ACG2021 part 2

• What organization makes accounting standards in the U.S.?

  The Financial Accounting Standards Board
• What are Generally Accepted Accounting Principles (GAAP)?

  Rules for financial reporting in the U.S.
• What is the correct answer regarding the truth of the statements about FASB and GAAP?

  Both statements are true
• What is the role of the Securities Exchange Commission (SEC)?

  Oversees U.S. financial markets and accounting standards
• How are financial statements interrelated?

  Results on one statement become inputs for others
• What does net income from the income statement affect?

  It is used in the retained earnings statement
• What happens to total assets if total liabilities decrease by $15,000 and stockholders' equity increases by $5,000?

  Total assets decrease by $10,000
• What is the accounting equation?

  Assets = Liabilities + Stockholders' Equity
• Which accounts are increased with credits?

  Common Stock and Revenue
• What is the primary purpose of the trial balance?

  To prove the equality of debit and credit amounts
• What is a source document in accounting?

  Evidence of a transaction
• Which document is NOT a source document?

  A trial balance prepared at year-end
• What is the first step in the recording process?

  Analyze each transaction using source documents
• What is the effect of closing entries on retained earnings?

  They adjust retained earnings for revenues and expenses
• What is the difference between adjusted trial balance and post-closing trial balance?

  Retained earnings amounts differ between them
• What is included in the computation of net cash provided by operating activities?

  Payment of rent and cash received from customers
• What does liquidity refer to in accounting?

  A company's ability to meet short-term obligations
• What is the current ratio?

  A measure of liquidity
• How do you calculate the net cost of goods with a discount?

  Subtract discount from invoice price
• What does the term 3/10, n/30 mean?

  3% discount if paid within 10 days
• How is gross profit measured?

  Sales revenue minus cost of goods sold
• What is the formula for beginning inventory?

  Beginning inventory = Cost of goods sold + Ending inventory - Purchases
• What is the rationale for the lower-of-cost-or-market rule?

  Conservatism in financial reporting
• What does conservatism dictate in accounting?

  Report assets and income conservatively
• What are the steps in the recording process of accounting?

  1. Analyze each transaction using source documents
  2. Journalize the transaction
  3. Post the journal information to the ledger
• What are the interrelationships between financial statements?

  • Net income affects retained earnings
  • Ending retained earnings appear in the balance sheet
  • Cash flow statement cash must match balance sheet cash
• What is the purpose of a trial balance?

  • Lists accounts and balances at a point in time
  • Confirms total debits equal total credits
  • Prepares for financial statement preparation
• What is the difference between adjusted trial balance and post-closing trial balance?

  • Adjusted trial balance includes all adjustments
  • Post-closing trial balance reflects closing entries
  • Retained earnings differ between the two
• What are the components of a multiple-step income statement?

  • Revenues
  • Cost of goods sold
  • Gross profit
  • Operating expenses
  • Income from operations
  • Non-operating income/expenses
  • Net income
• What is the formula for calculating cost of goods sold?

  Beginning inventory + Purchases – Ending inventory
• If beginning inventory is $90,000 and purchases are $620,000, what is the ending inventory if cost of goods sold is $650,000?

  $60,000
• What principle underlies the lower-of-cost-or-market rule?

  Conservatism
• Why does conservatism affect inventory valuation?

  It prevents overstating assets and income
• What is the formula for calculating days' sales in inventory?

  365 days x Ending inventory / Cost of goods sold
• If a company has an ending inventory of $135,000 and cost of goods sold of $315,000, what is the days' sales in inventory?

  156.4 days
• What happens when ending inventory is overstated in a periodic inventory system?

  It results in an understatement of net income
• How does an overstatement of ending inventory affect the next accounting period?

  It leads to overstated cost of goods sold
• When is a receivable recorded by a service organization?

  When service is provided on account
• What is the bad debt expense if the allowance for doubtful accounts needs to be $24,000?

  $70,000
• How do you calculate the duration of a note if total interest is $3,400 and principal is $51,000 at 10%?


  8 months