RepetoUnder a periodic inventory system, how is ending inventory normally established for period-end cost-of-sales calculation?
A physical count and valuation establish ending inventory, which is used to determine cost of goods sold.
Financial accounting basics
220 questions in English on double-entry bookkeeping, statements and cash flows, with IFRS and US GAAP distinctions.
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What time perspective does an income statement use?
A reporting period: it summarizes recognized income and expenses over that interval.
Why is a retained-earnings balance not evidence that the same amount of cash is available for dividends?
Retained earnings are accumulated earnings after distributions and adjustments; those resources may be invested in noncash assets.
What does acquired goodwill broadly represent in business-combination accounting?
The residual acquisition amount associated with benefits not separately identified and recognized as individual assets.
Why can a balanced trial balance still contain errors?
Omitted transactions, wrong accounts or equal offsetting errors can leave total debits equal to total credits.
What kinds of cash movements generally belong to financing activities?
Transactions changing contributed equity and borrowings, such as share issues, borrowing and principal repayments.
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Question Answer
Under a periodic inventory system, how is ending inventory normally established for period-end cost-of-sales calculation? A physical count and valuation establish ending inventory, which is used to determine cost of goods sold.
What time perspective does an income statement use? A reporting period: it summarizes recognized income and expenses over that interval.
Why is a retained-earnings balance not evidence that the same amount of cash is available for dividends? Retained earnings are accumulated earnings after distributions and adjustments; those resources may be invested in noncash assets.
What does acquired goodwill broadly represent in business-combination accounting? The residual acquisition amount associated with benefits not separately identified and recognized as individual assets.
Why can a balanced trial balance still contain errors? Omitted transactions, wrong accounts or equal offsetting errors can leave total debits equal to total credits.
What kinds of cash movements generally belong to financing activities? Transactions changing contributed equity and borrowings, such as share issues, borrowing and principal repayments.
Supplies has an unadjusted debit balance of $1,100, but the closing count is $350. Assuming no other adjustments, what entry records supplies used? Debit Supplies Expense $750; credit Supplies $750.
Current assets are $45,000 and current liabilities are $30,000. What is the current ratio? 1.5 times, from $45,000/$30,000.
Beginning inventory is $7,000, net acquisition costs are $21,000 and ending inventory is $6,000. With no other adjustments, what is cost of goods sold? $22,000, from $7,000 + $21,000 − $6,000.
How is basic EPS computed for a company with only ordinary shares and no allocation complications? Net income attributable to ordinary shareholders divided by weighted-average ordinary shares outstanding, adjusted for events such as stock splits.
Why is cash received before a promised service is performed generally recorded as a liability? The business still owes performance or a refund; receipt alone does not satisfy the revenue-recognition requirement.
What does a statement of changes in equity explain? How opening equity becomes closing equity through earnings, owner transactions and other recognized equity movements.
Does the Accumulated Depreciation balance represent cash reserved to replace the asset? No. It is a cumulative contra-asset balance; recording depreciation does not itself set aside cash.
How can a bond's face amount differ from its issue price? Face is the contractual principal due at maturity; issue price is the proceeds received, which can differ from face.
Under IAS 2, what comparison determines inventory's carrying amount after a write-down assessment? The lower of cost and net realizable value.
In a standard bank reconciliation, where is a deposit already recorded by the business but not yet by the bank added? To the bank-statement balance; it does not require recording the receipt a second time in the books.
How is an asset's depreciable amount calculated in a simple cost-model example? Cost minus estimated residual value.
Under US GAAP, how are cash proceeds from selling equipment normally classified on the cash-flow statement? As an investing cash inflow, using total proceeds rather than only the disposal gain.
Under IAS 38, how is the depreciable amount of a recognized finite-life intangible allocated? Through amortization over its useful life, using a pattern reflecting consumption of benefits where reliably determinable.
Under the US GAAP cost method, is reacquired treasury stock reported as an asset? No. Its cost is reported as a deduction from shareholders' equity.
How does ordinary common equity differ from a lender's contractual claim? It is a residual ownership interest, rather than a promise of fixed repayment merely because shares were issued.
What determines depreciation under a units-of-production method? Actual usage multiplied by depreciable amount per estimated lifetime unit of usage.
An IAS 16 machine costs $30,000 after discounts, with $1,200 delivery and $2,800 necessary installation. All qualify as cost; no other items apply. What is initial cost? $34,000, from $30,000 + $1,200 + $2,800.
Under the PPE cost model, how is carrying amount derived after depreciation and impairment? Cost minus accumulated depreciation and accumulated impairment losses.
Using a 365-day year and positive receivables turnover, how are average collection days estimated? 365 divided by receivables turnover.
For the same period and classifications, do direct and indirect presentations produce different net operating cash flow? No. They present the same total using different explanations.
Why can identical reported ratios conceal different underlying performance between two companies? Accounting policies, estimates, business models, seasonality and one-off events can affect the figures and their interpretation.
For a retailer, how does merchandise inventory differ from equipment used in the shop? Inventory is held for sale; shop equipment is used to operate the business.
In the IFRS Conceptual Framework, what distinguishes a liability from a plan to spend money later? A liability involves a present obligation from past events; a future spending intention alone is insufficient.
Why do routine accrual and deferral adjusting entries usually exclude Cash? They update recognition for activity already occurring without a new cash movement at adjustment time.
Under IFRS 13, is fair value based on the entity's own intention to keep an asset indefinitely? No. It uses a market-participant exit-price perspective at the measurement date.
What does posting a journal entry accomplish? It transfers each debit and credit to the appropriate ledger account, updating that account's balance.
Does a cash distribution to an owner reduce profit as a business expense? No. It reduces equity directly rather than being an expense in measuring profit.
If a bank fee appears on the bank statement but is absent from the books, which side of a reconciliation is adjusted? The book balance is reduced, with an entry recognizing the relevant fee expense.
Why is repaying a loan's principal not an interest expense? It settles the borrowing liability; interest expense represents the cost of using the borrowed funds.
Under an allowance method, a $450 receivable is approved for write-off against an existing allowance. What entry records it? Debit Allowance for Credit Losses $450; credit Accounts Receivable $450.
Under IAS 36, equipment carried at $11,000 has recoverable amount $8,400. With no revaluation surplus, what impairment loss reduces it to recoverable amount? $2,600, from $11,000 − $8,400.
In an aging-based allowance estimate, does the calculated required allowance automatically equal the adjustment expense? No. The adjustment must reconcile the existing allowance balance to the required closing balance.
Why separate cash custody from recording customer collections and reconciling the bank account? Combining these duties can let one person both misappropriate cash and conceal it in the records.
Under an allowance method, what is the immediate effect of writing off an identified receivable against an existing allowance? Gross receivables and the allowance both decrease; net receivables and current-period expense are unchanged by that write-off entry.
Why is very high inventory turnover not automatically desirable? It may indicate efficient inventory use, but it can also accompany insufficient stock and lost sales.
What does a bank reconciliation explain? Differences between the bank statement balance and the entity's recorded cash balance, identifying timing items and errors.
What cost-flow assumption does FIFO make? The earliest inventory costs are assigned to cost of goods sold first; the physical movement need not follow that order.
Why should preferred-share dividend rights be read from the instrument's terms rather than assumed from its name? Priority, accumulation, participation and other rights vary; the label alone does not specify them.
A $15,000 note earns 8% annual simple interest for three months. Using months/12, what is the interest? $300, from $15,000 × 8% × 3/12.
Opening cash is $8,000, operating cash flow is +$12,000, investing is −$9,000 and financing is +$3,000. With no other cash changes, what is closing cash? $14,000, from $8,000 + $12,000 − $9,000 + $3,000.
Under IFRS, how is a recognized indefinite-life intangible treated regarding amortization and impairment testing? It is not amortized and is tested for impairment annually, and also when impairment indicators arise.
Which entry normally increases a revenue account? A credit, reflecting an increase in equity through earnings.
A discount bond's opening carrying amount is $48,000, its annual effective rate is 6% and the year's cash coupon is $2,500. What interest entry is needed? Debit Interest Expense $2,880; credit Cash $2,500; credit Bond Discount $380.
What changes when a previously recognized cash dividend payable is paid? Cash and the dividend payable both decrease; no new dividend expense arises.
Once a cash dividend is validly declared and creates a present obligation, what broad balance-sheet effect arises? Equity decreases and a dividend payable liability increases; cash has not yet been paid.
With unchanged estimates, what is annual straight-line depreciation for an asset available for use for the full year? Depreciable amount divided by estimated useful life in years.
Under IFRS, debt principal is due in nine months with no right at reporting date to defer settlement for at least twelve months. How is it classified? As a current liability.
Can a liability for services already received exist before the supplier's invoice arrives? Yes. The absence of an invoice does not by itself remove a present obligation or the need for accrual.
When expected sales returns reduce the amount the seller is entitled to retain, why should gross cash billed not automatically equal revenue? The return-related obligations must be reflected; revenue excludes the portion the seller does not expect to retain.
What is an accrued revenue in an introductory service-business setting? Revenue recognized for services already performed before the related cash receipt, often accompanied by a receivable.
What distinguishes property, plant and equipment from inventory in ordinary operations? PPE is tangible property held for continuing use rather than ordinary sale to customers.
What does a general journal record before transactions are posted to ledger accounts? Dated entries identifying the accounts debited and credited, amounts and an explanation.
What is an accrued expense? An expense recognized for a resource or service already consumed before the related cash payment.
Equipment cost $20,000 and has $13,000 accumulated depreciation, with no impairment. It is sold for $8,500 without selling costs. What gain or loss arises? A $1,500 gain: proceeds of $8,500 minus carrying amount of $7,000.
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Under US GAAP, how is cash interest paid normally classified in the statement of cash flows? As an operating cash outflow.
What numerical condition must every balanced journal entry satisfy? Total debits equal total credits; a transaction may affect more than two accounts.
What is the purpose of an optional reversing entry at the start of the next period? To simplify later recording of selected accruals; it does not remove the need for the original period-end adjustment.
Under IAS 2, which inventory costing approach applies to items that are not ordinarily interchangeable? Specific identification of each item's individual cost.
What distinguishes an adjusted trial balance from an unadjusted trial balance? It includes the effects of period-end adjusting entries posted to the ledger.
Why identify the reporting framework before applying an accounting rule to a company? Recognition, measurement and presentation rules can differ between IFRS, US GAAP and other frameworks.
What does the statement of cash flows explain? How cash and cash equivalents changed during the period through operating, investing and financing activities.
Under IAS 36, which amount is an asset's recoverable amount? The higher of value in use and fair value less costs of disposal.
Why should a user examine notes about significant accounting estimates? Reported amounts may depend on assumptions whose changes could materially affect future measurements or results.
What distinguishes a perpetual inventory system? Purchases and sales update inventory records continuously, including cost of goods sold when sales occur.
Under IFRS, how does total comprehensive income differ from profit or loss? It includes profit or loss plus other comprehensive income; owner contributions and distributions are excluded.
What is the main purpose of general-purpose financial reporting for a business? To provide useful information about its resources, obligations and performance for decisions by investors, lenders and other creditors.
What is the financial-reporting purpose of internal controls? To support reliable records and reporting and safeguard resources, with reasonable rather than absolute assurance.
Under IFRS 15, what does the transaction price represent? The consideration the entity expects to be entitled to for transferring promised goods or services, excluding amounts collected for third parties.
Under the US GAAP cost method, is reissuing treasury shares above their cost recorded as operating revenue or a gain in net income? No. The difference is accounted for within equity.
An owner contributes $14,000 cash to a sole proprietorship. What entry records this contribution? Debit Cash $14,000; credit Owner Capital $14,000.
For an ordinary liability account such as Accounts Payable, which entry increases its balance? A credit; a debit decreases it.
Why do outside lenders use a borrower's financial statements? To assess resources, obligations and cash-generation capacity relevant to repayment; the statements do not guarantee future payment.
What does a trial balance compare? The total debit balances and total credit balances across ledger accounts at a particular time.
Does consistent accounting require a company to keep an inappropriate policy forever? No. Relevant framework rules govern required or justified policy changes and their disclosure.
Employees have earned $1,260 of wages that remain unrecorded and unpaid at period end. What adjustment is needed? Debit Wages Expense $1,260; credit Wages Payable $1,260.
In a simple stock split with no cash distribution or other transaction, does total shareholders' equity increase? No. Share count and per-share amounts change, but the split itself does not add total equity.
Perpetual inventory records show $5,400 at cost, but the physical count totals $5,150. Using a separate shrinkage expense account, what adjustment is needed? Debit Inventory Shrinkage Expense $250; credit Inventory $250.
What kinds of cash movements generally belong to operating activities in a simple nonfinancial business? Cash effects of its main revenue-producing activities and other activities not classified as investing or financing.
Under periodic weighted-average inventory costing, how is unit cost calculated? Total cost of units available for sale divided by the total number of units available for sale.
Beginning inventory is 10 units at $8; 10 more are bought at $10. Under periodic weighted average, what is cost per unit available? $9 per unit, from ($80 + $100)/20.
Why is land with an unlimited useful life normally not depreciated? It has no finite useful life over which to allocate cost; land improvements and finite-life land uses require separate analysis.
A business pays $1,900 cash to settle an already recorded supplier payable in full. What entry records payment? Debit Accounts Payable $1,900; credit Cash $1,900.
What basic equation must a balance sheet satisfy? Assets = liabilities + equity.
Does a share's stated par value tell an investor its current market price? No. Par value is a legal/accounting designation and can differ greatly from market price.
Why is a cash receipt not necessarily revenue? It may instead be borrowing, an owner contribution, collection of an existing receivable or a customer advance.
What does requiring approval before a payment aim to prevent? Unauthorized or inappropriate disbursements before cash leaves the business.
Using net income in the numerator and average total assets in the denominator, what does this ROA measure express? Accounting net income earned per unit of average assets; other ROA conventions must be identified before comparison.
Under IAS 38, is identifying a project as development sufficient to capitalize its costs? No. All development recognition criteria must be demonstrated before qualifying expenditure is recognized as an asset.
Under IAS 2, what broad costs belong in inventory cost? Purchase, conversion and other costs needed to bring inventory to its present location and condition.
For an ordinary asset account such as Cash, which entry increases its balance? A debit; a credit decreases it.
How does financial accounting differ from managerial accounting in its main audience? Financial accounting serves external reporting needs; managerial accounting supports internal planning, decisions and control.
How does permission to use LIFO for ordinary interchangeable inventory differ between US GAAP and IFRS IAS 2? US GAAP permits LIFO; IAS 2 does not permit it.
A corporation issues 1,000 shares with $1 par value for $6 cash each, with no issuance costs. What entry records the issue? Debit Cash $6,000; credit Common Stock $1,000; credit Additional Paid-in Capital $5,000.
For IAS 2 inventory, what is net realizable value? Estimated ordinary selling price less estimated completion costs and costs necessary to make the sale.
Why is it incomplete to classify every asset as current or noncurrent using only a one-year rule? The normal operating cycle and specific framework criteria also affect classification.
Why is depreciation included in net income added back in an indirect operating cash-flow reconciliation? It reduced net income without using cash in that period; the add-back does not mean depreciation generated cash.
For a simple discount bond with no other adjustments, how does discount amortization affect carrying amount as maturity approaches? It increases carrying amount toward face value.
For a conventional fixed-rate bond issued below face value, what does the discount do to its initial carrying amount? It reduces the carrying amount below face value.
A business completes $2,800 of services on credit, and the full amount qualifies as revenue. What entry records it? Debit Accounts Receivable $2,800; credit Service Revenue $2,800.
Under the effective-interest method, how is a period's interest expense on an amortized-cost bond calculated? Opening carrying amount multiplied by the effective interest rate for that period.
Why should an owner's personal spending be distinguished from the business's expenses? The business is a separate accounting entity; an owner's personal withdrawal is not automatically a business expense.
Using cash, short-term liquid investments and net receivables as quick assets, how is the quick ratio calculated? Their total divided by current liabilities; inventory and prepayments are excluded from this specified numerator.
What does a trade accounts receivable normally represent? A right to collect consideration from a customer for goods or services supplied on credit.
Under IAS 10, what makes an event after the reporting period an adjusting event? It provides evidence about conditions that already existed at the reporting date.
A $900 IFRS 15 contract has two obligations with stand-alone prices of $600 and $400. With no allocation exception, how much goes to the first? $540, from $900 × $600/($600 + $400).
Under IAS 2, are ordinary selling costs included in inventory cost? No. They are excluded from inventory cost and recognized as expenses when incurred.
Under IAS 10, how is a material event reflecting a condition arising after the reporting date generally treated? Do not adjust reporting-date amounts for it; disclose its nature and estimated financial effect, or inability to estimate that effect.
Using net credit sales and average net trade receivables, how is receivables turnover calculated? Net credit sales divided by average net trade receivables; use the same convention when comparing businesses.
Net income is $9,000; depreciation is $1,800; operating receivables increase $700; operating payables increase $400. With no other adjustments, what is operating cash flow? $10,500, from $9,000 + $1,800 − $700 + $400.
Under US GAAP's general R&D model, how are incurred research salaries and consumed materials with no alternative future use treated, excluding specialized software guidance? As research and development expense when incurred.
Does an unmodified financial-statement audit opinion guarantee that every error or fraud has been detected? No. An audit provides reasonable assurance about material misstatement, not absolute assurance about every item.
Under IAS 38, how can an intangible asset satisfy the identifiability condition? By being separable or arising from contractual or other legal rights.
What does equity represent in the accounting equation? The residual interest in recognized assets after deducting recognized liabilities; it is not necessarily market value.
Under IAS 16, is the cost model the only subsequent-measurement option for PPE? No. A qualifying revaluation model is also permitted and is applied to an entire class of PPE.
A business reports assets of $86,000 and liabilities of $31,000. What is its reported equity? $55,000, from $86,000 − $31,000.
Under IAS 8, how are material prior-period errors generally corrected in the next issued financial statements? Retrospectively by restating comparative amounts or opening balances, except to the extent that doing so is impracticable.
A customer advance of $3,600 is recorded as Unearned Revenue. One quarter now qualifies as earned revenue. What adjustment records that portion? Debit Unearned Revenue $900; credit Service Revenue $900.
A $12,000 note bears 6% annual simple interest. Two months of interest are unrecorded and unpaid. Using months/12, what adjustment is needed? Debit Interest Expense $120; credit Interest Payable $120.
Under IAS 38, what does an indefinite useful life mean for an intangible asset? There is no foreseeable limit to its net cash-inflow period after relevant factors are considered; it does not mean infinite life.
What distinguishes fraud from an ordinary accounting error? Fraud involves intentional deception; an error is unintentional, though either can materially misstate records.
For an ordinary contributed-capital account, which entry increases its balance? A credit; a debit decreases it.
Under US GAAP, how is repayment of a borrowing's principal normally classified on the cash-flow statement? As a financing cash outflow.
How is gross profit margin calculated when net sales are positive? Gross profit divided by net sales, often expressed as a percentage.
Why does a perpetual inventory system still need physical verification? Counts can reveal theft, damage and recording errors that continuous records alone do not detect.
Under IFRS 15, what is a performance obligation in a customer contract? A promise to transfer a distinct good or service, or a qualifying series of distinct goods or services.
Under IAS 37, is a contingent liability normally recognized as a liability on the balance sheet? No. It is generally disclosed unless the possibility of an outflow is remote.
How is the total-liabilities-to-assets ratio calculated when total assets are positive? Total liabilities divided by total assets; this specified measure includes more than interest-bearing debt.
Why can well-designed internal controls still fail? Human mistakes, collusion, management override and changing conditions can defeat or weaken controls.
Under IFRS 15's general allocation principle, how is transaction price allocated to distinct performance obligations? Using their relative stand-alone selling prices, subject to specific allocation exceptions.
What is the principal of a simple interest-bearing note? The amount borrowed on which interest is calculated, distinguished from the borrowing cost itself.
Under IFRS 16, what does a lessee normally recognize for a lease when no recognition exemption is used? A right-of-use asset and a lease liability; this differs from simply expensing each cash payment.
Why retain invoices, receipts and links between source documents, journal entries and ledger postings? They let a reviewer trace amounts and verify the basis for recorded transactions.
Equipment costs $17,000, has a $2,000 residual value and a five-year useful life. Using straight-line for a full year, what is depreciation? $3,000 per year, from ($17,000 − $2,000)/5.
Under US GAAP, how is a cash purchase of equipment for the business's own use normally classified on the cash-flow statement? As an investing cash outflow.
Why does a basic merchandise sale under a perpetual system normally require both a revenue entry and a cost entry? One records the sale consideration and revenue; the other transfers the merchandise's cost from Inventory to Cost of Goods Sold.
Under IAS 8, how is a change in an accounting estimate generally recognized? Prospectively in the affected current and future periods, rather than by restating prior periods as an error.
If there are no other retained-earnings adjustments, how is closing retained earnings calculated? Opening retained earnings + net income − dividends; a net loss reduces retained earnings.
Under IAS 38, is internally generated goodwill recognized as an asset? No. It is not an identifiable resource that meets the standard's recognition approach.
In a T-account, which side records a debit? The left side; debit does not universally mean increase or decrease.
For a conventional fixed-rate bond issued above face value, what does the premium do to its initial carrying amount? It increases the carrying amount above face value.
What does a trade accounts payable normally represent? An obligation to pay a supplier for goods or services already received on credit.
Under IAS 38, are internally generated brands and customer lists recognized as intangible assets? No. IAS 38 prohibits recognizing those internally generated items as assets.
If the bank alone incorrectly debits the account and the business records are correct, should the business record an expense for that error? No. Adjust the bank side of the reconciliation and seek correction; do not create a false book expense.
How is working capital calculated? Current assets minus current liabilities, using the amounts classified as current in the statements.
Under US GAAP, how are cash dividends paid to shareholders classified in the statement of cash flows? As financing cash outflows.
Annual cost of goods sold is $96,000 and average inventory is $16,000. What is inventory turnover? 6 times per year, from $96,000/$16,000.
At period end, $1,450 of completed services qualify as revenue, with an unconditional right to payment, but remain unrecorded. What adjustment is needed? Debit Accounts Receivable $1,450; credit Service Revenue $1,450.
How are outstanding shares related to issued shares when the company holds treasury shares? Outstanding shares = issued shares − treasury shares.
Under IAS 37, what broad conditions support recognizing a provision? A present obligation from a past event, a probable resource outflow and a reliable estimate of the amount.
Under the US GAAP indirect method, what starting figure is reconciled to net operating cash flow? Net income, adjusted for noncash items and relevant accrual changes.
Who has primary responsibility for preparing a company's financial statements even when external auditors examine them? Management; an audit does not transfer preparation responsibility to the auditor.
Under IAS 38, how is spending in the research phase of an internally generated project treated? As an expense when incurred; a research-phase intangible is not recognized.
Under IAS 38, what distinguishes an intangible asset from tangible PPE? It is an identifiable nonmonetary asset without physical substance.
With no acquisitions, write-downs or other changes, how does an increase in inventory affect the indirect operating cash-flow reconciliation? It is subtracted from net income because inventory purchases exceed the inventory cost recognized as expense.
Ignoring tax, how does failing to expense expired prepaid insurance affect assets and profit? Both assets and profit are overstated by the expired portion.
Why is acquiring equipment entirely by issuing a note excluded from the statement's cash-flow totals? No cash changed hands; the significant noncash investing and financing transaction is disclosed separately.
Why is a credit-loss allowance associated with receivables? To reflect estimated credit losses in the carrying amount instead of waiting for every specific nonpayment to be confirmed.
A corporation declares a $1,800 cash dividend that creates a present obligation. Using a temporary Dividends account, what entry records declaration? Debit Dividends $1,800; credit Dividends Payable $1,800.
Under IFRS 15, does signing a long-duration service contract automatically justify recognizing all revenue immediately? No. Recognition follows satisfaction of performance obligations; over-time recognition requires the relevant criteria to be met.
Gross trade receivables are $28,000 and their credit-loss allowance is $1,700. What is their net carrying amount? $26,300, from $28,000 − $1,700.
For trade payables relating only to operating purchases, with no other changes, how does an increase affect indirect operating cash flow? It is added to net income because some recognized operating costs or purchases remain unpaid.
Under accrual accounting, what determines recognition timing rather than cash movement alone? The underlying economic activity and applicable recognition criteria, even when cash is received or paid in another period.
Using net income as profit, how is net profit margin calculated when net sales are positive? Net income divided by net sales, often expressed as a percentage.
How is the current ratio calculated when current liabilities are nonzero? Current assets divided by current liabilities.
Which accounts appear in a properly prepared post-closing trial balance? Permanent accounts only; temporary revenue, expense and distribution accounts have been closed.
In the IFRS Conceptual Framework, why can an economic resource be an asset without being legally owned outright? Control of a present economic resource from past events matters; legal title alone does not determine asset status.
An allowance has a $300 credit balance before adjustment; the required closing credit balance is $1,100. What entry brings it to the estimate? Debit Credit-loss Expense $800; credit Allowance for Credit Losses $800.
Why are revenue and expense accounts closed at period end? To transfer the period's result to equity and start the next period's performance accounts at zero.
Bank balance is $7,800, deposits in transit $1,400 and outstanding checks $900, with no other bank-side items. What is adjusted bank cash? $8,300, from $7,800 + $1,400 − $900.
For a simple-interest note with principal P, annual rate r and time t in years, what is interest? Interest = P × r × t; use a time fraction consistent with the contract.
A $2,400 annual policy was recorded as Prepaid Insurance on October 1. Using equal monthly coverage, what adjustment is needed on December 31? Debit Insurance Expense $600; credit Prepaid Insurance $600, for three of twelve months.
In the cost model, what does depreciation allocate? An asset's depreciable amount over its useful life; it is not a periodic estimate of the asset's market price.
Can a business report profit while cash decreases during the same period? Yes. Accrual timing, asset purchases, debt repayments and owner distributions can separate profit from cash movement.
Why is a cash payment not necessarily a current-period expense? It may buy an asset, repay a liability or distribute funds to owners rather than consume a resource this period.
Current assets are $42,000 and current liabilities are $27,000. What is working capital? $15,000, from $42,000 − $27,000.
Why is an unexpired prepaid insurance payment initially an asset? It represents coverage available for future periods; the consumed portion becomes expense as coverage expires.
Ignoring tax and all other errors, how does overstated ending inventory affect cost of goods sold and profit in that period? Cost of goods sold is understated and profit is overstated by the same amount.
Why is a balance sheet described as a statement at a date rather than for a period? It reports recognized assets, liabilities and equity at the reporting date.
What kinds of cash movements generally belong to investing activities? Acquiring and disposing of long-lived assets and investments that are not cash equivalents.
A business receives $9,000 cash from a bank loan, with no fees. What entry records the borrowing? Debit Cash $9,000; credit Notes Payable $9,000.
In a cost-model example, routine maintenance merely preserves current operating condition and creates no separately recognizable asset. How is its cost treated? As an expense when incurred, rather than added to the asset's carrying amount.
Receivables turnover is 8 times per year. Using a 365-day year, what are estimated average collection days? 45.625 days, approximately 45.6 days, from 365/8.
A business buys equipment ready for use for $6,500 cash, with no additional costs. What entry records the purchase? Debit Equipment $6,500; credit Cash $6,500.
Under IFRS 15, what distinguishes a receivable from a contract asset? For a receivable, the right to payment is unconditional except for passage of time; a contract asset has an additional condition.
Net sales are $80,000 and cost of goods sold is $50,000. What is gross profit margin? 37.5%, from ($80,000 − $50,000)/$80,000.
Why is total reported equity not necessarily the price for which the whole business could be sold? Accounting recognition and measurement differ from market valuation; some internally generated value is not recognized as an asset.
For a retailer with no other inventory adjustments, how is cost of goods sold derived from inventory available for sale? Beginning inventory + net purchases and attributable acquisition costs − ending inventory.
In the IFRS Conceptual Framework, does faithful representation require every estimate to be perfectly certain? No. Uncertainty can coexist with faithful representation when the estimate and its process are appropriately described without bias.
Opening retained earnings are $18,000, net income is $7,500 and dividends are $2,000. With no other changes, what is closing retained earnings? $23,500, from $18,000 + $7,500 − $2,000.
In a basic par-value share issue, what does additional paid-in capital record? The proceeds contributed above the shares' par value, excluding effects such as issuance costs.
If a customer's previously recorded check is returned unpaid and remains collectible, what basic book adjustment is needed? Reduce Cash and reinstate the customer's Accounts Receivable.
Which broad account groups normally carry their balances into the next period rather than being closed? Assets, liabilities and permanent equity accounts.
What is the aim of transaction cutoff at the reporting date? To recognize transactions in the period to which they belong under the applicable accounting requirements.
Under IAS 16, why can installation and testing costs form part of equipment cost? Directly attributable costs can prepare the asset for its intended operating location and condition.
Under IFRS 15, what event drives revenue recognition for a performance obligation? Satisfying it by transferring control of the promised good or service to the customer.
Under a two-entry allowance-method recovery procedure, what precedes recording cash collected on a previously written-off receivable? Reinstating the receivable and the allowance for the recovered amount.
With no acquisitions, write-offs or other changes, how does an increase in operating receivables affect the indirect operating cash-flow reconciliation? It is subtracted from net income because recognized revenue exceeds related cash collections.
For a company with only ordinary equity, how is ROE calculated using net income and average equity? Net income divided by average ordinary equity, provided the denominator is meaningful.
Why may a valuable internally developed customer relationship be absent as a separate balance-sheet asset? Economic value alone does not ensure that the applicable recognition and measurement requirements are met.
In a standard bank reconciliation, how is an issued check already recorded by the business but not yet cleared treated? Subtract it from the bank-statement balance; no duplicate cash payment entry is made.
In a T-account, which side records a credit? The right side; credit does not universally mean increase or decrease.
Ignoring tax, how does omitting an accrued expense affect period-end profit and liabilities? Profit is overstated and liabilities are understated by the omitted amount.
Under the US GAAP indirect method, why is a gain on equipment disposal subtracted from net income in operating cash flows? The gain is in net income, while the disposal proceeds belong in investing cash flows.
Why does Accumulated Depreciation normally have a credit balance? It is a contra-asset account that offsets the related asset's debit balance.
Why does materiality depend on more than a fixed numerical cutoff? An item's size, nature and context can affect whether it influences users' decisions.
What does the going-concern basis assume about an entity's future operations? That it will continue operating rather than liquidate or cease trading; this is a preparation basis, not a guarantee of survival.
How does a cash contribution from an owner affect the accounting equation, before any issuance costs? Cash and equity increase by the same amount; revenue does not arise.
A finite-life intangible costs $24,000, has zero residual value and a six-year useful life. Using straight-line for a full year, what is amortization? $4,000 per year, from $24,000/6.
Beginning inventory is 10 units at $8; 10 more are bought at $10 before 12 units are sold. Under FIFO, what is cost of goods sold? $100, from 10 × $8 + 2 × $10.
In a typical manual accounting cycle, what follows posting period-end adjustments before preparing financial statements? Preparing the adjusted trial balance.
Which entry normally increases an expense account? A debit, reflecting a reduction in equity through earnings.
Why must financial-statement notes be read along with the face of the statements? They explain policies, estimates, breakdowns and risks that condensed statement totals cannot fully convey.
Compared with straight-line depreciation, how does an accelerated method allocate the same depreciable amount over useful life? It generally assigns more depreciation to earlier periods and less to later periods.
Using cost-based inventory amounts, how is inventory turnover calculated? Cost of goods sold divided by average inventory.
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