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Accounting Exam 1 Questions with Complete Answers
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Accounting Exam 1 Questions with Complete Answers
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Accounting Exam 1 Questions withComplete Answers
What are the four financial statements? - Answer-Balance sheet, income statement,
statement of cash flow, and statement of equity
What are the four valuation models? - Answer-Fair value, historical cost, amortized cost,
and net-realizable value
Amortized Cost:
Definition: Amortized cost is the cost of an asset or the carrying amount of a liability,
adjusted for any amortization, depreciation, or impairment. It is used when an asset's
value is systematically reduced over its useful life or when a liability's value changes
over time.
Use: Amortized cost is often used for long-term assets like loans or bonds. It reflects the
asset's book value as it is gradually written down to its estimated residual value, or it
represents the liability as it is adjusted for changes in its carrying amount.
Net Realizable Value (NRV):
Definition: Net realizable value is the estimated selling price of an asset in the ordinary
course of business, minus the estimated costs necessary to make the sale. For
inventory, NRV represents the expected selling price minus any selling costs and costs
to complete or dispose of the inventory.
Use: Net realizable value is commonly applied to assets like inventory or accounts
receivable. It ensures that these assets are valued at their expected recoverable
amount, considering potential reductions in value due to damage, obsolescence, or
uncollectibility.
What are examples of historical cost? - Answer-land, inventory, intangibles with an
infinite useful life
Balance Sheet accounting equation - Answer-Assets = Liabilities + Equity
What is an asset - Answer-a present right of an entity to an economic benefit. Generally
results in cash inflow.
they are the resources of a company
What is a liability - Answer-present obligation of the company to provide an economic
benefit
What is equity - Answer-remaining claim against the assets of a business after liabilities
have been satisfied.
, What are examples of equity? - Answer-Common stock, preferred stock, retained
earnings, treasury stock, contributed capital, etc
Composition of the balance sheet - Answer-Assets: Current Assets, Non-Current Assets
(Property, plant, and equiptment PPE AND intangible assets)
Liabilities + Equity: Current liabilities (accounts payable, utilities payable, wages
payable), non-current liabilities (long-term debt), contributed capital (investors buy stock
and have ownership), earned capital (retained earnings) (earnings from net income and
then distribute some through dividends)
What is accounts receivable? - Answer-services or goods that we have provided that we
haven't yet been paid for
they bought it on credit so they haven't paid for it yet
valuation method - Answer-net realizable value. we have the gross amount (total
amount of accounts receivable of the money that we are entitled to receive) and then
we have
allowances for bad debt: THIS IS A CONTRA ASSET ACCOUNT! it is what they do
NOT expect to receive
AR Net = AR Gross - allowances for bad debt
allowances for bad debt - Answer-it's a contra-asset account. It is what they expect NOT
to receive from people who paid on credit
AR Net = AR Gross - allowances for bad debt
what does AR stand for? - Answer-Accounts receivable
what are the two contra-assets we need to know for the test? - Answer-accumulated
depreciation and accounting for bad debt
Is a prepaid expense an asset or a liability? - Answer-It's an asset. It's always an asset.
The word "prepaid" trumps the word "expense"
What is depreciation? - Answer-A systematic expensing of an asset based on the
asset's estimated life
where does depreciation go? - Answer-on the income statement
Where does accumulated depreciation go? - Answer-balance sheet (it just keeps adding
up)
Benefits of debt financing - Answer-quick access to funds
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