ACT Exam 1 with complete solutions

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ACT Exam 1 with complete solutions Basic Accounting Equation Correct Answer: Assets = Liabilities + Owner's Equity •The liabilities of Platt Company are $90,000. Owner's capital is $150,000; ... drawings are $40,000; revenues, $450,000; and expenses, $340,000. What is the amount of Platt Company's total assets? Correct Answer: $310,000 •The total assets of Sierra Company are $57,000. Owner's capital is $35,000; drawings are $7,000; revenues, $52,000; and expenses, $35,000. What is the amount of the company's total liabilities? Correct Answer: $12,000 •The total assets of Birch Co. are $660,000 and its liabilities are equal to two-thirds of its total assets. What is the amount of Birch Co.'s owner's equity? Correct Answer: $220,000 Ethics Correct Answer: standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair. Historic Cost Principle Correct Answer: Dictates that companies record assets at their cost Fair Value Principle Correct Answer: States that assets & liabilities should be reported at fair value (only used when an asset is actively traded). Relevance Correct Answer: Financial information that is capable of making a difference in a decision. Faithful Representation Correct Answer: Number & descriptions match what really existed or happened. Monetary Unit Assumption Correct Answer: Transactions that can be expressed in terms of money. Economic Entity Assumption Correct Answer: Requires that the activity of the entity be kept separate & distinct from activities of its owners & all other economic entities. Sole Proprietorship Correct Answer: -Doesn't require much capital to start business -personally liable for all debts Partnership Correct Answer: -Doesn't require much capital to start business -Generally unlimited personal liability. Corporation Correct Answer: -Limited liability -Ownership is transferable -Can have unlimited life -Double taxation -less control -More compliance and set up costs What increases equity? Correct Answer: -Owner's capital -Revenues What decreases equity? Correct Answer: Owner's drawings -Expenses Income Statement Correct Answer: -Reports a specific period of time -Revenues and expenses -Shows net income Equity Statement Correct Answer: Shows change in owner's equity for a period of time Balance Sheet Correct Answer: Reports assets, liabilities, & owner's equity account balances Double Entry System Correct Answer: a system that records in appropriate accounts the dual effect of each transaction Accounts with normal Debit balances Correct Answer: -Assets -Expenses -Owner's Drawing (Increase Debit, Decrease Credit) Accounts with normal Credit balances Correct Answer: -Liabilities -Revenue -Owner's Capital (Increase Credit, Decrease Debit) Posting Correct Answer: Procedure of transferring journal entries to the ledger accounts Chart of Accounts Correct Answer: A list of accounts and the account numbers that identify their location in the ledger. The Trial Balance steps Correct Answer: 1. List account titles & balances in appropriate debit & credit column 2. Total the debit & credit columns 3. Verify debits=credits Net Income Correct Answer: Revenues - Expenses The Time Period Assumption Correct Answer: Accountants divide economic life of a business into artificial time periods (tax purposes). Interim Periods Correct Answer: Monthly & quarterly time periods Fiscal Year Correct Answer: Accounting period that is one year in length Which of the following is in accordance with generally accepted accounting principles? Correct Answer: Accruel-basis accounting Cash-Basis Accounting Correct Answer: -Record Revenue when cash is received -Record Expense when cash is paid Accruel-Basis Accounting Correct Answer: Record transactions that change companies financial statements in the periods in which the events occur (GAAP). Revenue Recognition Principle Correct Answer: recognize revenue in the accounting period in which the performance obligation is satisfied (day we do the work). Expense Recognition Principle Correct Answer: Recognize expenses in period in which they make efforts to generate revenue. Adjusting Entries Correct Answer: Required every time company prepares financial statements. Will Include: Income statement account & balance sheet account Deferrals (cash now) Correct Answer: -Prepaid expenses -Unearned revenues Accruels (cash later) Correct Answer: -Accrued revenues -Accrued expenses Depreciation Correct Answer: Process for allocating cost of an asset to expense over useful life Accumulated depreciation Correct Answer: is a contra asset account (credit) Accrued Revenues Correct Answer: Revenues for services performed but not yet recorded at the statement date (Interest, rent, services). Unearned Revenue Correct Answer: When company received cash before services are performed Accrued Expenses Correct Answer: Expenses incurred, but not yet paid or recorded at the statement date (Interest, taxes, salaries). Calculating Interest Correct Answer: -Face value of the note -Interest rate (annual) -Length of time Adjusted trial balance Correct Answer: Shows balance of all accounts at the end of the accounting period Cost Constraint Correct Answer: weighs the cost that companies will i [Show More]

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