18 Questions
Which of the following is a contra asset account?
Accumulated Depreciation - Equipment
When is unearned revenue recorded as a liability?
Until revenue is earned
When is accrued revenue recorded?
When revenue is earned but not yet received in cash
When are accrued expenses recorded?
When expenses are incurred but not yet paid in cash
What is the purpose of the adjusted trial balance?
To prepare financial statements
What are the primary components of an internal control system?
Control environment, risk assessment, control activities, information and communication, and monitoring
What is the value of accounts receivable based on?
Net realizable value
What is the method used to record uncollectible accounts receivable under GAAP?
Allowance method
Which inventory costing methods are commonly used?
FIFO, LIFO, and Average Cost
Which of the following accounts is a contra asset account?
Accumulated Depreciation - Equipment
What is the purpose of recording unearned revenue?
To show a liability for cash received before revenue has been earned
When is an adjusting entry made for accruals?
To update a revenue account that is understated
What is the purpose of transferring temporary account balances to Retained Earnings at the end of the accounting period?
To close out all accounts and start fresh for the next period
What are the two methods companies use to account for inventory?
Perpetual and Periodic
How is ending inventory calculated?
By applying unit costs to quantities on hand
Which cost flow method assumes that the first units purchased are the first ones sold?
FIFO
What happens when the value of inventory is lower than its cost?
Companies must write down the inventory to its market value
How do inventory errors affect the computation of cost of goods sold and net income?
They affect two periods
Study Notes
Accounting Cycle and Inventory Management
- Accumulated Depreciation - Equipment is a contra asset account that appears just after the account it offsets (Equipment) on the balance sheet.
- Companies record a receipt of cash before revenue has been earned as a liability called unearned revenue.
- Adjusting entry is made to record the revenue that has been earned and to show the liability that remains.
- Companies make adjusting entries for accruals to update a revenue or expense account that is understated.
- Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.
- At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholders’ equity account—Retained Earnings.
- Companies use either a perpetual inventory system or a periodic inventory system to account for inventory.
- After a company determines the number of inventory units on hand, it must apply unit costs to these quantities to compute ending inventory and cost of goods sold.
- Unit costs can be applied to quantities on hand using First-in, first-out (FIFO), Last-in, first-out (LIFO), or Average Cost.
- Each of the cost flow methods are allowed under GAAP, and a company may use more than one cost flow method at the same time.
- When the value of inventory is lower than its cost, companies may need to “write down” the inventory to its market value in the period in which the price decline occurs.
- Inventory errors affect the computation of cost of goods sold and net income in two periods, and ending inventory depends entirely on the accuracy of taking and costing the inventory.
Test your knowledge on accounting concepts and inventory management, as well as fraud prevention, internal control measures, and the reporting and analyzing of receivables. This quiz covers topics such as adjusting entries, inventory costing methods, and the Sarbanes-Oxley Act. You'll also learn about the different types of receivables and how they're valued, as well as the limitations and components of internal control systems. Whether you're a student of accounting or a business owner, this quiz will help you
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