Accounting Fundamentals Quiz

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Questions and Answers

What is the accounting equation?

Assets = Liabilities + Owner's Equity

Adding Property Plant or Equipment into a business through an investment by the owner would:

Increase O.E. and increase assets (correct)

Decrease one asset and increase another asset

Increase one asset and decrease another asset

Increase expenses and increase assets

Paying off an account payable with Cash would:

Increase O.E. and decrease liabilities

Increase assets and decrease O.E.

Increase liabilities and decrease assets

Decrease assets and decrease liabilities (correct)

Define the terms debit and credit. Which side of a T-account do they fall on?

Debits are recorded on the left side of a T-account, while credits are recorded on the right side. Debits increase assets and expenses, while decreasing liabilities, owner's equity, and revenues. Credits increase liabilities, owner's equity, and revenues while decreasing assets and expenses. Signup and view all the answers

What does the term normal balance of accounts mean and identify what the normal balance is of each of the categories listed in #1?

The normal balance of an account refers to the side (debit or credit) that increases the balance of that account. For assets, the normal balance is a debit. For liabilities and owner's equity, the normal balance is a credit. Signup and view all the answers

What is a trial balance and what is its purpose?

Used to verify debits = credits Signup and view all the answers

All of the following are Assets except?

Retained Earnings Signup and view all the answers

How do you know when to expense a purchase or add it as an asset?

A purchase is expensed if it is expected to be used up or consumed within a year (e.g., office supplies, utilities). It's added as an asset if it will provide benefits for more than a year (e.g., equipment, buildings). Signup and view all the answers

Define Accrual Accounting and Cash Accounting. Which is required for Gap? Which can be used for tax purposes?

Accrual accounting recognizes revenues and expenses when they occur, regardless of when cash is exchanged. Cash accounting records revenues when cash is received and expenses when cash is paid out. GAAP requires accrual accounting, while both methods can be used for tax purposes, with varying advantages and disadvantages. Signup and view all the answers

What are adjusting entries, why are they important, and provide a detailed example.

Adjusting entries are journal entries made at the end of an accounting period to allocate income and expenses to the correct period. They are crucial for ensuring that financial statements accurately reflect the company's performance for the period. An example is depreciating equipment at the end of each year to Accumulated Depreciation, which allocates the cost of the asset over its useful life. Signup and view all the answers

Study Notes

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

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

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Description

Test your knowledge on the fundamental concepts of accounting, including the accounting equation, managing assets, and understanding debits and credits. This quiz will cover essential topics for understanding financial statements and the normal balance of accounts. Perfect for students in introductory accounting classes!