Accounting Principles and Financial Statements: Key Concepts

Posted on Mar 11, 2025 in Accounting and Finance

Accounting Concepts and Principles

The accounting concept that maintains each organization is separate from all other organizations and individuals (including the owner) is known as the economic entity assumption.

Bonds and Liabilities

A bond with a face value of 100,000 and a quoted price of 99 ¼ has a selling price of 99,250.

If total assets are 225,000 and stockholder’s equity is 150,000, total liabilities would be 75,000.

Final Company issued a 20-year mortgage payable on January 1. Final is required to make the mortgage payments beginning February 1. At December 31, the unpaid principal balance will be reported on the balance sheet as a: long-term liability.

Financial Statements

The financial statement that presents revenues and expenses for a particular time period is the: Income statement.

Beginning retained earnings was 37,000, ending retained earnings was 12,000, and dividends were 27,000. The net income or net loss for the period was a loss of 2,000.

Account Balances and Transactions

Which of the following groups of accounts have a normal debit balance? Assets, dividends, expenses.

Payment of an Account Payable: Reduces the company’s total liabilities.

Generally, the revenue account for a merchandising enterprise is called Sales revenue.

Which of the following is TRUE? A journal is a chronological record of individual business transactions.

If sales revenue is 500,000, cost of goods sold is 320,000, and operating expenses are 80,000, the gross profit is: 180,000.

During March, a company received 5,000 cash for services it performed in March. It also performed 3,500 of services on account in March. In addition, the company received 2,100 cash in March for services to be performed in April. The revenue to be included on the March income statement is: 8,500.

Which of the following are all nominal (temporary) accounts? Revenues, expenses, and dividends.

The closing entry when a net loss has occurred requires that Retained Earnings be: Debited and income summary be credited.

Net Income from the income statement appears in The retained earnings statement.

If the shipping terms are FOB shipping point and the freight bill is 200, the purchaser of the merchandise inventory using a perpetual inventory system would record payment of the freight bill with a debit to: Merchandise Inventory and credit to Cash for 200.

Merchandise Inventory is classified as a Current asset on the balance sheet.

Inventory Valuation

Use the following information for questions 18 and 19. Assume the following data for Jones Company for the current fiscal year: Beginning Inventory 10 units at 7 each, March 18 purchase 15 units at 9 each, June 10 purchase 20 units at 10 each, October 30 purchase 12 units at 11 each. On December 31, a physical count reveals 18 units in ending inventory.

Under the FIFO method, cost of goods sold on the income statement would be: 345.

Under the weighted average method, the cost of ending inventory as reported on the balance sheet would be (rounded to the nearest dollar): 170.

Cash Reconciliation and Bonds

Which of the following items used to reconcile cash does not require an adjusting entry on the company’s books? Deposits in transit.

On July 1 when the market rate of interest was 8%, TTS Corporation issued 100,000 of 10%, 10-year bonds, interest payable June 30 and December 31. The bonds were issued at 103. TTS’s fiscal year ends December 31. What is the issue price of the bonds on July 1? 103,000.

The amount of sales tax collected by a retail store when making a sale is A current liability.

Accounts Receivable and Bank Reconciliation

A/R has a balance of 750,000 and the Allowance for Doubtful Accounts has a debit balance of 6,000 at the end of the current year prior to adjustment. Net credit sales for the current year are 850,000 and 4.5% of net credit sales are estimated to be uncollectible. The adjusting entry using the percentage of sales method would require a credit to: Allowance for Doubtful Accounts for 38,250.

In a bank reconciliation, a 4,000 note collected by the bank is: Added to the book balance.

Which of the following payroll taxes are paid by both the employer and the employee on behalf of the employee? FICA taxes.

On Nov 30, Catcher Com received an 8,000, 9%, 180-day note from NB Com. The entry on Catcher Comp books to record the collection of the note at maturity will include a debit for Cash for: 8,360.

Trial Balance and Closing Entries

The trial balance shows the following selected accounts and balances at the end of the fiscal year dated Dec 31. Accounts have their normal balance. Cash 10,400, R/E (1/1/14) 15,000, Salaries/P 2,100, Insur Exp 1,500, A/R 17,300, Unearned Rent Revenue 3,600, Dividends 5,000, Office Supplies 5,700, N/P 000, Repair Exp 14,000, Office Supplies Exp 1,600, Service Revenue 34,700, Rent Revenue 11,900, Prepaid Insurance 2,500, A/P 6,800, Salaries Exp 18,100, Cmmn Stck 4,000. What is the balance in the R/E after journalizing and posting the closing entries? 26,400.

Plant Assets and Investments

Which of the following should NOT be included in the plant assets classification? Company parking lot used by company visitors.

Investors who received checks in their names for interest earned on bonds must hold: Registered bonds.

Identify the item below where the terms are NOT related: Franchise – depletion.

An attorney receives payment of 2,100 in advance on May 1 for services to be performed. During the month of May, 700 of the services are completed. The May 31 adjusting entry would include A debit to Unearned Service Revenue of 1,400.

A truck that cost 15,000 and on which accumulated depreciation to date is 9,000 was disposed of for 2,000 cash. The gain or loss on this disposal is Loss of 4,000.

All of the following transactions increase stockholders’ equity except: Issuance of common stock.

A corporation has which of the following set of characteristics? Easier to transfer ownership and raise funds, government regulations.

A daily cash count of register receipts made by a cashier department supervisor demonstrates an application following internal control principles? Establish responsibility.

If a corporation issues only one class of stock, it must be: Common stock.

The maximum amount of stock that may be distributed according to the corporate charter is referred to as the Authorized stock.

Dab Comp buys land for 40,000 on Dec 31. As of March 31, the land has increased in value to 41,000. Dec 31, the land has an appraised value of 44,000. At what amount should the land be reported on the balance sheet at Dec 31? 40,000.

Par value: Is the value assigned per share in the corporate charter as legal capital.

Equipment was purchased for 17,000. Freight charges amounted to 700 and there was a cost of 2,000 to install the equipment. It is estimated that the equipment will have a 4,000 salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method will be 3,940.

All of the following are basic rights of a stockholder except: The right to maintain one’s proportionate ownership in the corporation.

ABC Com rents its extra office space to XYZ Com for 600 per month. On Nov 1, ABC Com received 3,600 rent in advance from XYZ Com for the months of Nov, Dec 31, Jan14, Feb14, Mrh14, and April14. The adjusting entry on Dec 31 would include: A credit to Rent Revenue for 1,200.

Which of the following items in a cash drawer at November 30 is NOT cash? A customer check dated Dec 4.

In a classified balance sheet, assets are usually classified using the following categories: Current assets; long-term investments; property, plant, and equipment; and intangible assets.

All of the following are advantages of a corporation except: Corporation taxation.

The factor that determines whether or not goods should be included in a physical count of inventory is Legal title.

On the balance sheet, the cost of treasury stock is deducted from Total stockholders’ equity.

ABC Corp purchased 100 shares of its own 6 par value common stock for the treasury at 15 per share. This entry to record this transaction would include: A debit to treasury stock for 1,500.

M Com has the following info available before recording the adjustment at the end of the year A/R 900,000 Allowance for Doubtful Accounts per books before adjustment 40,000 credit Bad Debt Expense calculated using % of sales method 15,000 The cash (net) realizable value of the a/r at the end of the year is 860,000.

What type of accounts will appear in the post-closing trial balance? Permanent (real) accounts.

Key Accounting Terms

  • Treasury stock is a contra stockholders’ equity account.
  • Sales revenue – cost of goods sold = gross profit.
  • Gross profit – operating expenses = net income I/S only reports Revenue and expense.
  • Rev – Exp = net income B/S only reports Assets, liab, c/s, r/e.
  • Internal users – marketing, finance, HR, management.
  • External – investors, creditors.
  • Monetary – express in money.
  • Economic entity – separate activities.
  • Sarbanes-Oxley Act – reduce unethical behavior.
  • Temporary accounts – RED (Revenue, Expenses, Dividends).
  • Permanent accounts – Balance sheet accounts.
  • FOB shipping point – free for the seller, buyer pays.
  • FOB destination – seller pays.
  • Sale of merchandise is 2 entries – cash or A/R with sales revenue and COGS with inventory.
  • Average cost calculation: 1. total cost / total units = ending inventory 2. COGAS – ending inventory = COGS COGS = units sold x avg cost.
  • 3 fraud factors – opportunity, financial pressure, rationalization.
  • Establishment of responsibility – 1 job/task.
  • Segregation of duties – different employees in charge of related activities.
  • Uncollectible account – debit bad debt expense, credit allowance for doubtful accounts.
  • Write-off – debit allowance, credit A/R.
  • Maker = borrower (N/P).
  • Payee = N/R.
  • Interest = face of note x annual interest rate x term.
  • Maturity value = face value + interest.
  • Multi-step (Net sales, COGS, gross profit, operating expenses, non-operating activities, net income).
  • Deferrals = prepaid expenses, unearned revenue.
  • Accruals = Revenues not received or recorded, expenses not paid or recorded.
  • Prepaid Expense – asset overstated, expense understated.
  • Unearned revenue – liability overstated, revenue understated.
  • Accrued revenue = assets understated, revenue understated.
  • Accrued expense = expense understated, liability understated.
  • FIFO – add # of Units and total cost (COGAS), # units you have – # units sold = ending inventory COGAS – ending inventory = COGS FIFO (start from the bottom).
  • Statement presentation for notes: B/S identify each receivable, report short-term receivables as current asset (gross and allowance) I/S report bad debt expense and service charge as selling expense, interest revenue under other revenue.
  • Credit Card has service charge expense debit.
  • Plant Assets – physical substance not intended for sale.
  • Historical cost principle – record asset at cost.
  • Land cost – cash purchase, closing cost (title and attorney fee) real estate, accrued taxes.
  • Straight-line method – same amount each year Depreciable cost = cost – salvage value. Then Depreciable cost / useful life is the depreciation expense.
  • Gain/Loss on Sale Dr Cash Dr Accumulated Depreciation Cr equipment Cr Gain/loss on disposal.
  • Payroll tax expense – FICA payable, federal unemployment, state unemployment payable.
  • Bonds are a form of interest-bearing N/P. The rate of interest investors demand for loaning funds to a corporation is the market interest rate.
  • Bond contractual interest rate. Market interest rate is below when premium, face value when the same, and discount when over.
  • Accounting for long-term N/P Dr Cash Cr Mortgage Payable Dr Interest expense Dr Mortgage payable Cr Cash.
  • Financial statements are prepared directly from the adjusted trial balance (I/S, R/E, B/S) R/E = add net income Less Dividends