Accounting Fundamentals Quiz

Accounting Equation

• Assets = Liabilities + Owner's Equity (optional to include Revenues and Expenses)

Adding Property, Plant, or Equipment

• Increasing one asset and decreasing another asset
• Increasing expenses and increasing assets
• Decreasing one asset and increasing another asset
• Increasing owner's equity and increasing assets

Paying Off Account Payable

• Increase assets and decrease liabilities
• Decrease liabilities and decrease assets
• Increase owner's equity and decrease liabilities
• Decrease assets and decrease liabilities

Debits and Credits

• Debits fall on the left side of a T-account
• Debits increase assets and expenses and decrease liabilities, owner's equity, and revenue
• Credits fall on the right side of a T-account
• Credits increase liabilities, owner's equity, and revenue and decrease assets and expenses

Normal Balance of Accounts

• Normal balance is the side that increases a certain account.
• Asset normal balance = Debit
• Liability normal balance = Credit
• Owner's equity normal balance = Credit

Trial Balance

• A report listing all accounts with their debit and credit balances
• Debits must equal credits
• Used to verify the accounting data accuracy

Assets Except

• Retained Earnings is not an asset, but rather a component of owner's equity
• Cash, Accounts Receivable, and Inventory are assets.

Expense vs. Asset

• Expense: Items used within the current accounting cycle (less than a year)
• Asset: Items used over many years (systematically depreciated)

Accrual vs. Cash Accounting

• Accrual: Records revenues and expenses when they occur (regardless of cash exchange)
• Cash: Records revenues when cash is received, and expenses when cash is paid out
• GAAP requires accrual accounting

Adjusting Entries

• Journal entries made at the end of an accounting period
• Allocate income and expenses to their proper periods
• Accounts to their proper balance

Example of Adjusting Entry

• Depreciating equipment at the end of each year to Accumulated Depreciation

Contra Account

• An account with an opposite sign (+/-) to its parent account
• Example: Accumulated Depreciation (reduces the book value of an asset)

Principle Financial Statements

• Income Statement
• Statement of Owner's Equity

Balance Sheet

• Retains all its balances into the next year

Prepaid Rent Calculation

• Example: Prepaid six months of rent for $3,000 in November 2008, the balance as of December 31, 2008 is $2,000

Supply Expenses & Supplies

• Supply expense of $700 if $700 was used
• The remaining balance of $300 in supplies is an asset.
• Example entry to reflect this would be a debit to Supply Expense and a credit to Supplies.

Book Value

• The actual worth of an account on the books
• e.g., equipment listed at $10,000 with $4,000 accumulated depreciation has a book value of $6,000

Depreciation Example

• Calculate depreciation for a machine purchased for $23,000 in January 2006 with a 5-year useful life and a $3,000 residual value (salvage value).
• Straight-line depreciation = ($23,000 - $3,000) / 5 = $4,000
• Double-declining balance depreciation (Yr1 example) = $23,000 x .4 = $9,200
• Units of production depreciation (assuming 150,000 units were produced in 2008) = ($23,000 - $3,000) x (150,000 / 500,000) = $6,000

Liquid Assets

• Cash and cash equivalents (investments that can be converted to cash in 3 months or less)

FOB Shipping Point/Destination

• FOB Shipping Point: Buyer pays shipping
• FOB Destination: Seller pays shipping

2/10, Net 30

• 2% discount if paid within 10 days, otherwise full amount due in 30 days

Perpetual vs. Periodic Inventory System

• Perpetual: Inventory account updates with every sale/purchase
• Periodic: Updates inventory at the end of the period

Gross Revenue Calculation

• Gross Revenue - Sales Discounts - Sales Returns = Net Sales

Earnings Per Share

• Portion of company profit allocated per outstanding share of common stock
• Calculated as (Net income - Preferred dividends) / Weighted average of Common Shares

Conversion Costs

• Direct labor + Factory overhead

Job Order vs. Process Costing

• Job Order: Used for specialty items
• Process Costing: Used for mass-produced items

Direct/Indirect Costs

• Direct Materials: Materials used to create the product
• Indirect Materials: Supplies used in the production process
• Direct Labor: Labor directly involved in production
• Indirect Labor: Labor not directly involved in production

Equivalent Units

• Calculates the equivalent number of fully completed units from partially completed units
• Needed for process costing

Variable/Fixed/Mixed Costs

• Variable: Changes in direct proportion to production
• Fixed: Remains constant regardless of production volume
• Mixed: Contains both variable and fixed components