Financial Accounting Midterm Exam

bank reconciliation goals

-Identify the deposits in transit. -Identify the outstanding checks. -Record other transactions on the bank statement and correct your errors.

Trial balance

-after processing all its transactions for the period, a trial balance is prepared -the trial balance lists all account balances in the general ledger -if the books are in balance, the total debits with equal the total credits -information from the trial balance is used to prepare financial statements

How are prepaid accounts recorded?

-also known as prepaid expenses 1. all expired and used prepaid accounts are recorded as regular expenses 2. all unexpired and unused prepaid accounts are recorded as assets (reflecting future use in future periods)

Revenues

-earned -credit -sales of goods or services to customers. they are measured at the amount the business charges the customer

Expenses

-incurred -debit -The costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities and supplies used in the office

Stockholders' equity

-investments and retained earnings -credit owners' claim to the business resources (common stock and retained earning)

Liabilities

-owe -credit -measurable amounts that the company owes to credits (notes payable -loans, accounts payable)

Assets

-own -debit -economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future (cash, supplies, furniture, equipment)

Controls from bank procedures

A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual.restricting access, documenting procedures, independently verifying

List the steps of the analyzing and recording process

1. Analyze each transaction and event from source documents 2. Record relevant transactions and events in a journal 3. Post journal information to ledger accounts 4. Prepare and analyze the trial balance

Posting Journal Entries

1. Identify the debit account in ledger 2. Enter the date 3. Enter the amount and description 4. Enter the journal reference 5. Compute the balance 6. Enter the ledger reference

What do liability accounts include?

Accounts payable, notes payable, accrued (accumulated) liabilities, unearned revenue

Each elements of accounting equation is made of several different what?

Accoutnts

Securities Act of 1933

Act requiring registration with the SEC before issuance of securities through interstate commerce.

Trial balance is prepared after what?

After processing all its transactions for the period

What are dividends?

Allowance, proceeds, bonus, coupon, returns

What are cash receipts?

Amount of cash that was received

What are accrued liabilities?

Amounts the you owe, but haven't yet paid. -Ex: wages payable

What is an account?

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. (Assets = Liabilities + Equity)

Sarbanes-Oxley Act

An act of Congress in 2002 intended to bring reform to corporate accountability and stewardship in the wake of a number of major corporate scandals.

Retained earnings

An amount earned by a corporation and not yet distributed to stockholders.

Contributed capital

An entry on the shareholders' equity section of a company's balance sheet that summarizes the total value of stock that shareholders have directly purchased from the issuing company.

Accounting Cycle (class)

Analyze-journalize-post-record-trial balance-adjustments-adjusted trial balance-financial statements-closing-post closing trial

Accounting Cycle (book)

Analyze-record-summarize-prepare trial balance-reports financial statement

What is a transaction?

Any event in life of business that impacts accounting equation

Expanded Accounting Equation

Asset Accounts ....... =Liability Accounts + Equity Accounts - owner's capital, owner's withdrawals, revenues, expenses

Accounting Equation

Assets = Liabilities + Equity

The four financial statements

Balance sheet, income statement, statement of stockholder's equity, and statement of cash flows.

Internal control components

Most organizations use the following control components as a framework when analyzing their internal control systems. control environment, risk assessment, control activities, information and communication, monitoring actives

Whatever causes an account to increase is referred to as

Normal balance

What are liability accounts?

Obligations owed by a company

Where does the debit go on a T-Account?

On the left side

Where does credit go on a T-Account?

On the right side

An accounts balance is usually on what side? This is referred to as what?

On the side that increases the account. This is referred to as the "Normal Balance"

Monetary Unit Assumption

Only data that can be expressed in dollars ex: can't express "owner health" in dollars not adjusted based on inflation

What are equity accounts?

Owner's interest in assets after liabilities are paid

What is the process of transferring journals to ledgers?

Posting

What are source documents?

Provides evidence that transaction took place -Ex: Bill, check, invoice, etc

Dividends

distributions of a company's earning to its stockholders as a return on their investment (common stock and retained earnings: rev-expenses)

Retained earnings

earned capital; net income that has been kept in the company

Principles of control activities

establish responsibility, segregate duties, restrict access, document procedures, independently verify

fraud

generally defined as an attempt to deceive others for personal gain. corruption, asset misappropriation, financial statement fraud

Inventory

goods purchased or produced for sale to customers

Inventory

goods purchased or produced for sale to customers ex: merchandise at target

Accounts Receivable

held by a seller and refer to promises of payment from customers to sellers

Property, plant, and equipment (PPE)

includes land, factory buildings, warehouses, office buildings, machinery, office equipment, and other items used in the operations of the company.

Intangible and other assets

includes patents, trademarks, franchise rights, goodwill, and other items that provide future benefits, but do not possess physical substance.

Balance Column Accounts

includes transaction dates and explanation column ulike t-accounts

Long-term financial investments

investments in debt securities or shares of other firms that management does not intend to sell in the near future

American Institute of Certified Public Accountants (AICPA)

is the national professional organization of Certified Public Accountants (CPAs) in the United States It sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments.

what is a ledger?

journal/record book

Land Accounts

land owned

Debit

left side of t-account Dr.

permanent accounts

liabilities, assets, equity. permanent accounts track financial results from year to year

accrual adjustments

needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period. used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts. involves one asset and one revenue account, or one liability and one expense account.

Intangible and other assets

not physical: such as copyrighted material ex: copyright material removed from youtube

Unearned Revenue

obligation to provide a service ex: $50 to nation geographic, obligation to send magazines 5k flights to italy; Delta obligated to provide flights

adjusting entries always includes

one balance sheet and one income statement account

Accounts Payable

oral or implied promises to pay later, which usually arise from purchases of merchandise

Equity Accounts

owner's claim on a company's assets

Journalizing

processes of recording in a journal

Controls for cash receipts

receive cash in receiving cash in person at time of sale and receive cash through electronic transfer. to ensure that the business receives the appropriate amount of cash and safely deposits it in the bank.

timing of reporting expenses (accruing)

record expenses in the same period as the revenues with which they can be reasonably associated

accrual basis accounting

records revenues when they are earned and expenses in the same period as the revenues to which they relate, regardless of the timing of cash receipts or payments

Cash Account

reflects a company's cash balance

Asset Accounts

resources owned or controlled by a company hat have expected future benefits

Accrual Accounting

revenues and expenses are recorded when they happened

Revenue Accounts

revenues and expenses impact equity

revenue recognition principle (accruing)

revenues are recognized when they are earned

income statement adjustments

revenues are recorded when earned. expenses are recorded in the same period as the revenues to which they relate

Revenue Recognition

revenues are recorded when they are gained, no matter when cash is recieved

temporary accounts

revenues, expenses dividends. temporary accounts track financial results for a limited period of time

Credit

right side of t-account Cr.

service companies

sell service> collect cash> pay operating expenses>

Recording inventory sales

selling price: cash (debit) and sales revenue ( credit) cost: cost of goods sold (debit) and inventory (credit)

Short-term borrowings

short-term debt payable to banks or other creditors

Marketable securities

short-term investments that can be quickly sold to raise cash

Balance Sheet

shows business assets, liabilities and stockholders equity

Income statement

shows revenues, expenses and net income for a time period only revenue and expenses shown

Buildings Accounts

stores, offices, warehouses, and factories provide expected future benefits to those who control or own them

The statement of cash flows

summarizes how a business's operating, investing, and financing activities caused its cash balance to change over a particular period of time

adjustments help ensure what

that all revenues and expenses are reported in the period in which they are earned and incurred.

Earned capital

the cumulative net income (and losses) that has been retained by the company (not paid out to shareholders as dividends)

Current maturities of long-term debt

the current portion of long-term debt that is due to be paid within one year.

damaged conditioned goods

the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance.

without adjustments

the financial statements present an incomplete and misleading picture of the company's financial performance.

perpetual inventory system

the inventory records are updated "perpetually," that is, every time inventory is bought, sold, or returned, bar codes and optical scanners. continuous tracking and can estimate shrinkage

Additional paid-in-capital

the investment by stockholders in excess in of the amounts assignable to capital stock as par or stated value of the common stock.

FOB shipping point

the sale is recorded when the goods leave the seller's shipping department.

FOB destination

the sale is recorded when the goods reach their destination (the customer).

Why do you draw a line across the T-Account?

to record the balance

paid-in-capital

total amount mark cuban would invest into the corporation

If the books in the trial balance are in balance, then what should be equal?

total debits should equal the total credits

closing temporary accounts

transfer net income and dividends to retained earning. establish zero balances in all income statement and dividend accounts

Posting

transferring journal entry information to a ledger

periodic inventory system

updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period. no up to date records and can't estimate shrinkage BI + P - EI = CGS

Other long-term liabilities

various obligations, such as warranty and deferred compensation liabilities and long-term tax liabilities, that will be satisfied at least a year in the future.

Owner Investments

when an owner invests in a company, the invested amount is recorded in an account title Owner, Capital

Owner Withdrawals

when an owner withdrawals assets for personal use it decreases both company assets and total equity

Note Receivable

written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note

Examples of unearned revenue

RECORDED IN LIABILITY ACCOUNTS -magazine subscription collected in advance by a publisher; Unearned Subscriptions -sales of gift certificates by stores; Unearned Store Sales -season ticket sales by sports teams; Unearned Ticket Revenue

The balance sheet

Reports at a point in time: assets, liabilities, stockholders' equity. Assets= liabilities +stockholders' equity

The statement of retained earning

Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. Add net income, subtract dividends

What are asset accounts?

Resources owned by a company

Basic Accounting Equation

assets= liabilities + stockholders' equity

Can you substitute ledger with a T-Account?

Yes

Can you use more than 2 accounts for a journal ledger?

Yes

Statement of stockholder's equity

a financial statement that shows changes in a corporations ownership for a fiscal period

Note Payable

a formal promise, usually denoted by the signing of a promissory note, to pay a future amount

T-Account

a ledger account and is a tool used to understand the effect of one or more transactions

Unearned Revenue Accounts

a liability that is settled in the future when a company delivers its products of services

Trial Balance

a list of accounts and their balances at a point in time

Chart of Accounts

a list of all ledger accounts and includes an identification number assigned to eat account

General Ledger or ledger

a record containing all accounts used by a company

Account

a record of increases and decreases in a specific asset, liability, equity, revenue or expense item (analyzed, summarized, and presented in reports and financial statements)

Where is the 1st place that a transaction is recorded?

In a journal

Retained earnings

Income the company has earned since its inception, minus the dividends it has paid out to shareholders.

What is used to prepare financial statements?

Information from the trial balance

Financial accounting

Information system that identifies, records, and communicates the economic events of an organization for external users

control limitations

Internal controls can never completely prevent and detect errors and fraud for two reasons: benefits must exceed the cost and human error or fraud

internal control for cash

Internal controls for cash are important because the volume of cash transactions is enormous and because cash is valuable and portable and therefore poses a high risk of theft.

What is a T-Account?

It represents a ledger account and is a tool used to understand the effects of 1 or more transactions

What are the accounts with typical credit balances?

Liabilities, owner's equity, revenues

Asset accounts is equal to what?

Liability accounts + Equity accounts

How should you list the accounts in the trial balance?

List it first as assets, liabilities, equity, revenues, and then expenses (debts/loans)

What is a chart of accounts?

List of all accounts and includes an identifying number for each account

Trial balance lists all what?

Lists all account balances in general ledger

Investing activities

Methods companies use to acquire and dispose of assets in the course of production and sales.

Financing activities

Methods companies use to fund investment resources.

Operating activities

Methods companies use to produce, promote, and sell its products and services.

control for cash payments

Most cash payments involve writing a check or completing an electronic funds transfer. The primary goal of internal controls for all cash payments is to ensure that the business pays only for properly authorized transactions.

If there are errors in a trial balance, the errors can be found by tracing steps backwards. What are these steps?

1. Read up the columns of the trial balance 2. Ensure that postings from the ledger are accurate 3. Recompute balances in ledger 4. Ensure (secure) postings from journal to ledger are accurate 5. Ensure accuracy of journal entries

How do you find the T-Account balance?

1. Subtract the lower balance from the higher balance 2. Then place on side that is higher.

Journal & Posting Transactions

1. analyze transactions and source documents 2. Apply double-entry accounting(Left side-debit; Right side-credit for T-account) ------Assets = Liabilities + Equity 3. Record journal entry 4. Post entry to ledger

two closing journal entries are needed

1. debit revenue accounts and credit expense accounts. debit or credit the difference to retained earnings. 2. credit dividends declared and debit retained earnings

Sole proprietorship

A business owned by a single person. The owner is responsible for all aspects of operation, including accounting, financing, production, and distribution. Sole proprietorships are easy to establish because they usually involve little government interference.

Partnership

A business with two or more owners who are also usually involved in managing the business.

What affects the number of accounts needed?

A company's size and diversity of operations

Executory contract

A contract which has not yet been fulfilled by one or both parties that promises action in the event of a specified future occurrence.

Treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

double-entry accounting system

A financial record keeping system in which each transaction affects at least two accounts; for each debit there must be an equal credit.

Income statement

A financial statement showing the revenue and expenses for a fiscal period.

Balance sheet

A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.

Corporation

A form of business organization that is characterized by a large number of owners who are not involved in managing the day-to-day operations of the company.

Securities and Exchange Commission (SEC)

A government agency formed by the 1934 Act, having primary responsibility for enforcing the Federal securities laws and regulating the securities industry. It protected investors, listened to complaints, issued licenses and penalized fraud.

Board of directors

A group of people elected by the stockholders to represent shareholders interests and oversee management.

cash paid to reimburse employees

A petty cash system is used to reimburse employees for small expenditures they have made on behalf of the organization.

Liability

A probable future economic sacrifice resulting from a past or current event.

Liability

A probable future economic sacrifice resulting from a past or current event. forced to transfer assets, company owes ex: ends in payable are liabilities: unearned revenue

Assets

A resource owned by the company that is expected to provide the company future economic benefits.

Assets

A resource owned by the company, expected to provide future economic benefits. ex. computer

What is there for each individual account?

A unique number

Each information pertaining to account will remain in the

Account

Generally accepted accounting principles (GAAP)

Accounting guidelines, formulated by the Federal Accounting Standards Board (FASB)

Financial accounting

Accounting information and analyses prepared for people outside the organization.

Managerial accounting

Accounting used to provide information and analyses to managers inside the organization to assist them in decision making.

Current assets

Assets that are expected to be converted to cash or used within one year

Non-current assets

Assets that will be in the business for longer than the financial period - usually one year.

Double-entry Accounting

At least two accounts are involved with one debit and one credit; total amount debited must equal the total amount credited; the accounting equation must not be violated

What is the balance of an account?

The difference between the increases and decreases in an account

What do the asset accounts include?

Cash, Land, Buildings, Equipment, Accounts Receivable, Notes Receivable, Supplies, Prepaid Expenses (assets)

What equity accounts increase equity?

Common stock and revenue

What do the equity accounts include?

Common stock, retained earnings, revenues, dividends, expenses

Common stock

Common stockholders have the right to vote at stockholders' meetings, sell or otherwise dispose of their stock, purchase their proportional share of any common stock later issued by corporation, receive the same dividend if any on each common share of the corporation, share in any assets remaining after creditors and preferred stockholders are paid.

Suppliers

Companies that provide material, human, financial, and informational resources to other companies

Solvency

Company's long-run financial viability and its ability to cover long-term obligations.

What is a ledger?

Complete collection of all accounts for an information system

The Sarbanes Oxley Act (SOX)

Contract incentives: stiff fines and prison terms. Reduce opportunities: internal control evaluation independent audit committee. encourage honesty: tip lines, whistleblower protection, ethic code

What is the mnemonic memory device used to remember all the normal balances for all the accounts?

DEAD COLR D ebit C redit E xpense O wner's Equity A ssets L iabilities D ividend R evenues

Equity

Debit - decreases Credit - increases

Liabilities

Debit - decreases Credit - increases

Assets

Debit - increases Credit - decreases

Debit does not mean _____ and credit does not mean ____.

Debit does not mean DECREASE and credit does not mean INCREASE.

What equity accounts decrease equity?

Dividends and expenses

Expense Recognition

Expenses are typically recorded in the period they are incurred, regardless of when cash is paid

Accrued liabilities

Expenses that have been incurred but have not been paid at the end of the accounting period

What are the accounts with typical debit balances?

Expenses, assets, and dividends

post trial balance

Final check that all debits still equal credits and that all temporary accounts have been closed. Contains balances for only permanent accounts.

Creditors

Financial institutions or individuals who provide loans.

Statement of cash flows

Financial statement that reports net cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.

Note Payable

Formal arrangement that includes the signing of a note

What are cash disbursements?

How much cash was paid

Stockholders' Equity

I get what is left over after creditors are happy - my claims to business assets

What is unearned revenue?

Revenue you haven't earned. -Ex: Customer pays you in advance for a service, but you haven't provided service yet. Ex: Unearned fees, unearned subscription

Deferred revenues

Revenues that have been collected but not earned; they are liabilities until the goods or services have been provided.

Net Income

Revenues-expenses =net income

Statement of Retained Earnings

Shows changes in Retained earnings for a specific time

What kind of dating period is used for the trial balance?

Shows particular balance on a particular date

Transactions occur through what?

Source documents

Economic Entity Assumption

Stops owners from putting their own transactions in the company's records ex; can't list my home investment accounts as assets or utilities as company expenses

Where is double entry accounting done in and what is double entry accounting?

T-Account; double entry accounting is where every debit has a credit. ------DEBITS = CREDITS------

Public Company Accounting Oversight Board (PCAOB)

The Public Company Accounting Oversight Board (PCAOB) was established pursuant to the Sarbanes-Oxley Act of 2002. The PCAOB establishes auditing and related professional practice standards to be used in the preparation and issuance of audit reports for "issuers."

What happens when journalizing transactions?

The accounts the is DEBITED is always written FIRST before the one that is CREDITED

Disclosure

The act of providing financial information to external users.

Historical cost

The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets.

Historical cost

The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets. buy house in 1995 at 10k will be noted as 10k in 2017

Expenses

The cost incurred to generate revenue, including the cost of the goods and services sold to customers as well as the cost of carrying out other business activities.

Revenue

The increase in equity resulting from the sale of good and services to customers.

inventory

The merchandiser's total cost of acquiring goods that it has not yet sold

Income

The net increase in equity from the company's operating activities. Income, also called net income, equals revenues minus expenses.

fair value

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Planning activities

The process of identifying a company's goals, and the strategies adopted to reach those goals.

The income statement

The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit ( rev-exp.)

Dividends

When earnings are distributed to stockholders not a expense

T-Accounts are used to determine what?

To determine balances of accounts

What is the trial balance for?

To ensure posting process is correct

-cost of goods sold

Total cost of all goods that the merchandiser did sell to customers BE + P - EI = Cost of goods sold

sales revenue

Total selling price of all goods that the merchandiser did sell to customers

Account Balance

difference between total debits and total credits for an account, including beginning balance

Accumulated other comprehensive income or loss

accumulated changes in equity that are not reported in the income statement

note 1

accumulated depreciation- balance sheet. depreciation expense-income statement

note 2

accumulated depreciation-total amount depreciate. equipment-original cost

Solution to adjustments

adjustments are made to the accounting records at the end of the period to state assets liabilities revenues and expenses at appropriate amounts

after closing entries

all the income statement accounts and the dividend account will have a zero balance.

Long-term debt

amounts borrowed from creditors that are scheduled to be repaid more than one year in the future.

Accounts receivable

amounts due to the company from customers arising from the sale of products or services on credit

Accrued Liabilities

amounts owed that are not yet paid

Accounts payable

amounts owed to suppliers for goods and services purchased on credit.

Financial statements often have what?

amounts reported that are a summation of several ledger accounts

deferral adjustments

an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period. used to decrease balance sheet accounts and increase corresponding income statement accounts. one asset and one expense or one liability and one rev

Equipment Accounts

asset; includes cost of assets used in a store (counters, showcases, ladders)

balance sheet adjustments

assets are reported at amounts representing the economic benefits that remain at the end of the period. liabilities are reported at amounts owed at the end of the period

Prepaid Accounts

assets that represent prepayments of future expenses

Supplies Accounts

assets until they are used - when used, turn into expenses

cash paid to employees via eft

direct deposit. many companies use an imprest system.

relationship between inventory and cost of goods sold

beginning inventory + purchases+ goods available for sale>ending inventory (still here) and cost of goods sold (sold)

Post Reference Column

blank line between each journal entry ID numbers are later entered here after the ledger

merchandising companies

buy inventory> sell inventory> collect cash> operating expenses>

merchandisers earn revenue how

by transferring control of merchandise to a customer, either for cash or on credit.

adjusting journal entries never involve what

cash

Liabilities Accounts

claims by creditors against assets, which means they are obligations to transfer assets of provide products or services to others

Accounts receivable

company can receive cash in the future from customer purchases

Journal

complete record of each transaction in one place, shows debits and credits for each transaction

internal control objectives

consists of the actions taken by people at every level of an organization to achieve its objectives. operations, reporting, compliance

note 3

contra-account-opposes account it offsets

Expenses

cost gained because of selling goods and providing service; decreases equity

Prepaid expenses

costs paid in advance for rent, insurance, or other services

Cash

currency, bank deposits, certificates of deposit, and other cash equivalents

note 4

depreciation amount-depends on method used

Why adjustments are needed

designed to record most recurring daily transactions, particularly any involving cash. cash is not always received or paid in the period in which the company earns the related revenue or incurs the related expenses