ACG 2021 Exam Review: Accounting Cycle, Inventory, Receivables and Financial Statements

Terms in this set (30)

1. State the basic accounting equation.Assets = Liabilities + Stockholders' Equity. Every transaction keeps it in balance.
2. Normal balances of the account typesDebit: assets, expenses, dividends. Credit: liabilities, equity (common stock, retained earnings) and revenues.
3. A company buys $5,000 of equipment on account. Journal entry?Debit Equipment 5,000; Credit Accounts Payable 5,000. Assets and liabilities both rise.
4. What does the revenue recognition principle require?Revenue is recognized when the performance obligation is satisfied (goods or services delivered), not necessarily when cash is received.
5. 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.
6. What is the expense recognition (matching) principle?Expenses are recorded in the same period as the revenues they helped generate.
7. Four types of adjusting entriesPrepaid expenses (deferral), unearned revenues (deferral), accrued revenues, and accrued expenses. Adjusting entries never involve cash.
8. Adjusting entry for $300 of supplies used during the periodDebit Supplies Expense 300; Credit Supplies 300.
9. What type of account is Unearned Revenue?A liability: cash received before the service is performed. When earned, debit Unearned Revenue and credit Service Revenue.
10. What is accumulated depreciation?A contra-asset account with a credit balance subtracting total depreciation to date from an asset's cost. Cost minus accumulated depreciation equals book value.
11. Order in which the financial statements are prepared, and whyIncome statement, then retained earnings statement (needs net income), then balance sheet (needs ending retained earnings), then statement of cash flows.
12. Retained earnings roll-forward formulaEnding RE = Beginning RE + Net income - Dividends.
13. Which accounts are closed at period end?Temporary accounts (revenues, expenses, dividends) are closed to Retained Earnings. Permanent balance sheet accounts are not closed.
14. Straight-line depreciation formula(Cost - Salvage value) / Useful life. Example: (50,000 - 5,000)/9 years = 5,000 per year.
15. Double-declining-balance depreciationRate = 2 / useful life, applied to beginning book value each year (ignore salvage in the rate, but don't depreciate below salvage).
16. Cost of goods sold formula (periodic)COGS = Beginning inventory + Purchases - Ending inventory.
17. In a period of rising prices, which method gives higher net income: FIFO or LIFO?FIFO, because older, cheaper costs go to COGS, leaving lower expenses and higher ending inventory. LIFO gives higher COGS and lower taxes.
18. Units: 10 at $4, then 10 at $6. 12 sold. COGS under FIFO?FIFO uses oldest first: 10 x $4 + 2 x $6 = $52.
19. What is the lower of cost and net realizable value rule?If inventory's net realizable value falls below cost, write it down to NRV, recognizing a loss in the current period.
20. Allowance method for bad debts: entry to estimate uncollectible accountsDebit Bad Debt Expense; Credit Allowance for Doubtful Accounts. Net realizable value = Accounts Receivable - Allowance.
21. Under the allowance method, what entry writes off a specific bad account?Debit Allowance for Doubtful Accounts; Credit Accounts Receivable. It does not affect expense or net realizable value.
22. Gross profit and gross marginGross profit = Net sales - COGS. Gross margin (gross profit rate) = Gross profit / Net sales.
23. What is a bank reconciliation, and name one item that adjusts the book side.It explains differences between the bank statement and the company's cash balance. Book-side items include bank service charges, NSF checks and interest earned.
24. Name two key internal control principles.Segregation of duties (no one person handles a transaction from start to finish) and establishing responsibility; others include documentation and independent verification.
25. Bonds issued at a discount: what does it mean?The stated rate is below the market rate, so the bonds sell below face value. The discount is amortized, raising interest expense above cash interest.
26. What happens to equity in a 2-for-1 stock split?Shares outstanding double and par value per share halves; total equity and each account balance are unchanged.
27. Three sections of the statement of cash flowsOperating activities (core business), investing activities (buying/selling long-term assets and investments), and financing activities (debt, stock, dividends).
28. Under the indirect method, how is depreciation treated in operating cash flow?It is added back to net income because it reduced net income but used no cash.
29. Current ratio formula and meaningCurrent assets / Current liabilities; it measures short-term liquidity. A ratio above 1 means current assets exceed current liabilities.
30. Is paying dividends an expense?No. Dividends are a distribution of retained earnings to owners; they reduce equity but never appear on the income statement.

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