BAF3M Exam Review

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Questions and Answers

What does liquidity refer to in financial terms?

  • The length of time a liability remains outstanding
  • The ease with which an asset can be converted to cash (correct)
  • The total amount of assets a company owns
  • The difference between current assets and liabilities

The chart of accounts assigns numbers to liabilities in the range of 100-199.

False (B)

What are the two accounts affected by amortization adjustments?

Amortization expense and accumulated amortization

The straight line method of depreciation allocates the same amount of depreciation to each fiscal __________.

<p>period</p> Signup and view all the answers

Match the following categories with their respective account number ranges:

<p>Assets = 100-199 Liabilities = 200-299 Owners equity = 300-399 Revenue = 400-499 Expenses = 500+</p> Signup and view all the answers

What is the primary formula for calculating net income in a service business?

<p>Net income = revenue - expenses (B)</p> Signup and view all the answers

Operating expenses are costs incurred from selling products only.

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

What does the fundamental accounting equation state?

<p>Assets - liabilities = owner's equity</p> Signup and view all the answers

In the cost of goods sold formula, the expression for COGS is given by BI + (P - D, R, A) - FI - ____ = COGS.

<p>EI</p> Signup and view all the answers

Match each term with its description:

<p>Assets = Anything a business owns Liabilities = Anything a business owes Owner's Equity = Net worth of a business Operating Expenses = Costs associated with running a business</p> Signup and view all the answers

What principle requires accountants to use the same methods over time?

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

Current assets must be paid within a year.

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

What are contra accounts?

<p>Accounts that are paired but contrary to each other.</p> Signup and view all the answers

Owners' equity can be calculated as _____ minus liabilities.

<p>assets</p> Signup and view all the answers

Match the following types of accounts with their descriptions:

<p>Current Assets = Convertible into cash within a year Fixed Assets = Used in operations for over a year Current Liabilities = Must be paid within a year Long Term Liabilities = Not due within a year</p> Signup and view all the answers

Which of the following describes the materiality principle?

<p>GAAPs are not followed when they are prohibitively expensive. (D)</p> Signup and view all the answers

Assets listed in the current assets category are ordered by liquidity.

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

Give an example of a current liability.

<p>Accounts payable</p> Signup and view all the answers

Which GAAP principle assumes that a business will continue to operate in the foreseeable future?

<p>Continuing concern concept (C)</p> Signup and view all the answers

The matching principle requires that expenses be recorded in the same accounting period as the revenue they generate.

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

What does GAAP stand for?

<p>Generally Accepted Accounting Principles</p> Signup and view all the answers

Under the __________ principle, revenue is recorded when it is earned, not necessarily when cash is received.

<p>revenue recognition</p> Signup and view all the answers

Match the following GAAP principles with their descriptions:

<p>Business entity concept = Accounting for a business is separate from its owner's personal affairs Objectivity principle = Accounting is recorded based on objective evidence Principle of conservatism = Fair and reasonable accounting without overstatement or understatement Time period concept = Accounting occurs over specific fiscal periods</p> Signup and view all the answers

Which of the following is NOT a type of account?

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

The account numbers used in ledgers are not relevant to the accounting process.

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

What is the primary purpose of a Classified Balance Sheet?

<p>To present assets and liabilities in categories for better clarity</p> Signup and view all the answers

What is the new value of the asset after depreciation in Year 3?

<p>7680 (B)</p> Signup and view all the answers

The gross profit is calculated before subtracting operating expenses.

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

How do you calculate the insurance expense from a prepaid insurance policy?

<p>Insurance policy value at start of period divided by time remaining in policy, then multiplied by 12.</p> Signup and view all the answers

Net sales = sales - __________ - __________.

<p>sales discounts, sales returns and allowances</p> Signup and view all the answers

Match the adjustment types with their corresponding accounts affected:

<p>Prepaid Expenses = Insurance Expense &amp; Prepaid Insurance Interest = Interest Expense &amp; Cash Unpaid Accounts = Bad Debt Expense &amp; Allowance for Doubtful Accounts Salary = Salaries Expense &amp; Salaries Payable</p> Signup and view all the answers

How is gross profit calculated?

<p>Net sales - cost of goods sold (A)</p> Signup and view all the answers

What is net income?

<p>The final total on an income statement.</p> Signup and view all the answers

Merchandise inventory adjustments appear on the adjusting entries section.

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

Flashcards

Amortization

The process of allocating the cost of a fixed asset over its useful life as an expense.

Business Entity Concept

The accounting for a business is separate from the owner's personal finances.

Accumulated Amortization

A contra-asset account that accumulates the total amount of depreciation expense recognized on a fixed asset.

Continuing Concern Concept

Assumes a business will continue operating unless there's evidence to the contrary.

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Straight-line method

A method of depreciation that allocates an equal amount of depreciation expense to each fiscal period.

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Principle of Conservatism

Accounting should be fair and reasonable, not exaggerating or underestimating.

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Declining balance method

A method of depreciation where the asset depreciates at a declining percentage each year, resulting in higher depreciation in the early years and lower depreciation in later years.

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Objectivity Principle

Accounting records are based on objective evidence, ensuring everyone arrives at the same value.

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Salvage Value

The amount that an asset is expected to be worth at the end of its useful life.

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Revenue Recognition Principle

Revenue is recorded when it's earned, regardless of when payment is received.

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Matching/Expense Principle

Costs related to revenue are recorded in the same accounting period as the revenue they generated.

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Time Period Concept

Accounting occurs over specific time periods, such as months or years.

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Net Income

The remaining profit of a business after subtracting all expenses from its revenue.

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Operating Expenses

Expenses associated with the day-to-day operations of a business, such as rent, utilities, and salaries.

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Cost of Goods Sold Equation

The formula used to calculate the cost of goods sold (COGS), which represents the direct costs associated with producing or acquiring goods for sale.

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Balance Sheet

A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.

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Income Statement

A financial statement that reports a company's revenue and expenses over a specific period of time.

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Consistency Principle

Ensures consistent accounting methods for better comparability over time. This includes using the same rules and procedures for financial reporting from one period to the next. Changes must be clearly explained in financial statements.

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Cost Principle

Things are recorded at their original cost, not their changing market value. It's based on the actual price paid when the item was acquired.

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Current Assets

Items that can be quickly converted to cash, sold, or consumed within one year. They are listed in order of how easily they can be transformed into cash.

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Fixed Assets

Assets used in the business for more than a year. They are listed based on how long they are expected to last.

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Current Liabilities

Debts that must be paid within a year or less. They are listed in order of when they are due.

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Long-term Liabilities

Debts that are not due for payment within a year. They are listed in order of when they are due for repayment.

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Owners Equity

Includes capital (net worth), owner withdrawals (drawings), revenue (income), and expenses (costs of doing business).

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Contra Accounts

Accounts that are directly related but have opposite balances - one is typically a debit and the other a credit. Example: sales are a credit and sales returns are a debit.

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Depreciation

The value of an asset after accounting for depreciation over a period.

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Accrued Expense

A type of adjusting entry that accounts for expenses incurred but not yet paid for at the end of an accounting period.

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Accrued Revenue

A type of adjusting entry that accounts for revenue earned but not yet collected at the end of an accounting period.

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Prepaid Expense Adjustment

A type of adjusting entry that accounts for prepaid expenses that have been used up during an accounting period.

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Net Sales

The total sales revenue generated by a business after excluding returns, allowances, and discounts but before deducting the cost of goods sold.

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Gross Profit

The profit a business makes after subtracting the cost of goods sold from the net sales.

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Prepaid Expenses Adjustment

An adjusting entry that accounts for the portion of a prepaid expense that has been used up during an accounting period.

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Study Notes

BAF3M Exam Review

  • Exam Breakdown:
    • Part A: True/False (25 minutes)
    • Part B: Multiple Choice (25 minutes)
    • Part C: Problem Solving (40 minutes)
    • Part D: Review (10 minutes)
    • Total Exam Time: 120 minutes

Part A & B: True/False & Multiple Choice

  • Knowledge Basis:

    • Generally Accepted Accounting Principles (GAAPs)
    • Types of accounts (Assets, Liabilities, Owner's Equity, Revenue, Expenses, Contra Accounts)
    • Account Order (Liquidity, Maturity)
    • Accounting Procedures (Ledger, Posting, Account Numbers)
    • Depreciation Methods (Declining Balance, Straight-Line)
    • Financial Statements (Balance Sheet, Income Statement, what each column means)
    • Fundamental Accounting Equation

  • Diagram/Chart Analysis:

    • Analyzing Total Liabilities & Total Assets
    • Calculating Net Income & Gross Profit

  • Worksheet Analysis:

    • Understanding account totals
    • Performing appropriate adjustments

Part C: Problem Solving

  • Focus Areas:
    • Financial Statement Analysis
    • Calculating Cost of Goods Sold (COGS)
    • Creating a Classified Balance Sheet

Additional Review Material

  • Review all lessons, tests, quizzes, and handouts.

Accounting Principles (From Additional Pages)

  • Business Entity Concept: Business transactions are separate from the owner’s personal affairs.
  • Continuing Concern Concept: Businesses will continue to operate unless otherwise stated.
  • Conservatism Principle: Accounting information should be fair and reasonable, not over or understating.
  • Objectivity Principle: Accounting should be based on verifiable evidence.
  • Revenue Recognition Principle: Revenue is recorded when earned, not necessarily when cash is received.
  • Matching/Expense Principle: Costs related to revenue are recorded in the same period as the revenue.
  • Time Period Concept: Accounting occurs over specific periods (fiscal periods).
  • Cost Principle: Assets are recorded at the original cost.
  • Consistency Principle: Similar accounting methods should be used consistently from period to period.
  • Materiality Principle: Accounting principles are usually followed, unless following them would be too costly.
  • Full Disclosure Principle: All relevant financial information needs to be included with financial statements.

Types of Accounts (From Additional Pages)

  • Current Assets: Assets converted to cash within a year. (Cash, Accounts Receivable, Prepaid Expenses, Supplies, Inventory)
  • Fixed Assets: Assets with a useful life over a year. (Land, Buildings, Equipment)
  • Current Liabilities: Liabilities payable within a year. (Accounts Payable, Salaries Payable, HST, Current Portion of Mortgage Payable)
  • Long-Term Liabilities: Liabilities not due within a year. (Loan Payable, Mortgage Payable)
  • Owners Equity: Net worth of the business. (Capital, Drawings, Revenue, Expenses)
  • Contra Accounts: Accounts that are opposite to another account. (Drawings, Capital, HST Recoverable/Payable, Accounts Receivable/Allowance for Doubtful Accounts, Amortization).

Journalizing & General Ledger (From Additional Pages)

  • General Ledger: Where journal entries are recorded in individual account
  • Chart of Accounts: Numbers used to identify accounts (Assets (100-199), Liabilities (200-299), Owner's Equity (300-399), Revenue (400-499), Expenses (500+)).
  • Posting Reference (PR): Shows chart of accounts numbers.

Adjusting Entries (From Additional Pages)

  • Amortization: Allocating the cost of a fixed asset to expense over its useful life.
  • Straight-Line Amortization: Equal amounts of amortization each period.
  • Prepaid Expenses: Expenses paid in advance.
  • Supplies: Used or expired supplies during the accounting period.
  • Interest: Interest expense for debts.
  • Salaries: When salaries are paid.
  • Unpaid Accounts: Bad debts expense and allowance for doubtful accounts.
  • Merchandise Inventory and Mortgage Payable: Adjustments for these items are made only on the balance sheet.

Key Equations (From Additional Pages)

  • Cost of Goods Sold (COGS): Beginning Inventory + Purchases - Purchase Discounts and Returns and Allowances - Ending Inventory = COGS
  • Net Sales: Sales - Sales Returns and Allowances - Sales Discounts

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