ACC Exam Study Guide PDF

**The primary role of accounting is to determine the amount of taxes a business will be required** **to pay to taxing entities.** A. True B. False 2. **All of the following are general-purpose financial statements except a(n)** A. balance sheet B. income statement C. statement of st...

**The primary role of accounting is to determine the amount of taxes a business will be required** **to pay to taxing entities.** A. True B. False 2. **All of the following are general-purpose financial statements except a(n)** A. balance sheet B. income statement C. statement of stockholders' equity D. cash budget 3. **Two common areas of accounting that respectively provide information to internal and** **external users are** A. forensic accounting and financial accounting B. managerial accounting and financial accounting C. managerial accounting and environmental accounting D. financial accounting and tax accounting systems 4. **If the liabilities owed by a business total \$300,000 and stockholders\' equity is equal to** **\$300,000, then the assets also total \$300,000.** A. True B. False 5. **Which of the following are guidelines for behaving ethically?** I. Identify the consequences of a decision and its effect on others. II. Consider your obligations and responsibilities to those affected by your decision. III. Identify an ethical decision by using your personal ethical standards of honesty and fairness A. I and II B. II and III C. I and III D. I, II, and III 6. **To determine the balance in an account, always subtract credits from debits.** A. True B. False 7. May 23 Cash 22,000 ----- ---- -------------- -- -------- -------- Common Stock 22,000 **This journal entry will...** A. increase Common Stock and decrease Cash B. increase Cash and decrease Common Stock C. increase Cash and increase Common Stock D. decrease Cash and decrease Common Stock 8. March 10 Accounts Payable 800 ------- ---- ------------------ -- ----- ----- Cash 800 **What effects does this journal entry have on the accounts?** A. decrease Accounts Payable and increase Cash B. increase Accounts Payable and decrease Cash C. increase Accounts Payable and increase Cash D. decrease Accounts Payable and decrease Cash 9. **Accounts are records of increases and decreases in individual accounting equation elements.** A. True B. False 10. **The normal balance of the dividends account is a debit.** A. True B. False 11. **The increases in stockholders\' equity attributable to selling services or products to customers** **are called** A. assets B. liabilities C. revenues D. expenses 12. **The payment of cash to a creditor on account has what effect on the accounting equation?** A. increases assets; increases liabilities B. increases liabilities; decreases stockholders\' equity C. increases assets; decreases assets D. decreases assets; decreases liabilities **13. A purchase of supplies on credit has what effect on the accounting equation?** A. increases assets; increases liabilities B. increases liabilities; decreases stockholders\' equity C. increases assets; increases stockholders\' equity D. decreases assets; decreases liabilities **14. Transactions affecting stockholders\' equity include** A. stockholder investments and payment of liabilities B. stockholder investments, dividends, earning of revenues, and incurrence of expenses C. stockholder investments, earning of revenues, incurrence of expenses, and collection of accounts receivable D. stockholder dividends, earning of revenues, incurrence of expenses, and purchase of supplies on account **15. When a business receives an invoice from a creditor, no entry should be made until the** **invoice is paid.** A. True B. False **16. A client has a massage and asks the company bookkeeper to mail her the bill. The** **bookkeeper should make which entry to journalize the invoice?** A. No entry until the cash is received B. debit Fees Earned; credit Accounts Receivable C. debit Cash; credit Fees Earned D. debit Accounts Receivable; credit Fees Earned **17. A company depreciates its equipment by \$500 per year. The adjusting entry on December 31** **is a debit to Depreciation Expense for \$500 and a credit to Equipment for \$500.** A. True B. False **18. Which of the following account groups are temporary accounts?** A. Cash, Dividends, Wages Payable B. Prepaid Insurance, Equipment, Fees Earned C. Common Stock, Dividends, Retained Earnings D. Rent Revenue, Fees Earned, Miscellaneous Expense **19. The entry to close a debit in the appropriate insurance account at the end of the accounting** **period is** A. debit Retained Earnings; credit Prepaid Insurance B. debit Prepaid Insurance; credit Retained Earnings C. debit Insurance Expense; credit Retained Earnings D. debit Retained Earnings; credit Insurance Expense **Use this end-of-period spreadsheet to answer questions 20 - 22 that follow.** **Finley Company** **End-of-Period Spreadsheet** **For the Year Ended December 31** ----------------------- ------------------------ -------------------------------- ----------------------- ----------------------- ----------------------- ----------------------- Adjusted Trial Balance Income Statement Balance Sheet Account Title Debit Credit Debit Credit Debit Credit Cash 48,000 48,000 Accounts Receivable 18,000 18,000 Supplies 6,000 6,000 Equipment 57,000 57,000 Accumulated Depr. 18,000 18,000 Accounts Payable 25,000 25,000 Wages Payable 6,000 6,000 Common Stock 30,000 30,000 **Retained Earnings** 3,000 3,000 Dividends 3,000 3,000 Fees Earned 155,000 155,000 Wages Expense 63,000 63,000 Rent Expense 27,000 27,000 Depreciation Expense [15,000] [\_\_\_\_\_\_\_\_] [15,000] \_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_ \_\_\_\_\_\_\_ [237,000] [237,000] 105,000 155,000 132,000 82,000 **Net Income** 50,000 \_\_\_\_\_\_ \_\_\_\_\_\_\_ 50,000 [155,000] [155,000] [132,000] [132,000] ----------------------- ------------------------ -------------------------------- ----------------------- ----------------------- ----------------------- ----------------------- **20. The effect of closing revenues and expenses to Retained Earnings will be to** A. increase Retained Earnings by \$50,000 B. decrease Retained Earnings by \$50,000 C. increase Retained Earnings by \$237,000 D. decrease Retained Earnings by \$237,000 **21. The journal entry to close revenues and expenses would involve** A. debits to the expense accounts and Retained Earnings and a credit to Fees Earned B. debits to the expense accounts and credits to Retained Earnings and Fees Earned C. a **debit** to **Fees Earned** and **credits** to the **expense accounts** and **Retained Earnings** D. debits to Fees Earned and Retained Earnings and credits to the expense accounts **22. The entry to close Dividends would be** A. debit Common Stock, \$3,000; credit Retained Earnings, \$3,000 B. debit Retained Earnings, \$3,000; credit Common Stock, \$3,000 C. debit Retained Earnings, \$3,000; credit Dividends, \$3,000 D. **debit** Dividends, \$3,000; **credit** Retained Earnings, \$3,000b bgftv **23. Which of the following are the correct parts of a T account?** A. title, date, total B. date, debit side, credit side C. title, debit side, credit side D. title, debit side, total **24. Which of the following types of accounts have a normal credit balance?** A. assets and liabilities B. liabilities and expenses C. revenues and common stock D. common stock and dividends **25. The financial statements are prepared from the unadjusted trial balance.** A. True B. False **26. The balance sheet should be prepared** A. before the income statement and the statement of stockholders\' equity B. before the income statement and after the statement of stockholders\' equity C. after the income statement and the statement of stockholders\' equity D. after the income statement and before the statement of stockholders\' equity **27. Assets (such as supplies or prepaid insurance) that are used up or consumed during the** **process of earning revenue are called expenses.** A. True B. False **28. Using accrual accounting, revenues are recorded** A. When ~~cash~~ is received without regard to when the services are performed or products have been delivered to customers B. When a service has been performed or products have been delivered to customers without regard to when cash is received C. When ~~cash~~ is received at the time services are performed or products have been delivered to customers D. Only if ~~cash~~ is received after the services are performed or products have been delivered to customers **29. Using accrual accounting, expenses are recorded and reported only** A. when they are incurred, whether or not cash is paid B. when they are incurred and paid at the same time C. if they are paid before they are incurred D. if they are paid after they are incurred **30. Smokey Company purchases a 1-year insurance policy on July 1 for \$3,600. The adjusting** **entry on December 31 is** A. debit Insurance Expense, \$1,800; credit Prepaid Insurance, \$1,800 B. debit Insurance Expense, \$1,500; credit Prepaid Insurance, \$1,500 C. debit Insurance Expense, \$2,100; credit Prepaid Insurance, \$2,100 D. debit Prepaid Insurance, \$1,800; credit Cash, \$1,800 **[1. CLOSING ENTRIES]** **What are they?** - **Closing entries** are the journal entries made at the end of an accounting period to **reset temporary accounts** (revenues, expenses, and dividends) to **zero** so they can start fresh for the next period. **Why do we record them?** - We record them to **transfer the balances** from temporary accounts into **Retained Earnings**, which is a permanent account that tracks the company's overall equity. **What type of accounts do they impact (or do not impact)?** - **Impact temporary accounts**: - **Revenues**, **Expenses**, and **Dividends** are temporary accounts that get closed (reset to zero). - **Do not impact permanent accounts**: - **Assets**, **Liabilities**, and **Equity** are permanent accounts and are **not reset** at the end of the period. **When do we record them?** - Closing entries are made at the **end of the accounting period**, typically at the end of the month, quarter, or year. **[2. TRANSACTIONS IMPACTING THE ACCOUNTING EQUATION]** **The Accounting Equation:** **Assets = Liabilities + Equity** A **business transaction** will affect one or more of these categories (assets, liabilities, or equity). Every transaction **must keep this equation balanced**. **Examples:** - **Pay a creditor**: - You're paying off a debt. - **Cash (asset) decreases**, and **Liabilities decrease**. - **Purchase land**: - **Assets increase** (you get land), but another **Asset (cash) decreases** (you pay for the land). - **Receive cash from a credit customer**: - **Cash (asset) increases**, and **Accounts Receivable (asset) decreases** (because the customer paid you). - **Exchange cash for stock** to start a business: - **Cash (asset) increases**, and **Equity increases** (because investors gave you cash in exchange for stock). **[3. DEBIT VS. CREDIT]** - Every transaction has **debits** and **credits**, and they must balance. **The "Rules":** 1. **Assets**: - Increase with a Debit and Decrease with a Credit. 2. **Liabilities**: - Increase with a Credit and Decrease with a Debit. 3. **Equity**: - Increase with a Credit and Decrease with a Debit. 4. **Revenues**: - Increase with a Credit. 5. **Expenses and Dividends**: - Increase with a Debit. **Key concept**: **Debits** and **Credits** must always equal each other in every transaction. **[4. JOURNAL ENTRY TRANSACTIONS]** Here's how to record a few example transactions: - **Pay a creditor on account**: - **Debit Accounts Payable** (liability decreases). - **Credit Cash** (asset decreases). - **Purchase land**: - **Debit Land** (asset increases). - **Credit Cash** (asset decreases). - **Receive cash from a credit customer**: - **Debit Cash** (asset increases). - **Credit Accounts Receivable** (asset decreases because the customer paid). - **Start a business by exchanging cash for stock**: - **Debit Cash** (asset increases). - **Credit Common Stock** (equity increases). - **Pay dividends**: - **Debit Dividends** (equity decreases). - **Credit Cash** (asset decreases). **5[. ADJUSTING JOURNAL ENTRIES]** Adjusting entries are made at the end of the accounting period to make sure everything is up to date. **Types of Adjustments:** - **Accruals**: When you record **revenue or expenses before cash is received/paid**. - **Accrued Revenue**: You earned revenue but haven't been paid yet. - **Debit Accounts Receivable**, **Credit Revenue**. - **Accrued Expense**: You owe an expense but haven't paid it yet. - **Debit Expense**, **Credit Accounts Payable**. - **Deferrals**: When you **pay or receive cash before the revenue or expense is recognized**. - **Prepaid Expense**: You paid for something in advance (e.g., insurance). - **Debit Prepaid Insurance (asset)**, **Credit Cash**. - **Unearned Revenue**: You received cash for a service you haven't provided yet. - **Debit Cash**, **Credit Unearned Revenue (liability)**. **[6. CALCULATIONS]** Let's go over some important formulas and concepts. **The Balance Sheet (Accounting Equation):** Assets= Liabilities + Equity **Income Statement:** Net Income = Revenues− Expenses **Statement of Retained Earnings:** Ending Retained Earnings = Beginning Retained Earnings + Net Income − Dividends **Working Capital:** Working Capital = Current Assets − Current Liabilities **Current Ratio:** Current Ratio=Current Assets/Current Liabilities A higher current ratio means better liquidity (the company can easily pay its short-term debts). **[7. ETHICS]** In accounting, behaving ethically means: - Providing **accurate and honest** financial information. - Following **rules and laws**. - Acting in the **best interest** of all stakeholders (employees, investors, customers, etc.). **[8. ROLE OF ACCOUNTING]** - **Who uses accounting information?** - **Internal Users**: Managers and employees use accounting to make decisions. - **External Users**: Investors, creditors, and government agencies use financial statements to assess the company's financial health. - **Why is accounting important?** - Accounting provides the information needed to make business decisions, track performance, and ensure transparency. **[9. MANAGERIAL VS. FINANCIAL ACCOUNTING]** - **Managerial Accounting**: - Provides information for **internal users** (managers) to help with decision-making and running the company. - **Financial Accounting**: - Provides information for **external users** (investors, creditors) in the form of financial statements that comply with regulations. **[10. THE ACCOUNTING CYCLE]** The accounting cycle consists of several steps that happen during a period. You don't need to memorize every part, but here are the major things: **Three Sets of Trial Balances:** 1. **Unadjusted Trial Balance**: - This is prepared after recording all transactions but **before adjustments**. 2. **Adjusted Trial Balance**: - This is prepared after recording the **adjusting journal entries** (accruals and deferrals). 3. **Post-Closing Trial Balance**: - This is prepared after making the **closing entries** (revenues, expenses, and dividends closed to Retained Earnings) **[SUMMARY]** - **Closing entries** reset temporary accounts at the end of a period. - **Debits increase assets and expenses**, while **credits increase liabilities and equity**. - **Accruals** record when things happen before cash moves, and **deferrals** record when cash moves before the event happens. - Use the **balance sheet** and **income statement** to assess a company\'s financial health. - **Financial accounting** is for external users, while **managerial accounting** is for internal users.