61 Cards in this Set
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Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization's business activities.
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True
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Managerial accounting is the area of accounting that provides internal reports to assist the decision making needs of internal users.
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True
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The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities.
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True
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Internal users include lenders, shareholders, brokers and managers
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False
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In the partnership form of business, the owners are called stockholders
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False
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A customer's promise to pay is called an account payable to the seller
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False
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Withdrawals by the owner are a business expense
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False
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Unearned revenues are liabilities.
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True
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When a company provides services for which cash will not be received until some future date, the company should record the amount charged as unearned revenue.
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False
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An account balance is the difference between the debits and credits for an account including any beginning balance.
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True
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Debits increase asset and expense accounts.
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True
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The time period assumption assumes that an organization's activities can be divided into specific time periods.
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True
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Interim statements report a company's business activities for a one-year period.
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False
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A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52 weeks
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True
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Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded
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True
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Income Summary is a temporary account only used for the closing process.
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True
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Revenue accounts should begin each accounting period with zero balances.
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True
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A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers.
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True
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A company has current assets of $15,000 and current liabilities of $9,500. Its current ratio is 1.6.
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True
Current Ratio = Current Assets/Current Liabilities
Current Ratio = $15,000/$9,500 = 1.6
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A work sheet is a tool to help organize information needed in adjusting the accounts and preparing the financial statements.
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True
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The work sheet is a required report.
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False
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Merchandise inventory consists of products that a company acquires to resell to customers.
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True
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A wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to consumers.
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False
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A company had sales and cost of goods sold of $350,000 and $200,000, respectively. Its gross profit equals $150,000.
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True
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Gross profit is also called gross margin.
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True
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Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller.
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True
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Purchase allowances refer to merchandise a buyer acquires but then returns to the seller.
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False
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Credit terms of 2/10, n/30 imply that the seller offers the purchaser a 2% cash discount if the amount is paid within 10 days of the invoice date. Otherwise, the full amount is due in 30 days.
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True
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The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination.
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True
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The cost of an inventory item includes its invoice cost minus any discount, and plus any added or incidental costs necessary to put it in a place and condition for sale.
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True
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Goods on consignment are goods shipped by their owner, called the consignee, to another party called the consignor.
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False
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Incidental costs often added to the costs of inventory include import duties, freight, storage, and insurance.
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True
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The consistency concept prescribes that a company use the same accounting methods period after period, so that financial statements are comparable across periods.
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True
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A company has inventory with a market value of $217,000 and a cost of $241,000. According to the lower of cost or market, the inventory should be written down to $217,000.
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True
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The days' sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365.
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True
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An advantage of LIFO is that it assigns the most recent costs to cost of goods sold, and does a better job of matching current costs with revenues on the income statement.
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True
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Proper internal control means that responsibility for a task is clearly established and assigned to one person.
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True
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Technology such as cash registers, check protectors, time clocks and personal identification scanners can improve internal control.
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True
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Good internal control dictates that a person who controls an asset also maintains that asset's accounting records.
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False
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Separation of duties divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. Separation of duties reduces the risk of error and fraud.
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True
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The payee is the person who signs a check, authorizing its payment.
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False
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A voucher system is a set of procedures and approvals designed to control cash disbursements and the acceptance of obligations.
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True
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If the Cash Over and Short account has a debit balance at the end of the period, the amount is reported as miscellaneous revenue.
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False
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The petty cash fund should be reimbursed when it is nearing zero and at the end of the accounting period when financial statements are prepared.
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True
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Accounts receivable occur from credit sales to customers.
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True
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The formula for computing interest on a note is principal of the note times the annual interest rate times time expressed in fraction of year.
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True
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A company had net sales of $500,000 and an average accounts receivable of $80,000. Its accounts receivable turnover equals 6.25.
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True
Accounts Receivable Turnover = Net Sales/Average Accounts Receivable
Accounts Receivable Turnover = $500,000/$80,000 = 6.25
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The aging method of determining bad debts expense is based on the knowledge that the longer a receivable is past due, the lower the likelihood of collection.
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True
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A company has sales of $350,000 and estimates that 0.7% of its sales are uncollectible. The estimated amount of bad debts expense is $2,450.
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True
$350,000 * .007 = $2,450
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Notes receivable are always classified as current liabilities.
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False
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he matching principle requires that accrued interest on outstanding notes receivable be recorded at the end of each accounting period
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True
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A company borrowed $1,000 by signing a six month promissory note at 5% interest. The total amount of interest is $25.
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True
$1,000 * .05 * 6/12 = $25
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Plant assets refer to intangible assets that are used in the operations of a business.
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True
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Depreciation measures the actual decline in market value of an asset
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False
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Inadequacy refers to the insufficient capacity of a company's plant assets to meet the company's growing productive demands
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True
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Depreciation expense is calculated using estimates of an asset's salvage value and useful life.
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True
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Obligations not due within one year or the company's operating cycle, whichever is longer, are reported as current liabilities.
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False
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A single liability can be divided between current and noncurrent liabilities.
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True
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A company can have a liability even if the amount of the obligation is unknown.
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True
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A lawsuit is an example of a contingent liability for the defendant.
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True
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The full disclosure principle requires the reporting of contingent liabilities that are reasonably possible.
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True
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RETL 261: Exam 2