FMGT 1105 Final Review: Transactions, Adjusting Entries, Financial Statements and Merchandising

Terms in this set (32)

1. State the basic accounting equation.Assets = Liabilities + Equity. Every transaction keeps the equation in balance.
2. Which account types increase with a debit and which with a credit?Debits increase assets, expenses and drawings (or dividends). Credits increase liabilities, equity (capital or share capital) and revenues.
3. What is an account's normal balance?The side on which it increases: debit for assets, expenses and drawings or dividends; credit for liabilities, equity and revenues. Accumulated depreciation, a contra-asset, has a credit normal balance.
4. Journalize: the owner invests $10,000 cash in a proprietorship.Debit Cash 10,000; credit Owner's Capital 10,000. For a corporation issuing shares, the credit is to Common Shares (share capital).
5. Journalize: supplies are bought on account for $500.Debit Supplies 500; credit Accounts Payable 500. No expense is recorded until the supplies are used.
6. When is revenue recognized under accrual accounting?When it is earned, meaning the goods or services have been provided to the customer, regardless of when cash is received.
7. What is the expense recognition (matching) principle?Expenses are recorded in the same period as the revenues they helped generate, not necessarily when cash is paid.
8. Accrual basis vs cash basis accountingAccrual basis records revenues when earned and expenses when incurred. Cash basis records them only when cash changes hands. ASPE requires the accrual basis.
9. Name the four main types of adjusting entries.Prepaid expenses (and depreciation), unearned revenues, accrued revenues and accrued expenses. Adjusting entries never involve the Cash account.
10. On Oct 1 a company pays $1,200 for 12 months of insurance. Give the Dec 31 adjusting entry.Three months have expired: 3/12 × 1,200 = 300. Debit Insurance Expense 300; credit Prepaid Insurance 300.
11. A customer paid $6,000 in advance for 6 months of service; 2 months are now done. Adjusting entry?2/6 × 6,000 = 4,000 earned. Debit Unearned Revenue 4,000; credit Service Revenue 4,000.
12. Employees earned $2,000 of wages by year-end that will be paid next month. Adjusting entry?Debit Salaries (Wages) Expense 2,000; credit Salaries (Wages) Payable 2,000. This is an accrued expense.
13. Straight-line depreciation: equipment costs $50,000, residual value $5,000, life 5 years. Annual depreciation?(50,000 − 5,000) / 5 = 9,000 per year. Debit Depreciation Expense 9,000; credit Accumulated Depreciation 9,000.
14. What is book value (carrying amount)?Cost minus accumulated depreciation. It is not the asset's market value.
15. What does a trial balance prove, and what can't it detect?It shows total debits equal total credits. It won't catch a transaction that was never recorded, an entry posted to the wrong account on the correct side, or equal offsetting errors.
16. In what order are the financial statements prepared, and why?Income statement first (gives net income), then the statement of owner's equity or retained earnings (uses net income), then the balance sheet (uses ending equity).
17. What are closing entries for?They reset temporary accounts (revenues, expenses, and drawings or dividends) to zero and transfer their balances, through Income Summary, to Owner's Capital or Retained Earnings.
18. Temporary vs permanent accountsTemporary (nominal) accounts are closed each period: revenues, expenses, drawings or dividends. Permanent (real) accounts carry their balances forward: assets, liabilities and equity.
19. What appears on a post-closing trial balance?Only permanent accounts (assets, liabilities and equity), because every temporary account now has a zero balance.
20. List the main steps of the accounting cycle.Analyze transactions, journalize, post to the ledger, prepare a trial balance, journalize and post adjusting entries, prepare an adjusted trial balance, prepare financial statements, close the books, prepare a post-closing trial balance.
21. What is the purpose of a worksheet?An optional working tool that lays out the trial balance, adjustments and adjusted trial balance in columns, then sorts amounts into income statement and balance sheet columns to help prepare statements.
22. Current vs non-current assets and liabilitiesCurrent items are expected to be converted to cash, used up or paid within one year or the operating cycle, whichever is longer. Everything else is non-current, e.g., equipment or a 5-year loan.
23. Perpetual vs periodic inventory systemsPerpetual systems update Inventory and Cost of Goods Sold with every purchase and sale. Periodic systems record purchases in a Purchases account and work out COGS only at period end from a physical count.
24. Under a perpetual system, journalize a $1,000 credit sale of goods that cost $600.Debit Accounts Receivable 1,000; credit Sales 1,000. Also debit Cost of Goods Sold 600; credit Inventory 600.
25. How are net sales and gross profit calculated?Net sales = Sales − Sales returns and allowances − Sales discounts. Gross profit = Net sales − Cost of goods sold.
26. Terms 2/10, n/30 on a $1,000 invoice: how much does the buyer pay if paying within 10 days?The buyer takes a 2% discount and pays $980. Otherwise the full $1,000 is due within 30 days.
27. FOB shipping point vs FOB destinationFOB shipping point: the buyer owns the goods and pays freight once they leave the seller. FOB destination: the seller owns them and pays freight until they reach the buyer.
28. Periodic system: how is cost of goods sold calculated?COGS = Beginning inventory + Cost of goods purchased − Ending inventory. Cost of goods purchased = Net purchases + Freight in.
29. Compare proprietorships, partnerships and corporations.A proprietorship has one owner and a partnership two or more, and the owners usually have unlimited personal liability. A corporation is a separate legal entity owned by shareholders, who have limited liability.
30. Name four principles of internal control.Establishing responsibility, segregation of duties, documentation procedures, physical controls, independent checks of performance and human resource controls (any four).
31. Economic entity, going concern and monetary unit assumptionsEconomic entity: business records are kept separate from the owner's personal affairs. Going concern: the business is assumed to continue operating. Monetary unit: only items measurable in money are recorded.
32. What are the two fundamental qualitative characteristics of useful financial information?Relevance (it can make a difference to decisions) and faithful representation (it is complete, neutral and free from material error).