Arab Open University Faculty Of Business Studies BE2104 Intr

Arab Open Universityfaculty Of Business Studiesbe2104 Introduction T

Choose the best answer for each of the following questions:

• The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called: Cash basis accounting, Operating cycle accounting, Accrual basis accounting, Revenue recognition accounting.
• During a period of steadily rising costs, the inventory valuation method that yields the highest reported net income is: Specific identification method, Average cost method, Weighted-average method, FIFO method.
• Which of the following principles states that a business's financial statements must report enough information for outsiders to make knowledgeable decisions about the company? Conservatism, Materiality concept, Disclosure principle, Consistency principle.
• Merchandise inventory: Is a long-term asset, Is a current asset, Includes supplies the company will use in future periods, Is classified with investments on the balance sheet.
• The credit terms 2/10, n/30 are interpreted as: 2% cash discount if paid within 10 days, or the balance due in 30 days; 10% cash discount if paid within 2 days, or the balance due in 30 days; 30% discount if paid within 2 days; 30% discount if paid within 10 days.
• A measure of how quickly an asset may be converted into cash is: Materiality, Cash Basis Accounting, Accrual Basis Accounting, Liquidity.
• Records revenues when earned and expenses when incurred is a characteristic of: Materiality, Accrual Basis Accounting, Time Period Concept, Liquidity.
• A business's activities can be divided into small segments and financial statements can be prepared for specific periods, such as month, quarter, or year is explained by: Materiality, Accrual Basis Accounting, Time Period Concept, Liquidity.
• A company must perform strictly proper accounting only for significant items is a concept related to: Materiality, Cash Basis Accounting, Accrual Basis Accounting, Time Period.
• At May 1, 2017, Deitrich Company had beginning inventory of 300 units at €3.50 each. During May, the company purchased 600 units at €3.75 and 400 units at €4.00. The company sold 1,500 units at €6 each. Deitrich uses the average-cost method. The average cost per unit for May is: €3.50, €3.75, €3.80, €4.00.
• An inventory system that keeps a running computerized record of merchandise is a: Perpetual Inventory System, Merchandise Inventory account, Cash Basis Accounting, Accrual Basis Accounting.
• Revenue is earned when the business has: Entered into an agreement with the customer about goods or services, Prepared a journal entry to record revenue, Received cash before goods/services are delivered, Delivered a good or service to the customer.
• The goal of reporting realistic figures and never overstating assets or net income applies to: Materiality concept, Conservatism principle, Disclosure principle, Consistency principle.
• ABC Company earned revenues of $19,000 and incurred expenses of $4,000. The company declared and paid dividends of $1,500. The balance in the Income Summary account after closing net income or loss to the Retained Earnings account is: Debit balance of $19,000, Credit balance of $4,000, Credit balance of $15,000, Balance of $0.
• An invoice of $600 with terms 3/15, n/30, paid on or before the 15th day, results in what payment amount: $582, $600, $618, $621.
• A company purchased inventory for $73,000 FOB shipping point with terms 4/10, n/30, paid $1,500 freight. If paid nine days after sale, the inventory cost (assuming no beginning inventory) is: $71,580, $74,500, $68,580, $71,500.
• Quality Jewelers sold merchandise for $60,000 with $10,000 allowances/returns, and COGS of $23,000. The gross profit is: $50,000, $23,000, $27,000, $25,800.
• Accrued expenses are classified as: Liability, Asset, Revenue, Equity accounts.
• Ted's Used Cars uses specific identification. Ted purchased cars at $8,000, $10,000, $13,000, and sold two for $15,000 each. The car remaining at $13,000. Gross profit for March is: $6,000, $12,000, $7,000, $9,000.
• Which statement about inventories is incorrect? LIFO assumes earliest costs are last to be sold, It is generally bad to sell most recent goods first, Under LIFO, ending inventory is based on latest units, All statements are correct.

Question 2 involves recording adjustments in journal entries, opening T-accounts and computing balances, as well as net income calculations based on trial balance adjustments.

Question 3 requires preparing perpetual inventory records using LIFO for Modern Furniture, and calculating gross profit in dollars and percentage.

Question 4 involves journalizing closing entries, computing ending retained earnings, preparing a post-closing trial balance, and presenting a classified balance sheet based on provided adjusted trial balance of TAREK Photography.

Paper For Above instruction

The following comprehensive analysis covers key concepts and applications in financial accounting as outlined by the exam questions. It emphasizes the fundamental principles, inventory valuation methods, measurement of liquidity, and closing procedures that are essential for accurate financial reporting and compliance with accounting standards.

Introduction to Financial Accounting Principles

Financial accounting serves as the backbone of providing critical financial information to external users such as investors, creditors, and regulators. It relies on established principles and conventions to ensure transparency, comparability, and reliability of financial statements. Two fundamental accounting systems are cash basis and accrual basis accounting. Cash basis recognizes revenue and expenses only when cash is received or paid, suitable for small businesses and personal finance, but often criticized for not matching revenues with expenses appropriately. Conversely, accrual basis accounting recognizes revenues when earned and expenses when incurred, providing a more accurate picture of a company's financial position and operational performance (Kieso, Weygandt, & Warfield, 2019).

Inventory Valuation Methods

Valuation of inventory significantly impacts reported net income, especially during inflationary periods. The FIFO (First-In, First-Out) method allocates the oldest costs to cost of goods sold, often resulting in higher net income during rising costs, as newer, higher costs remain in ending inventory. The LIFO (Last-In, First-Out) method, under the proper standards, assigns most recent costs to COGS, usually reducing taxable income and providing tax benefits, but can lead to understated inventory values. The average-cost method computes a weighted average unit cost, smoothing out price fluctuations (Wild, Subramanyam, & Halsey, 2020).

Accounting Principles and Concepts

The materiality concept emphasizes that all significant information must be disclosed, while the conservatism principle advocates for recognizing expenses and liabilities as soon as possible when uncertainty exists, guarding against overstatement of assets and income. The disclosure principle mandates that enough information is provided to external users for sound decision-making, whereas the consistency principle assures comparability across periods by applying accounting methods uniformly (Schipper, 2014).

Liquidity and Measurement of Assets

Liquidity measures how quickly an asset can be converted into cash, influencing a company's ability to meet short-term obligations. Current assets such as inventory, receivables, and cash are highly liquid, whereas long-term assets like equipment are less so. Inventory management is critical, and perpetual systems facilitate real-time updates, improving inventory control and financial accuracy (Gibson, 2018).

Adjusting Entries and Financial Statement Accuracy

Adjustments ensure that revenues are recognized in the period they are earned and expenses in the period incurred, aligning financial statements with actual economic activity (Bauman, 2020). For example, recording accrued revenues and expenses, depreciation, and deferred income ensures compliance with accrual accounting standards and enhances the accuracy of net income figures (Kieso et al., 2019).

Inventory and Costing Methods

Using the perpetual inventory system combined with LIFO, companies track inventory continuously, updating costs and quantities after each transaction. The choice of inventory method affects gross profit calculations—LIFO generally produces higher COGS and lower profits during rising prices. Calculations involve determining the specific units sold and remaining inventory, applying costing layers accordingly (Wild et al., 2020).

Closing Entries and Financial Statement Preparation

Closing entries transfer temporary accounts such as revenues, expenses, and dividends to retained earnings, resetting balances for the next accounting period. Accurate posting of these entries ensures the integrity of the retained earnings account and facilitates preparation of the end-of-period financial statements. The classified balance sheet categorizes assets and liabilities into current and non-current, enabling stakeholders to assess financial health efficiently (Schipper, 2014).

In conclusion, mastery of these core concepts—ranging from accounting principles, inventory management, adjusting entries, to financial statement presentation—is essential for producing trustworthy financial information. This foundational knowledge supports compliance, transparency, and informed decision-making in accounting practice and enhances the credibility of financial reporting within the global economic environment.

References

• Bauman, R. P. (2020). Accounting Principles. Pearson Education.
• Gibson, C. H. (2018). Financial Reporting & Analysis. Cengage Learning.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Schipper, K. (2014). Financial reporting and analysis. Accounting and Finance, 54(1), 23-36.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis. McGraw-Hill Education.