D072 FUNDAMENTALS FOR SUCCESS IN BUSINESS STUDY QUESTIONS WITH 100% CORRECT ANSWERS 2024 L, Exams of Financial Accounting

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D102 FINANCIAL ACCOUNTING (

QUESTIONS AND ANSWERS 100%

CORRECT 2024 UPDATED GRADED

100% PA SS(ACTUAL EXAM)

Balance Sheet - Solution A listing of an organization's assets and of its liabilities at a certain time. Assets - Solution Economic Resources that are owned and controlled by a company Liabilities - Solution The economic obligations of a company, composed primarily of the money or services that the company owes to its creditors. Owner's Equity - Solution The residual interest in the assets that remain of an entity after its liabilities have been deducted. Owner's equity is the difference between total assets and total liabilities Stockholders - Solution Those who own a corporation by owning shares of stock in that corporation; also called shareholders. Stockholder's equity - Solution A term used to describe the owner's equity section of the balance sheet. Dividends - Solution Payments made by a company to owners of the company's stock Current assets - Solution Cash, accounts, and inventory Long-term investments - Solution Those assets you expect to still be around next year when you prepare the balance sheet again. Property, Plant, and Equipment - Solution Land, buildings, machinery, tools, furniture, fixtures, and vehicles used by a company in conducting its business activities

Accumulated depreciation - Solution Reflects the wear and tear, or depreciation of items since they were originally purchased. Current Liabilities - Solution Those obligations expected to be paid within one year, the most common being accounts payable. long-term liabilities - Solution Obligations that are not expected to be paid within a year. Traditional loans, bonds, loans structured as leases, deferred income taxes, employee pensions. Stockholder's Equity - Solution The difference between assets and liabilities of a corporation. additional paid-in capital - Solution Capital invested by stockholders that exceeds the par value of the issued share. Preferred stock - Solution Stockholder's equity investment Treasury stock - Solution The repurchased shares when a company buys back its own shares. Classified balance sheet - Solution Shows current and long term assets Revenue - Solution The value of goods and services provided by a company in its business operations. Sales revenue, service revenue, interest revenue, other revenue such as brand names, logos, food prep systems etc. Expenses - Solution The value of resources used in generating the reported revenue Gross profit - Solution The profit a company makes after deducting the costs associated with making and selling its products, or the other costs associated with providing its services. Gross Profit Percentage - Solution The margin earned (as a percentage) on a product or service after applying the total production cost to the revenue earned.

To compute: gross profit divided by sales Types of expenses on income statement - Solution COGS, Selling, general, and administrative expenses Research and Development expense Wages and Salaries Expense(includes employee benefits, such as pensions, employer paid healthcare and so on. Bad debt expense Depreciation expense Interest expense Income tax expense Single step income statement - Solution All revenues are grouped together, all expenses are grouped together, and net income is computed as the difference between total revenues and total expenses. multiple-step income statement - Solution A statement format that emphasizes the presentation of gross profit and operating income. Highlights: Gross margin, operating income, operating profit. See notes Consolidated financial statements - Solution Statement that combines the financial results of a "parent company" with other companies that it owns, called subsidiaries. Net Income (net loss) - Solution The difference between revenues and expenses. Total revenues - total expenses= net income Earnings Per Share (EPS) - Solution A company's net income divided by the number of outstanding shares held by shareholders. Two EPS figures reported by Delta in the book - basic and diluted. Basic is based on the number of shares actually outstanding. Diluted EPS is based on the shares that could be outstanding if stock options were exercised. Statement of Cash Flows - Solution Short term, highly liquid investments such as Treasury bills, commercial paper, and money market funds.

3 categories of cash flows: - Solution Operating activities, investing activities, financing activities Operating Activities - Solution All transactions relating to a company's delivering or producing its goods for sale and providing its services. Investing activities - Solution Cash inflows and outflows from 1) acquiring and selling productive assets such as PPE 2) acquiring and selling investment securities; and 3) lending money and collecting on those loans. Financing Activities - Solution Obtaining resources from owners and providing them a return on their investment; obtaining resources from creditors and repaying those borrowings. Operating Activities - Solution Cash receipts for - Sales of goods services, sale of trading securities, interest revenue, dividend revenue Cash payments for - Inventory purchases, wages and salaries, taxes, interest expense, other expense (utilities, rent) purchase of trading securities Investing Activities - Solution Cash receipts - sale of plant assets, same of business segment, sale of non-trading securities, collection of principle on loans Cash payments for - purchase of plant assets, purchase of non-trading securities, making loans to other entities. Financing activities - Solution Cash receipts from - issuance of stock, borrowing (bonds, notes, mortgages) Cash payments for - Cash dividends, repayment of loans, repurchase of stock (treasury stock) Articulation - Solution The interrelationship among the financial statements. How the three primary financial statements tie together. Two specific interactions:

1. The income statement helps explain the change in the retained earnings balance in the balance sheet.
2. The statement of cash flows explains the change in the cash balance in the balance sheet. Exchange Transactions - Solution Buying and selling goods and services, borrowing and investing money, paying wages to employees, purchasing land, buildings, equipment, distributing earnings to owners, paying taxes to government Business Documents - Solution Records of transactions used as the basis for recording accounting entries; include invoices, check stubs, and similar business papers. Accounting Cycle - Solution 1. Analyze transactions
3. Record the effects of transactions
4. Summarize the effects of transactions

• posting journal entries
• preparing a trial balance

4. Prepare reports -adjusting entries

• preparing financial statements
• closing the books Two Rules: Double Entry Accounting system - Solution 1. Debits - assets are increased on the left

2. Liabilities are the opposite of T account - Solution A simplified depiction of an account in the form of a letter T. Debit (up) left side of page Credit (down) right side of page Debit (Dr) - Solution An entry on the left side of a T-account Credit (CR) - Solution an entry on the right side of a T-account

Debits and credits for asset accounts - Solution Typically have debit balances. Debits increase, credits decrease. Debits and credits for liability accounts - Solution Typically have credit balances. Debits decrease and credits increase. Debits and credits of retained earnings - Solution Increase with a credit, decrease with a debit Transaction analysis - Solution The process of determining how an economic event impacts the financial statements. Executory Contract - Solution It's an exchange of promises about the future Assets can be acquired in 4 ways - Solution 1. In exchange for another asset

2. By borrowing money to buy the asset
3. By owners investing the money to buy the asset
4. By generating the asset in the normal course of business by providing value to a customer Assets can be used, or given away, in 4 basic ways: - Solution 1. In exchange for another asset
5. In repayment of a loan
6. In returning assets to owners, such as through dividends
7. By consumption of the asset in the normal course of business in the process of providing value to a customer. Expanded Accounting Equation - Solution Assets = liabilities + Paid in Capital + (Revenues - Expenses - Dividends) Revenue transactions - Solution Those that involve the creation of assets through business operations. Can be cash, credit, or accounts receivable. Ledger - Solution A book of accounts in which data from transactions recorded in journals are posted and thereby summarized. Journal - Solution An accounting record in which transactions are first entered; provides a chronological record of all business activities.

Posting - Solution The process of transferring amounts from the journal to the ledger Journalizing - Solution Recording transactions in a journal Journal entry - Solution A recording of a transaction where debits equal credits; usually includes a date and an explanation of the transaction Journal entry 3 step process - Solution 1. Identify which accounts are involved - assets, liability, owners equity

2. For each account, determine if increased or decreased - debit or credit
3. For each account, determine how much it has changed - completes journal entry. Compound journal entry - Solution A journal entry that involves more than one debit or more than one credit or both Trial balance - Solution A listing of all account balances; provides a means of testing whether total debits equal total credits for all Accounts. Chart of Accounts - Solution A systematic listing of all accounts used by a company. Normal order of chart accounts assets, then liabilities, followed by owner's equity General Accepted Accounting Principles (GAAP) - Solution A common set of accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Accrual Accounting - Solution The process of recording expense and revenues when incurred and earned, regardless of when cash is received, and of adjusting original transaction data into refined measures of a firm's past economic performance and current economic condition. Time Period Concept - Solution The idea that the life of a business is divided into distinct and relatively short time periods so that accounting information can be timely.

Fiscal year - Solution An entity's reporting year, covering a 12 month accounting period Calendar year - Solution An entity's reporting year, from January 1 to December 31 Accrual Basis Accounting - Solution A system of accounting in which revenues and expenses are recorded as they are earned and incurred, not necessarily when cash is received or paid. Revenue Recognition Principle - Solution The idea that revenue should be recorded when 1) the earnings princess had been substantially completed and 2) cash has either been collected or collectibility is reasonably assured. Matching Principle - Solution The concept that all costs and expenses incurred in generating revenues must be recognized in the same reporting period as the related revenues. Cash Basis Accounting - Solution A system of accounting in which transactions are recorded and revenues and expenses are recognized only when cash is received or paid. Adjusting entries - Solution Entries required at the end of each accounting period to recognize, on an accrual basis, revenues and expenses for the period and to report proper amounts of asset, liability, and owner's equity accounts. 3 steps for adjusting entries - Solution 1. Fix the balance sheet

2. Fix the income statement
3. Make sure your entry does NOT include cash four types of adjusting entries - Solution Unrecorded receivables Unrecorded liabilities Prepaid expenses Unearned revenues unrecorded receivables - Solution revenues earned during a period that have not been recorded by the end of that period

unrecorded liabilities - Solution expenses incurred during a period that have not been recorded by the end of that period prepaid expenses - Solution payments made in advance for items normally charged to expense Unearned Revenues - Solution cash amounts received before they have been earned. nominal accounts - Solution accounts that are closed to a zero balance at the end of each accounting period; temporary accounts generally appearing on the income statement (revenues, expenses, and dividends - subcategories if retained earnings) real accounts - Solution accounts that are not closed to a zero balance at the end of each accounting period; permanent accounts appearing on the balance sheet (assets, liabilities, and owner's equity). Closing entries - Solution Entries that reduce all nominal (temporary) accounts to a zero balance at the end of each accounting period, transferring their preclosing balances to a permanent balance sheet account 3 steps for closing entries - Solution 1. Separate nominal accounts from real accounts

2. Debit or credit each nominal account to make balance = 0
3. Corresponding debit or credit to retained earnings post-closing trial balance - Solution A listing of all real accounts balances after the closing process has been completed; tests whether total debits equal total credits for all real accounts prior to beginning a new accounting cycle. Ending retained earnings balance - Solution Beginning retained earnings + Net Income - Dividends Control environment - Solution the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity

organizational structure - Solution Lines of authority and responsibility Audit Committee - Solution Members of a company's board of directors who are responsible for dealing with the external and internal auditors. Control Activities - Solution Policies and procedures used by management to meet their objectives. Control Procedures - Solution Policies and procedures used by management to meet their objectives Preventative controls - Solution Internal control activities that are designed to prevent the occurrence of errors and fraud. Control activities fall into five categories: - Solution - Segregation of duties

• proper procedures for authorization
• Physical control over assets and records
• Adequate documents and records
• Independent checks on performance First 3 are preventative controls Last two are detective controls Detective controls - Solution Internal control activities that are designed to detect the occurrence of errors and fraud. Segregation of Duties - Solution A strategy to provide and internal check on performance through separation of authorization of transactions from custody of related assets, operational responsibilities from record keeping responsibilities, and custody of assets from accounting personnel. The following functions should be performed by separate departments of people when possible: - Solution 1. Authorization - authorizing and approving execution of transactions 2.Record Keeping - recording the transactions in accounting records.

3. Custody of assets - having physical possession of control over the assets involved in transactions.

Physical safeguards - Solution Physical precautions used to protect assets and records. independent checks - Solution Procedures for continual internal verification of other controls. cash - Solution Coins, currency, money orders, checks, and funds on deposit with financial institutions Cash collection - Solution The recovery of cash from a business or individual with which you have previously entered into a transaction Control of cash: - Solution Separation of duties Daily Cash deposits Pre-numbered checks NSF (not sufficient funds) checks - Solution A check that is not honored by a bank because of insufficient cash in the check writer's account bank reconciliation - Solution The process of systematically comparing the cash balance as reported by the bank with the cash balance on the company's books and explaining any differences Revenue recognition - Solution The process of recording revenue in the accounting records; occurs after the work has been substantially completed and cash collection is reasonably assured. Revenue is recognized when two important criteria have been met: - Solution 1. The work has been substantially completed (the company has done something)

2. Cash, or a valid promise of future payment, has been received (the company has received something in return) sales discounts - Solution A reduction in the selling price if payment is received within a specific period. contra account - Solution An account that is offset or deducted from another account Recorded like - 2/10, n30 - two ten net thirty

If you pay in 10 days you get 2% off 2/10, n/EOM - two ten, net end of month If you decide not to take the discount, you have to at least pay by the end of the month Sales Returns and Allowances account - Solution A contra-revenue account in which the return of, or allowance for reduction in the price of, merchandise previously sold is recorded Gross sales - Solution total recorded sales before sales discounts and sales returns and allowances. Net sales - Solution Gross sales less sales discounts and returns and allowances Receivables - Solution Claims for money, goods, or services Accounts receivables - Solution A current asset representing money due for services performed or merchandise sold on credit. Bad debts - Solution An uncollectable account receivable Bad debt expense - Solution An account that represents the portion of the current period's credit sales that are estimated to be in collectible. Direct write off method - Solution the recording of actual losses from uncollectible accounts as expenses during the period in which accounts receivable are determined to be uncollectible. Violates the matching principle allowance for bad debts - Solution A contra account, deducted from accounts receivable, that shows the estimated losses from uncollectible accounts. Amount reported for sales in the income statement is computed as follows:

• Solution Gross sales Less: sales discounts Less: sales returns and allowances

= net sales Amount reported for accounts receivables in the balance sheet is computed as follows: - Solution Gross accounts receivables Less: allowance for bad debts = net accounts receivables FIFO - Solution first in first out An inventory cost flow assumption whereby the first goods purchased are assumed to be the first goods sold so that the ending inventory consists of the most recently purchased goods. LIFO - Solution last in first out An inventory cost flow assumption whereby the last goods purchased are assumed to be the first goods sold so that the ending inventory consists of the first goods purchased. LIFO provides higher COGS and lower net income than FIFO because the newest goods are assumed to have been sold. Cost of goods sold - Solution The costs incurred to purchase or manufacture the merchandise sold during a period. Raw materials - Solution Materials purchased for use in manufacturing products. Work in process - Solution Partially completed units in production Finished foods - Solution Manufactured products ready for sale Manufacturing overhead - Solution The indirect manufacturing costs associated with producing inventory. FOB destination (free on board( - Solution A business term meaning that a seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Ownership transfers at destination. Reported on balance sheet of seller.

FOB shipping point (free on board) - Solution A business term meaning that the buyer of merchandise bears the shipping costs and acquires ownership at the point of shipment. Ownership transfers at the shipping point. Reported on balance sheet of buyer. consignment - Solution An arrangement whereby merchandise owned by one party, the consign or, is sold by another party, the consignee, usually on a commission basis. Consignor - owner doesn't have Consignee - doesn't own, has Perpetual inventory system - Solution A system accounting for inventory in which detailed records of the number of units and the cost of each purchase and sales transactions are prepared throughout the accounting period. -Inventory records are updated whenever a purchase or sale

• More often used when individual inventory item has relatively high value or when there are large costs to running out of or overstocking specific items. Periodic inventory system - Solution A system for inventory in which cost of goods sold is determined and inventory is adjusted at the end of the accounting period, not when merchandise is purchased or sold.
• used when inventory comprises a large number of diverse items, each with a relatively low value
• used in small businesses
• when speed is crucial
• temporary holding account freight in is created - see page 18 notes Freight in - Solution The shipping cost to be paid by the buyer of merchandise purchased when the terms are FOB shipping point. Purchase return - Solution when unsatisfactory merchandise purchased by a buyer is returned to the supplier

Purchase discount - Solution When a retailer gets a reduction from their wholesalers for paying quickly Purchase allowances - Solution Occur when a company purchases inventory that somehow doesn't meet expectations. Also payment reduction for incorrectly shipped goods etc. Inventory shrinkage - Solution The amount of inventory that is lost, stolen, or spoiled during a period, Obsolescence - Solution A notable decrease in the worth or utility of an inventory item; typically results in a write-down of the inventory item to reflect its reduced value. Period system equation - Solution Beginning inventory + purchased = Cost of goods available for sale - ending inventory = COGS Perpetual system equation - Solution Beginning inventory + Purchases = cost of goods for sale - perpetual system COGS = ending inventory predicted - ending inventory actual = cost of missing inventory Average - Solution An inventory cost flow assumption whereby cost of goods sold and the cost of ending inventory are determined by using an average cost of all merchandise available for sale during the period. Sell a mixture/COGS, keep a mixture/ending inventory. Cost of goods sold is computed by multiplying the number of units ending inventory by the average cost per unit. Specific Identification - Solution A method of valuing inventory and determine cost of goods sold whereby the actual costs of specific inventory items are assigned to them. Inventory cost flow equation - Solution Beginning inventory + net purchases = goods available for sale - ending inventory = cost of goods sold Property, Plant, and Equipment - Solution Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business.

intangible assets - Solution Long lived assets without physical substance that are used in business that include licenses, patents, franchises, and goodwill Research - Solution An activity undertaken by a company to discover new knowledge that will be useful in developing new products, services, or processes as a part of a company's larger (R&D) activities. Development - Solution The application of a company's research and findings to develop a plan or design for new or improved products and processes as part of a company's larger (R&D activities). Depreciation - Solution The process of cost allocation that assigns the original cost of plant and equipment to the period benefitted Book value - Solution For a long term operating asset, the asset's original cost less any accumulated depreciation Original cost - Solution the cost at which an asset is recorded on the books of a company estimated useful life - Solution The life over which it is estimated that an asset will be used by a company Salvage value - Solution The amount expected to be received when an asset is sold at the end of its useful life straight-line depreciation method - Solution the depreciation method in which the cost of an asset is allocated equally over the periods of an asset's estimated useful life Formula for calculating straight line depreciation - Solution (Cost - salvage value) /estimated useful life (years)= annual depreciation expense The declining balance method - Solution An accelerated depreciation method in which an asset's book value is multiplied by a constant depreciation rate (such as double the straight line percentage, in the case of double declining balance).

Intangible assets - Solution Rights and privileges that are long lived, are not held for resale, have no physical substance, and usually provide their owner with competitive advantages over the firms. Trademark - Solution A distinctive name, symbol, or slogan that distinguishes a product from similar products or services. Patent - Solution An exclusive right granted by the government to the owner of a product, process, or idea. Franchise agreement - Solution An exclusive right or privilege received by a business or individual to perform certain functions or sell certain products or services Amortization - Solution The process of cost allocation that assigns the original cost of an intangible asset to the periods benefited. Amortization is depreciation for intangible assets Social security (FICA) taxes - Solution Federal Insurance Contributions Act taxes imposed on the employee and the employer; used mainly to provide retirement benefits FICA is SS and Medicare together. Bonus - Solution Additional compensation beyond the regular compensation that is paid to employees if certain objectives are achieved. Sales tax - Solution A tax imposed by the government on the sale of goods and services Property taxes - Solution Taxes imposed by county or city governments on land, buildings, and other company assets Contingency - Solution Circumstance involving potential losses or gains that will not be resolved until some future event occurs. Contingent liabilities - Solution Probable - the future event is likely to occur. Estimate the amount of the contingency and make the appropriate journal entry; provide detailed disclosure in the notes.

Reasonably possible - the chance of the future event occurring is more than remote but less than likely - provide detailed disclosure of the possible liability in the notes Remote - the chance of the future event occurring is slight - no disclosure required. Record the expense as a debit, the liability as a credit on balance sheet Present Value of $1 - Solution the value today of $1 to be received or paid at some future date, given a specified interest rate Present value - what the amount is worth right now Future value - that amount that will be received (or paid) in the future. Discount - Solution The process of converting future values into present values. Compound interest - Solution Interest earned on your interest Promissory note - Solution An agreement under which the borrower promises to pay back the principal amount with interest over a redetermined time period. 3 different types of financing - Solution Notes payable, mortgages, bank loans Mortgage payable - Solution A written promise to pay a stated amount of money at one or more specified future dates; certain assets, usually real estate, are pledged as collateral. Usually relate to a specific asset like a home. Interest bearing notes - Solution Long term liabilities like bank loans and promissory notes 3 sources of financing used by a company to get the money it needs to buy assets: - Solution Borrowed money, direct shareholder investment, and retained earnings

Initial Public Offering (IPO) - Solution The first time a private company publicly offers shares of its stock on the open market; this is sometimes reverted to as going public. Prospectus - Solution A report provided to potential investors that represents a company's financial statements and explains its business plan, sources of financing, and significant risks. Benefits of going public - Solution Easier to raise capital Liquid market for shareholders Prestige Costs of going public - Solution Increased regulation (SEC scrutiny) Increased , impatient scrutiny by analysts and investors Loss of control Stockholders - Solution Individuals or organizations that own a portion (shares of stock) of a corporation Board of directors - Solution Individuals elected by the stockholders to govern a corporation Corporate charter - Solution A written document filed by the founders of a corporation with the state in which the corporation is registered. It details the major components of a company, such as its objectives, structure, and planned operations Common stock - Solution The most frequently issued class of stick; typically provides voting rights but is secondary to preferred stock in dividend and liquidation rights. Preferred stock - Solution A class of stock that usually provides dividend and liquidation preferences over common stock. Convertible preferred stock - Solution preferred shares that can be converted by the shareholders to common stock at a specified conversion rate Par value - Solution The stated value or face value of a share of stock

Has little to do with market value. When it sells at a price above par it is said to sell at a premium. Illegal to sell below par value in most states. Contributed capital - Solution the portion of owners' equity contributed by investors (the owners) in exchange for shares of stock Dividends - Solution Distributions to the owners (stockholders) of a corporation. Cash dividends - Solution A cash distribution of earnings to stockholders Declaration date - Solution The date on which a corporation's board of directors formally decides to pay a dividend to stockholders. A company becomes legally obligated to pay There's a journal entry Debit to dividends - credit to dividends payable Date of record - Solution The date selected by a corporation's board of directors on which the stockholders of record are identified as those who will receive dividends. No journal entry required Dividend payment date - Solution The date on which a corporation pays dividends to its stockholders. Board of directors vote and commit to paying on a certain date There's a journal entry.