Accounting Cycle Overview
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Questions and Answers

What is the primary reason Sally cannot enter the $43.00 expense without a receipt?

  • Lack of accuracy in financial records
  • Compliance with tax regulations
  • Absence of a prior authorization
  • Reliability of financial documentation (correct)

Which of the following best describes an expense in accounting?

  • Income earned through services provided
  • Costs related to daily business operations (correct)
  • A transaction that increases assets
  • Sale of goods at a discounted price

If Carla used cash to buy pencils and pay an electricity bill, how should these transactions be classified?

  • Revenues and Liabilities
  • Expenses only
  • Expenses and Revenues (correct)
  • Assets and Revenues

What accounting principle suggests that transactions should be recorded based on their economic substance?

<p>Accrual basis (B)</p> Signup and view all the answers

How much revenue did the store generate from cash sales?

<p>$300 (B)</p> Signup and view all the answers

Which expense was part of Carla's errands according to the given transactions?

<p>Electricity bill (B), Purchase of pencils (D)</p> Signup and view all the answers

What amount did Carla spend on the electricity bill?

<p>$160 (B)</p> Signup and view all the answers

What is the significance of recording transactions accurately in accounting?

<p>To ensure financial statements reflect true performance (B)</p> Signup and view all the answers

What is the primary goal of a bookkeeper before presenting financial statements?

<p>To ensure statements are accurate. (D)</p> Signup and view all the answers

Accruals occur when revenue is recognized under which scenario?

<p>At the time of the transaction. (A)</p> Signup and view all the answers

Deferrals are best described as which of the following?

<p>Payments received that cannot be reported on the current income statement. (A)</p> Signup and view all the answers

How does an increase in expenses affect equity?

<p>It decreases equity. (B)</p> Signup and view all the answers

The reliability assumption in accounting requires transactions to be verifiable through which of the following?

<p>Bank statements and receipts. (D)</p> Signup and view all the answers

What type of revenue are fees earned on investments categorized as?

<p>Passive revenue. (C)</p> Signup and view all the answers

What accounting method must businesses with revenue over $25 million utilize?

<p>Accrual accounting. (D)</p> Signup and view all the answers

The accounting cycle refers to which of the following?

<p>A set of actions taken to record and track financial transactions. (D)</p> Signup and view all the answers

What step does Sally need to perform after receiving the statements for review?

<p>Step eight: Closing (B)</p> Signup and view all the answers

Which of the following steps does Sally take first after receiving receipts and bills from Carla?

<p>Step one: Transactions (D)</p> Signup and view all the answers

What action should Sally take if she identifies a mistake in the Trial Balance?

<p>Step five: Worksheet (A)</p> Signup and view all the answers

What allows Sally to enter depreciation for the company’s long-term assets?

<p>Step six: Adjusting Entries (B)</p> Signup and view all the answers

Which adjustment occurs prior to any payment being processed?

<p>Accruals (C)</p> Signup and view all the answers

When do deferrals typically occur within the accounting cycle?

<p>After payments have been made (A)</p> Signup and view all the answers

What are non-cash expense adjustments primarily used for?

<p>Adjusting depreciation and prior accounting errors (C)</p> Signup and view all the answers

Which step includes making adjustments related to accrued revenues?

<p>Step six: Adjusting Entries (C)</p> Signup and view all the answers

What were the total expenses and revenues in this scenario?

<p>Expenses: $200, Revenues: $345 (B)</p> Signup and view all the answers

Which account increased by $100?

<p>Cash (C)</p> Signup and view all the answers

What is a significant difference between revenue and an asset?

<p>Revenue represents earned income; an asset is a resource owned. (D)</p> Signup and view all the answers

Why is accrual accounting preferred over cash-basis accounting?

<p>Accrual accounting provides a more accurate financial picture over time. (C)</p> Signup and view all the answers

How much did Accounts Receivable increase in this scenario?

<p>$45 (B)</p> Signup and view all the answers

Which expense increased significantly by $160?

<p>Utility Expense (D)</p> Signup and view all the answers

What method of accounting records income only when payment is received?

<p>Cash-basis accounting (D)</p> Signup and view all the answers

What was the annual income of Pencil Pros?

<p>$35,000 (A)</p> Signup and view all the answers

What document does Tera prepare to ensure Franky and Vinny understand their payment agreement?

<p>Promissory note (D)</p> Signup and view all the answers

Which type of account will Tera create to keep track of Vinny's payments for the van?

<p>Notes receivable asset account (C)</p> Signup and view all the answers

If Franky needs to write off the amount Vinny owes, where will this be recorded?

<p>Write-off expense account (B)</p> Signup and view all the answers

What might cause accounts to become uncollectible?

<p>Fraud (A)</p> Signup and view all the answers

Which action can companies take to prevent paying taxes on revenue not received?

<p>Use a write-off account (D)</p> Signup and view all the answers

What is likely to happen when a debtor stops making payments as Vinny did?

<p>The company needs to analyze its debt collection practices (D)</p> Signup and view all the answers

What is a common reason for accounts to become uncollectible aside from fraud?

<p>Bankruptcy (A)</p> Signup and view all the answers

Identifying uncollectible accounts helps companies manage what aspect of their finances?

<p>Cash flow forecasting (D)</p> Signup and view all the answers

What is the value of the 2,750 fritters using the FIFO method?

<p>$3,438 (C)</p> Signup and view all the answers

Using the WAC method, what is the value of the 2,750 fritters in inventory?

<p>$4,482 (C)</p> Signup and view all the answers

What is the value of the 4,750 fritters sold using the LIFO method?

<p>$6,875 (B)</p> Signup and view all the answers

According to the FIFO method, what is the total value of the fritters sold?

<p>$8,813 (B)</p> Signup and view all the answers

What key aspect must be consistent when choosing an inventory valuation method for tax purposes?

<p>The method must be used consistently (C)</p> Signup and view all the answers

Which inventory valuation method would typically result in the highest tax liability during periods of inflation?

<p>FIFO (A)</p> Signup and view all the answers

What is an example of inventory shrinkage?

<p>Employee theft (D)</p> Signup and view all the answers

Which of the following is true about inventory valuation methods?

<p>They impact the financial statements consistently each period (D)</p> Signup and view all the answers

Flashcards

Accurate statements

Bookkeepers ensure all financial statements are precise before presentation to stakeholders like owners and investors.

Accruals

Recording revenue or expenses when the transaction occurs, regardless of payment timing.

Deferrals

When payments are made or received, but the amount can't be reported in the current income statement.

Expense Increase and Equity

Increased expenses decrease equity; increased revenue increases equity.

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Reliability Assumption

Only record accounting transactions supported by verifiable evidence like bank statements or invoices.

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Investment Fees

Investment income classified as revenue.

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Accrual Accounting Requirement

Businesses with revenue exceeding $25 million must use accrual accounting.

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Accounting Cycle

A series of steps for recording financial transactions and tracking a business's financial health over a period.

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Closing Entries

The final step in the accounting cycle, used to close temporary accounts and transfer balances to permanent accounts.

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Transactions

The initial step of the accounting cycle, where business transactions are recorded and summarized.

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Worksheet

A tool used to correct errors found in the trial balance.

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Adjusting Entries

The step in the accounting cycle where adjustments are made for accruals, deferrals, and non-cash expenses like depreciation.

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Accruals

Adjustments made before payments or receipts.

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Deferrals

Adjustments made after payments or receipts.

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Non-cash Expenses

Adjustments for things like depreciation, often done at the accountant's request.

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Uncollectible Accounts

Accounts that are likely to not be paid, due to reasons like fraud, bankruptcy, or lost contact with the debtor.

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Accounting Assumptions

Underlying principles that guide the recording and reporting of financial information.

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Revenue

Income earned from selling goods or services.

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Write-off Account

An account used to record uncollectible amounts to prevent taxes on revenue not received.

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Expense

Costs incurred in running a business.

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Promissory Note

A written agreement that outlines a loan or agreement between two parties; it's crucial for van sales, loans or other specific payment agreements.

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Transaction as Revenue or Expense

Determining if a business activity should be categorized as revenue or expense.

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Notes Receivable

An asset account used to record the amount owed to a company on a promissory note.

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Reliability

The principle that financial records are accurate and trustworthy.

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Write-Off of Van

The recording of an uncollectible account, in this case, on a van sold.

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Missing Receipt

A situation where a record of payment is not available.

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Cash Sales

Sales made where payment is received immediately in cash.

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Project on Account

Work completed for a client but payment is not yet received.

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Purchase of Pencils

Carla buys 400 pencils for $40.

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Electricity Bill

Carla pays $160 for her electricity bill.

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Reason for no receipt

Carla misplaced receipt for client dinner.

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Transaction Recording

Recording of financial activities according to accounting principles.

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Total Expenses

The total amount spent by a company or individual during a particular period.

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Total Revenues

The total amount earned or received by a company or individual by providing goods or services.

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Expenses in this scenario

The amount being $200.

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Revenues in this scenario

The amount is $345.

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Cash increased

The cash account grew by $100.

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Accounts Receivable Increased

Value of uncollected payments increased by $45.

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Sales Revenue Increased

The revenue from sales went up by $345.

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Utility Expense Increased

Utility costs went up by $160.

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Accrual Accounting

Records revenue and expenses when they occur, not when cash changes hands.

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Cash-Basis Accounting

Records revenue and expenses only when cash is received or paid.

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FIFO Inventory Valuation

First-In, First-Out (FIFO) assumes the first items purchased are the first ones sold. Used for valuing ending inventory and costing of goods sold.

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LIFO Inventory Valuation

Last-In, First-Out (LIFO) assumes the last items purchased are the first ones sold. Used for valuing ending inventory and costing of goods sold.

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Weighted-Average Cost (WAC) Inventory Valuation

Calculates the average cost of all Items in inventory, then uses this average cost to value ending inventory and calculate cost of goods sold.

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Inventory Valuation

Assigning a monetary value to the inventory on hand in a business.

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Physical Inventory

A physical count of the goods on hand.

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Inventory Shrinkage

Loss of inventory due to theft, damage, or other reasons.

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Cost of Goods Sold (COGS)

The direct cost of making the products sold in a business.

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Inventory Adjustment

Adjusting inventory balances after a physical count to reflect the actual amount of goods on hand.

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Accounting Period

A specific time interval for which financial statements, such as income statements and balance sheets, are prepared.

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Study Notes

Accounting Cycle

  • The accounting cycle is a series of steps taken by accountants and bookkeepers to record financial transactions and track a business's financial health.
  • There are eight steps, though the names may vary between professionals.
  • The first step is Transactions, analyzing business dealings and determining how they affect the company.
  • The second step is Journal Entries, putting transactions into a transaction journal, ordered by date.
  • The third step is General Ledger Post, copying journal entries into the appropriate accounts in the general ledger.
  • The fourth step is Trial Balance, bringing all transactions into focus and exposing possible errors (assets = liabilities + owner's equity).
  • The fifth step is Worksheet, identifying and rectifying errors in the trial balance.
  • The sixth step is Adjusting Entries, recording changes that naturally occur during business but don't trigger a paper trail (accruals, deferrals, and depreciation).
  • The seventh step is Financial Statements, preparing financial statements in a specific order: income statement, owner's equity statement, balance sheet, and statement of cash flows.
  • The eighth step is Closing, totaling the books of the period in question and preventing future edits.

Adjusting Process

  • Three main adjustments are made during adjusting entries: accruals, deferrals, non-cash expenses.
  • Accruals occur before payment.
  • Deferrals occur after payment.
  • Non-cash expense adjustments are for depreciation & prior accounting cycle errors.
  • Adjustments are performed at an accountant's request.

Accounting and Reporting Assumptions

  • Set by the Financial Accounting Standards Board (FASB).
  • Reliability: Companies must only record verifiable transactions.
  • Consistency: The same accounting method should be used every period.
  • Time Period: Accounting periods must remain consistent over time.
  • Going Concern: Businesses are expected to remain operational.
  • Economic Entity: Personal and business records are kept separate.
  • Money Measurement: Transactions are recorded in monetary terms.

Transactions as Revenue or Expenses

  • Revenue: Income earned from sales of goods or services.
  • Expenses: Costs associated with everyday business operations.

Accrual vs. Cash-Basis Accounting

  • Accrual: Records revenue and expenses as they occur, regardless of payment timing.
  • Cash-basis: Records revenue and expenses when payment is made.

Notes Receivable and Uncollectible

  • Notes Receivable: Long-term receivables created when payment isn't expected within a year.
  • Uncollectible Accounts: Receivables a company no longer expects to collect due to fraud, bankruptcy, or lost contact.

Merchandise Inventory

  • Merchandise inventory are goods intentionally stocked for sale. Companies providing services usually have less inventory than those selling goods. Items used as part of day to day operations are not typically considered inventory.

Inventory Valuation Methods

  • Specific Identification: Tracks inventory items from receipt to sale
  • FIFO (First-In, First-Out): Sells the oldest items first.
  • LIFO (Last-In, First-Out): Sells the newest items first.
  • Weighted Average Cost (WAC): Averages the prices of items purchased during the year.

Adjusting Inventory Balances

  • Inventory balances are adjusted after a physical count, often at the end of a fiscal year.
  • Inventory is not adjusted for appreciation or depreciation.
  • Spoilage, theft or damage can cause inventory adjustments.

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Description

Explore the essential steps of the accounting cycle, which are critical for accountants and bookkeepers in recording financial transactions. From analyzing transactions to making adjusting entries, this quiz covers each phase in detail, helping you understand how to track a business's financial health effectively.

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