Acct 253 exam study questions and answers solved 2024

accrual accounting - recognize revenues when earned and expenses when incurred, regardless of when cash is exchanged cash accounting - recognize revenues and expenses when cash is paid or collected accrued revenues - an asset, company provides product or service to customer before receiving payment (accts receivable) deferred revenue - a liability, company is paid before product or service is provided to customer (unearned revenue) accrued expenses - a liability, company incurs expense before making a payment (accts payable) deferred expenses - an asset, company pays for expense before incurring the expense (prepaid rent) accounts receivable - prepaid expenses - adjusting entries - accounting cycle steps - record transactions, adjust accounts, prepare statements, close nominal/temp accounts closing process - transfers net income/loss and dividend to retained earnings. establishes 0 in revenue, expense, and dividend (closes temp accounts) temporary accounts - expenses, revenue, dividends permanent accounts - liabilities, assets, equity recognition - Formally recording an economic item or event in the financial statements realization - Collecting cash, generally from the sale of products or services matching concept - Cash basis accounting can distort the measurement of net income because it sometimes fails to properly match revenues with expenses. The problem is that cash is not always received or paid in the period when the revenue is earned or when the expense is incurred. conservatism principle - When faced with a recognition dilemma, conservatism guides accountants to select the alternative that produces the lowest amount of net income cash flow - net income - return on assets ratio - = net income/total assets. This ratio measures the relationship between the level of income and the size of the investment. A larger ratio means the company did a better job of managing its assets. debt to asset ratio - = total debt/total assets. A smaller ratio indicates that there is less debt risk for the company return on equity ratio - = net income/stockholder's equity. A larger ratio indicates that the owners have a higher return on their investment. financial leverage - the ability of a company to use debt to make money product costs/inventory costs - include the price of the goods purchased, shipping and handling costs, transit insurance, and storage costs. period costs/selling admin costs - Examples include advertising, administrative salaries, sales commissions, insurance and interest cost of good available for sale - = beginning inventory + inventory purchase cost of goods sold - Gross margin (gross profit) - = sales revenue - costs of goods sold ending inventory - perpetual inventory system - This inventory system adjusts the inventory account perpetually (continually) throughout the accounting period for each purchase or sale of inventory.