Financial Accounting Chapters 1-4

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Questions and Answers

What account is used to track amounts owed to vendors?

Accounts Payable (correct)

Cost of Goods Sold

Accounts Receivable

Sales Revenue

If a company sells goods to a customer on credit, which account is used to track the amount owed by the customer?

Accounts Payable

Accounts Receivable (correct)

Cost of Goods Sold

Sales Revenue

What is the process of transferring debit and credit information from the journal to individual general ledger accounts called?

Balancing

Adjusting

Posting (correct)

Journalizing

Which side of a T-account represents credits?

Right (A) Signup and view all the answers

What is a trial balance used for?

Summarizing account balances at a specific date (A) Signup and view all the answers

Which of the following is NOT a purpose of a trial balance?

Recording daily transactions (A) Signup and view all the answers

What is the primary objective of adjusting entries?

Reflecting accrual accounting principles in financial statements (B) Signup and view all the answers

What happens to the accounting period after final financial statements are prepared?

It is closed (B) Signup and view all the answers

Which of the following is NOT considered an investing activity?

Issuing bonds to raise capital (D) Signup and view all the answers

What is the primary purpose of financial accounting?

To provide information to external stakeholders, such as investors and creditors (C) Signup and view all the answers

Which of the following is NOT a key financial statement?

Statement of Changes in Working Capital (B) Signup and view all the answers

Which of the following would be classified as a liability?

Bonds payable (A) Signup and view all the answers

What is the purpose of the statement of stockholders’ equity?

To show the changes in the company's ownership structure and equity over a period of time (D) Signup and view all the answers

What is the difference between accrual-basis accounting and cash-basis accounting?

Accrual-basis accounting recognizes revenues and expenses when they are earned or incurred, while cash-basis accounting recognizes them when cash is received or paid. (C) Signup and view all the answers

What does it mean to “close” temporary accounts at the end of the accounting period?

To transfer the balances of temporary accounts to the retained earnings account (D) Signup and view all the answers

Which of the following is NOT a characteristic of a corporation?

Profits are taxed directly to the owners of the business (A) Signup and view all the answers

What journal entry should be made to record the write-off of a specific customer account receivable that is deemed uncollectible?

Debit: Allowance for Uncollectible Accounts; Credit: Accounts Receivable (D) Signup and view all the answers

What is the purpose of using the allowance method for uncollectible accounts?

To recognize the estimated amount of uncollectible accounts at the end of each accounting period. (A) Signup and view all the answers

When a company writes off an uncollectible account, what is the impact on total assets and total expenses?

Total assets remain the same; total expenses remain the same. (A) Signup and view all the answers

How does the allowance method differ from the direct write-off method for uncollectible accounts?

The allowance method estimates uncollectibles at the end of each period, while the direct write-off method records them when they are deemed uncollectible. (C) Signup and view all the answers

Which of the following statements regarding the allowance for uncollectible accounts is true?

The allowance for uncollectible accounts is a credit balance account. (A) Signup and view all the answers

What does the term 'aging of accounts receivable' refer to?

The process of estimating uncollectible accounts based on the length of time receivables are outstanding. (D) Signup and view all the answers

Which of the following is NOT a factor that would influence a company's estimate of uncollectible accounts?

The company's cash flow statement. (D) Signup and view all the answers

What is the general journal entry to record the adjustment for estimated uncollectible accounts using the allowance method?

Debit: Bad Debt Expense; Credit: Allowance for Uncollectible Accounts (B) Signup and view all the answers

Which account is used to track the total amount of depreciation expense that has been recorded for all plant, property, and equipment assets?

Accumulated Depreciation (D) Signup and view all the answers

A company purchases office supplies on credit. Which account is used to track the amount owed to the supplier?

Accounts Payable (B) Signup and view all the answers

Which of the following accounts would be increased when a company receives cash from a customer for an outstanding invoice?

Cash (B) Signup and view all the answers

What is the purpose of the 'Lower of Cost or Market Adjustment' in the Inventory account?

To adjust the inventory balance to its fair market value (C) Signup and view all the answers

Which of the following accounts would be used to track the estimated amount of uncollectible receivables from customers?

Allowance for Uncollectible Accounts (B) Signup and view all the answers

A company pays for a one-year insurance policy in advance. Which account would be credited to record the payment?

Cash (A) Signup and view all the answers

A company writes off a specific customer account as uncollectible. Which of the following accounts would be affected?

All of the above (D) Signup and view all the answers

Which account is used to track the amount of wages owed to employees but not yet paid?

Wages (Salaries) Payable (C) Signup and view all the answers

Which of the following is NOT considered a typical adjustment to be made at the end of an accounting period?

Inventory Valuation (D) Signup and view all the answers

What is the main purpose of closing temporary accounts at the end of an accounting period?

To reset the temporary accounts to zero for the next accounting period. (B) Signup and view all the answers

When a company receives cash in advance from customers for goods or services that will be delivered later, what type of account arises?

Deferred Revenue (D) Signup and view all the answers

Which of the following BEST describes the concept of accrued expenses?

Expenses that have been incurred but not yet paid for. (A) Signup and view all the answers

What is the primary difference between accrued revenues and deferred revenue?

Accrued revenue is earned before it is collected, while deferred revenue is collected before it is earned. (A) Signup and view all the answers

In the context of accounting, when does revenue recognition typically occur?

When control of the goods or services is transferred to the customer. (A) Signup and view all the answers

What is the primary purpose of preparing a trial balance after adjustments have been posted?

To ensure all accounts are properly classified and balanced. (C) Signup and view all the answers

Which of the following is NOT transferred to Retained Earnings when closing the temporary accounts at the end of the accounting period?

Accumulated Depreciation (C) Signup and view all the answers

What is the primary difference between operating income and pre-tax income?

Operating income includes only revenue from core business activities, while pre-tax income includes revenue from both core and non-core activities. (D) Signup and view all the answers

Which of the following individuals or entities is NOT typically considered a stakeholder in a company?

Competitors (D) Signup and view all the answers

What is the role of source documents in accounting?

Source documents provide evidence of transactions and support their recording. (B) Signup and view all the answers

Which of the following sub-totals in a multi-step income statement is calculated by subtracting the cost of goods sold from sales revenues?

Gross profit (B) Signup and view all the answers

The Expanded Accounting Equation demonstrates the relationship between:

Assets, liabilities, and owner's equity (D) Signup and view all the answers

Which of the following best describes the meaning of "on credit" or "on account" in the context of a transaction between two businesses?

The transaction is paid for later, typically within a specific timeframe. (B) Signup and view all the answers

When a company records its transactions using debits and credits, what is the primary goal?

To ensure that the accounting equation remains balanced (C) Signup and view all the answers

What is the primary purpose of the Statement of Cash Flows?

To explain the changes in cash balances during the accounting period. (B) Signup and view all the answers

Study Notes

Skills List

Chapter 1: Recognize business activities measured by financial accounting, describe the role of financial accounting in decision making, understand the four key financial statements and related information.
Chapter 2: Describe various asset classifications and measurement methods, describe liability and stockholders' equity classifications, describe revenues, expenses, gains, and losses, calculate different income measures, identify operating, investing, and financing cash flows, understand the purpose of the statement of stockholders' equity.
Chapter 3: Analyze the effects of transactions on assets, liabilities, and stockholders' equity, analyze the effects of transactions on revenues, expenses, and dividends, prepare a trial balance, prepare a preliminary balance sheet and income statement.
Chapter 4: Understand when assets, liabilities, revenues, and expenses are recorded, distinguish between accrual-basis and cash-basis accounting, adjust account balances at the end of the period, calculate adjusted balances of all accounts, prepare financial statements using adjusted account balances, close temporary account balances.
Chapter 5: Revenue Recognition - explain when revenue is recognized at a point in time, explain when revenue should be recognized over a period of time, calculate net revenues using sales returns and sales discounts, Accounts Receivable Recognition and Valuation - recognize accounts receivable at the time of credit sales, establish an allowance for uncollectible accounts, write off accounts receivable as uncollectible.

Study Aid

Chapter 1 - Financial Accounting Overview: All business activities can be categorized into three types: Operating (primary company operations), Investing (purchasing and selling resources), and Financing (transactions with investors and creditors).

Additional Notes

Accounting Equation: Assets = Liabilities + Stockholders' Equity
Financial Statements: Balance Sheet - reports financial position at a point in time, Income Statement - reports revenues and expenses during a period, Statement of Stockholders' Equity - reports changes in stockholders' equity, Statement of Cash Flows - reports cash inflows and outflows during a period.
Common Balance Sheet Elements: Assets (Cash, Accounts Receivable, Inventory, etc.), Liabilities (Accounts Payable, Notes Payable, etc.), and Stockholders' Equity (Common Stock, Retained Earnings).
Common Income Statement Elements: Revenues, Expenses, Gains, Losses, Net Income.
Financial Statement Attributes: Financial statements provide information about a company's position and performance. Balance sheets report a company's financial position at a point in time, while income statements describe the results of operations over a period.

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Description

Test your knowledge on the foundations of financial accounting through Chapters 1 to 4. This quiz covers business activities, financial statements, asset classifications, and the effects of transactions on financial statements. Develop a comprehensive understanding of how accounting impacts business decision-making.