Time Period Assumption
Presumes that an organization’s activities can be divided into specific periods of time such as month, three-month quarter, six-month interval, or a year.
The time periods that are covered in an “interim” financial statement?
one, three, or six months of activity.
The difference between a fiscal year that is a “calendar year” and one that is a “natural business year”?
A Calendar fiscal year is used when there is little seasonal variation and runs from the start of January to the end of December. A Natural Business Fiscal Year ends at the point when sales activities are at their lowest level for the year.
Explain Cash Basis Accounting
recognizes revenue when cash is received and records expenses when cash is paid. In short, cash is paid or received up front and all at once. Net income for period is difference between cash receipts and cash payments. Not consistent with G.A.A.P. or IFRS
Explain Accrual Basis Accounting
recognizes revenue when earned and expenses when incurred (matched with revenue). In short, revenue is recorded over time as services are rendered, and expenses are recorded over time as it is used up. Think monthly uses and payments.
Several advantages of accrual basis accounting
–>Increases comparability of financial statements from one period to another.
–>Better reflects business performance
Why must end-of-period adjustments be made for internal transactions?
Explain the end goals of the end-of-period adjusting process.
Explain which transactions and events need adjustments.
List some assets that generally benefit more than one period, but get paid for all at once, which will have to be expensed at the end of each period that benefitted from the use of the asset.
Why is deferred revenue a liability?
When cash is accepted, an obligation to provide products or services is accepted. Note: As products or services are provided, unearned (deferred) revenue becomes earned revenue.
Name some expenses that might be incurred, yet are neither paid nor recorded.
(Accrued Expenses) –> (Debit Increase Expense and Credit Increase Liability) –>salaries, interest, rent, and taxes.
Name some sources of revenue that are earned, yet neither recorded nor received.
(Accrued Revenues) –> (Debit Increase to Asset and Credit Increase to Revenue) –> service fees, products, interest, and rent.
What will happen to the accounting equation if a deferral adjustment or an accrual adjustment is omitted?
Explain what a “trial balance” is, whether “unadjusted” or “adjusted”.
An unadjusted trial balance is a list of accounts and balances prepared BEFORE adjustments are recorded. An adjusted trial balance is a list of accounts and balances AFTER adjusting entries have been recorded and posted to ledger.
Steps to preparing a simple income statement, statement of retained earnings, and balance sheet, given an adjusted trial balance.
-> Step 1: Income Statement
—>List all revenues and expenses from adjusted trial bal.
—>Total revenues – Total expenses = Net Income
-> Step 2: Statement of Retained Earnings
—>(Starting retained earnings from start of period) + (net income from income statement) – (cash dividends from adjusted t.b.) = (retained earnings from end of period).
-> Step 3: Balance Sheet
—> List all assets, liabilities, and equity from adjusted T.B.
—> Total Assets -Total Liabilities = Total Equity
Explain what the “closing” process accomplishes.
It prepares accounts for recording the next period’s transactions and events.
List the “temporary” accounts.
all income statement accounts, dividends account, and income summary account.
List all “permanent” accounts.
asset, liability, and equity accounts
Explain how to use the “income summary” account to empty out the revenue and expense accounts.
Debit all revenue balances in revenue account and credit revenue balance to income summary to close. Credit all expense balances in expense account and debit expense balance to income summary to close.
Explain the 2 end goals of generating a “post-closing trial balance”.
–>To verify that total debits equal total credits.
–> To verify that all temporary accounts have zero balances.
Put the steps of the accounting cycle in order.
Analyze Transactions –> Journalize –> Post –> Prepare unadjusted trial balance –> Adjust –> Prepare adjusted trial balance –> Prepare statements –> Close –> Prepare post-closing trial balance –> Reverse (optional)
Write (in-order) the typical categories of a “classified” balance sheet, and explain what items would fall in each category.
——>Ex: cash, short-term investments, acc. receivables, short-term notes receivable, merchandise inventory, and prepaid expenses.
—> Non-current Assets
——> Long-term investments
———> Ex: land held for future expansion.
——> Plant Assets
———>Ex: equipment, machinery, buildings, and land used to produce or sell products or services.
——> Intangible Assets
———> Ex: patents, trademarks, copyrights, franchises, and goodwills.
—> Current Liabilities
——> Ex: acc. payable, notes payable, wages payable, taxes payable, interest payable, and unearned revenues.
—> Non-current Liabilities
——> Ex: notes payable, mortgages payable, bonds payable, and lease obligation.
—> Ex: common stock and retained earnings.
Explain what “liquid” means when it refers to an asset.
Explain what “maturity” means when it refers to a liability.
Calculate and interpret the profit margin ratio.
Profit Margin = (Net Income)/(Net Sales)
useful measure of a company’s operating results that reflects the percent of profits in each dollar of sales.
Calculate and Interpret the current ratio.
Current Ratio = (Current Assets)/(Current Liabilities)
measure of a company’s ability to pay its short-term obligations. If less than 1.0, current liabilities exceed current assets, and company’s ability to pay back short-term obligations becomes doubtful.
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