Chapter 4:
What accounts belong in the asset section of the balance sheet? (Provide 8).
cash, land, equipment, building, office supplies, accounts receivable, accumulated depreciation, prepaid rent.
Define Current Ratio:
Formula:
the current ratio measures a company’s
ability to pay its current liabilities with its
current assets.
Total current assets/total current liabilities
What does the multi-step income statement report?
contains subtotals to highlight significant relationships.
– In addition to net income, it reports gross
profit and operating income.
What are the four accounting principles?
- Consistency
– Disclosure
– Materiality
– Accounting conservatism
In what order are assets listed on a balance sheet?
They are listed in order of liquidity
define liquidity:
Define vendor:
when the company purchases inventory from an individual or a business
In what two categories are operating expense reported as?
-Selling expenses are related to marketing and
selling the company’s goods and services.
-Administrative expenses include expenses not
related to marketing the company’s goods and
services
What is LIFO?
The first-in, first-out method (FIFO) assumes the first units purchased are the first to be sold.
• Cost of Goods Sold is based on the oldest
purchases.
• Ending Inventory closely reflects the current
replacement cost
Closing process/entries accomplish what?
transfer revenues, expenses,
and Dividends to Retained Earnings.
• Revenues and expenses may be transferred
first to an account titled Income Summary.
Define COGS:
How do you account for goods sold?
the cost of merchandise sold to customers
Cost of Goods Sold xx
Merchandise Inventory xx
What is the periodic inventory system?
Periodic Inventory System: requires a physical count of inventory to determine the quantities on hand. *updated at the end of the period, during the closing process*
What is FIFO?
last-in, first-out method
as inventory is sold, the cost of the newest item in inventory is assigned to each unit as COGS.
- Cost of Goods Sold closely reflects current
replacement cost.
- Ending Inventory contains the oldest costing
units.
What are the steps in the closing process?
Service Revenue (debit) to Income Summary (credit). To close Revenues.
Income Summary (debit) to close expenses(credit).
Income Summary (debit) to retained earnings (credit). to close Income Summary*
Retained Earnings (debit) to dividends (credit). to close Dividends
The formula for Gross Profit?
The formula for Gross Profit Percentage?
Gross Profit: Net Sales Revenue - Cost of Goods Sold
Gross Profit Percentage: Gross/Net Sales Revenue
What is the perpetual inventory system?
computerized systems that helps keep track of inventory
What is the weighted-average method?
computes a new weighted-average cost per unit after each purchase.
• Weighted-average cost per unit is
determined by dividing the cost of goods
available for sale by the number of units
available.
• Ending Inventory and Cost of Goods Sold
are based on the same weighted-average
cost per unit.
From the list below what accounts are permanent and which ones are temporary?
Land
Dividends
Accounts Payable
Salaries Expense
Building
Wages Expense
Accumulated Depreciation - Building
Retained earnings
Revenue
Temporary:
Dividends, Salaries Expense, Wages Expense, Revenue
Permanent:
Accumulated Depreciation - Building, Land, Accounts Payable, Building
How would you solve for operating income? What would you need to do?
Gross Profit - Operating Expenses
What is the order of the subtitles on a multi-step income statement?
Gross Profit
Operating Income
Other Income and Expenses and Income Before Income Tax Expense
Income Tax Expense and Net Income
What is specifc identification method?
is an inventory costing method based on the specific cost of particular units of inventory
ex: automobiles, jewels, real estate