D102 Financial Accounting - Set 4 - Part 2

Correct Answer: Assets and equity increase

Accounts receivable (asset) increases, and service revenue (equity) also increases.

Correct Answer: Debit accounts receivable, credit interest income

Interest earned but not yet received is recorded as a receivable (debit) and interest income (credit).

Correct Answer: Prepaid rent

Prepaid rent is a deferred expense because it is paid in advance and expensed over time.

Correct Answer: Debit cash, credit service revenue

When cash is received for services not yet performed, it is recorded as unearned revenue, a liability.

Correct Answer: By counting inventory at the end of the period

Under the periodic system, inventory is counted at the end of the period to determine the cost of goods sold.

Correct Answer: The oldest costs are assigned to cost of goods sold

Under FIFO (First In, First Out), the earliest purchased inventory costs are used to calculate the cost of goods sold.

Correct Answer: No effect on total revenue

Writing off an uncollectible account increases bad debt expense, which reduces net income.

Correct Answer: To increase bank profits

Bank reconciliation helps identify discrepancies between the company's cash records and the bank's statements.

Correct Answer: Asset

Warranty liability represents an obligation to repair or replace products sold, making it a liability on the balance sheet.

Correct Answer: It increases current expenses

Capitalizing an expenditure means it is recorded as an asset, which increases total assets on the balance sheet.

Correct Answer: An increase in inventory

Debiting the inventory account signifies that inventory has increased.

Correct Answer: It increases total equity

A stock split increases the number of shares but does not change the total equity amount.

Correct Answer: By adding all cash receipts and deducting all cash payments

The net cash flow from operating activities is calculated by summing all cash inflows and outflows related to operations.

Correct Answer: To align financial reporting with government regulations

A fiscal year establishes a 12-month period for reporting and allows companies to manage operations and financial reporting consistently.

Correct Answer: Increase in liabilities and decrease in assets

Issuing preferred stock increases equity but typically does not provide voting rights to shareholders.

Correct Answer: Operating activity

Purchasing fixed assets is considered an investing activity as it involves acquiring long-term resources.

Correct Answer: Revenue recognition principle

The matching principle ensures that expenses are recorded in the same period as the related revenues.

Correct Answer: Current expense

The payment is considered a deferred expense (prepaid insurance) and will be expensed over time as the coverage is used.

Correct Answer: Assets decrease and liabilities decrease

Paying off a liability reduces both the asset (cash) and the liability (the amount owed).

Correct Answer: Selling goods to customers

Issuing bonds is a financing activity that involves obtaining cash from creditors.