Accounting Test 2 Practice

Assets are considered current assets if they can be converted into cash within a year or less. This means that these assets have a short-term nature and can be easily liquidated. The time frame of one year or less is used to determine whether an asset can be quickly turned into cash to meet short-term obligations. Assets such as cash, accounts receivable, and inventory are examples of current assets.

Gross profit is calculated by subtracting the cost of goods sold from net sales. This represents the amount of revenue generated from the sale of goods before deducting any expenses. By subtracting the cost of goods sold, which includes the direct costs associated with producing or purchasing the goods sold, from the net sales, the gross profit can be determined. This measure helps assess the profitability of a company's core operations and is an important indicator of its financial performance.

When the account Allowance for Doubtful Accounts is used to write-off an uncollectible accounts receivable, it means that the company has already anticipated and set aside funds for such potential losses. Therefore, the write-off does not affect income since the expense has already been recognized in the form of the allowance. Additionally, the write-off does not impact total assets because the uncollectible accounts receivable were already accounted for in the allowance, which is a contra asset account.

Sales Discounts is classified as a contra-revenue account because it represents the discounts given to customers for early payment or other reasons. Contra-revenue accounts are deducted from gross revenue to calculate net revenue. Sales Discounts has a debit balance and is subtracted from gross sales to arrive at net sales.

The credit term 2.10, n.30 means that there is a 2% discount if payment is received within 10 days. If payment is not received within 10 days, the full payment is due within 30 days. This credit term allows the buyer to take advantage of a small discount if they pay earlier, but if they do not, they are required to make the full payment within 30 days.

Maintaining an inventory subsidiary ledger allows management to keep track of the cost and quantity of merchandise on hand at all times. This ledger provides detailed information about each item in the inventory, including its cost, quantity, and any changes that occur, such as purchases or sales. By using an inventory subsidiary ledger, management can easily monitor and control their inventory levels, make informed decisions about reordering, and accurately calculate the cost of goods sold.

In a perpetual inventory system, the entry to record the cost of goods sold always includes an entry of equal amount to the Inventory account. This is because the perpetual inventory system continuously updates the inventory balance after each transaction, allowing for real-time tracking of inventory levels and cost of goods sold. By debiting the Inventory account, the system reduces the quantity and value of inventory, reflecting the cost of goods sold. Therefore, the correct answer is Inventory account.

The allowance for Doubtful Accounts is a contra-asset account that is used to estimate and record the amount of accounts receivable that is expected to be uncollectible. It is reported on the balance sheet as a deduction from accounts receivable. This allows for a more accurate presentation of the accounts receivable balance by reflecting the anticipated losses due to non-payment. The income statement, cash flow statement, and owner's equity statement do not directly involve the allowance for Doubtful Accounts.

The equation for Retained Earnings at the end of a period is calculated by adding the Beginning Retained Earnings to the Net Income and then subtracting the Dividends. This equation represents the change in retained earnings over a period, taking into account the starting balance, the profit earned during the period, and any dividends paid out to shareholders.

A beer bar is most likely to use a periodic inventory system because it typically has a large number of fast-moving items with relatively low unit costs. In a periodic inventory system, the inventory is counted and updated periodically, usually at the end of an accounting period. This method is suitable for businesses that have a high volume of sales and a relatively low number of inventory items. Since a beer bar sells a large variety of beers and other beverages, it is more practical for them to conduct periodic inventory counts rather than continuously tracking inventory levels.

A periodic inventory system eliminates the need for recording the cost of merchandise sold as sales occur. In a periodic inventory system, the cost of merchandise sold is calculated at the end of a specific period, usually at the end of the accounting period, through a physical count of inventory. This means that the cost of merchandise sold is not recorded at the time of each sale. Instead, it is recorded periodically, simplifying the recording process and reducing the frequency of entries.

The correct answer is income statement, statement of retained earnings, balance sheet. This is the normal order in which financial statements are prepared. The income statement shows the company's revenues and expenses over a specific period of time, resulting in net income or loss. The statement of retained earnings shows the changes in the company's retained earnings account, including net income or loss, dividends, and adjustments. Finally, the balance sheet provides a snapshot of the company's assets, liabilities, and shareholders' equity at a specific point in time.

If Income Summary has a net credit balance, it signifies net income. This means that the total revenue earned during a specific period exceeds the total expenses incurred. A net credit balance in the Income Summary account indicates that the company has made a profit, resulting in an increase in its overall net worth.

When preparing a bank reconciliation, checks outstanding refers to checks that have been issued by the depositor but have not yet been presented to the bank for payment. These checks are deducted from the balance per the bank statement because they have not yet been cleared by the bank. Therefore, they decrease the balance per the bank statement.

If a business closes its accounts only at year-end, it means that the financial statements are prepared only once at the end of the year. This also implies that adjusting entries, which are necessary to accurately reflect the financial position and performance of the business, are made only at year-end. As a result, revenue and expense accounts reflect year-to-date amounts throughout the year, meaning that they accumulate the revenues and expenses incurred from the beginning of the year until the end. Since financial statements are prepared only at year-end, monthly and quarterly financial statements cannot be prepared.

A subsidiary ledger is a detailed record that provides information about the individual items that make up the balance of a general ledger account. It helps in maintaining a more detailed and organized record of transactions, allowing for easier analysis and reconciliation. By keeping track of specific details related to each transaction, such as dates, amounts, and descriptions, a subsidiary ledger enables accountants to have a clearer understanding of the transactions that contribute to the balance of a particular account. This information is crucial for accurate financial reporting and decision-making.

When Regal Artwork Co. makes a payment after the discount has expired, it means that they were not able to take advantage of the purchase discount. This results in a loss for the company, as they have to pay the full amount without any discount. Therefore, the entry to record the payment should include a debit to Purchase Discount Lost, indicating the loss incurred by not being able to avail the discount.

The gross profit can be calculated by subtracting the cost of goods sold from the sales. In this case, the cost of goods sold is given as $215,000 and the sales are given as $358,000. Therefore, the gross profit is $358,000 - $215,000 = $143,000. However, since the year-end physical inventory indicated merchandise on hand costing $24,000, this needs to be subtracted from the gross profit. Therefore, the final gross profit for the year is $143,000 - $24,000 = $141,000.

The statement of retained earnings is increased by business earnings. This is because the statement of retained earnings shows the amount of net income that is retained in the business after dividends are paid out to shareholders. Business earnings represent the profit made by the company, and when these earnings are retained, they contribute to the overall retained earnings of the company.

In a perpetual inventory system, two entries are made to record each sales transaction. One entry recognizes the sales revenue, which represents the amount of money earned from the sale of goods. The other entry recognizes the cost of goods sold, which represents the cost incurred to produce or acquire the goods that were sold. These two entries are necessary to accurately track the financial impact of sales on the company's revenue and expenses.

When the bookkeeper accidentally recorded the check as $86 instead of $68, there was an overstatement of $18 in the book balance. To correct this error in the bank reconciliation, $18 should be added to the book balance. This adjustment will ensure that the book balance reflects the correct amount and matches the bank statement.

The equation for net income is Revenue - Expenses. Net income is calculated by subtracting expenses from revenue. This equation represents the basic formula for determining the profitability of a company after deducting all expenses from its total revenue.

The correct answer is "Included short-term investments i marketable securities and receivables, as well as cash." This answer is supported by the statement in the given information that financial assets consist of cash and cash equivalents, which includes short-term investments in marketable securities and receivables. Therefore, these assets are included in the category of financial assets.

The statement of retained earnings shows the changes in the retained earnings balance over a period of time. Retained earnings are the portion of a company's profits that are reinvested back into the business rather than distributed to shareholders as dividends. Therefore, when dividends are paid out to shareholders, the retained earnings decrease. Additionally, if the business incurs losses due to depreciation, it also decreases the retained earnings balance. Business earnings and profit, on the other hand, would increase the retained earnings balance.

The "Balance per Depositor" when reconciling a bank statement includes the deposits made by the bank, any book adjustments that need to be made, any service charges deducted from the account, and any NSF (non-sufficient funds) checks that were returned.

"Balance per Bank" when reconciling a bank statement includes the following items: + Deposits in Transit (deposits made by the company that have not yet been recorded by the bank), +/- Bank Adjustments (any adjustments made by the bank that affect the company's account balance), and - Outstanding Checks (checks that have been issued by the company but have not yet been cleared by the bank). These items are added or subtracted from the bank statement balance to arrive at the correct "Balance per Bank".

The 8 steps of the accounting cycle are as follows: General Journal, General Ledger, Unadjusted Trial Balance, Make Adjustments, Adjusted Trial Balance, Financial Statements, Close Temporary Accounts, and After-closing Trial Balance. These steps outline the chronological order in which financial transactions are recorded, summarized, adjusted, and ultimately presented in the form of financial statements. The General Journal is where all transactions are initially recorded, while the General Ledger serves as a central repository for all accounts. The Unadjusted Trial Balance verifies the equality of debits and credits before any adjustments are made. Adjustments are then made to ensure accurate financial reporting, leading to the creation of the Adjusted Trial Balance. Financial Statements are prepared using the adjusted balances, and temporary accounts are closed to prepare for the next accounting period. Finally, the After-closing Trial Balance confirms that all temporary accounts have been closed properly.