Financial Accouting Midterm Practice Part 2

In recording accounting transactions, evidence that a transaction has taken place is obtained from source documents. Source documents are the original records that provide proof of a transaction, such as invoices, receipts, bank statements, and purchase orders. These documents contain important information about the transaction, including the date, amount, parties involved, and nature of the transaction. They serve as a reliable and verifiable source of evidence for recording and verifying accounting transactions.

When a company makes a purchase "on account," it means that they are purchasing on credit. This means that the company is buying goods or services and agreeing to pay for them at a later date, usually within an agreed-upon timeframe. Purchasing on credit allows companies to acquire the necessary items they need for their operations without having to make an immediate payment. Instead, they can pay for the purchase at a later date, usually when they have generated revenue from their business activities.

In a T-account, the left side is called the debit side because it represents the increase in assets or expenses. The debit side is used to record transactions that result in a decrease in liabilities, equity, or revenue. It is the side where debits are recorded, and it is essential for maintaining the balance between debits and credits in accounting.

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Revenues are the income generated by a business through its primary activities, such as sales of goods or services. When revenues are earned, they increase the owner's equity of a business. This is because revenues contribute to the overall profitability and value of the business, which ultimately belongs to the owner. Therefore, revenues directly impact and increase the owner's equity.

When making an adjusting entry to recognize depreciation on machinery, the account that will be credited is Accumulated Depreciation. Accumulated Depreciation is a contra-asset account that is used to track the total amount of depreciation that has been recorded on an asset over its useful life. By crediting this account, it reduces the carrying value of the machinery on the balance sheet, reflecting the decrease in its value due to depreciation. This adjustment helps to accurately represent the current value of the machinery on the company's financial statements.

A journal entry is a record of a business transaction that includes the date, accounts involved, and the amounts debited and credited. The components of a journal entry are the explanation of the transaction, the debit entry (which increases an asset or expense account), and the credit entry (which increases a liability, equity, or revenue account). However, a trial balance is not a component of a journal entry. A trial balance is a list of all the accounts and their balances, used to ensure that debits and credits are equal and to prepare financial statements.

When an expense is recognized, it means that the company acknowledges and records the occurrence of the expense in its financial records. This recognition leads to an increase in the expense account because the expense is being added to the company's expenses. Therefore, the correct answer is "increase to the expense account".

Supplies is considered an asset because it represents tangible items that a company owns and can use in its operations. These items have economic value and are expected to provide future benefits. Supplies are typically classified as current assets on a company's balance sheet, as they are expected to be used or consumed within one year.

The normal balance of an asset account is a debit balance. This means that the account typically has a positive balance, representing the value of assets owned by the entity. Debit balances are the standard for asset accounts because they reflect increases in assets and decreases in liabilities or equity. Conversely, credit balances are typically associated with liability and equity accounts. Therefore, the correct answer is a debit balance.

Net income is the amount of money that a company has earned after deducting all of its expenses from its total revenues during a specific accounting period. It represents the profitability of the company and is calculated by subtracting all expenses, including cost of goods sold, from the total revenues earned. This measure is important for assessing the financial performance of a company and is often used to determine the amount of dividends that can be paid to shareholders or reinvested in the business.

The Accumulated Depreciation account is a contra-asset account. This means that it is a negative asset account that offsets the value of the related asset account. Accumulated Depreciation is used to track the total amount of depreciation that has been recorded for an asset over its useful life. By subtracting the Accumulated Depreciation from the original cost of the asset, the net book value of the asset can be determined.

Depreciation is the process of allocating the cost of an asset to expense over the course of its estimated useful life. This means that instead of recognizing the full cost of the asset in one accounting period, the cost is spread out over the asset's useful life. This is done to match the expense with the revenue generated by the asset, as the asset is expected to contribute to revenue generation over multiple periods. By allocating the cost over its useful life, the financial statements reflect a more accurate representation of the asset's value and the expenses incurred in using it.

Retained earnings are not considered temporary accounts because they represent the accumulated profits or losses of a company over time. They are carried forward from one accounting period to another and are not closed out at the end of each period like temporary accounts such as expenses, dividends, and revenues. Temporary accounts are used to track the income and expenses of a specific period and are closed out at the end of that period to start fresh in the next accounting period.

Posting refers to the process of transferring amounts from the journal entries to general ledger accounts. This is done to ensure that all transactions are properly recorded in the general ledger, which is the main record of a company's financial transactions. By posting the journal entries to the general ledger accounts, the company can keep track of its financial activities and prepare accurate financial statements.

The company manager would look at the Accounts Payable account to determine the amounts owed to suppliers. This account records the outstanding balances that the company owes to its suppliers for goods or services received but not yet paid for. It represents the company's short-term liabilities and is an important component of the company's overall financial position.

A journal entry is the record of a single transaction that is entered into a company's journal. It includes the date, accounts debited and credited, and the corresponding amounts. This entry serves as a chronological record of all financial transactions and is used as the basis for creating financial statements. It helps in tracking and analyzing the company's financial activities and is an essential part of the accounting process.

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If a journal entry has been posted and the accounting equation is out of balance, it suggests that the transaction was posted to the wrong accounts. This means that the debits and credits were not correctly recorded, resulting in an imbalance in the accounting equation. This could occur due to human error or a lack of understanding of the proper account classification. To rectify this, the transaction needs to be reevaluated and correctly posted to the appropriate accounts to bring the accounting equation back into balance.

The proper order in which accounts should be listed in a trial balance is Assets, Liabilities, Equity, Dividends, Revenues, and Expenses. This order follows the standard accounting equation (Assets = Liabilities + Equity) and ensures that the balance sheet accounts (Assets, Liabilities, and Equity) are listed before the income statement accounts (Revenues and Expenses). Dividends, which are a distribution of profits to shareholders, are typically listed after Equity.

The journal entry recorded by the accountant indicates that a liability account has been debited and an asset account has been credited. This suggests that the company has made a payment towards an account payable, which is a liability. Therefore, the correct answer is "Payment of an account payable."

Closing entries are journal entries made at the end of an accounting period to transfer the balances of revenue, expense, and dividends accounts to the retained earnings account. These entries help in resetting the temporary accounts to zero and updating the retained earnings account with the net income or loss for the period. By closing these accounts, the company prepares for the next accounting period and ensures that the financial statements accurately reflect the company's financial position.

The total change in retained earnings can be calculated by subtracting total expenses and dividends from total revenues. In this case, $126,000 (total expenses) and $12,500 (dividends) are subtracted from $174,000 (total revenues). The result is $35,500, which represents the total change in retained earnings after all closing entries have been made.

Dividends are payments made to shareholders out of a company's profits. When dividends are declared, it reduces the company's equity, specifically the owner's equity. Owner's equity represents the owner's share of the company's assets after deducting liabilities. Therefore, debiting the Dividends account would decrease the owner's equity, as it represents a distribution of profits to shareholders.

When the Patterson Company makes an adjusting entry to record the expiration of $500 of prepaid rent, the account that will be debited is Rent Expense. This is because prepaid rent is an asset account that represents rent paid in advance, and when it expires, it needs to be recognized as an expense. Therefore, Rent Expense is debited to reflect the decrease in the prepaid rent asset and to accurately record the expense in the accounting records.

Recognizing an expense means recording the occurrence of an expense in the financial records. This involves increasing the expense account because expenses are debited. When an expense is recognized, it leads to a higher total expense amount, which is reflected by an increase in the expense account. Therefore, the correct answer is "increase to the expense account".

When liabilities are paid in cash, it means that the company is using its cash reserves to settle its debts. This will result in a decrease in the company's assets, as cash is considered an asset. By using the cash to pay off liabilities, the company's cash balance will decrease, leading to a decrease in overall assets.

If the total of the debt column equals the total of the credit column in the trial balance, it indicates that the accounting equation has remained in balance. The accounting equation states that assets equal liabilities plus equity. The trial balance is a statement that lists all the debit and credit balances of accounts in a company's general ledger. If the total of the debt column equals the total of the credit column, it means that the total assets (represented by the debits) are equal to the total liabilities and equity (represented by the credits), thus ensuring that the accounting equation is in balance.

The adjusting journal entry will involve debiting the Accounts Receivable account to recognize the amount owed by the clients for the services provided. The Service Revenue account will be credited to recognize the revenue earned from the services. This entry reflects the recognition of the revenue and the corresponding increase in the accounts receivable balance.

Crediting an account means recording an increase in that account. Assets are accounts that represent the resources owned by a company, such as cash, inventory, or property. When an asset is credited, it means there is an increase in the value of that asset. Therefore, crediting an asset account would increase the balance of the account.

This journal entry shows sales revenue being closed into the Retained Earnings account. By debiting the Sales Revenue account and crediting the Retained Earnings account, the company is transferring the revenue earned from sales to the Retained Earnings account, which is a component of Owner's Equity. This entry reflects the process of closing the revenue account at the end of the accounting period and transferring the balance to the Retained Earnings account.

The entry "Wages Expense XXX Cash XXX" represents payment for wages. This entry shows that an expense has been incurred for wages and cash has been used to make the payment.

Working capital is a measure of a company's liquidity and ability to meet short-term obligations. It represents the amount of funds available to cover day-to-day operations. The correct answer, "Current Assets - Current Liabilities," is the formula used to compute working capital. Current assets include cash, accounts receivable, and inventory, while current liabilities include accounts payable and short-term debt. By subtracting current liabilities from current assets, the formula calculates the net amount of funds available for the company's operations.

Deferred or prepaid expenses are recorded as current assets on the balance sheet. These are expenses that have been paid in advance but have not yet been incurred or used up. Examples of prepaid expenses include prepaid rent, prepaid insurance, or prepaid subscriptions. Since these expenses will be used or consumed in the near future, they are considered assets that provide future economic benefits and are therefore classified as current assets.

The correct answer represents the expanded accounting equation because it includes all the necessary components. The equation states that the assets of a company minus its liabilities and common stock equals the sum of its revenues, expenses, and dividends. This equation reflects the fundamental principle of accounting that the total value of a company's assets must be equal to the sum of its liabilities and equity.

The company purchased a piece of equipment for $8,000, paying $4,000 in cash and issuing a $4,000 note payable. This transaction involves both an increase in assets (equipment) and a decrease in assets (cash) as well as an increase in liabilities (note payable). Therefore, the appropriate journal entry to record this transaction is to debit Equipment for $8,000, credit Cash for $4,000, and credit Note Payable for $4,000.

The correct answer is Accounts Receivable XXX. This entry shows revenues earned and billed but not yet collected. Accounts Receivable represents the amount of money that a company is owed by its customers for goods or services provided on credit. Revenue represents the income earned by a company from its normal business activities. When revenue is recognized but payment has not yet been received, it is recorded as an increase in Accounts Receivable and an increase in Revenue.

The adjusting journal entry that must be made is Supplies Expense 1,500 and Supplies 1,500. This is because the physical count of supplies on hand is only $1,750, while the trial balance indicates $3,250. Therefore, there is an overstatement of supplies on hand by $1,500, which needs to be adjusted by reducing both the Supplies Expense and Supplies accounts by $1,500.

The cost allocation principles of depreciation align with the matching principle. The matching principle states that expenses should be recognized in the same period as the revenues they help generate. Depreciation is the systematic allocation of the cost of an asset over its useful life, and it helps in matching the cost of the asset with the revenue it generates over time. By allocating the cost of the asset over its useful life, the matching principle ensures that the expenses associated with the asset are recognized in the same period as the revenue it helps generate.

The answer "Debit" means left, and "credit" means right is correct because in accounting, the terms "debit" and "credit" are used to record transactions and keep track of financial information. The left side of an account is the debit side, and the right side is the credit side. Debit entries are used to record increases in assets and expenses, while credit entries are used to record increases in liabilities, equity, and revenue. This system of recording transactions is known as double-entry accounting, where every transaction has both a debit and credit entry to maintain the balance in the accounting equation.

The correct answer is Rent Expense 8,000 and Prepaid Rent 8,000. This adjusting entry is necessary because the company prepaid rent for one year, but only a portion of that time period has expired by December 31. Therefore, the amount of rent that has expired needs to be recognized as an expense (Rent Expense) and deducted from the prepaid rent account (Prepaid Rent). This adjustment ensures that the financial statements accurately reflect the portion of rent that has been used up during the period.

The quick ratio is a measure of a company's ability to pay off its current liabilities using its most liquid assets. It excludes inventory from current assets because inventory may not be easily convertible to cash. By subtracting inventory from current assets and dividing the result by current liabilities, we get a ratio that reflects the company's ability to meet its short-term obligations without relying on inventory sales.

Revenues are a type of income generated by a company through its business activities. Debiting an account means increasing its balance. Since revenues represent income, debiting the revenues account would increase its balance. Therefore, the answer is incorrect.

The amount of interest that will accrue over nine months can be calculated by multiplying the principal amount ($400,000) by the interest rate (8%) and then multiplying it by the time period (9/12). This gives us $24,000, which is the correct answer.

The cost of the building should be deducted over the expected useful life of the building because it is a long-term asset that will provide economic benefits to the company over a period of time. Deducting the cost of the building over its useful life allows for a more accurate representation of the expenses incurred in generating revenue from the building. This method of depreciation matches the expense recognition with the revenue earned from the building over time.

The correct answer is revenue earned on account. This is because the McBain Company has provided services to the Buchanan Company and has the right to receive payment for those services. Even though they have not received cash yet, they have earned revenue by completing the work. This revenue is recorded on McBain's books as an account receivable, indicating that they expect to receive payment in the future.

The correct answer is "are consumed or used." This means that a company recognizes a supplies expense when the supplies are actually used up or consumed in the course of business operations. This is because the supplies are considered as an expense only when they have been utilized and no longer have any economic value. Counting, purchasing, and recording on the books are important steps in the process, but the expense is recognized when the supplies are consumed or used.

The quick ratio measures a company's ability to meet its short-term debts with its most liquid assets. This ratio excludes inventory from the calculation, focusing only on assets that can be quickly converted into cash. By comparing these liquid assets to the short-term debts, the quick ratio provides insight into the company's ability to pay off its immediate obligations without relying on inventory sales.

The quick ratio is considered to be a more conservative measure of a company's liquidity because it only includes the most liquid assets (such as cash and cash equivalents) in its calculation, excluding inventory and other less liquid assets. This provides a more stringent assessment of a company's ability to meet its short-term obligations without relying on the sale of inventory. In contrast, the current ratio includes all current assets in its calculation, which may overstate a company's liquidity position if a significant portion of its current assets are tied up in inventory.

The accounting cycle typically begins with analyzing the transactions and events that have occurred. This involves examining the source documents and determining the appropriate accounts to record the transactions. Once the analysis is complete, the next step is to journalize the transactions by recording them in the general journal. After journalizing, the transactions are then posted to the respective accounts in the general ledger. Finally, a trial balance is prepared to ensure that the debits and credits in the ledger accounts are equal, thus completing the accounting cycle.