payable O + n. Cash sale of land I + o. Sale of long-term investment I + p.Acquisition of building by cash payment I – q. Net income O + r.Issuance of common stock for cash F + s.Payment of cash dividend F – (Non-Cash Investing, Investing Activity, Financing Activity, Operating Activity)
Net Income=Revenues−Expenses Change in Retained Earnings=Net Income−Dividends -Revenues: $150,00 Expenses: $90,000 Cash Dividends Declared: $10,00 Net Income=150,000−90,000=60,000 Current Liabilities: Obligations a company expects to settle within one year or the operating cycle (whichever is longer). These are typically paid using current assets (e.g., cash) or by creating other current liabilities. Long-Term Liabilities: Obligations a company expects to settle beyond one year or the operating cycle. These usually involve larger sums and may require future financing or asset liquidation. Net Income = Revenues + Gain - Operating Expenses - Loss
Current Liabilities : accounts payable, wages payable, interest payable, unearned interests, taxes payable, current portion of long term debt
Long term Liabilities: long term notes payable—- Current Ratio=Current Liabilities / Current Assets—--- Debt-to-Equity Ratio=Total Equity/ Total Liabilities
How do you record the purchase of land? Do you record it at the List Price, the Fair Value Price, or the purchase price? (The purchase price is the correct answer)
Where are the dollar amounts on the Trial Balance from? They are from the ending balances in the ledger accounts. (The Trial Balance is not a required financial statement, but the report used to create the financial statements once it has been adjusted for month-end entries)
Failing to enter a credit when a debit is recorded violates the double-entry system, resulting in an unbalanced trial balance
If a debit to "Cash" was entered but no credit : Determine the source (e.g., revenue or loan). : Add the corresponding credit (Service Revenue or Notes Payable).
Journal Entry (Reimbursement): Debit: Relevant Expense Account (e.g., Travel Expense, Office Supplies) Credit: Cash—----------Gross Profit=Sales Revenue−COGS
FIFO: Provides the highest net income in periods of rising prices as older, cheaper costs are used for COGS.
LIFO: Provides the lowest net income in periods of rising prices as newer, higher costs are used for COGS.
Average Cost: Smooths out price fluctuations, providing moderate net income and inventory values.
Specific Identification: Matches exact costs to specific items, offering the most accurate measure of net income when items are unique or high-value.
Most Realistic Measure of Net Income: Specific Identification, when applicable, provides the most accurate net income, but FIFO often aligns better with actual inventory flow.
Are acquisitions and sales of long-term assets reported as investing activities on the statement of cash flows? (YES, they are.)
Depreciation does not change an asset's original cost. It only allocates the cost over time.The original cost is the original cost!
Net Income: Calculate by subtracting expenses from revenues (dividends don't affect net income).
Liabilities: Current liabilities are due within a year; long-term liabilities are due later.
Accrued Liabilities: Include wages, taxes, and interest owed but unpaid.
Contra Accounts: Contra assets (e.g., Accumulated Depreciation) have credit balances; contra liabilities (e.g., Discount on Bonds Payable) have debit balances.
Corporations: Benefits include limited liability and access to capital; disadvantages include double taxation and regulatory oversight.
Corporate Charter: States the company’s purpose, authorized stock, and structure.
Contingent Liabilities: FASB requires recording only if probable and estimable; disclose otherwise.
Stable Monetary Unit Assumption: Ignores inflation in accounting records.
Land Purchase: Record at the purchase price, not list or fair value.
Trial Balance: Derived from ledger balances; used to create financial statements after adjustments.
Debits & Credits: Every debit must have an equal credit to keep accounts balanced.
Supplies on Account: Increases both assets (supplies) and liabilities (accounts payable).
Revenue Principle: Record revenue when earned, not when cash is received.
Prepaid Rent: Record as an asset and expense it monthly over the term.
Expense Reimbursements: Require receipts and documentation for approval.
Misappropriation of Assets: Includes theft, fraud, or misuse of company resources.
Quick Ratio: Includes cash, accounts receivable, and short-term investments.
Inventory Costing: FIFO increases net income during rising prices; Specific Identification is most accurate when feasible.
Gross Profit & COGS (FIFO): Subtract FIFO-calculate COGS from sales to find gross profit.
Stockholders’ Equity: Expenses and dividends decrease it; revenues increase it.
Dividends: Reduce cash but don’t affect expenses.
Treasury Stock: Reported in Stockholders’ Equity as a reduction.
Investing Activities: Acquisitions and sales of long-term assets appear in this section.
Depreciation: Allocates cost over time; doesn’t change the asset’s original cost.
a. Lance invested $50,000 in the business, which issued common stock to him
Debit: Cash $50,000
Credit: Common Stock $50,000
b. The business purchased equipment on account for $10,000.
Debit: Equipment $10,000
Credit: Accounts Payable $10,000
c. The business provided engineering services on account, $15,000.
Journal Entry:
Debit: Accounts Receivable $15,000
Credit: Service Revenue $15,000
d. The business paid salary to the receptionist.
Journal Entry:
Debit: Salary Expense $3,000
Credit: Cash $3,000
e. The business received cash from a customer as payment on account $10,000.
Journal Entry:
Debit: Cash $10,000
Credit: Accounts Receivable $10,000
f. The business borrowed $20,000 from the bank, issuing a note payable.
Journal Entry:
Debit: Cash $20,000
Credit: Notes Payable $20,000