49 Questions
Why does the company stick with LIFO for the rest of the book?
To save taxes
What is the Retained Earnings after rolling up the earnings from week three?
$28.00
When did the company account for the Accounts Receivable as a sale?
Two weeks ago
Which of the following best describes depreciation?
A non-cash expense that reduces earnings and taxes
What is the purpose of capitalizing an asset?
To recognize the asset's value over time
Why is depreciation considered a non-cash expense?
Because it does not affect cash
Which of the following is NOT considered a fixed asset in this text?
The cash
Why is land not depreciated?
Land lasts forever
What is the method of depreciation used in this text?
Straight Line
What is the net book value of a fixed asset?
The purchase price minus depreciation
Which section of the financial statement would the purchase of pre-made lemonade be recorded under?
Income Statement
What is the total amount of cash paid for the purchase of pre-made lemonade?
$20.00
What is the balance on the right side of the Balance Sheet after reflecting the day's sales?
$27.00
When does the Accounts Payable for the purchase of sugar show up on the Income Statement?
Never
When should a major purchase of significant value be added to the Balance Sheet?
When it increases assets
What is the purpose of capitalizing an item?
To increase the value of the item
What should be done with a major purchase that has a short life?
Expense it
Why did the lemonade business have a loss in the Earnings Week to Date?
The business didn't open for business that week
Which financial statement is NOT mentioned as one of the three statements that make up the 'financial stool'?
Statement of Retained Earnings
What method is used for managing the business's income statement and balance sheet?
Accrual Method
What does the Cash Flow Statement record?
Only cash transactions of the business
When a business buys property, plant, or equipment, it is considered a:
Fixed Asset
When a business makes a capital improvement to an asset, how is it accounted for?
Capitalized and added to the value of the asset
Based on the text, how does a business decide whether to expense or capitalize an item?
By considering both the time it takes to use the item and the cost of the item
Which financial statement does the transaction of capitalizing an asset improvement show up on?
Balance Sheet
Based on the text, what are the two main criteria for deciding whether to expense or capitalize an item?
Time and cost
What is the purpose of depreciation in accounting?
Depreciation is used to allocate the cost of a fixed asset over its useful life and to reflect the decrease in value due to wear and tear and obsolescence.
What is the purpose of depreciation and why is it considered a non-cash expense?
The purpose of depreciation is to allocate the cost of an asset over its useful life. It is considered a non-cash expense because it does not involve an actual outflow of cash.
Explain the concept of capitalizing an asset and provide an example.
Capitalizing an asset means recording it as a long-term asset on the balance sheet instead of expensing it immediately. An example would be when a business purchases a building and records it as a fixed asset.
How does depreciation affect a company's earnings and taxes?
Depreciation reduces a company's earnings and taxes without reducing its cash flow. By deducting depreciation expenses, a company's taxable income is reduced, resulting in lower taxes.
Based on the text, what method of accounting is the business using and why?
The business is using the LIFO method of accounting because it wants to save taxes.
What is the purpose of adding $5 in cash and taking away $5 in Accounts Receivable?
The purpose is to demonstrate the collection of cash from a customer who previously purchased on account.
Why is the sale of lemonade on account not accounted for as a sale now?
The sale was already accounted for on the Income Statement two weeks ago using the Accrual Method of accounting.
What are the two main reasons for not considering the purchase of pre-made lemonade a good idea?
Freshness and uniqueness of product are going down.
What is the amount of cash paid for the purchase of pre-made lemonade?
$20.00
What section of the financial statement would the purchase of pre-made lemonade be recorded under?
Purchases section of Cost of Goods Sold
When a business makes a capital improvement to an asset, how is it accounted for?
It is capitalized and added to the asset's value on the Balance Sheet
What are the three financial statements that make up the 'financial stool'?
Balance Sheet, Income Statement, Cash Flow Statement
What is the purpose of the Cash Flow Statement?
To record the cash that comes in and goes out of the business
What is a Fixed Asset and why is it called 'fixed'?
A Fixed Asset is property, plant, or equipment that a business owns. It is called 'fixed' because it refers to things not normally intended for sale, which are used over and over again in the course of doing business.
Can the purchase of a Fixed Asset be expensed on the Income Statement?
No
What is the benefit of having a sink in the lemonade stand?
Having a sink allows for washing and re-using glasses on the spot, instead of having to cart them home every night.
How is the purchase of the sink recorded in the financial statements?
The purchase of the sink is recorded by increasing the Accounts Payable by $2.00 and capitalizing the sink as an improvement to the lemonade stand.
Why is the sink capitalized instead of expensed?
The sink is capitalized because it is considered an improvement to the lemonade stand and is expected to last for years, increasing the value of the stand.
What are the two main criteria for deciding whether to expense or capitalize an item?
The two main criteria for deciding whether to expense or capitalize an item are the item's time (how long it lasts) and cost. Items that last longer than one year and exceed a set dollar amount are capitalized, while items that last less than a year or are below the set dollar amount are expensed.
What are the general guidelines for deciding whether to capitalize or expense an item?
General guidelines for deciding whether to capitalize or expense an item include considering whether the item is a major purchase of significant value that increases assets and is added to the Balance Sheet, and whether it is an improvement that increases the value of the asset or a cost of doing business.
What are the two options for accounting for the paint used to paint the lemonade stand?
The two options for accounting for the paint used to paint the lemonade stand are to either capitalize it as an improvement and add it to the Fixed Assets, or to expense it as a maintenance expense.
What should be done if the paint is of high quality and is expected to last 10 years?
If the paint is of high quality and is expected to last 10 years, it should be capitalized as an improvement and added to the Fixed Assets.
What should be done if the paint is of low quality and peels within the first year?
If the paint is of low quality and peels within the first year, it should be expensed as a maintenance expense.
Test your knowledge of financial transactions and balance sheets with this quiz. Learn about cash flow, interest, and how to properly record payments and liabilities. Challenge yourself to see if you can identify the correct actions needed to achieve balance in a financial statement.
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