Accounting Chapters 1-4

On Jan 1, 2017 Anson Co. started the year with a $300,000 credit balance in retained earnings, a $50,000 balance in common stock, and a $300,000 balance in additional paid in capital. During 2017, the company earned net income of $45,000, declared a divided of $15,000 and issued 900 additional shares of stock (par value of $1 per share) for 10,000. What is the total stockholders' equity on December 31, 2017?

$690,000

Four types of adjustments

(1) Deferred revenues -- previously recorded liabilities that need to be adjusted at the end of the period to reflect revenues that have been earned (e.g., Unearned Ticket Revenue must be adjusted for the portion of ticket revenues earned in the current period). (2) Accrued revenues -- revenues that have been earned by the end of the accounting period but which will be collected in a future accounting period (e.g., recording Interest Receivable for interest revenues not yet collected). (3) Deferred expenses -- previously recorded assets that need to be adjusted at the end of the period to reflect incurred expenses (e.g., Prepaid Insurance must be adjusted for the portion of insurance expense incurred in the current period). (4) Accrued expenses -- expenses that have been incurred by the end of the accounting period but which will be paid in a future accounting period (e.g., recording Utilities Payable for utilities expense incurred during the period that has not yet been paid).

What is the equation for A. Income statement B. Balance sheet C. Stockholders' equity

(a) Income statement: Revenues (and gains) - Expenses (and losses) = Net Income (b) Balance sheet: Assets = Liabilities + Stockholders' Equity (c) Statement of stockholders' equity: Ending Stockholders' Equity = (Beginning Contributed Capital + Stock Issuances - Stock Repurchases) + (Beginning Retained Earnings + Net Income - Dividends Declared)

Define a business transaction in the broad sense, and give an example of two different kinds of transactions.

-an exchange of resources (assets) and obligations (debts) between a business and one or more outside parties Example: sale of goods or services -certain events that directly affect the entity such as the use over time of rent that was paid prior to occupying space and the wearing out of equipment used to operate the business Example: use of insurance paid prior to coverage

What two accounting equalities must be maintained in transaction analysis?

-assets= liabilities + stockholders' equity -debits=credits

Financing activities in the statement of cash flows

-company borrows money -company pays dividends -company issues stock to stakeholders

Which of the following is the entry to be recorded by a law firm when it receives a $2,000 retained form a new client at the initial client meeting?

-debit cash $2,000 -credit unearned revenue $2,000

During 2016, Cliff Co. incurred operating expenses of $250,000 of which $150,000 was paid in cash; the balance will be paid on Jan 2017. Transaction analysis of operating expenses for 2016 should reflect:

-decrease stockholders' equity $250,000 (expense) -decrease assets $150,000 (cash) -increase liability $100,000 (payable)

Specific accounts

-gain on sale of assets -interest revenue -unearned revenue

Retained earnings are

-increased by net income and decreased by a net loss -a component of stockholders' equity on the balance sheet -represent earnings not distributed to stockholders in the form of dividends

The T-account is a tool commonly used for analyzing

-increases and decreases to a single account -debits and credits to a single account -changes in specific account balances over a period of time

Assets

-land -prepaid expense -investments

What are the items required on the heading of a financial statement?

-name of the company -title of financial statement -unit of measure -date

Annual report contains

-notes providing more detail about a specific item shown in the financial statement -note describing accounting rules applied in the financial statements -note descrbing financial disclosure about items not appearing in the finacial statements

The balance sheet

-one cannot determine the true fair value of a company by reviewing the balance sheet -certain internanlly generated assets, such as trademark, are not reported on a company's balance sheet -shows only the ending balances, in a summarized format, of all balance sheet accounts in the accounting system as of a particular date

Closing entries

-salary expense -accumulated depreciation -interest income

The statement of cash flows

-separates cash inflows and outflows into three major categories: operating, investing, and financing -ending cash balance of the statement of cash flows must agree with the amount shown on the balance sheet for the same fiscal period

Revenue recognition criteria

-services have been performed -goods have been transferred -amount the company expects to receive is determinable ***cash does not have to be collected

The balance sheet

-the accounts shown on a balance sheet represent the basic accounting equation for a particular business entity -the retained earnings balance sheet must agree with ending retained earnings balance shown on the statement of stockholders' equity -the balance sheet reports the amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time

What happens when you debit and credit the following: 1. Revenues 2. Losses 3. Gains 4. Expenses

1. Decrease - Increase 2. Increase - Decrease 3. Decrease - Increase 4. Increase - Decrease

The cash t-account has a beginning balance of $21,000. During the year, $100,000 was debited and $110,000 was credited to the account. What is the ending balance of cash?

11,000 debit balance

On June 2016, O Co. signed a three year $110,000 note payable with 9% interest. Interest is due on June 1 of each year beginning in 2017. What amount of interest expense should be reported on the income statement for the year ended December 31, 2016?

4,950

What is a contra-asset? Give an example.

A contra-asset is an account related to an asset that is an offset or reduction to the asset's balance. Accumulated Depreciation is a contra-account to the equipment and buildings accounts.

What is a journal entry?

A method for expressing the effects of a transaction on accounts in a debits-equal-credits format. The title of the accounts to be debited is listed first and the title of accounts to be credited is listed underneath the debited accounts. The debited amounts are placed in the left-hand column and the credited amounts are in the right hand column.

For accounting purposes, what is an account? Explain why accounts are used in an accounting system.

A standardized format used by organizations to accumulate the dollar effects of transactions on each financial statement item. Accounts are necessary to keep track of all increases and decreases in teh fundamental accounting model.

Describe a typical business operating cycle

A typical business operating cycle for a manufacturer would be as follows: inventory is purchased, cash is paid to suppliers, the product is manufactured and sold on credit, and the cash is collected from the customer.

According to GAAP, what ratio must be reported on the financial statements or in the notes to the statements?

Earnings per share

How is earnings per share computed and interpreted?

Earnings per share = Net income ÷ average number of shares of stock outstanding during the period. Earnings per share measures the average amount of net income for the year attributable to one share of common stock.

Assets are listed on the balance sheet

From most liquid to least liquid

The FASB creates

GAAP

This period a company collects $100 cash on an account receivable from a customer for a sale last period. How would the receipt of cash impact the following two financial statements this period?

Income Statement: No effect Statement of Cash Flows: Increase 100 account receivable (inflow)

Explain why the income statement and the statement of cash flows are dated "for the year ended December 31" whereas the balance sheet is dated "at December 31".

Income statement and the statement of cash flows are dated "for the year ended december 31" because they report inflows and outflows of resources during a period of time. The balance sheet is dated "at december 31" because it represents the resources, obligations, and stockholders' equity at a specific date.

On oct. 2017 the $12,000 premium on a one-year insurance policy for the building was paid and recorded as prepaid insurance. On dec 31, 2017 what adjusting entry is needing?

Insurance Expense 3, 000 Prepaid Expense 3,000

Chapter 2

Investing and Financing decisions and the accounting system

Briefly distinguish investors from creditors.

Investors purchase all or part of a business and hope to gain by receiving part of what the company earns and/or selling the company at a higher price than they paid. Creditors lend money to a company for a specific length of time and hope to gain by charging interest on the loan.

The income statement

Is called the statement of operations

If a publicly traded company is trying to maximize its perceived value to decision makers external to the corporation, the company is the most likely to understate which of the following on its balance sheet?

Liabilities

Total liabilities on a balance sheet at the end of the year are $150,000, retained earnings at the end of the year are $80,000, net income for the year is $60,000, common stock is $40,000, and additional paid-in-capital is $20,000. What amount of total assets would be reported on the balance sheet at the end of the year?

Liabilities (150,000) + Stockholders equity (80,000+40,000+20,000)= 190,000

Current liability

Liability that will be settled by providing cash, goods, or other services within the coming year

Briefly explain the responsibility of company management and the independent auditors in the accounting communication process.

Management is responsible for preparing the financial statements and other information contained in the annual report and for the maintenance of a system of internal accounting policies, procedures and controls. These measures are intended to provide reasonable assurance, at appropriate cost, that transactions are processed in accordance with company authorization as well as properly recorded and reported in the financial statments, and that assets are adequately safeguarded. Independent auditors examine the financial reprots (prepared by managment) and the underlying records to assure that the reports represent what they claim and conform with generally accepted accounting principles.

Historical cost

Measurement model that requires assets to be recorded at the cash-equivalent cost on the date of the transaction. Cash equivalent cost is the cash paid plus the dollar value of all noncash considerations.

Explain why stockholders' equity is increased by revenues and decreased by expenses.

Net income equals revenues minus expenses. Thus revenues increase net income and expenses decrease net income. Because net income increases stockholders' equity, revenues increase stockholders' equity and expenses decrease it.

Cash payments for salaries are reported in what section of the statement of cash flows?

Operating

Chapter 3

Operating Decisions and the Accounting System

Additional paid-in-capital

Owner provided financing to the business that represents the excess of the amount received when the common stock was issued over the par value of the common stock

Statement of cash flows

Present information about the flow of cash into the entity (sources), the flow of cash out of the entity (uses), and the net increase or decrease in cash during the period

Income statement

Present information about the revenues, expenses, and the net income of the entity for a specified period of time

Asset

Probable future economic benefit owned or controlled by the entity as a result of past transactions

Liability

Probable future sacrifice of economic benfits of the entity arising from preset obligations as a result of a past transaction

What is the primary objective of financial reporting for external users?

Provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. These users are expected to have a reasonable understanding of accounting concepts and procedures. Usually, they are interested in information to assist them in projecting future cash inflows and outflows of a business.

At the end of a recent year, Co. G reported total assets of $7, 422 million, current assets of $4, 309 million, total liabilities of $4, 667, current liabilities of $2 ,128 million, and stockholders' equity of $2, 755 million. What is the current ratio and what does this suggest?

Ratio: current assets/ current liabilties -The ration of 2.02 suggests that Co. G has sufficient liquidity

Balance sheet

Report the financial position of an entity at a given date, that is, to report information about the assets, obligations, and stockholders' equity as of a specific date

Monetary unit assumption

Requires information to be reported in the national monetary unit without any adjustment for changes in purchasing power. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia.

Separate entity assumption

Requires that business transactions are separate from the transactions of the owners; for example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business

When expenses exceed revenues in a given period

Retained earnings are decreased

Explain the equation for the income statement. What are the 3 major items reported on the income statement?

Revenues - Expenses = Net Income (Net Loss) 1) revenues 2) expenses 3) net income

An adjusted trial balance

Shows the ending account balances resulting from the adjusting journal entries in a "debit" and "credit" format

You have observed that the net profit ratio for a retail chain has increased steadily over the last three years. The most likely explanation is which of the following?

Successful adveritising campaign increased sales companywide, but with no increases in operating expenses

Briefly describe the day that accounting measurement rules are determined in the US.

The SEC is the US government agency which determines the financial statements that public companies must provide to stockholders and the measurement rules used in producing those statements. The financial accounting standards board is the private sector body given the primary responsiblity to work out the detailed rules which become generally accepted accounting principles.

What are purposes for closing the books?

The closing entry is made at the end of the accounting period to (1) transfer the balances in the temporary income statement accounts to retained earnings and (2) reduce the revenue, gain, expense, and loss accounts to a zero balance so that they can be used for the accumulation process during the next period. A closing entry must be entered into the system through the journal and posted to the ledger accounts to state properly the temporary and permanent account balances (i.e., zero balances in the temporary accounts).

What criteria must normally be met for revenue to be recognized under accrual basis accounting?

The criteria that must be met for revenue to be recognized under the accrual basis of accounting are to recognize revenue (1) when the company transfers promised goods or services to customers (2) in the amount it expects to receive.

Explain the expense recognition principle.

The expense recognition principle requires that expenses be recorded when incurred in earning revenue - expenses are matched to the period in which the revenues are earned. For example, the cost of inventory sold during a period is recorded in the same period as the sale, not when the goods are produced and held for sale.

Explain why the income statement accounts are closed by the balance sheet accounts are not.

The income statement accounts are closed at the end of the accounting period because, in effect, they are temporary subaccounts to retained earnings (i.e., a part of stockholders' equity). They are used only for accumulation during the accounting period. When the period ends, these accumulated accounts must be transferred (closed) to retained earnings. The closing process serves: (1) to correctly state retained earnings, and (2) to clear out the balances of the temporary accounts for the year just ended so that these subaccounts can be used again during the next period for accumulation and classification purposes. Balance sheet accounts are not closed at the end of the period because they reflect permanent accumulated balances of assets, liabilities, and stockholders' equity. Permanent accounts show the entity's financial position at the end of the period and are the beginning amounts for the next period.

Explain what the time period assumption means

The time period assumption means that the financial condition and performance of a business can be reported periodically, usually every month, quarter, or year, even though the life of the business is much longer.

What is a T-account? What is its purpose?

Tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities. It is a simplified representation of a ledger account with a debit column on the left and credit column on the right.

The expense recognition principle controls

When costs are recognized as expense on the income statement

The dual effects concept can best be described as follows

When one records a transaction in the accounting system, at least 2 effects on the basic accounting equation will result

Retained earnings

Cummulative earnings of a company that are not distributed to the owners and are reinvested in the business

At the beginning of the current year, Donna Co. had $1,000 of supplies on hand. During the current year, the company purchased supplies amounting to $6,400 (paid for in cash and debited to supplies). At the end of the current year, a count of supplies reflected $2,000. The adjusting entry Donna Co. would record at the end of the current year to adjust the supplies account would in crude a

Debit COGS 5,400 Credit Supplies 5,400

Written Homework

E: 1, 2, 4, 5, 6, 9, 12, 19 P: 2, 3

Written Homework

E: 2, 3, 4, 6, 7, 10, 11, 18 P: 1, 2, 3

Written Homework

E: 2,3 8, 10, 15, 19 P: 1, 2, 3

Written Homework

E: 7, 9 P: 1

Current asset

An asset that will be used or turned into cash within one year; inventory is always considered a current asset regardless of how long it takes to produce and sell inventory

Failure to make an adjusting entry to recognize accrued salaries payable would cause

An understament of expenses and liabilities and an overstatement of stockholders' equity

JJ Co. owns a building. Which of the following statements regarding depreciation as used by accountants is false?

As the value of the building decreases over time, it "depreciates"

If a company is successful in acquiring several large buildings at the end of the year, what is the effect on total asset turnover ratio?

Asset turnover ratio: Net Sales/Average Total Assets The ratio will decrease

Explain the equation for the balance sheet. Define the 3 major components reported on the balance sheet.

Assets = Liabilities + Stockholders' equity 1) Assets: probable future economic benefits owned by the entity as a result of past transactions; these resources are owned by the business at a given point in time, such as: cash, receivables, inventory, machinery, buildings, land, and patents. 2) Liabilities: probable debts or obligations of the entity as a result of past transactions which will be paid ith assets or services in the future; these are accounts payable, notes payable, and bonds payable. 3) Stockholders' equity: financing provided by the ownwers of the busienss and operations; this is the claim of the owners to the assets of the business after the creditor claims have been satisified

What is the purpose of recording adjusting entries?

Adjusting entries are made at the end of the accounting period to record all revenues and expenses that have not been recorded but belong in the current period. They update the balance sheet and income statement accounts at the end of the accounting period.

Explain the effect of adjusting entries on cash.

Adjusting entries have no effect on cash. For deferred revenues and deferred expenses, cash was received or paid at some point in the past. For accruals, cash will be received or paid in a future accounting period. At the time of the adjusting entry, there is no cash being received or paid.

Chapter 4

Adjustments, financial statements, and the quality of earnings

Which are the four basic financial stamens?

Balance sheet, income statement, statement of cash flows, and statement of stockholders equity

Explain the equation for retained earnings. Explain the 4 major items reported on the statement of stockholders' equty related to retained earnings.

Beggining retained earnings + Net income - Dividends = Ending retained earnings 1) end of the previous year's retained earnings become the beggining retained earnings 2) current year's net income is added 3) current year's dividends are subtracted 4) ending retained earnings are reported on the balance sheet

Explain the difference between A. Revenues and gains B. Expenses and losses

Both revenues and gains are inflows of net assets. However, revenues occur in the normal course of operations, whereas gains occur from transactions peripheral to the central activities of the company. An example is selling land at a price above cost (at a gain) for companies not in the business of selling land. Both expenses and losses are outflows of net assets. However, expenses occur in the normal course of operations, whereas losses occur from transactions peripheral to the central activities of the company. An example is a loss suffered from fire damage.

Which account is least likely to appear in an adjusting journal entry?

Cash

GAAP

Changes in GAAP can affect the interserts of managers and stockholders

Statement of stockholders' equity

Changes in each of the company's stockholders' equity accounts during the accounting period including issue and repurchase of stock and the way that net income and distribution of dividends affected the reatined earnings of the company during that period

Under the going concern assumption

Companies assumed to operate into the foreseeable future; that is, they are not expected to liquidate

As stated in the audit report, or report of independent accountants, the primary responsibility for a company's financial statements lies with

Company's management