Chapter 13

Question 1

Classified Financial Statement

Answer 1

a format by which revenues and expenses on the income statement, and assets and liabilities on the balance sheet, are divided into groups of similar accounts and a subtotal is given for each group

Question 2

Classified Income Statement

Answer 2

AKA Multiple-Step Income Statement
- a type of income statement on which several subtotals are computed before the net income is calculated

Question 3

Single-step Income Statement

Answer 3

a type of income statement where only one computation is needed to determine the net income (total revenue - total expenses = net income)

Question 4

Operating Revenue

Answer 4

First section of the classified income statement contains the revenue from operations. Revenue earned from normal business activities
Other Income - bottom

Question 5

Cost of Goods Sold

Answer 5

contains information about the cost of merchandise that was sold during the period
1. Beginning Inventory
2. Net Delivered Cost of purchases
3. Ending Inventory

+ Purchase
+ Freight In
- Purchases Returns
- Purchases Discounts
= Net Delivered Cost of Purchases

+ Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
= Total Merchandise Available for Sale (Ending Merchandise Inventory)

= Cost of Goods Sold

Question 6

Merchandise Inventory

Answer 6

Located on both the Income Statment and Balance Sheet

Beggining/Ending Merchandise appears on Income Statement

Ending Merchandise appears on Balance sheet in Currents Asset section

Question 7

Gross Profit

Answer 7

the difference between net sales and the cost of goods sold (gross profit = net sales - cost of goods sold)

Question 8

Operating Expenses

Answer 8

Expenses that arise from normal business activities
1. Selling Expenses: marketing, sale, and delivery of goods
2. General and Administrative Expenses: rent, utilities, and salaries for office employees
3. Warehouse Expenses: to store inventory

Question 9

Net Income or Net Loss from Opertations

Answer 9

Gross Profit on Sales
(Total Operatin Expenses)
= Net Income/Loss

Question 10

Other Income and other Expenses

Answer 10

Interest on notes receivable and miscellaneous income item

Interest Expense

Question 11

Condensed Income Statement

Answer 11

An Income statement summarizing detailed income statement accounts into a few lines of information

Question 12

The Classified Balance Sheet

Answer 12

Divided the various assets and liabilities into groups

Question 13

Current Assets

Answer 13

Assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year
- listed in order of liquidity

Question 14

Liquidity

Answer 14

the ease with which an item can be converted into cash; the ability of a business to pay its debts when due

Question 15

Plant and Equipment

Answer 15

Property that will be used in the business for longer than one year
- sizable investment
- balance sheet shows three amounts of each category
1. Asset
2. Accumulated Depreciation
3. Book Value

Question 16

Current Liabilities

Answer 16

Debts that must be paid or otherwise satisfied within one year
- listed in order of priotiry of payment

Question 17

Long-Term liabilities

Answer 17

debts of a business that are due more than one year in the future
- mortgages, notes payable, and loans payable

Question 18

Temporary accounts

Answer 18

revenue, costs of goods sold, income summary, drawing

Question 19

Closing Process

Answer 19

1. Close Revenue accounts and cost of goods sold accounts with credit balances to Income Summary
2. Close Expense accounts and cost of goods sold accounts with debit balances to Income Summary
3. Close Income Summary, which now reflects the net income or loss for the period, to owner’s capital
4. Close the drawing account to owner’s capital

Question 20

1. Close Revenue Accounts and COGS w/ Credit Balances

Answer 20

Debit Sales
Debit Interest Income
Debit Misc. Income
Debit Purchases Returns
Debit Purchases Discounts
Credit Income Summary

Question 21

2. Closing the Sales Accounts w/ Debit Balances, Expense Accounts and COGS w/ debit balances

Answer 21

Debit Income Summary
Credit:
- Sales Returns
- Purchases
- Freight In
- Salaries Expense - Sales
- Advertising
- Cash Short or Over
- Supplies Expense
- Depreciation Expense - Eq.
- Rent
- Salaries Exp - Office
- Insurance
- Payroll Tax Expense
- Telephone
- Uncollectible Accounts Exp.
- Utilities
- Depreciation Expense - Office
- Interest Expense

Question 22

3. Closing Income Summary

Answer 22

Debit Income Summary
Credit Capital

Question 23

4. Closing Drawing Account

Answer 23

Debit Capital
Credit Drawing

Question 24

Accounts left with balances

Answer 24

the asset, liability, and capital

Question 25

Postclosing Trial Balance

Answer 25

to confirm the general ledger is in balance asset, liability, and capital appear - matches amounts on balance sheet

Question 26

Gross Profit Percentage

Answer 26

the amount of gross profit from each dollar of sales (gross profit percentage = gross profit/net sales)

Question 27

Working Capital

Answer 27

the measure of the ability of a company to meet its current obligations; the excess of current assets over current liabilities (Current Assets - Liabilities)

Question 28

Current Ratio

Answer 28

a relationship between current assets and current liabilities that provides a measure of a firm's ability to pay it's current debts (current ratio = current assets/current liabilites)

Question 29

Inventory Turnover

Answer 29

the number of times inventory is purchased and sold during the accounting period (inventory turnover = cost of goods sold/average inventory) - to estimate the average number of days it takes to sell inventory once purchased

Question 30

Average Inventory

Answer 30

Beginning Inventory + Ending Inventory/ 2

Question 31

Average Collection Period

Answer 31

the ration of 365 days to the accounts receivable turnover; also called the 'number of days sales in receivables' (365/accounts receivable turnover)

Question 32

Average # of days in inventory

Answer 32

the average # of days for merchandise inventory to be sold after its purchased (365/Inventory Turnover rate = )

Question 33

Accounts Receivable Turnover

Answer 33

a measure of the speed with which sales on account are collected; the ration of net credit sales to average receivables - measures the reasonableness of accounts receivable outstanding and can be used to estimate the average collection period of AR (Net credit sales/Average accounts receviable)

Question 34

Average A/R

Answer 34

Beginning AR + Ending AR/2 - to calculate the average # of days it takes for a business to receive cash from credit customers

Question 35

Reversing Entries

Answer 35

Journal Entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses to avoid problems in recording future payments or receipts of cash in a new accounting period

Question 36

Items for Reversal

Answer 36

- accrued salaries - accrued payroll taxes - interest payable - interest receivable

Question 37

Gross Profit

Answer 37

Net Sales (Sales - Sales Returns/Discounts) - COGS