HFT 2401 final exam review

From Chapter 3: Three parts of an Account

1) account title 2) left side: debit 3) right side: credit total debit > total credits = debit balance total credits > total debits = credit balance total debits = total credits = zero balance

closing the books

-closing entries formally recognize in the ledger the transfer of net income (net loss) and dividends to retained earnings as shown in the retained earnings statement -journalizing and posting closing entries is a required step in the accounting cycle -closing entries produce a ZERO balance in each temporary account (revenue and expense accounts and the dividends account) -these accounts are then ready to accumulate data in the next accounting period separate from the data of prior periods

things to remember about worksheets...

-completed worksheet is NOT a substitute for the formal financial statements -worksheet is merely a working tool and is NOT distributed to management and other parties -a worksheet is NOT a journal and CANNOT be used for posting to ledger accounts; however, the adjusting entries ARE prepared from the adjustment columns of the work sheet

principles of internal control

-establishment of responsibility -segregation of duties -documentation procedures -physical, mechanical, and electronic controls -independent internal verification -other controls

significant noncash activities

-issuance of common stock for the purchase of assets -conversion of bonds into common stock -issuance of debt to purchase assets -exchanges of plant assets

conceptual framework consists of...

-objectives of financial reporting -qualitative characteristics of accounting info -elements of financial statements -operating guidelines (assumptions, principles, constraints)

Steps in posting

1) in ledger, enter appropriate columns of the account(s) debited, the date, journal page, and debit amount shown in the journal 2) in the reference column of the journal, write the account number to which the debit amount was posted 3) in the ledger, enter the appropriate columns of the account(s) credited, the date, journal page, and credit amount shown in the journal 4) in the reference column of the journal, write the account number to which the credit amount was posted

Accounting cycle

1. analyzing transactions 2. journalizing 3. posting 4. trial balance 5. adjustments 6. adjusted trial balance 7. financial statements 8. closing entries 9. post closing trial balance info flows from both front and back of the house

From Chapter 6: Forms of income statements

2 forms of income statements: 1) multiple step income statement -includes sales revenues, COGS, and operating expenses with the sub-grouping of operating expenses into selling and administrative expenses. -two non-operating expenses sections: other revenues adn gains, other expenses and losses 2) single-step income statement -all data are classified under two categories: revenues, expenses -the revenues category includes both operating revenues and other revenues and gains -the expenses category includes COGS, operating expenses and other expenses and losses

Closing the books

4 closing entries: 1) debit each revenue account for its balance, and credit income summary for total revenues 2) debit income summary for total expenses, and credit each expense account for its balance 3) debit income summary and credit retained earnings for the amount of net income (net loss) 4) debit retained earnings for the balancein the dividends account, credit dividends for same amount

reconciliation procedure

4 steps: -deposits in transit -outstanding checks -errors -bank memoranda ****refer to review chapter 10 for examples of bank reconciliation format

correcting entries vs. adjusting entries

ADJUSTING entries are an important part of the accounting cycle. CORRECTING entries are unnecessary if the records are free of errors ADJUSTING entries are journalized and posted only at the end of an accounting period. CORRECTING entries are made at any time an error is discovered. ADJUSTING entries always affect at least one balancde sheet account and one income statement account CORRECTING entries may involve any combination of accounts in need of correction **correcting entries must be posted BEFORE closing entries

From Chapter 4: Accrual vs Cash-Basis accounting

Accrual basis accounting- transactions that change a company's financial statements are recorded inthe periods in which the events happen cash basis accounting- revenue is recorded when cash is RECEIVED and expenses are recorded when PAID (not in accordance with GAAP)

assumed cost flow methods

FIFO- first in first out: -assumes that the costs of the earliest goods purchased are the first to be sold -the cost of the ending inventory is found by taking the unit cost of the most recent purchase and working backward until all units of inventory are costed LIFO- last in first out: -assumes that the costs of the latest goods purchased are the first to be assigned to COGS -the cost of the ending inventory is found by taking the unit cost of the oldest goods and working forward until all units of inventory are costed Average cost method: -assumes that the goods available for sale have the same (avg) cost per unit -cost of goods available for sale is allocated on the basis of the weighted avg cost unit -weighted avg cost unit computed ny dividing cost of goods available for sale by total units avaible for sale

Organizations primarily responsible for establishing GAAP

Financial accounting standards board (FASB) Securities and exchange comission (SEC)

From Chapter 1: Generally Accepted Accounting Principles (GAAP)

Standards that are generally accepted and universally practiced in the accounting profession

Basics of Adjusting entires

adjusting entries are necessary to ensure that the revenue recognition and matching principles are followed required EVERY TIME financial statements are prepared

the recording process

analyze: business transactions (for effects on specific accounts; business documents) record: transactions entered in a journal (book of original entry; journalizing) transfer: journal information transferred to ledger accounts (posting)

From Chapter 7: Basics of Financial statement analysis

analyzing financial statements involves evaluating three characteristics of a company: liquidits, profitability, solvency.

The accounting equation

assets = liabilities + stockholders equity assets - liabilities = SE liabilities = assets - SE assets: resources that possess future economic benefit liabilities: creditor claims on the assets and represent the debts and obligations of the entity stockholders equity: stockholders residual claim on total assets

going concern assumption

assumes that the enterprise will continue in operation long enough to carry out its existing objctives

pitfalls in preparing closing entries

avoid unintentionally doubling revenue and expense accounts rather than zeroing them **DO NOT close dividends through the income summary account. dividends are NOT expenses and are NOT a factor in determining net income

effects of inventory errors

beginning inventory understated: -COGS understated -net income overstated beginning inventory overstated: -COGS overstated -net income understated ending inventory understated: -COGS overstated -net income understated ending inventory overstated: -COGS understated -net income overstated

the ledger

home to the entire group of accounts maintained by a company general ledger contains all asset, liability, and SE accounts accounts are arranged in the order presented on the financial statements, beginning with balance sheet accounts

basics of financial statement analysis

comparison of financial information can be made on a number of different bases. intracompany basis: compares either an item or financial relationship within an enterprise with the same item or relationship over one or more years industry averages: compares either an item or financial relationship of a company with industry averages intercompany basis: compares either an item or financial relationship of one entity with the same item or relationship in one or more competitor entities

limitations of internal control

concept of reasonable assurance rests ont he premise that the costs of establishing control procedures should not exceep their expected benefit human element (fatigue, etc) is important factor in every system of internal control

From Chapter 10: Internal Control

consists of the plan of organization and all the related methods and measures adopted within a business to: -safeguard assets from employee theft, robbery, unauthorized use -enhance the accuracy and reliability of ts accounting records

liquidity ratios

current ratio: current assets / current liabilities measures short term debt paying ability acid test of quick ratio: cash + short term investments + recievables / current liabilities measures immediate short term liquidity

solvency ratios

debt to total assets: total debt / total assets measures the percentage of total assets provided by creditors times interest earned: income before income taxes and interest expense / interest expense measures ability to meet interest paymets as they come due

cost principle

dictates that assets be recorded at their cost

double entry recording rules

dictates that each transaction must affect two or more accounts remember: it is possible to affect two of the same type of account, such as two asset accounts

matching principle (expense recognition)

dictates that expenses be matched with revenues in the period in which efforts are made to generate the revenues

revenue recognition principle

dictates that revenue should be recognized in the accounting period in which it is EARNED for ex., if a sale is involved, revenue is recognized as the point of sale

correcting entries

errors are to be corrected AS SOON AS THEY ARE DISCOVERED by journallizing and posting correcting entries. correcting entries are made whenever an error is discovered, not only at the end of an accounting period to determine the correcting entry, is it useful to compare the incorrect entry with the correct entry in order to identify the accounts and amounts that should - or should NOT - be corrected errors may also be corrected by reversing the incorrect entry adn then preparing the correct entry if the accounting records are free of errors, no correcting entries are necessary

limitations of financial statement analysis

estimates: financial statements are loaded with estimates (ex. depreciation) cost: financial statements are based on cost, which is consistend with the cost principle alternative accounting methods: ex. FIFO vs. LIFO costing for inventory atypical data: ex. 9/11, hurricane katrina diversificaiton of firms: diversification within a global environment limits the usefulness of financial analysis

horizontal analysis

evaluates a series of financial statement data over a period of time percentage increase or decrease from base year formula: current year amount - base year amount / base year amount trend analysis = horizontal

vertical analysis

evaluates financial statement data by expressing each iten in a financial statement as a percent of a base amount common size = vertical

gross profit & operating expenses

gross profit = sales revenue - COGS operating expenses are expenses incurres in the process of earning salex revenue.

From Chapter 9: Classifying inventory

inventory of a merchandiser has two common characteristics: 1) owned by the company 2) in a form ready for sale in the oridinary course of business inventory classified into 3 categories: 1) raw materials-on hand waiting to be used in production 2) work in process-in various stages of production 3) finished goods- completed and ready for sale

the trial balance

lists the accounts and their respective balances at a given time primary purpose is to prove (check) that the debits equal the credits after posting if debits do NOT equal credits, trial balance can be used to uncover errors in journalizing and posting

From Chapter 5: What is a work sheet?

multiple column form that may be used in the adjustment process and in preparing financial statements NOT a permanent accounting record; OPTIONAL

information sources for activities

operating activities: analyze income statement items; changes in noncash current asset and current liability items investing activities: analyze increase and decrease in investments an dlont term asset items financing activities: analyze increases and decreases in long-term liability and stocholders equity items

constraints

permit a company to modify GAAP without reducing the usefulness of the reported info materiality: related to an items impact on a firms overall financial condition and operations; an item is material when it is likely to influence the decision of a resonably prudent investor/creditor conservatism: dictates that when in doubt, choose the method that will least likely overstate assets and income. IT DOES NOT MEAN UNDERSTATING ASSETS OR INCOME

Types of adjusting entries

prepaid expenses: -reason for adjustment: prepaid expenses originally recorded in asset accounts have been used -account balances before adjustment: assets overstated, expenses understated -adjusting entry: dr. expenses, cr. assets unearned revenues: -reason for adjustment: unearned revenues initially recorded in liability accounts have been earned -accounts balances before adjustment: liabilities overstates, revenues understated -adjusting entry: dr. liabilities, cr. revenues accrued revenues: -reason for adjustment: revenues earned but not yet recieved in cash or recorded -account balances before adjustment: assets understated, revenues understated -adjusting entry: dr. assets, cr. revenues accrued expenses: -reason for adjustment: expenses incurred but not yet paid in cash or recorded -account balances before adjustment: expenses understated, liabilities understated -adjusting entry: dr. expenses, cr. liabilities

statement of cash flows

primary purpose of the Statement of Cash Flows is to provide info about an entity's cash receipts and cash payments during a period secondary objective is to provide information about the operating, investing, and financing activities of an entity during the period reports the cash reciepts, cash payments and net change in cash resulting from operating, investing, and financing activities during a period

principles

principles dictate how economic events should be recorded/reported

reconciling the bank account

process of making the balance on the books agree with the balance per bank lack of agreement between the two casued by: -time lags that prevent one of the parties from recording the transaction in the same period -errors bhy either party in recording transactions

profitability ratios

profit margin: net income / net sales measures net income generated by each dollar of sales asset turnover: net sales / average assets measures hoe efficiently assets are used to generate sales return on assets: net income / average assets measures overall profitability of assets return on common stockholders equity: net income / avg. common stocholders equity measures profitability of owners investment

assumptions

provide foundation for accounting process

ratio analysis

ratios can be classified as follows: liquidity ratios: measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash profitability ratios: measure the income or operating success of an enterprise for a given period of time solvency ratios: measure the ability of the enterprise to survive over the long run

main difference between perpetual and periodic inventory systems

refer to chapter 9 section of powerpoint final exam review

Steps in posting

refer to slide 19, chapter 3 presentation

conceptual framework cont'd.

refer to slide 4 from ch. 2 presentation

double entry recording rules

refer to slide 7 in ch. 3 presentation

preparing the work sheet

refer to slides 3-8 in chapter 5 presentation for steps of how to prepare a worksheet ***pay special attenton to illustrations 5-2 to 5-4, pages 142-143

adjusting entries

refer to slides 9-16 in chapter 4 presentation for various relationships in adjustments

full disclosure principle

requires that curcumstances and events that make a difference to financial statement users be disclosed ex. september 11, hurricanes of 2004

Net income/Net loss

revenues and expenses determine if net income or net loss occurs as follows: revenues > expenses = net income revenues < expenses = net loss

periodic inventory system

revenues from the sale of merchandise are recorded when sales are made. purchases of merchandise are recordedi n a purchases account rather than a merchandise inventory account

basics of financial statement analysis

short term creditor (such as a bank) is primarily interested in the ability of the borrower to pay oblligations when they come due a long term creditor (such as a bondholder) looks to profitability and solvency measures that indicate the company's ability to survive over the long run stockholders are interested in the profitability and solvency of the company/ they want to assess the likelihood of dividends adn the growth potential of the stock

significant noncash activities

significant financing and investing activities that do NOT affect cash are NOT reported in the body of the statement of cash flows (however, activities ARE either reported on a separate schedule or in a separate note or supplementary schedule to the financial statements)

statement of cash flows

statement is generally prepared using "cash and cash equivalents" as its basis. cash equivalentws are short term, highly liquid investments that are both: -readily convertible to known amounts of cash -investments with original maturities of three months or less whose market values are relatively insensitive to changes in interest rates

monetary unit assumption

states that only transaction data can be expressed in terms of money should be included in the accounting records

economic entity assumption

states that the activities of the entity should be kept seperate and distinct from the activities of the owners

time period assumption

states that the economic life of a business can be divided into artificial time periods: months, quarters, year (also known as interims)

analyzing and journalizing transactions

steps in recording process shown in example: refer to exam review page 5

From Chapter 2: conceptual framework

the conceptual framework developed by the FASB serves as the basis for resolving accounting and reporting problems

posting

the procedure of transferring journal entries to the ledger accounts

post-closing trial balance

the purpose of the post-closing trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period post closing trial balance will contain ONLY permanent- balance sheet- accounts since all remporary accounts will have zero balance

cost of goods sold (COGS)

total cost of merchandise sold during the period, determined by subtracting ending inventory from cost of goods available for sale **refer to example shown on chapter 9 final exam review

Basics of Adjusting entries, cont'd.

trial balance may NOT always contail current info for the financial statements due to: - some events not journalized daily b/c it is not effective to do so -some costs not journalized during the period becasue they expire with the passage of time (insurance) -some items not yet recorded. example utility bill that is recieved after end of accounting period)

Uniform systems

uniform systems for hotels, clubs, restaurants, spas. NO UNIFORM SYSTEM FOR GAMING!

expansion of the basic equation

we know: assets = liabilities + SE with revenues and expenses taken into consideration.... assets = liabilities + owners capital - owners drawing + revenues - expenses (sole proptietorships and partnerships) assets = liabilities + paid in capital - dividends + revenues - expenses (corporations)

periodic inventory system

when a purchaser returns merchandise for credit or recieves a discount for prompt payment, it is called PURCHASE RETURNS AND ALLOWANCES and PURCHASE DISCOUNTS. **both of these are contra accounts to the purchases account and have normal credit balances