PA Revision PDF

CHAPTER 1 QUIZ 1 Auditing, income tax, management advisory => public accountants. Managerial, cost accounting => private accounting functions. Net income => increases in retained earnings Losses and dividends => decreases in retained earnings. Investments by stockholders’ would cause an increase...

CHAPTER 1 QUIZ 1 Auditing, income tax, management advisory => public accountants. Managerial, cost accounting => private accounting functions. Net income => increases in retained earnings Losses and dividends => decreases in retained earnings. Investments by stockholders’ would cause an increase in capital stock, not retained earnings. Payment of rent for the current period => rent expense. The repayment of a bank loan => liability Dividends => equity The purchase of land establishes => asset. GG forms Proprietorship (Sole Proprietorship): Owned by one person. The owner is often the manager/operator. The owner receives all profits, incurs all losses, and is personally liable for all debts of the business. Partnership: Owned by two or more individuals. Often used for businesses that provide retail and service-type activities. Partners share profits, losses, and responsibilities. Generally has unlimited personal liability for each partner, though liability can vary with specific agreements. Corporation: Ownership is divided into shares of stock, making it easier to transfer ownership. A corporation is a separate legal entity from its owners, organized under state corporation laws. Owners (stockholders) have limited liability, meaning they are not personally responsible for the company’s debts beyond their investment in the company.  Internal users of accounting data are individuals within the organization, such as the president of the company, production manager, and merchandise inventory clerk. The president of the employees' labor union is considered an external user, as they are not part of the internal management or operations of the company. Examples of internal users include: Owners: Especially in smaller businesses, owners are directly involved in management decisions. Managers: Such as production managers, marketing managers, and financial managers who need financial data for budgeting, performance evaluation, and decision-making. Employees: Especially in management positions, employees use accounting information to assess the company’s financial stability and performance, which could impact job security and compensation. Executives: Including the president, CEO, and CFO, who rely on accounting data to set strategic direction and policies. Department Heads: Responsible for specific areas (e.g., inventory, human resources) and use data relevant to their department. External Users Examples of external users include: Investors: Interested in the company’s financial health to make decisions about buying, holding, or selling shares. Creditors: Such as banks or suppliers, who need to assess the company’s ability to pay back debts and meet financial obligations. Regulatory Agencies: For instance, the Securities and Exchange Commission (SEC) requires publicly traded companies to disclose financial data. Tax Authorities: Such as the Internal Revenue Service (IRS), to ensure correct tax calculations and payments. Customers: Interested in the company’s stability, especially if they depend on its goods or services. Labor Unions: Represent employees and use financial information to negotiate wages and benefits. General Public: People in the community who may be affected by the company’s operations, such as environmental impact. Expense: Cost of assets consumed or services used. Revenue: Income earned from business operations. Liability: Future obligation or debt. Asset: Resource with future economic benefit. a. Cash owned by the company: Explanation: Cash is one type of asset, but not the only one. Assets encompass a wider range of resources beyond just cash, including inventory, property, and equipment. b. Collections of resources belonging to the company and the claims on these resources: Explanation: This definition mixes up assets with both assets and liabilities. "Claims on resources" refers to liabilities or owner’s equity, which represent claims on the company’s assets. Assets are solely the resources with future benefits. c. Owners’ investment in the business: Explanation: This refers to owner’s equity, not assets. Owner’s investment represents the owner’s claim on the company’s assets but does not encompass all assets owned by the company. Only buildings, cash, inventory, and accounts receivable are assets. Sales revenue, owner's capital, operating expenses, drawings, and accounts payable are not assets. Formula for Ending Owner's Capital Balance The formula is: Ending Capital=Beginning Capital+Net Income (or Net Loss)−Withdrawals Net income: Revenues - Expenses a. Balance sheet The balance sheet is the only financial statement that reports the company’s financial position at a specific point in time, showing assets, liabilities, and owner’s equity as of a particular date. b. Income statement: Covers a period of time (e.g., a month, quarter, or year) and shows revenues, expenses, and net income or loss over that period. c. Statement of owner’s equity: Also covers a period of time, detailing changes in the owner’s capital due to net income and withdrawals.  d. Statement of cash flows: Covers a period of time and shows cash inflows and outflows from operating, investing, and financing activities. economic entity assumption requires that a business’s financial activities be separate and distinct from the personal financial activities of its owner(s) and any other entities. This means that personal expenses or assets of the owner should not be included in the business’s financial statements. At December 1, 2016, Dubois Company’s accounts receivable balance was $1,300. During December, Dubois had credit sales of $7,400 and collected accounts receivable of $6,000. At December 31, 2016, the accounts receivable balance is Cụm từ collected nghĩa là đã thu,mà đã thu thì ghi vào credit Examples of Current Assets Common items classified as current assets include: 1. Cash: Money available immediately. 2. Accounts Receivable: Amounts owed to the company by customers from credit sales. 3. Inventory: Goods available for sale. 4. Prepaid Expenses (like prepaid insurance): Expenses paid in advance, which provide benefits within the year. 5. Short-Term Investments: Investments that the company plans to sell within a year, such as stock investments classified as short-term. ? total dollar amount of assets to be classified as property, plant, and equipment? Land: $270,000 Land does not depreciate, so we use its full value. Buildings: $315,000 Subtract Accumulated Depreciation on buildings, which is $60,000. Net Value of Buildings: 315,000−60,000=255,000 Add Land and Net Value of Buildings: 270,000+255,000=525,000 ( nghĩa là đất không khấu hao, nhưng với buildings thì phải trừ đi khấu hao, sau đó mới cộng hết tất cả) On a classified balance sheet, current assets are listed in the order of liquidity, meaning the order in which they are expected to be converted into cash. A T-account is simply a tool for depicting the basic form of an account, The revenue recognition principle states that revenue should be recognized when it is earned (when a performance obligation has been satisfied), regardless of when cash is received. This principle ensures that revenue is recorded in the correct accounting period, reflecting the actual completion of a service or delivery of goods. a. Expenses should be matched with revenues: This is the matching principle, not the revenue recognition principle. d. The economic life of a business can be divided into artificial time periods: This is the time period assumption, not the revenue recognition principle. 18. A law firm has billed their clients for services performed. They subsequently received payments from their clients. What entry will the law firm make upon receipt of the payments? When the law firm initially bills their clients for services performed, it records the amount as Accounts Receivable (debiting Accounts Receivable and crediting Service Revenue). This entry recognizes revenue earned but not yet received in cash. When the clients make payments, the law firm receives cash and reduces the amount owed by the clients (Accounts Receivable). Thus, the correct entry upon receiving the payments would be: Debit Cash (to increase cash balance) Credit Accounts Receivable (to reduce the amount clients owe) The expense recognition principle (also known as the matching principle) To calculate net income under the accrual basis of accounting, we need to consider revenues earned and expenses incurred during the period, regardless of when cash was received or paid.. La More Company had the following transactions during 20X1. Sales of $9,000 on account Collected $4,000 for services to be performed in 20X2 Paid $2,650 cash in salaries Purchased airline tickets for $500 in December for a trip to take place in 20X2 What is La More’s 20X1 net income using cash basis accounting? 1. Sales of $9,000 on account ○ Since this amount was earned on account and not yet collected in cash, it is not included under the cash basis. 2. Collected $4,000 for services to be performed in 20X2 ○ This amount was collected in cash in 20X1, so it is included as revenue under the cash basis, even though the services will be performed in 20X2. ○ Include $4,000 as revenue. 3. Paid $2,650 cash in salaries ○ This is a cash payment for expenses in 20X1, so it is included as an expense under the cash basis. ○ Include $2,650 as an expense. 4. Purchased airline tickets for $500 in December for a trip to take place in 20X2 ○ This is a cash payment in 20X1, so it is included as an expense under the cash basis, even though the trip is for 20X2. ○ Include $500 as an expense. Calculation of Net Income (Cash Basis) Net Income=Cash Revenue−Cash Expenses =4,000−(2,650+500) The adjusted trial balance is the primary source used in the preparation of financial statements because it includes all account balances after adjusting entries have been made. This ensures that revenues and expenses are recorded in the correct accounting period, giving an accurate picture of the company’s financial position and performance. Post-closing trial balance: This is prepared after closing entries are made and includes only permanent accounts (assets, liabilities, and equity), not revenues and expenses. Under the accrual basis of accounting, revenue is recognized when it is earned (i.e., when services are performed or goods are delivered), and expenses are recognized when they are incurred, regardless of when cash is received or paid. a. Events that change a company’s financial statements are recorded in the periods in which the events occur: This is true for accrual basis accounting, as it records transactions in the period they affect, not necessarily when cash is exchanged. c. Revenue is recognized in the period in which services are performed: This is a key principle of accrual accounting, where revenue is recorded when earned, not when cash is received. d. This basis is in accordance with GAAP (Generally Accepted Accounting Principles): Accrual basis accounting is required by GAAP, as it provides a more accurate representation of a company’s financial performance and position. The Harris Company purchased equipment for $15,000 on December 1. It is estimated that annual depreciation on the computer will be $3,000. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: ( có chữ annual nên nhớ phải chia cho 12 tháng) a. debit Depreciation Expense, $3,000; credit Accumulated Depreciation, $3,000. b. debit Depreciation Expense, $250; credit Accumulated Depreciation, $250. c. debit Depreciation Expense, $12,000; credit Accumulated Depreciation, $12,000. d. debit Equipment, $15,000; credit Accumulated Depreciation, $15,000. If a company fails to adjust an Unearned Rent Revenue account for rent that has been recognized, what effect will this have on that month’s financial statements? a. Assets will be understated and revenues will be understated. b. Liabilities will be understated and revenues will be understated. c. Liabilities will be overstated and revenues will be understated. d. Assets will be overstated and revenues will be understated. Explanation: If a company fails to adjust the Unearned Rent Revenue account, it means that the revenue earned for the month has not been recognized. Instead, the unearned revenue remains recorded as a liability, even though a portion of it should have been recognized as revenue. Liabilities will be overstated: Since the Unearned Rent Revenue account was not adjusted, it still holds a balance that includes the earned portion. This makes the liability appear larger than it should be. Revenues will be understated: Because the revenue was not transferred from Unearned Rent Revenue to Rent Revenue, the company’s revenue for the month will be lower than it actually earned. Adjusting entries are made to ensure that: a. Expenses are recognized in the period in which they are incurred: This follows the expense recognition principle, which requires that expenses be matched with the revenues they help generate. b. Revenues are recorded in the period in which the performance obligation is satisfied: This aligns with the revenue recognition principle, which requires that revenue be recognized when earned, regardless of when cash is received. c. Balance sheet and income statement accounts have correct balances at the end of an accounting period: Adjusting entries ensure that all account balances reflect the true financial position of the company at period-end. Chris Harper earned a salary ( salaries and wages expense) of $550 for the last week of January. She will be paid ( account payable) on Feb 1. The adjusting entry for Chris’ employer at Jan 31 is: a. Dr. Salaries and Wages Expense $550 ; Cr. Salaries and Wages Payable $550 b. Dr Salaries and Wages Expense $550 ; Cr Cash $550 c. Dr Salaries and Wages Payable $550 ; Cr Cash $550 d. No entry is required Which one of the following is not an application of revenue recognition? a. Receiving cash for services performed. b. Accepting cash from an established customer for services to be performed over the next three months. c. Recording revenue as an adjusting entry on the last day of the accounting period. d. Billing customers on June 30 for services completed during June. In this case: Option b describes accepting cash for services that will be performed in the future. Since the service has not yet been performed, revenue should not be recognized until the service is completed. This is therefore not an application of revenue recognition. Here’s why the other options are applications of revenue recognition: a. Receiving cash for services performed: Revenue can be recognized immediately because the service has been completed. c. Recording revenue as an adjusting entry on the last day of the accounting period: This reflects accrued revenue for services that have been performed but not yet billed, which is an application of the revenue recognition principle. d. Billing customers on June 30 for services completed during June: Revenue is recognized because the services were completed, even if cash has not yet been received.  A law firm received $5,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause Explanation: When the law firm received $5,000 in advance for services to be performed in the future, it correctly credited the amount to Unearned Service Revenue, a liability account. If the services have been provided by the end of the accounting period but no adjusting entry is made, the revenue for those services will not be recognized. This causes: Revenues to be understated: Since the revenue was not recorded, it reduces the total revenue reported for the period. Liabilities to be overstated: The Unearned Service Revenue account still reflects the $5,000 as a liability, even though the obligation has been fulfilled. Net income to be understated: Because revenues are understated, net income will also be lower than it should be. At December 31, 2016, before any year-end adjustments, Obama Company’s Insurance Expense account had a balance of $2,600 and its Prepaid Insurance account had a balance of $7,600. It was determined that $3,200 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be To determine the adjusted balance for Insurance Expense, we need to account for the expired portion of Prepaid Insurance by adding it to the existing balance in the Insurance Expense account. 1. Initial Insurance Expense Balance: $2,600 2. Expired Prepaid Insurance: $3,200 (amount to be transferred from Prepaid Insurance to Insurance Expense) Adjusted Insurance Expense Calculation Adjusted Insurance Expense=Initial Insurance Expense+Expired Prepaid Insurance 5,800=2,600+3,200 33. Boneta City College sold season tickets for the 2016 football season for $250,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Ticket Revenue at October 31 is a. $93,750. b. $0. c. $156,250 d. $50,000. Total Season Ticket Revenue: $250,000 for 8 games. Revenue per Game: Revenue per Game=250,000/8=31,250 Games Played by October 31: September: 2 games October: 3 games Total games played by October 31: 2+3=52 + 3 = 52+3=5 Revenue Earned by October 31: Revenue Earned=5×31,250=156,250 Unearned Revenue Remaining: Unearned Revenue=250,000−156,250=93,750 Đầu tiên xác định đã được bao nhiêu revenue, từ đó trừ đi sẽ còn phần unearned revenue 34. Salem Corporation purchased a one-year insurance policy in January 2016 for $51,000. The insurance policy is in effect from April 2016 through March 2017. If the company neglects to make the proper year-end adjustment for the expired insurance a. net income and assets will be overstated by $38,250. b. net income and assets will be understated by $8,500. c. net income and assets will be overstated by $8,500. d. net income and assets will be understated by $38,250. Salem Corporation purchased a one-year insurance policy for $51,000 effective from April 2016 through March 2017. This means that by December 31, 2016, only part of the insurance policy has expired, and we need to determine the amount that should be recorded as an expense (expired insurance). 1. Monthly Insurance Expense: Monthly Expense=51,000/12=4,250 2. Insurance Expense for April to December (9 months): ○ From April through December, 9 months of the policy have expired.  3. Expired Insurance=4,250×9=38,250 4. Impact of Not Making the Adjustment: ○ If the company fails to record this $38,250 as an expense, the Insurance Expense for the period will be understated, leading to an overstatement of net income by $38,250. ○ Additionally, the Prepaid Insurance (asset account) will not be reduced, causing an overstatement of assets by $38,250. 35. SWC Bus Charter signed a four-month note payable in the amount of $30,000 on September 1. The note requires interest at an annual rate of 5%. The amount of interest to be accrued at the end of September is a. $500. b. $125. c. $200. d. $1,500. To calculate the interest to be accrued at the end of September, we use the formula: Interest=Principal×Rate×TimeGiven Information: Principal (Amount of Note Payable): $30,000 Annual Interest Rate: 5% Time: Since we are calculating for September only (1 month), we represent this as a fraction of the year: 1/12. Calculation: Interest=30,000×0.05×1/12=125 When a business receives payment in advance for services it has not yet performed (or goods it has not yet delivered), the payment is recognized as Cash and a liability (typically in an account like Unearned Revenue or Unearned Service Revenue), not Accounts Receivable. The accounting cycle is a series of steps followed in accounting to ensure that financial statements are accurate and complete. The proper sequence for the accounting cycle is: 1. Analyze: Evaluate transactions to determine their impact on accounts. 2. Journalize: Record the transactions in the journal in chronological order. 3. Post: Transfer (post) the journal entries to the general ledger accounts. 4. Adjust: Make adjusting entries at the end of the period to ensure all revenues and expenses are properly recorded.  5. Prepare Statements: Use the adjusted trial balance to prepare financial statements (income statement, statement of owner's equity, and balance sheet). 6. Close: Close temporary accounts (revenues, expenses, and drawings) to update the owner's capital account and prepare for the next accounting period. The Income Summary account is a temporary account used during the closing process to summarize revenues and expenses before transferring the net result to the owner’s capital account. Here’s how it works: If net income has occurred, revenues exceed expenses, resulting in a credit balance in the Income Summary account. This credit balance is then transferred to the owner’s capital account. If a net loss has occurred, expenses exceed revenues, resulting in a debit balance in the Income Summary account. This debit balance is then transferred to reduce the owner’s capital account. A current asset is defined as an asset that is expected to be converted into cash, sold, or used up within one year or within the business’s operating cycle, whichever is longer. Examples of current assets include cash, accounts receivable, inventory, and prepaid expenses. Current assets are important for covering short-term obligations and are listed separately on the balance sheet. Temporary accounts are accounts that are closed at the end of each accounting period, with their balances transferred to a permanent account (usually Owner’s Equity or Retained Earnings). Temporary accounts include revenues, expenses, and drawing (or withdrawal) accounts. These accounts start with a zero balance at the beginning of each new period. Owner’s Drawings: This is a temporary account because it tracks withdrawals by the owner during the period. At the end of the period, the balance in the Owner’s Drawings account is closed out and transferred to Owner’s Equity, reducing the capital. Here’s why the other options are incorrect: a. Owner’s Equity: This is a permanent account that reflects the ongoing interest of the owner(s) in the business and is not closed at the end of each period. b. Unearned Revenue: This is a liability account and a permanent account. It is not closed at period-end because it represents an obligation to provide goods or services in the future. c. Cash: This is also a permanent account that carries its balance into the next period and reflects the company’s cash position. A post-closing trial balance is prepared after all closing entries have been made, which close out temporary accounts (such as revenues, expenses, and drawings) by transferring their balances to the owner’s capital account. After closing, only permanent accounts (or balance sheet accounts) remain, as they carry their balances forward to the next accounting period. Balance Sheet Accounts (permanent accounts): Include assets, liabilities, and owner’s equity, and these accounts retain their balances into the next period. Income Statement Accounts (temporary accounts): Such as revenues and expenses, will have zero balances after closing and therefore do not appear on the post-closing trial balance. Why the Other Options Are Incorrect: a. zero balances for all accounts: Only temporary accounts are closed to zero, not all accounts. b. zero balances for balance sheet accounts: Balance sheet accounts retain their balances; they are not zeroed out. d. only income statement accounts: Income statement accounts have zero balances after closing, so they are not shown in the post-closing trial balance. The following information is from the Income Statement of the M & J’s CPA Firm. The entry to close the Income Summary includes a: a. credit to Income Summary for $52,000. b. debit to Income Summary for $52,000. c. debit to Owner’s Equity for $52,000. d. credit to Service Revenue for $52,000. Ở đây thu được net income ( do revenue > expenses), thì lúc đó income summary sẽ ghi ở credit Vậy để close the entry, thì sẽ ghi vào cái Owner’s Equity và có cả tài khoản Income Summary luôn, vậy để tài khoản bằng 0 thì phải ghi nhận Income Summary ở debit To calculate the owner’s capital we need to consider the beginning balance, the revenues, expenses, withdrawals, and purchases of equipment (note that purchases of equipment do not affect owner's capital directly), nhớ nha, chi phí mua các equipment không ảnh hưởng đến owner’s capital In the accounting cycle, the trial balance is prepared periodically, often at the end of each month or accounting period to check the accuracy of the recorded transactions and ensure that debits equal credits. This makes it one of the steps that may be performed most frequently. The other steps are typically done at the end of the accounting period or the year: a. Post closing entries: This is done at the end of the accounting period after all temporary accounts have been closed. b. Journalize closing entries: This step is also done at the end of the accounting period, after preparing financial statements. d. Prepare a post-closing trial balance: This is completed once, after closing entries are posted, at the end of the accounting period. Cost of Goods Sold=Beginning Inventory+Purchases−Ending Inventory 64. Under the perpetual inventory system, in addition to making the entry to record a sale, a company would a. debit Inventory and credit Cost of Goods Sold b. debit Cost of Goods sold and credit Inventory c. make no additional entry until the end of the period d. debit Cost of Goods Sold and credit Purchases （Bởi vì khi bán, sẽ ghi nhận AR và Revenue, sau khi record a sale, thì dĩ nhiên inventory sẽ giảm, inventory đi với cost of goods sold ） The formula for gross profit is: Gross Profit=Net Sales−Cost of Goods Sold Under the perpetual inventory system, any freight costs incurred by the buyer to transport purchased goods are considered part of the cost of inventory. These costs are added to the Inventory account because they are necessary to bring the inventory to its intended location and condition for sale. c. Freight-Out: Freight-Out refers to the shipping costs paid by the seller when delivering goods to customers, not the buyer. d. Freight-In: While Freight-In might be used in a periodic inventory system, under the perpetual system, freight costs are directly added to the Inventory account. Under a perpetual inventory system, inventory records are updated continuously with each purchase and sale, which provides a real-time view of the amount of inventory on hand. This system tracks every transaction affecting inventory, so the Inventory account directly reflects changes without using separate accounts like "Purchases" or "Purchase Returns and Allowances." Here’s why the other options are incorrect: a. The account purchase returns and allowances is credited when goods are returned to vendors: In a perpetual inventory system, returns to vendors are recorded by crediting the Inventory account directly, not a separate "Purchase Returns and Allowances" account (which is used in the periodic inventory system). b. There is no need for a year-end physical count: Even with a perpetual system, a physical inventory count is usually done at year-end to verify records and account for shrinkage, loss, or errors. d. Increases in inventory resulting from purchases are debited to purchases: In a perpetual system, purchases are debited directly to the Inventory account, not a separate "Purchases" account. 75. Maggie’s Market recorded the following events involving a recent purchase of merchandise: · Received goods for $50,000, terms 2/10, n/30. · Returned $1,500 of the shipment for credit. · Paid $400 freight on the shipment. · Paid the invoice within the discount period. As a result of these events, the company’s inventory increased by a. $47,930 b. $49,400 c. $48,900 d. $48,192 To calculate the total increase in inventory for Maggie's Market, let's break down each component of the transaction, considering any discounts and returns. Steps: 1. Initial Purchase: ○ The goods were received with an invoice of $50,000 with terms 2/10, n/30. 2. Return of Merchandise: ○ Maggie’s Market returned $1,500 of the goods. ○ Adjusted purchase amount after return: 50,000−1,500=48,500 Freight Cost: ○ Freight costs of $400 were paid, which adds directly to the inventory cost. ○ Adjusted amount including freight: 48,500+400=48,900 Discount for Early Payment: ○ Since the invoice was paid within the discount period, Maggie's Market is eligible for a 2% discount on the adjusted purchase amount of $48,500 (excluding freight). ○ Discount amount: 48,500×0.02=970 Adjusted inventory cost after discount: 48,900−970=47,930 Final Inventory Increase Calculation: The total increase in inventory, after accounting for the return, freight, and discount, is $47,930. The primary purpose of the post-closing trial balance is to prove the equality of the balance sheet account balances that carry forward into the next accounting period