Download D072 FUNDAMENTALS FOR SUCCESS IN BUSINESS STUDY QUESTIONS WITH 100% CORRECT ANSWERS 2024 L and more Exams Financial Accounting in PDF only on Docsity! D102 FINANCIAL ACCOUNTING (190 QUESTIONS AND ANSWERS 100% CORRECT 2024 UPDATED GRADED 100% PA SS(ACTUAL EXAM) Balance Sheet - SolutionA listing of an organization's assets and of its liabilities at a certain time. Assets - SolutionEconomic Resources that are owned and controlled by a company Liabilities - SolutionThe economic obligations of a company, composed primarily of the money or services that the company owes to its creditors. Owner's Equity - SolutionThe 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 - SolutionThose who own a corporation by owning shares of stock in that corporation; also called shareholders. Stockholder's equity - SolutionA term used to describe the owner's equity section of the balance sheet. Dividends - SolutionPayments made by a company to owners of the company's stock Current assets - SolutionCash, accounts, and inventory Long-term investments - SolutionThose assets you expect to still be around next year when you prepare the balance sheet again. Property, Plant, and Equipment - SolutionLand, buildings, machinery, tools, furniture, fixtures, and vehicles used by a company in conducting its business activities Accumulated depreciation - SolutionReflects the wear and tear, or depreciation of items since they were originally purchased. Current Liabilities - SolutionThose obligations expected to be paid within one year, the most common being accounts payable. long-term liabilities - SolutionObligations 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 - SolutionThe difference between assets and liabilities of a corporation. additional paid-in capital - SolutionCapital invested by stockholders that exceeds the par value of the issued share. Preferred stock - SolutionStockholder's equity investment Treasury stock - SolutionThe repurchased shares when a company buys back its own shares. Classified balance sheet - SolutionShows current and long term assets Revenue - SolutionThe 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 - SolutionThe value of resources used in generating the reported revenue Gross profit - SolutionThe 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 - SolutionThe margin earned (as a percentage) on a product or service after applying the total production cost to the revenue earned. 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 - SolutionBuying 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 - SolutionRecords of transactions used as the basis for recording accounting entries; include invoices, check stubs, and similar business papers. Accounting Cycle - Solution1. Analyze transactions 2. Record the effects of transactions 3. 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 - Solution1. Debits - assets are increased on the left 2. Liabilities are the opposite of T account - SolutionA 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) - SolutionAn entry on the left side of a T-account Credit (CR) - Solutionan entry on the right side of a T-account Debits and credits for asset accounts - SolutionTypically have debit balances. Debits increase, credits decrease. Debits and credits for liability accounts - SolutionTypically have credit balances. Debits decrease and credits increase. Debits and credits of retained earnings - SolutionIncrease with a credit, decrease with a debit Transaction analysis - SolutionThe process of determining how an economic event impacts the financial statements. Executory Contract - SolutionIt's an exchange of promises about the future Assets can be acquired in 4 ways - Solution1. 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: - Solution1. In exchange for another asset 2. In repayment of a loan 3. In returning assets to owners, such as through dividends 4. By consumption of the asset in the normal course of business in the process of providing value to a customer. Expanded Accounting Equation - SolutionAssets = liabilities + Paid in Capital + (Revenues - Expenses - Dividends) Revenue transactions - SolutionThose that involve the creation of assets through business operations. Can be cash, credit, or accounts receivable. Ledger - SolutionA book of accounts in which data from transactions recorded in journals are posted and thereby summarized. Journal - SolutionAn accounting record in which transactions are first entered; provides a chronological record of all business activities. Posting - SolutionThe process of transferring amounts from the journal to the ledger Journalizing - SolutionRecording transactions in a journal Journal entry - SolutionA recording of a transaction where debits equal credits; usually includes a date and an explanation of the transaction Journal entry 3 step process - Solution1. 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 - SolutionA journal entry that involves more than one debit or more than one credit or both Trial balance - SolutionA listing of all account balances; provides a means of testing whether total debits equal total credits for all Accounts. Chart of Accounts - SolutionA 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) - SolutionA common set of accounting principles, standards, and procedures that companies and their accountants must follow when they compile their financial statements. Accrual Accounting - SolutionThe 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 - SolutionThe idea that the life of a business is divided into distinct and relatively short time periods so that accounting information can be timely. organizational structure - SolutionLines of authority and responsibility Audit Committee - SolutionMembers of a company's board of directors who are responsible for dealing with the external and internal auditors. Control Activities - SolutionPolicies and procedures used by management to meet their objectives. Control Procedures - SolutionPolicies and procedures used by management to meet their objectives Preventative controls - SolutionInternal 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 - SolutionInternal control activities that are designed to detect the occurrence of errors and fraud. Segregation of Duties - SolutionA 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: - Solution1. 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 - SolutionPhysical precautions used to protect assets and records. independent checks - SolutionProcedures for continual internal verification of other controls. cash - SolutionCoins, currency, money orders, checks, and funds on deposit with financial institutions Cash collection - SolutionThe recovery of cash from a business or individual with which you have previously entered into a transaction Control of cash: - SolutionSeparation of duties Daily Cash deposits Pre-numbered checks NSF (not sufficient funds) checks - SolutionA check that is not honored by a bank because of insufficient cash in the check writer's account bank reconciliation - SolutionThe 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 - SolutionThe 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: - Solution1. 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 - SolutionA reduction in the selling price if payment is received within a specific period. contra account - SolutionAn 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 - SolutionA contra-revenue account in which the return of, or allowance for reduction in the price of, merchandise previously sold is recorded Gross sales - Solutiontotal recorded sales before sales discounts and sales returns and allowances. Net sales - SolutionGross sales less sales discounts and returns and allowances Receivables - SolutionClaims for money, goods, or services Accounts receivables - SolutionA current asset representing money due for services performed or merchandise sold on credit. Bad debts - SolutionAn uncollectable account receivable Bad debt expense - SolutionAn account that represents the portion of the current period's credit sales that are estimated to be in collectible. Direct write off method - Solutionthe 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 - SolutionA 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: - SolutionGross sales Less: sales discounts Less: sales returns and allowances Purchase discount - SolutionWhen a retailer gets a reduction from their wholesalers for paying quickly Purchase allowances - SolutionOccur when a company purchases inventory that somehow doesn't meet expectations. Also payment reduction for incorrectly shipped goods etc. Inventory shrinkage - SolutionThe amount of inventory that is lost, stolen, or spoiled during a period, Obsolescence - SolutionA 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 - SolutionBeginning inventory + purchased = Cost of goods available for sale - ending inventory = COGS Perpetual system equation - SolutionBeginning inventory + Purchases = cost of goods for sale - perpetual system COGS = ending inventory predicted - ending inventory actual = cost of missing inventory Average - SolutionAn 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 - SolutionA 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 - SolutionBeginning inventory + net purchases = goods available for sale - ending inventory = cost of goods sold Property, Plant, and Equipment - SolutionLong-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business. intangible assets - SolutionLong lived assets without physical substance that are used in business that include licenses, patents, franchises, and goodwill Research - SolutionAn 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 - SolutionThe 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 - SolutionThe process of cost allocation that assigns the original cost of plant and equipment to the period benefitted Book value - SolutionFor a long term operating asset, the asset's original cost less any accumulated depreciation Original cost - Solutionthe cost at which an asset is recorded on the books of a company estimated useful life - SolutionThe life over which it is estimated that an asset will be used by a company Salvage value - SolutionThe amount expected to be received when an asset is sold at the end of its useful life straight-line depreciation method - Solutionthe 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 - SolutionAn 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 - SolutionRights 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 - SolutionA distinctive name, symbol, or slogan that distinguishes a product from similar products or services. Patent - SolutionAn exclusive right granted by the government to the owner of a product, process, or idea. Franchise agreement - SolutionAn exclusive right or privilege received by a business or individual to perform certain functions or sell certain products or services Amortization - SolutionThe 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 - SolutionFederal Insurance Contributions Act taxes imposed on the employee and the employer; used mainly to provide retirement benefits FICA is SS and Medicare together. Bonus - SolutionAdditional compensation beyond the regular compensation that is paid to employees if certain objectives are achieved. Sales tax - SolutionA tax imposed by the government on the sale of goods and services Property taxes - SolutionTaxes imposed by county or city governments on land, buildings, and other company assets Contingency - SolutionCircumstance involving potential losses or gains that will not be resolved until some future event occurs. Contingent liabilities - SolutionProbable - 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.