ACC 103: CONCEPTUAL FRAMEWORK QUIZ 2 REVIEWER

ACCOUNTING PROCESS
 ACCOUNT- it is the record of the increase and decrease in specific item of ALEIE
 T-Account- has three parts (Account title, Debit side, and Credit side)
 Chart of Accounts- list of all the accounts used by a business
 Debit- value received
 Credit- value pretend with
 FIVE MAJOR ACCOUNTS- Asset, Liability, Equity, Income, and Expense

 CLASSIFICATION OF THE FIVE MAJOR ACCOUNTS:

 Balance Sheet Accounts- Asset, Liability and Equity
 Income Statement Accounts- Income and Expense
 Balance Sheet- shows the financial position of the business
 Income Statement- shows the profit or loss of the business

BOOKS OF ACCOUNTS
1. JOURNAL
 “BOOK OF ORIGINAL ENTRIES”
 SPECIAL JOURNALS (sales journal, purchase journal, cash receipts journal, cash disbursements journal)
 GENERAL JOURNAL - All transactions that cannot be recorded in special journals.

2. LEDGER
 “BOOK OF SECONDARY ENTRIES OR FINAL ENTRY”
 SUBSIDIARY LEDGER -Breakdown of the balances of controlling accounts
 GENERAL LEDGER - contains all accounts appearing in the trial balance

DOUBLE ENTRY SYSTEM

 Double-entry system- Under this system, each transaction is
recorded in two parts - debit and credit
 Concept of Duality- two folds effect on values (value received
and value parted with)
 Concept of Equilibrium- equal debit and credit
 Contra Accounts- Deduction to their related accounts
 Adjunct Accounts- Addition to their related accounts
 Carrying Amount- sum of balances of an account and its
related contra or adjunct

Business Transactions and Analysis

 Accounting Cycle
 Represents the steps and procedures used to record transactions and prepare financial statements

STEPS IN AN ACCOUNTING CYCLE

1. Identifying and Analyzing
 identifying business transactions that affected or meet the definition of being an asset, liability, or equity
2. Journalizing
 after an accountable event is identified and analyzed, the second step is to record.
3. Posting
 process of transferring the amounts of dr (debit) and cr (credit) from journal to ledger
4. Unadjusted Trial Balance
 list of general ledger accounts and their balances
5. Adjusting Entries
 update certain accounts to reflect correct balances
 Mixed Accounts- both real and nominal accounts subject to adjustments
 Accrual Basis- payment happens AFTER a good/service is delivered
a. record an income that is already earned but not yet collected
b. record an expense that is already incurred but not yet paid
 Deferral/ Cash Basis- payment happens BEFORE a good/service is delivered
a. earned and unearned portions of an advanced collection
b. expired and unexpired portions of prepayments
6. Adjusted Trial Balance (Worksheet)
 analytical device used to facilitate the gathering of data for adjustments, the preparation of FS and
closing entries
7. Financial Statement
 end product of the accounting process
  Income Statement- If total credits exceed total debits, there is profit. If total debits exceed total credit
there is loss.
 Balance Sheet- If total debits exceed total credits, there is profit. If total credit exceed total debits, there
is loss.
8. Closing Entries
 prepared at the end of the accounting period to “zero out” all nominal accounts in the ledger.
 Income Accounts- All debited
 Expense Accounts- All credited
 Income Summary- Clearing account
9. Post-closing Entries
 it will be the beginning balances of accounts in the next accounting period.
 Closed account- an account that has no balance
 Open account- an account that has a balance
10. Reversing Entries
 it is usually made on the first day of next accounting period to reverse certain adjusting entries made in
preceding period.
 Adjusting entries that may be reversed:
1. Accruals for income or expense
2. Prepayment using expense method
3. Advance collection using expense method

1. These are the important activities included in the definition of accounting, except
a. Communicating
b. Measuring
c. Identifying
d. Balancing

2. Which of the following is not a core financial statement?

a. The Income Statement
b. Statement of Cash Flows
c. The Trial Balance
d. The Balance Sheet

3. What are the main sections on a balance sheet?

a. Assets, liabilities, income
b. Assets, liabilities, equity
c. Assets, liabilities, expenses
d. Assets, gains, revenue

4. What is the result of the following transaction for Company A? Company A’s customer is unable to pay for a
previous credit sale in accordance with Company A’s 90-day payment terms. The customer makes a promissory
note to Company A that extends payment over a 24-month term including 5% interest.
a. No result because the customer didn’t pay.
b. Accounts receivable increases because of the interest.
c. A note receivable is recorded in non-current assets.
d. Company A records the loan as a liability.

5. When are liabilities recorded under the accrual basis of accounting?

a. When incurred
b. When paid
c. At the end of the fiscal year
d. When bank accounts are reconciled

6. Which is true about time in accounting?

a. Current liabilities are debts payable within 2 years.
b. Balance sheets reflect a company’s financial position at a certain point in time.
c. The time value of money is a finance concept, not relevant in accounting.
d. Accounts receivable are more easily collected as time passes

7. When a company purchases property, plant, and equipment, how is it reflected on the statement of cash flows?
a. As a source of cash in the "cash from investing activities" section
b. As a source of cash in the "cash from financing activities" section.
c. As a use of cash in the "cash from investing activities" section.
d. As a use of cash in the "cash from operating activities" section.

8. What would the journal entry be for a company that takes out a five-year, $100,000 business loan?
a. Debit $100,000 non-current asset, Credit $100,000 non-current liabilities
b. Debit $100,000 current asset, Credit $100,000 non-current liabilities
c. Debit $100,000 non-current liabilities, Credit $100,000 non-current assets
d. Debit $100,000 current liabilities, Credit $100,000 current assets

9. Which accounts are associated with cost of goods sold?

a. Accrued interest
b. Depreciation
c. Dividends
d. Inventory

10. Which organizations are involved in development of US Generally Accepted Accounting Principles (GAAP)?
(Check all that apply.)
a. Financial Accounting Standards Board (FASB)
b. Government Accounting Standards Board (GASB)
c. Securities and Exchange Commission (SEC)
d. Federal Accounting Standards Advisory Board (FASAB)

11. Which inventory valuation method reflects the most current market value for inventory on hand?
a. Last-in-First-Out (LIFO)
b. Average Costs
c. First-in-First-Out (FIFO)
d. Specific Identification

12. Which of the following statements is not true about intercompany accounting?
a. Intercompany transactions are between two units within the same legal entity.
b. Intercompany transactions are eliminated in consolidated parent financial statements.
c. They can significantly impact taxes.
d. Intercompany transactions are between different legal entities under the same parent control.

13. Which is the method of depreciation used for US tax returns that is not GAAP-compliant?
a. Straight-line method
b. Modified accelerated cost recovery systems
c. Double-declining balance method
d. Units of production method

14. What is the most-used method to amortize intangible assets on a company’s financial statements?
a. Straight-line method
b. Sum of the years’ digits method
c. Double-declining balance method
d. Units of production method

15. Which financial statement is a report of a company’s revenues and expenses during a certain time period?
a. Statement of Changes in Equity
b. Income Statement
c. Statement Of Cash Flows

16. After making a sale of $3,000, where $1,200 is paid in cash and $1,800 is sold on credit, how would a company
go about updating its balance sheet?
a. $1,800 debit in accounts receivable; $3,000 credit in retained earnings; $1,200 debit in cash
b. $3,000 debit in retained earnings; $1,200 credit in cash; $1,800 credit in accounts receivable
c. $1,800 debit in accounts payable; $1,200 debit in cash; $3,000 credit in retained earnings
d. $1,200 credit in cash; $1,800 credit in accounts payable; $3,000 debit in retained earnings

17. Which is not an example of financing cash flow?

a. Paying off a debt of $25,000
b. Investing in equipment worth $90,000
c. Paying $12,000 worth of dividends to shareholders
d. Issuing $42,000 worth of shares

18. Which side of the ledger account are debits recorded on?
a. Left
b. Right
c. Depends on the debit

19. Are assets on the balance sheet recorded at their estimated fair market value?
a. Yes
b. No
c. Sometimes; it’s situational

20. Increasing an asset involves crediting the account.

a. True b. False
21. Unearned revenues are recorded on a company’s balance sheet under which kind of account?
a. Current asset
b. Owners’ or stockholders’ equity
c. Non-current asset
d. Liability

22. What is the minimum number of accounts that accounting entries can have?
a. One
b. Four
c. Five
d. Two

23. The listing of all the financial accounts within a company’s general ledger is called the _____.
a. Chart of accounts
b. Journal entry
c. Balance sheet
d. P&L statement

24. Which is not classified as a current asset?

a. Cash
b. Product inventory
c. Liquid assets
d. Prepaid liabilities
e. Property

25. Which formula is used to calculate operating income?

a. Revenue + Direct Operating Cost = Operating Income
b. Indirect Operating Cost - Revenue = Operating Income
c. Gross Income - Operating Expenses = Operating Income
d. Gross Profit - Indirect Operating Cost = Operating Income

26. Which of these statements about accrual accounting is true?

a. Revenue is recorded only when payments are received, while expenses are recognized when they're incurred.
b. All revenue from prepayments should be recognized when the payment is received, while expenses accrue over
the life of the obligation.
c. If the business has provided the goods or services and can reasonably expect to receive cash, it can recognize
the revenue in that period.
d. The matching principle dictates that expenses should be recognized when they are incurred, regardless of when
revenue is recognized.

27. In a journal entry, a debit decreases which of the following accounts?

a. Cash
b. Accounts Payable
c. Supplies Expense
d. Both a and c

28. Which describes the double-declining balance depreciation method?

a. Estimated salvage value is greater at the end of the assets’ useful life than with straight-line depreciation.
b. It yields reports of higher income in the early years and lower income later on.
c. This method decreases the useful life of the asset and disposal costs by half.
d. The depreciation expense is larger in the first few years and gets smaller as time goes on.

29. Which one of these WILL NOT yield earnings before interest and taxes (EBIT)?
a. Revenue - Cost of goods sold - Operating expenses
b. Net income + Tax expense + Interest expense
c. Sales + Taxes + Interest
d. Gross profit - Operating expenses

30. Which of the following is true?

a. Accounts receivable are found in the current asset section of a balance sheet.
b. Accounts receivable increase by credits.
c. Accounts receivable are generated when a customer makes payments.
d. Accounts receivable become more valuable over time.

31. A company that uses the cash basis of accounting will:

a. Record revenue when it is collected.
b. Record revenue when it is earned.
c. Record revenue at the same time as accounts receivable.
d. Record bad debt expense on the income statement.
32. The purpose of the Conceptual Framework is:
a. To assist the International Accounting Standards Board to develop IFRS Standards.
b. To assist preparers of IFRS financial statements to develop consistent accounting policies when no IFRS
Standard applies to a particular transaction or other event, or when a Standard allows a choice of
accounting policy.
c. To assist all parties to understand and interpret IFRS Standards.
d. All of the above

33. The Conceptual Framework can override requirements in a Standard.

a. True b. False
34. Revision of the Conceptual Framework will automatically lead to changes in Standards that are inconsistent with
the revised concepts.
a. True b. False
35. If an IFRS Standard sets out requirements that are inconsistent with the Conceptual Framework, preparers have
to apply the Conceptual Framework for affected transactions.
a. True b. False