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185 Cards in this Set
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fundamental accounting equation
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A - L = OE or
A = L + OE |
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Assets
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are measurable economic resources that the buiness owns and are likely to provide future benefits (resources a business owns)
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Manufacturing business
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make products from raw inputs
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Service business
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provide service to custormers or clients; they do not make or sell products
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Merchandising business
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sell manufactured goods to customers
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Which finacila statement links together the income statement and balance sheet?
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Statement of owner's equity
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When a company distrubutes profits to its owners the result is
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decrease in assets and owners's equity
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A sole propietorship is an organizational form of business which
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Is not legally separate from its owners
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a company reported assets of $12,000 and liabilities of $2,500 what amount would be reported for owners equity
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9,500
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The income statement reports
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Net income or loss for the period
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Assets should originally be recorded at
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Historical cost
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historical cost
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assets initially measured at the total cost to acquire them
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Partnership agreement outlines
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how the the profits (losses) are shared
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Managerial accounting
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this area of account primarily serves the decision making needs of internal users
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bank is a major user of this accounting info
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external financial statements also suppliers and creditors besides banks
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If a company purchases supplies on account for 5,000 what is the affect on the account equation
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Assets increase 5,000 liabilities increase 5000 no effect on equity
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Income statement reports
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net income or loss
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an example of a claim to resources of a business
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account payable
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a company purchases equipment for 45,000 cash. what is the effect on the accounting equation
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no effect on the accounting equation because assets increase and decrease by the same amount
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which financial statement includes only those activities that result in cash changing hands during the period
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statement of cash flows
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Sole proprietorships
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are woned by one individual, are not legally separate from their wones. Thus, all profits or losses become part of the taxable income of the owner, who is also personally responsible for all of the business's debts.
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Parnerships
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are legally similar to properiotorships, but they have two or more owners
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corporations
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seperate legal entities that sell shares of stock to investors. Stockholders in corpations cannot be held liable for more than their investment in the corporation
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management accounting
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the area of accounting that produces financial info for internal users
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finacial acconting
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the area of accounting that produces financial info for external users
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Liabilities
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measuable and probable obligations that require the business to pay cash or deliver goods or services to other in the future
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owner's equity
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the difference between the assets the business owns and the liabilities it owes
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Revenues
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the amount that the business erarnd in delivering goods and servised to custormer
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Expenese
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the amounts of resources an entity used to earn revenurs during a period
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Income statement
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its prupose is to report the performance of abuiness over aperiod of time
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Income statement equation
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revenues - expenses = net income or loss
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Statement of owner's equity
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purpose is to report the changes in owner's equity for a period of time and link the income statement to the balance sheet
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balance sheet equation
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assets = liabilities = owner's equity
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Statement of cash flows
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purpose is to report the cash inflows and outflows for operating, investing, and financing activities during a period of time
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the cash flow equation
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cash for operating activities-cash form investing activities+-cash form financing activities= change in cash during the period
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operating activities
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activities directly related toearningprofits
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investing activitiew
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buying and sellingproductive resources primarly with long lives
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finacing activites
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borrowing and repaying bank loans, receiving additional investments formowners and withdrawing profit form the fusiness by owners
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monetary unit assumption
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fincial information is reporte in the standard monetary unit of the country in which the business operatews
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Terms for the left and right side of an account are known as
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debit/credit
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ordering supplies is an example of
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an exchange of promises
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an account with the word prepaid is
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asset
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equipment as an asset
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is not a current asset
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external exchanges
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measurable exchanges of assets and services form one company for other assets or promises to pay form another company
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internal events
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those that are not exchanges between the business and others, but which have a direct and measurable effect on the entity, including use of supplies and use of building over many years
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During the accounting period when a transaction occurs it is analyzed its effects are recorded in
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the general journal (using journal entries) and the amounts are posted at the general ledger(similar to T-accounts)
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at the end of accounting period a what is prepared
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trial balance; adjustments are analyzed, recorded and posted; financial statements are prepared; and the records are closed
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Journal entries express in debit = credit form
recording transactions |
are used to record financial info in the accounting system which is later summarized by account in the ledger
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adjusting entries affect
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both income statements and balance sheet accounts
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when a customer pays for goods or services before the company deliver them, this result in
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unearned revenues
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Permanent accounts
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retain their balances form the end of one period ot the begining of the next period
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temporary acconts are
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start with a zero balance at the beginning of the period
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the ending balance in the owner's capital account is determined by
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owner's contributions, withdrawals and net income
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the proose of the closing process is to
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colose temproray account to prepare for the next acconting period
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examples of permanent accounts
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equipment
prepaid rent accounts payable |
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net profit margin formula
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net income(revenues-expenses)/total revenue
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Which will not appear in a closing journal
sales revenue wages expense prepaid rent owner's capital |
prepaid rent
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which is least likely to appear in an adjusting journal entry
cash interest payable unearned revenue depreciation expense |
cash
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Expense
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dollar amount of resources an entity uses to earn revenues during a period
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finical accounting
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area of account that prepares information used by external parties, such as investor, creditors,a d regulators
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accounting cycle
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1. analyze transactions,
2. record the effects of the transactions in the journal 3. then post the effects to the ledger At the end of the cycle: 4.take trial balance 5. adjust accounts 6. prepare financial statements 7. close the records |
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classified balance sheet
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balance sheet separated into classifications: current assets are listed separately from non-current liabilities
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Conservatism
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accounting concept that when doubt exist about the amount at which assets and liabilities should be reported, the least optimistic measurement should be used
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continuity assumption
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accounting concept that asumes a business will continue operating long enough to meet its contractual commitments and plan; it will continue to operate into the foreseeable future
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Credit
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right side of accounts
decrease assets and increase liabilities and owner's equity |
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current assets
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resources the business will use or turn into cash withing one year
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current liabilities
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short-term obligations that will be paid with current assets or settled by providing goods or services within the current operating cycle of the business or within one year of the balance sheet date, whichever is longer
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debit
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left side of accounts
increase assets and dectrease liabilities and owner's equity |
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journal
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chronological record of the effects of transactions on accounts
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journal entry
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form used to record the effects of a transaction in the journal. accounts to be debited are listed first with the amounts indicate3d in the left column accounts to be credited are listed below the debited accounts with amounts indicated in the right column
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Ledger
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record used to accumulate the effects of transactions on individual accounts
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T-accounts
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simplification of a page in the ledger, written in the form of a T with debit effects on the left of the T and credit effects on the right
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transactions
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business activities that affect the accounting equation
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Trial balance
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list of individual accounts, usually in financial statement order, with their ending balances form the ledger (T-accounts) indicated in the appropriate column. Its purposes are to ensure that debits equal credits, summarize account balance, review and analyze necessary adjustment, and prepare financial statements
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When a company borrows cash form a bank, what will occur
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increase to cash
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Dual effects
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every transaction affects at least two accounts
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Accrual accounting
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revenues are recorded when earned (the company performs the service or delivers goods to customers) and expenses are recorded when incurred to generate revenues in the same period
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cash basis accounting
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that revenues are recorded when cash is received and expenses are recorded when cash is paid. cash basis accounting is not a generally accepted accounting principle
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Matching principle
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costs incurred to generate revenues should be recognized(recorded) in the same period to match the costs with benefits.
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operating (cash-to-cash) cycle
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process by which a company acquires and pay for goods and services and then sells goods and services to customers who pay cash to the company
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revenue principle
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revenue should be recognized in the period earned. also known as the revenue recognition rule
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time period assumption
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assumption that, to measure income for a specific period of time, the long life of a company can be reported in shorter time periods
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Unadjusted trial balance
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list of individual account, usually in financial statement order, with their ending balances form the ledger indicated in appropriate column ( debit right, credit left) the purpose is to check the account system to ensure that debits equal credits
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the income statement reports net income that is calculated by combining
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revenues - expense's
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the expanded transaction analysis model includes revenues, expenses and the owner's drawing account as subcatergories of owner's captial
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revenues increase with credits, thus increasing owner's equity
expenses increase with debits, thus decreasing owner's equity (chapter 3 summary) for diagram |
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classified income statement
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revenues and expenses are classified into operating revenues, operating expenses and other items on a classified income statement
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a company can report operations over various time periods , such as months, quarters, and years. is called
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time period assumption
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when sales are made on account, what occurs
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accounts receivable will increase
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Under accrual basis accounting, revenue is recorded when
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a customer buys goods
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the matching principle determines
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when costs should be recognized as expenses
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Is Interest expense included under operating expenses on the income statement
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no, it is listed separately
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separating operating revenues and expenses from other items allows users of financial statements to
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identify activities that are ongoing as opposed to those that are not
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Expenses are
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costs incurred to generate revenues
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what is used to determine when to recognize revenue
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revenue principle
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when does the operating cycle end
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when the company receives a customer's payment
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the unadjusted trial balance contains which type of accounts
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both income statement and balance sheet accounts
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revenue accounts would not include
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unearned revenue
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Under accrual basis accounting, revenue is recorded when
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a customer buys goods
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Accrued expenses
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expenses that are incurred but not recorded until the end of the period because cash is paid after the goods or sevices are used
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Accrued revenues
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revenues earned but not recorded until the end of the period because cash is received after the services are performed or goods delivered
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adjusted trial balance
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listing of all accounts and their balances after adjustments have been posted to the accounts to verify that debits equal credits
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adjusting entries
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entries necessary at the end of the accounting period to measure all revenues when earned and expenses when incurred during that period
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closing the books
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process of making all temporary account have a zero balance for the start of the next accounting period; the balances in the temporary are transferred to owner's capital to update its balance
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contra-account
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account directly related to another but with an opposite balance
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depreciation
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allocation of the cost of long-lived tangible assets over their estimated productive lives using a systematic and rational method
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income summary
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temporary account used only during the closing process; all revenues and expenses are closed to income summary and then income summary is closed to owner's capital
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net profit margin
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ratio that measures how effective managers were at generating profit on every dollar of sales
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Permanent accounts
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accounts that retain their balances from period to period;assets, liabilities, and owner's equity accounts are permanent
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prepaid expenses
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previously recorded assets that must be adjusted for the amount of expense incurred by using the asset during the period to generate revenues
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temporary accounts
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accounts that accumulated data for the current accounting period only : revenues, expenses and owner's drawing are temp
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Unearned revenues
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previously recorded liabilities created when cash was received in advance of being earned, that need to be adjusted for the amount of revenue earned during the period
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Adjusting entries affect
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both income statement accounts
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When a customer pays for goods or services before the company delivers them, this results in what account is adjusted
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unearned revenues credit
debit cash |
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Permanent accounts
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retain their balances form the end of one period to the beginning of the next period
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Temporary accounts
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start with a zero balance at the beginning of the period
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The ending balance in the owner's capital account is determined by
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owner's contribution, withdrawals and net income
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The purpose of the closing process is to
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close temporary accounts to prepare for the next accounting period
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If revenues are less than expenses then the income summary account will have ______ balance before being closed at the end of the period
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debit
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Assets are listed
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in order of liquidity
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What is the formula for net profit margin
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Revenues-expense(net income)
_________________________ total revenue times by 100 |
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Which account is least likely to appear in an adjusting journal entry
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cash
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analyzing net profit margin(NPM)
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a measure of how much profit management generated on every dollar of sales during the period by:
computation of NPM Assesses management's effectiveness at generating sales and/or controlling costs a higher ratio suggest management is more effective at generating sales and/or controlling costs. |
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What accounts would be used to determine the balance owed by a specific customer
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Accounts receivable subsidiary ledger
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Special journals can be used for transactions that are
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frequent
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Transactions involving customer payments are often recorded in
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Cash Receipts journal
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a company experiences a large number of sales on account. in order to reduce the amount of time spent recording these transactions, they can use
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Revenue journal
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Transactions involving customer payments are often recorded in
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cash receipts journal
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a company experiences a large number of sales on account. In order to reduce the amount of time spent recording these transactions, they can use
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Revenue journal
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Dons auto repair services uses a cash receipts journal to record payments from customer for services provided. don received $500 form Thompson for repair work on this car. In which column of the cash receipts journal should this transaction be recorded
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Fees Earned Cr.
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Which of the following does not represent one of the three basic features of an effective accounting information system:
usefulness accessible flexibiblity cost effectiveness |
accessible
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what is the list of the four phases in the development of an accounting information system
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analysis, design, implementation, and feedback
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Transactions involving customer payments are often recorded in
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cash receipts journal
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A company needs to pay its supplier were would look to determine how much is owed to supplier
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accounts payable subsidiary ledger
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the cash receipts journal provided by peachtree complete 2008 has__________colmns when compared to the manual version
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less
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all correcting entries should be recorded in the
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general journal
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what should be used to record end-of-period adjustments
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general journal
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When a company uses special journal in their computerized accounting system, a given transactions will be recorded in
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in the general journal or one of the four special journal
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Accounting Information system
(AIS) |
collects, classifies, summarizes, and reports the financial information about a business to interested parties
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Accounts payable subsidiary ledger
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used to collect and maintain all individual transactions with creditors that occurred on account
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Account receivable subsidiary ledger
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used to collect and maintain all individual transactions with customers that occurred on account
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Cash payments journal
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used to record all transactions involving the payment of cash from a business
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Cash receipts journal
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used to record all cash receipts/collections in a business regardless of the reason for the receipt
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Computerized accounting information system
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performs all steps in the accounting cycle electronically with the aid of general ledger software packages
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control account
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performs all steps in the accounting cycle electronically with the aid of general ledger software packages
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crossfoot the columns
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to verify that the total amounts of the debit columns equal the total amounts of the credit columns in a multi column special journal
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foot
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to add the dollar amounts in a column
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Manual accounting information system
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performs all steps in the accounting cycle by hand without the aid of a computerized program
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purchases journal
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Used to record all purchases made or expenses incurred on account
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Revenue journal
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used to record services rendered to customers on account
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special journal
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used to record similar types of transactions in one convenient place
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subsidiary ledger
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group of accounts that share a common feature
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components of an accounting information system
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account receivable subsidiary ledger: collects and maintains individual customer records for transactions made on account
Accounts payable subsidiary ledger:collects and maintains individual creditor records for transactions made on account |
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Advantages of using subsidiary ledgers
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Dedicated accounts for individual customers
Omission of unnecessary detail from the general ledger accounts Ease of locating errors in individual customer and creditor accounts Division of labor |
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The underlying assumptions of AIS
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Usefulness: to adequately sever users, the AIS should be reliable, relevant,and accurate.
Cost effective: the usefulness of the AIS must be balanced against the cont of implementing it. Flexibility: the AIS should meet the changing needs of a growing company |
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the developmental phases of a accounting system
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Analysis: identify the needs of internal and external user
Design: create a system that meets users' needs and determine whether it should be manual or computerized Implementation: transform a design on paper into a workable, effective, and efficient system. Feedback: monitor the system periodically to ensure that needs are being met as planned |
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advantages of using a computerized accounting information system
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Fewer errors
Simplified record keeping Up-to-date balances |
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disadvantages of using a computerized accounting information system
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Human errors made inputting information.
Loss of control over portions of the accounting process. Ease of altering records and potential for fraud |
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Merchandising company operating cycle
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Buy products
Sell products Receive cash Incur operating expenses |
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Manufacturing operating cycle
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Buy raw materials
Make products Sell products Receive cash Incur operating expenses |
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The sale of inventory should be recorded when
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ownership is transferred to the customer
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An income statement that separates cost of foods sold form other expenses is
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multi-step income statement
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Which of the following describes how payments to suppliers are recorded when they are made during the discount period using a perpetual inventory system
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Decrease Cash; decrease Accounts payable' decrease inventory
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the gross profit percentage
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measures a merchandiser's ability to earn profit fro the sale of inventory
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sales returns refer to
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merchandise that customers return to the seller after the sale
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FOB destination means that title to goods purchases is transferred when
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goods reach the buyers place of business
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cost of goods sold
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is a term used for the cost of inventory sold
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A debit to sales returns and allowances and credit to account receivable recognizes
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a customer returned merchandise or received an allowance
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cost of goods available for sale less ending inventory equals
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cost of goods sold
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Gross profit
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must cover all operating expenses in order to generate a profit for the business
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Cost of goods sold (CGS)
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expense account including the total cost of inventory sold during the period
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FOB destination
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Sales term indicating that ownership changes when goods reach the buyer's premises and the seller pay the fright charges
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FOB shipping point
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sales term indicating that ownership changes when goods leave the seller's premises and the buyer pays the fright charges
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Gross profit
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amount the company earned from selling goods over and above their cost
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Gross profit percentage
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percentage of profit earned on each dollar of sales after considering the cost of products sold
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Manufacturing company
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sell goods it has made itself
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Merchandising company
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sells goods(merchandise) obtained from a supplier
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periodic Inventory
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inventory system that updates the inventory records"periodically" that is, at the end of the accounting period
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perpetual inventory system
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inventory system that updates the inventory records "perpetually" that is, every time inventory is bought,sold, or returned
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Purchase discount
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cash discount received for prompt payment of a purchase on account
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purchase returns and allowances
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reduction in the cost of inventory purchases associated with unsatisfactory goods
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sales discount
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discount given to customers for prompt payment of an account receivable
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Service company
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company that sells services rather than physical goods
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Analyze merchandise purchases under a perpetual inventory system
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The inventory account should include the purchase price and any cost, such as freight-in, that are needed to prepare the inventory for sale.
The inventory account is decreased whenever the purchaser returns goods to the supplier or receives a discount for prompt payment |
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Analyze merchandise sales under a perpetual inventory system
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Two entries are made every time inventory is sold.
Sales discounts and sales returns and allowances are reported as contra-revenues, which reduce net sales. credit card discounts and fright-out are recorded as operating expenses |
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merchandise sales under perpetual inventory has two entries
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1. records the sale( and corresponding debit to cash or accounts receivable)
2. records the cost of goods sold(and a corresponding credit to invetory |