46 terms

Accounting Exam 2

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periodicity assumption
requires accountants to divide the economic life of a business into artificial time periods
Revenue Recognition Principle
when companies recognize (record, make journal entry) revenue in the accounting period in which is it earned
Expense Recognition Principle
when expenses are matched with revenues in the period when efforts are expended to generate revenues (match principle; match expenses with the revenue they help)
adjusting entries
make it possible to report correct amounts on the balance sheet and on the income statement
financial statements
a company makes adjusting entries every time it prepares _______
income statement (revenue or expense); balance sheet (assets or liabilities)
financial statement includes one ____________ account and one ____________ account
adjusting entries
the movement of money between the balance sheet and income statement in order to get the account balances correct before financial statements are prepared
adjusting entry
one side of the entry (debt/credit) must come from the balance sheet (asset or liability) and one side of the entry (debit/credit) must come from the income statement
adjusting entries
never involve cash
prepaid expenses
expenses paid in cash and recorded as assets before they are used or consumed
unearned
cash received and reported as liabilities before revenue is earned
accrued revenues
revenues earned but not yet received in cash or recorded
accrued expenses
expenses incurred but not yet paid in cash or recorded
trial balance
prepared from the ledger accounts after all adjusting entries are journalized and posted
to prove the equality of total debits balances and total credits balances in the ledger
What is the purpose of the adjusted trial balance?
adjusted trial balance
the primary basis for the preparation of the financial statements
to prove the equality of the permanent account balances that the company carries forward into the next accounting period
What is the purpose of the post-closing trial balance?
zero balance
All temporary accounts have a ______________
perpetual inventory system
scanner method
perpetual inventory system
maintain detailed records of the cost of each inventory purchase and sale
perpetual inventory system
records continuously show inventory that should be on hand
perpetual inventory system
company determines cost of goods sold each time a sale occurs
periodic inventory system
mom and pop method
periodic inventory system
do not keep detailed records of the goods on hand
periodic inventory system
keep receipts of everything sold, then go compare to inventory at end of accounts period
periodic inventory system
cost of goods sold determined by count at the end of the accounting period
purchaser
may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications
credit terms
may permit buyer to claim a cash discount for prompt payment
taking physical inventory
involves counting, weighing, or measuring each kind of inventory on hand
determining ownership of goods
count all good for which the company has "legal title"
goods on hand
in warehouse
goods in transit
purchased goods not yet received
goods in transit
sold goods not yet delivered
goods in transit
legal title is determined by the term of sale "freight term"
consigned goods
goods held for sale by one party although ownership of the goods is retained by another party
consignor
owner
consignee
holder of the goods
First In First Out (FIFO)
earliest goods purchased are first to be sold
Last In First Out (LIFO)
latest goods purchased are first to be sold
COGS
in periods of rising prices, FIFO reports lowest
net income/ending inventory
in periods of rising prices, FIFO reports highest
net income/ending inventory
in periods of rising prices, LIFO reports lowest
COGS
in periods of rising prices, LIFO reports highest
inventory management
a double-edged sword
high inventory levels
may incur high carrying costs
low inventory levels
may lead to stock outs and lost sales
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