Accounting Exit Exam Review Questions PDF

Review questions for Accounting Exit Exam with Answers 1. What is the accounting equation? Assets = Liabilities + Owner’s Equity (optional to include Revenues and Expenses) 2. Adding Property Plant or Equipment into a business through an investment by the owner would: a. Increase expenses...

Review questions for Accounting Exit Exam with Answers 1. What is the accounting equation? Assets = Liabilities + Owner’s Equity (optional to include Revenues and Expenses) 2. Adding Property Plant or Equipment into a business through an investment by the owner would: a. Increase expenses and increase assets b. Increase one asset and decrease another asset c. Decrease one asset and increase another asset d. Increase O.E. and increase assets 3. Paying off an account payable with Cash would: a. Increase assets and decrease O.E. b. Increase liabilities and decrease assets c. Increase O.E. and decrease liabilities d. Decrease assets and decrease liabilities 4. Define the terms debit and credit. Which side of a T-account to they fall on? Debits fall on the Left side of a T-Account They increase Assets and Expenses while decreasing liabilities, owner’s equity, and revenue Credits fall on the Right side of a T-Account. The increase liabilities, owner’s equity, and revenue while decreasing assets and expenses 5. What does the term normal balance of accounts mean and identify what the normal balance is of each of the categorizes listed in #1? The normal balance is the side that will increase (+) the certain account. Asset normal balance = Debit Liability normal balance = Credit O.E. normal balance = Credit 6. What is a trial balance and what is its purpose? a. Listing of all accounts with their GL balance b. Separated into two columns: Debits and Credits c. Used to verify debits = credits The trial balance is a report in which all of the accounts are listed with debits and credits. The total amount of debt for each account must match the total amount of credit for each account. The trial balance is performed to catch errors that might have occurred during the accounting process. 7. All of the following are Assets except? a. Retained Earnings b. Cash c. Accounts Receivable d. Inventory 8. How do you know when to expense a purchase or add it as an asset? Expense – Items that will be used within the current accounting cycle and will not last more than a year (Rent, advertising, computer ink, paper, small purchases Asset – Large items that will be used over the course of many years – systemically depreciate these items over their useful life (vehicles, computers, buildings…) 9. (4 pts) Define Accrual Accounting and Cash Accounting. Which is required for Gap? Which can be used for tax purposes? Accrual Accounting – records revenues and expenses when they occur, regardless of when cash is exchanged. Cash Accounting – records revenues when cash is received, and records purchases when cash is paid out. GAAP requires Accrual Accounting. Either can be used for tax purposes. 10. (3) What are adjusting entries, why are they important, and provide a detailed example Adjusting entries - journal entries made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred. Important - Get accounts to their proper balance Example – Depreciating a piece of equipment at the end of each year to Accumulated Depreciation. 11. (3) What is a Contra account and give two examples of contra accounts. An account with an opposite + - as its parent account. A normal asset as a + - setup (debits increase assets). However Accumulated Depreciation has a - + setup and while a credit increases the A/D, it actually decreases total Assets. 12. (4 pts) List the four principle financial statements for a sole proprietorship. - Income Statement - Statement of Owners Equity  - Balance Sheet - Statement of Cash Flows 13. Which financial statement(s) retain(s) all of its balances into the next year? - Balance Sheet 14. A company purchased prepaid six months of rent November 1, 2008 for $3,000. As of Dec. 31, 2008, what would be the prepaid rent balance? -2,000 15. (3 pts) A company purchased $1,000 of supplies on July 1, 2008 and listed them as an asset (rather than expensing them upfront). As of the Dec. 31, 2008 supply count, there are $300 left in supplies. Provide the Journal Entry to account for this. Supply Expense 700 Supplies 700 16. Define the term Book Value. - What a particular account is actually worth on the books. For example, a piece of equipment listed at 10,000 with $4,000 Accumulated Depreciation would have a book value of $6,000. The historic listing value less accumulated depreciation. 17. Depreciation - Provide the Dec. 31, 2008 depreciation expense for a machine that was purchased Jan. 1, 2006 and has a 5-year useful life with a $3,000 residual value (salvage value). The machine was purchased for $23,000. The Machine is estimated to produce 500,000 total units during its life. During 2008, the machine produced 150,000 units a. (2 pts) Straight line depreciation = - (23,000 – 3,000) / 5 = $4,000 b. (2 pts) Double Declining depreciation = -Yr 1 = 23,000 x.4 = 9,200 Yr 2 = 13,800 x.4 = 5,520 Yr 3 = 8,280 x.4 = $3,312 c. (2 pts) Units of Production = (23,000 – 3,000) x (150,000 / 500,000) = $6,000 FYI: Closing entries are to be done in the regular General Journal. There is no such thing as a Closing journal or special journal for closing entries. 18. What are liquid assets? Cash and cash equivalents. Cash equivalents are investments that can be converted into a known amount of cash in three months or less 19. Which asset is most liquid? - Cash 20. Define current assets and list at least 3 accounts that are current assets. -Assets that can be converted to cash, sold or used during the operating cycle or one year whichever is shorter. Accounts Receivable, Inventory, Supplies 21. Define FOB Shipping point and FOB Destination. Why are these important to accountants? FOB Shipping point – shipping term that requires the buyer to pay shipping costs FOB Destination - shipping term that requires the seller to pay shipping costs These terms are important not only for who will pay shipping but also to determine when ownership of inventory transfers from seller to buyer. 22. What does 2/10 net 30 mean? This is a sales discount used to encourage early payment by customers. It means the customer may deduct 2% from the selling price provided the bill is paid within ten days of the invoice date. Otherwise the full invoice amount is due in 30 days 23. If a company purchases an asset for $3,000 on July 1st with 3/15 net eom terms, how much would the company owe if they paid on July 10th? ($3,000 X 97%) = $2,910 or $3,000 – ($3,000 X 3%) = $2,910 24. What is the difference between a perpetual inventory system and a periodic inventory system? Perpetual system updates the inventory account each time there is a sale or purchase of inventory. Purchases of inventory get recorded in inventory. Period system updates inventory at the end of the period only. Purchases of inventory go to the purchases account. 25. Gross Revenue - $10,000 Sales Discounts -$ 600 Sales Returns - $ 1,600 COGS - $ 4,800 Other Expenses - $ 3,200 a. (1) What is the Net Sales? $10,000 - $600 - $1,600 = $7,800 b. (1) What is the Gross Profit? $7,800 - $4,800 = $3,000 c. (1) What is the Net Income? $3,000 - $3,200 = ($200) net loss FYI: Know the cash, sales and purchases journal and when they are used 26. (3) Bank Reconciliation Business’s Oct. 31, 2008 Cash (before reconciliation) = $32,100 Deposits in Transit = $4,500 Bank Service charge = $50 Interest Revenue = $750 NSF check returned = $1,500 What is the adjusted cash balance? (note some or all of the above may not be used in calculation) – SHOW WORK 32,100 – 50 + 750 – 1,500 = 31,300 27. Define petty Cash A small fund maintained for incidental expenses when writing a check would not be cost effective. This fund is generally controlled by one or two individuals 28. Petty cash fund, established with a $500 balance, had petty cash tickets totaling $474 and cash in the amount of $19. The entry to replenish the fund would include a: a. Debit to cash in bank for $481 b. Debit to Cash short and over $7 c. Credit to Petty cash for $481 d. Credit to Cash in Bank for $474 B Misc. Expenses (whatever they were) 474 Cash Short 7 Cash 481 29. The current credit balance in allowance for uncollectible accounts before adjustment is $1,500. An aging schedule reveals $3,500 of uncollectible accounts. The ending balance in allowance for uncollectible accounts should be: a. $1,500 b. $3,000 c. $3,500 d. $5,000 The aging of A/R shows what the new balance should be. The entry would be Bad Debt Expense 2,000 Allow. For uncollectible accts 2,000 30. How much interest should be collected on a 9% interest note for $4,000 due in 90 days (assume a 360-day year)? a. None b. $ 90 c. $360 d. $4,090 4,000 x (90/360) x.09 = $90 31. Assuming the same example as #5 how much interest has accrued if the loan was made on Nov. 1 and there is a normal fiscal year in. 4,000 x (60/360) x.09 = $60 32. (3) Explain if using LIFO will increase or decrease Net Income during a period of rising prices. Using LIFO during periods of rising prices will decrease Net Income since the most expense items (the last ones to come in) are the first ones to be sold and put to COGS 33. Sales = 100,000 // Purchases = $50,000 // Beg. Inv = 12,000 // Ending Inv. = 16,000. What is the COGS? 12,000 + 50,000 – 16,000 = 46,000 34. What is the Gross Margin ratio? Gross Profit Margin Ratio = gross profit / sales. 35. (3) What type of liabilities that have yet to occur must be included on the Balance Sheet, the notes, or left off (Likely, Possible, Remote). Likely - Included on B.S. (if amount is fairly certain) and Notes Possible – Notes Remote - Neither 36. (3) An employee works for $15/hour for a 40-hour work week. Any hours over 40 and they are paid time and a half. How much would an employee receive if they worked 45 hours? 15 * 40 = 600 5 * 22.5 = 112.50 //// 600 + 112.50 = 712.50 37. (4) What payroll taxes are withheld from an employee? Do any of these withholdings have a cap? Employee - Social Security (Capped), Medicare, Federal Withholdings, State and Local (depends on the State) 38. (4) What payroll taxes must the employer also pay on top of what the employee has taken out? Do any of these have a cap? - Social Security (Capped), Medicare, Federal Unemployment (FUTA) - Capped, State Unemployment (SUTA) – generally capped (varies by state) 39. Explain when the Present Value of $1 computation would be used? What’s the purpose? Present Value of $1 would be used to determine how much a future lump sum payment is worth Right Now (due to the time value of money = interest). 40. Explain when the Future Value of $1 computation would be used? What’s the purpose? Future Value of $1 would be used to determine how much a lump sum payment right now is worth at some point in the future (due to the time value of money = interest). 41. The present value of $30,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar): There are different ways to calculate #3 and #4, but the easiest two are to use PV and FV tables found in most accounting text books or online. The other way is to use a PV/FV calculator. PV = $28,302 42. The future value of $30,000 to be received in one year, at 6% compounded annually, is (rounded to nearest dollar): There are different ways to calculate #3 and #4, but the easiest two are to use PV and FV tables found in most accounting text books or online. The other way is to use a PV/FV calculator. FV = $31,800 43. Why does a bond sell for a discount? A bond sells for a discount when the bond interest rate is lower than the current market rate for a similar bond. Investors will not want a lower interest rate unless they don’t have to pay as much for the bond up front 44. List the main items that are listed as extraordinary on the income statement. Items that are Both Unusual and infrequent Examples – Casualties, Floods in a non-flood area, Prohibition under a new law 45. (3) What are the primary differences between Common Stock and Preferred Stock? Common Stock is voting stock (Preferred is not) Preferred receives dividends before Common. Preferred dividends are the same regardless of earnings. Common shareholders get what’s left after Preferred take their share. Common bears the ultimate risk and reward. 46. What is treasury stock? A company’s own stock that is repurchased from investors and kept. These shares are no longer considered outstanding. 47. What does par value mean? A dollar amount that is assigned to a security when representing the value contributed for each share in cash or goods.. The par values for different fixed-income products will vary. Bonds generally have a par value of $1,000, while most money market instruments have higher par values. 2. Stocks will typically have a par value of $0.01 or none at all. 48. (3) Journalize the following entry. Jordan inc. sold 30 shares of its $3 par common stock for $20 each. Cash 600 C.S. 90 APIC-CS 510 49. What is earnings per share and how is it calculated? The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability. Calculated as: (Net income – Preferred dividends) / Weighted average of Common Shares 50. (4) For the year that just ended, a company reports net income of $400,000. There are 10,000 shares authorized, 6,000 shares issued, and 5,000 shares of common stock outstanding. What is the earnings per share? 400,000 / 5,000 = $80 51. What are conversion costs? Direct Labor + Factory Overhead. Costs to convert Direct Materials into finished product 52. (3) When is it appropriate to use the Job Order Costing or Process Costing methods? Job Order – Best used when production involves specialty items Process Costing – Best used for Mass Produced items 53. (2 for each) Assuming you work in a Automobile factory, what would be: a. Direct materials - Steel, Glass, Rubber b. Indirect materials – Screws, nails, Glue c. Direct labor – those working on the actual production line in making the cars d. Indirect labor – those who still work in the factory, but not directly on the cars…. supervisor, janitor, machine repairment e. Other Factory Overhead (besides indirect materials and indirect labor) Rent on factory building, Real Estate tax on Factory, Electricity for Factory 54. (3) What does Equivalent Units of Production mean? Why is it needed? Equivalent Units of Production = How many total and complete units could have been made when you factor in those that were partially completed to begin with and those that have been started but not completed. This is needed when using the Process Costing method to assign costs to partially completed units If 200 units were 25% complete at the end of the period, your equivalent units to assign costs to would be 50 units. 55. (2 each) Describe and give examples of each a. Variable Costs - Costs that change relative to use. If you make more items, total cost for that expenditure will continually rise at a even rate. Ex. Direct Materials, Direct Labor, electricity b. Fixed Costs – Costs that remain the same regardless of the number of items produced Ex. Real estate tax, Depreciation c. Mixed Costs – Costs that have an upfront cost (fixed), but will also increase with use. Ex. Cell phone bill…basic Flat fee, but additional charges could be applied if one goes over their minutes. FYI: Closing entries are to be done in the regular General Journal. There is no such thing as a Closing journal or special journal for closing entries.