Financial Reporting & Internal Controls
Write the formulas for: (1) the accounting equation, (2) net income, (3) retained earnings
(1) assets = liabilities + owners' equity (common stock + retained earnings)
(2) net income = revenues - expenses
(3) beginning retained earnings + net income - dividends = ending retained earnings
Name the major debit/credit accounts (hint: DEAD CURLS or DEALOR).
Debits: expenses, assets, dividends
Credits: revenues, liabilities, owners' equity (stock & retained earnings)
________ are recorded as they are earned, while ________ are recorded as they are incurred.
(1) revenues
(2) expenses
(1) What is the formula for calculating interest?
(2) What is different about a note receivable (versus a note payable)?
(1) principal x rate x (# months/12)
(2) note receivable - asset, lender's POV; note payable - liability, borrower's POV
Name four inventory cost flow methods. What does each represent?
(1) specific identification - each unit is matched with its actual cost; (2) FIFO - first units purchased are the first ones sold; (3) LIFO - last units purchased are the first ones sold; (4) weighted average - cost of each unit is an average of the cost of all goods available for sale
(1) Which financial statement(s) show a company's financial position over a period of time?
(2) Which one(s) show a snapshot of a company's financial position at a point in time?
(3) What are the two primary functions of financial accounting?
(1) income statement, statement of stockholders' equity, cash flow statement
(2) balance sheet
(3) measure financial information & communicate it to creditors/investors for useful decision-making
(1) Total debits must always _____ total credits.
(2) In the accounting language, debit means "______" while credit means "_______". (hint: directions)
(3) True/False: When we record a journal entry, the order of debits and credits does NOT matter.
(1) equal
(2) left; right
(3) False - Debits are always recorded first and left-aligned. Credits are recorded second and indented.
**Note: if dealing with multiple debit/credit accounts in one journal entry, the order of the accounts in debit group & credit group doesn't matter.
Name the three accounts "zeroed-out" in the closing process.
revenues, expenses, dividends
(1) What type of account is allowance for uncollectible accounts?
(2) What is the goal of allowance for uncollectible accounts (i.e. what does it do)?
(1) contra-asset (to accounts receivable) - credit account
(2) reduce the reported value of accounts receivable - allowance is an estimate of how much accounts receivable the company believes it won't be able to collect from customers at some point in the future
What is the difference between purchase discounts & purchase returns (versus sales discounts & sales returns)?
POV - purchase discounts/returns are buyer's POV; sales discounts/returns are seller's POV
__(1)__ are the rules and procedures that guide measurement and communication processes in financial accounting. The __(2)__ primarily establishes financial accounting and reporting standards in the U.S., but the __(3)__ retains legal authority over publicly-traded companies.
(1) Generally Accepted Accounting Principles (GAAP
(2) Financial Accounting Standards Board
(3) Securities and Exchange Commission (SEC)
True/False: To record a decrease in the balance of a debit account, we would credit it (and vice versa for credit accounts).
True
Debit accounts: increase w/ debit, decrease w/ credit
Credit accounts: increase w/ credit, decrease w/ debit
True/False: At the end of the accounting period, closing entries are recorded before financial statements are prepared.
False
Name three examples of contra-revenue accounts.
sales returns, sales allowances, sales discounts
The time that the title (i.e. who has legal ownership of the product) transfers
- FOB shipping point: title transfers at time of shipment, so buyer covers shipping cost
- FOB destination: title transfers at time product reaches buyer's destination, so seller covers shipping cost
(1) Name three types of businesses.
(2) Name an advantage and a disadvantage of a corporation.
(1) sole proprietorship, partnership, corporation
(2) advantage: limited liability; disadvantages: increased government regulation, double taxation
(1) What point distinguishes current assets/liabilities from long-term assets/liabilities?
(2) Name 3 examples of assets & liabilities.
(1) One year (current: <= 1 year, long-term: > 1 year)
(2) assets: cash, accounts receivable, notes receivable, buildings, land, equipment, etc.; liabilities: anything "payable," deferred revenue
_________ is when we allocate the cost associated with using an asset (like equipment) over its useful life.
depreciation
If we are adjusting for bad debt expense, what do we record in the journal entry (i.e. what accounts do we debit/credit)?
Debit Bad Debt Expense; Credit Allowance for Uncollectible Accounts
Selling inventory on account requires two separate journal entries. What are they?
(1) Debit Accounts Receivable; Credit Service Revenue
(2) Debit COGS; Credit Inventory
(1) What are the three components of the fraud triangle?
(2) _______ is legislation that established guidelines after a series of accounting scandals (WorldCom, Enron) that increased corporate executive accountability, better internal controls procedures, and oversight of auditor-client relations.
(1) opportunity, motivation, rationalization
(2) Sarbanes-Oxley Act of 2002 (SOX)
(1) True/False: Prepaid expenses are examples of liabilities.
(2) Name 2 examples of prepaid expenses.
(1) False - asset
(2) prepaid insurance, prepaid rent, etc.
A(n) (accrual/deferral) is when the adjustment is recorded first and cash is exchanged later, while a(n) (accrual/deferral) is when the cash is exchanged first and the adjustment is recorded later.
(1) accrual
(2) deferral
If we are writing off an account balance, what do we record in the journal entry (i.e. what accounts do we debit/credit)?
Debit Allowance for Uncollectible Accounts; Credit Accounts Receivable
How do we calculate gross profit?
**Can also be written as: Sales - Sales Discounts - Sales Returns - COGS = Gross Profit