ACG 2021 Exam Review: Accounting Cycle, Financial Statements, Assets and Liabilities

Terms in this set (30)

1. State the basic accounting equation.Assets = Liabilities + Equity. Every transaction keeps this equation in balance.
2. Expanded accounting equation for a corporationAssets = Liabilities + Common Stock + Retained Earnings, where retained earnings increase with revenues and decrease with expenses and dividends.
3. Normal balances: which accounts increase with a debit?Debits increase assets, expenses and dividends. Credits increase liabilities, equity (stock and retained earnings) and revenues.
4. Journal entry: company performs services for $500 on account.Debit Accounts Receivable $500; credit Service Revenue $500.
5. Journal entry: pays $1,200 cash for a one-year insurance policy in advance.Debit Prepaid Insurance $1,200; credit Cash $1,200. It is an asset until used.
6. List the steps of the accounting cycle in order.Analyze transactions, journalize, post to the ledger, prepare an unadjusted trial balance, make adjusting entries, prepare an adjusted trial balance, prepare financial statements, close temporary accounts, prepare a post-closing trial balance.
7. Revenue recognition principle vs expense recognition (matching) principleRevenue is recognized when the performance obligation is satisfied, not when cash is received. Expenses are recorded in the same period as the revenues they help generate.
8. Accrual vs cash basis accountingAccrual basis records revenues when earned and expenses when incurred (required by GAAP). Cash basis records them only when cash changes hands.
9. Name the four types of adjusting entries.Prepaid expenses (deferred expenses), unearned revenues (deferred revenues), accrued revenues and accrued expenses.
10. Adjusting entry: $300 of employee wages earned but not yet paid at year-end.Debit Wages Expense $300; credit Wages Payable $300.
11. Adjusting entry: $2,000 of previously collected unearned revenue is now earned.Debit Unearned Revenue $2,000; credit Service Revenue $2,000.
12. Which accounts are closed at period end and where do they go?Temporary accounts (revenues, expenses, dividends) are closed, ultimately to Retained Earnings. Balance sheet accounts are permanent and not closed.
13. In what order are the four main financial statements prepared, and why?Income statement, statement of retained earnings, balance sheet, statement of cash flows. Net income feeds retained earnings, which feeds the balance sheet.
14. Three sections of the statement of cash flowsOperating activities (day-to-day business), investing activities (buying or selling long-term assets) and financing activities (debt, issuing stock, paying dividends).
15. What is the difference between current and long-term assets?Current assets are expected to be converted to cash or used within one year or the operating cycle, whichever is longer; long-term assets last beyond that.
16. Allowance method: what is the entry to write off a specific uncollectible account?Debit Allowance for Doubtful Accounts; credit Accounts Receivable. It does not affect expense or net realizable value at write-off.
17. FIFO vs LIFO when prices are risingFIFO assigns older, cheaper costs to COGS, giving lower COGS and higher net income and ending inventory. LIFO gives higher COGS, lower net income and lower taxes.
18. Cost of goods sold formulaCOGS = Beginning Inventory + Purchases - Ending Inventory.
19. Gross profit vs net incomeGross profit = Net Sales - Cost of Goods Sold. Net income = all revenues minus all expenses, including operating expenses, interest and taxes.
20. Straight-line depreciation formulaAnnual depreciation = (Cost - Salvage Value) / Useful Life.
21. Equipment costs $50,000, salvage $5,000, life 5 years. Straight-line depreciation?(50,000 - 5,000) / 5 = $9,000 per year.
22. What is book value of a long-term asset?Book (carrying) value = Cost - Accumulated Depreciation.
23. How is depreciation recorded?Debit Depreciation Expense; credit Accumulated Depreciation, a contra-asset account.
24. Bond issued at a discount vs premiumDiscount: the bond's stated rate is below the market rate, so it sells below face value. Premium: the stated rate is above the market rate, so it sells above face value.
25. Simple interest formula for a note payableInterest = Principal x Annual Rate x Time (fraction of a year). A $10,000, 6 percent, 3-month note accrues 10,000 x 0.06 x 3/12 = $150.
26. Common stock vs preferred stockCommon stock usually carries voting rights and residual claim. Preferred stock gets priority for dividends and in liquidation but usually no vote.
27. Effect of a cash dividend on the accounting equationOn the declaration date, retained earnings decrease and dividends payable increase. On payment, cash and the liability both decrease.
28. Sole proprietorship vs corporation: key differencesA proprietorship has one owner with unlimited liability, and income is taxed to the owner. A corporation is a separate legal entity with limited liability for shareholders and its own income tax.
29. Formula for the current ratio and what it measuresCurrent ratio = Current Assets / Current Liabilities. It measures short-term liquidity.
30. Common pitfall: is a dividend an expense?No. Dividends are distributions of retained earnings to owners; they do not appear on the income statement.

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