ACC 131 FINAL REVIEW
Deposit in Transit
An amount received and recorded by a company, but has not been recorded by the bank in time to appear on the current bank statement.
Unearned Expenses (Deferred Expenses)
Asset arising from the payment of cash has not been used or consumed by the end of the period.
Straight Line Depreciation =
Cost minus Residual Value over Expected Useful Life
What info is needed to calculate depreciation?
Cost of the fixed asset, Useful Life, and Residual Value
Units of production depreciation method
Depreciation cost per Unit = Cost - Residual Value divided by expected usage of the Asset
Relevance
Information is relevant if it is capable of making a difference in a business decision by helping users predict future events (predictive value) or providing feedback about prior expectations (confirmatory value). Materiality is also an aspect of relevance.
Timeliness
Information is timely if it is available to users before it loses its ability to influence decisions. Â Â
Verifiability
Information is verifiable when independent parties can reach a consensus on the measurement of the activity.
Current liabilities
consist of obligations that will be satisfied, through the payment of cash or by providing goods or services, within one year or the operating cycle, whichever is longer.
Cost constraint
constraint states that the benefit received from accounting information should be greater than the cost of providing that information.
What is an accurate description of the Allowance for Doubtful Accounts?
contra accounts
Book Value
cost minus accumulated depreciation
Depreciable Cost
cost of asset minus its residual value
A credit memo appeared on the Sept bank statement. How should this amount be treated on the Sept bank reconciliation?
deduct it from the bank balance
Cash collected & recorded by a company but not yet reflected in a bank statement are known as ___________
deposit in transit
while preparing a bank reconciliation, which of the following items would be added to the bank statement balance?
deposit in transit
Double-entry accounting
describes the system used by companies to record the effects of transactions on the accounting equation.
The revenue recognition principle
determines when revenue is recorded and reported.
Revenue expenditures
do not increase the future benefit of an asset and are expensed as incurred
FIFO
first in, first out
T-account
graphical representation of an account; title and 2 columns, left-debit, right-credit
Accrual-basis accounting
is an alternative to cash-basis accounting that is required by generally accepted accounting principles.
Accrued Revenues
when a company has earned revenue but not received the cash
Long Term Debt
Obligations that extend beyond one year
Financing Activities
Obtaining funds to start a business (from owners or creditors)
Contra accounts
accounts that have a balance that is opposite of the balance in the related account e.g., Accumulated Depreciation account.
Periodic Inventory System
balances are not up to date
If a company uses the direct write-off method of accounting for bad debts, it will record :
(it will record) bad debt expense only when an account is determined to be uncollectedÂ
Stockholders' Equity
- Contributed capital (common stock) - Retained earnings
Liabilites
- Current Liabilites (accounts payable, salaries payable) - Long-term liabilities (notes payable, bonds payable)
Assets
- Current assets (cash,accounts receivable, inventories) - Long Term assets - Property, plant, and equipment (land, equipment) - Intangible assets (patents, copyrights)
FIFO during rising prices
- Highest Ending Inventory - Lowest Cost of Goods Sold - Highest Income
LIFO during Rising
- Lowest Ending Inventory - Highest Cost of goods sold - Lowest Income
Types of Adjusting Entries
- accruals - deferrals
"All of the following are TRUE for a company that uses the allowance method of accounting for bad debts.
- it uses a contra-asset account called the allowance for doubtful accounts - it reports accounts receivable in the balance sheet at their net realizable value
Sole Proprietorship
-a business owned by one person. - 70% of all businesses, are usually small, local businesses such as restaurants, photography studios, retail stores, or website providers
The three parts of a journal entry are:
-the date of the transaction -the accounts and amounts to be increased or decreased -a brief explanation of the transaction
Straight Line Rate
1 divided by useful life
Order of Current Liabilities on the Balance Sheet
1. Accounts Payable 2. Salaries Payable 3. Unearned Revenue 4. Interest Payable 5. Income Taxes Payable
Four Enhancing Characteristics
1. Comparability 2. Verifiability 3. Timeliness 4. Understandability
Types of Business Activities
1. Investing 2. Financing 3. Operating
3 Categories of Operating Assets
1. Property, Plant, and Equipment 2. Intangible assets 3. Natural resources
Declining balance rate
2 X Straight-line rate
Partnership
A business in which two or more persons combine their assets and skills
Corporation
A business owned by stockholders who share in its profits but are not personally responsible for its debts
Outstanding Check
A check that has been issued and recorded by the business, but has not yet been cashed by the bank.
NSF Checks
A check that has been returned to the depositor, because funds in the issuers accounts are not sufficient to pay the check.
Which of the following statements best describes the term "outstanding Check" from a company's point of view?
A check written by a customer to the company, but it has not been presented to the bank for payment
Journal
A chronological record showing the credit and debit effects of transactions of a company
Ledger
A collection of accounts and their balances
A customer's check for $25 that had been deposited into the company's checking account the previous month was returned stamped "NSF" by the bank. Which journal entry is required?
Accounts Receivable: $25 Cash: $25
Straight Line Method
Allocates an equal amount of an assets cost to depreciation expense for each year of the assets useful life
Normal Debit Balance
Assets, expenses, and dividends.
Fundamental Accounting Equation
Assets=Liabilities+Stockholders' Equity
Aging Method
Bad debt is estimated by determining the collectability of the accounts recievable
Which Financial Statement is for a Specific Date
Balance Sheet
While preparing a bank reconciliation, which of the following items would be subtracted from the balance per company records?
Bank service charges
Cost of Goods Sold =
Beginning Inventory + Purchases - Ending Inventory
What account is used to record the difference between what the cash register shows, and what is actually deposited?
Cash over and Short
Comparability
Comparable information allows external users to identify similarities and differences between two or more items. Within comparability is consistency. Consistency can be achieved by a company applying the same accounting principles for the same items over time.
What type of account is allowance for doubtful accounts
Contra Asset
Working capital =
Current Assets + Current Liabilities
Current Ratio =
Current Assets/Current Liabilities
Units of Production Depreciation expense
Depreciation Cost per Unit X Actual Usage of the Asset
The amount of depreciation expense is recorded as so
Depreciation Expense - Debit Accumulated Depreciation - Credit
Declining Balance Depreciation Expense
Declining Balance Rate X Book value -has higher depreciation expense in the early years of the assets life and lower depreciation expense in the later years of the assets life
Understandability
If users who have a reasonable knowledge of accounting and business can, with reasonable study effort, comprehend the meaning of the information, it is considered understandable.
Net Income =
Income from operations - (nonoperating revenues - expenses)
Unearned Revenue (Deferred Revenue)
Liability rising from the receipt of cash for which revenue has not been earned.
Operating Activities
Operating the business to earn a profit
Debit Memos
Recorded by the bank, but not yet by the business. Causes the bank balance to be less than the cash balance of the business.
Credit Memos
Recorded by the bank, but not yet recorded by the business. Causes the bank balance to be larger than the cash balance for the business.
Found on the Income Statement
Revenue minus Expenses = Net Income
Normal Credit Balance
Stockholders equity, revenues, and liabilities
Permanent accounts
The balance sheet accounts- assets, liabilities, and stockholders' equity
Creditor
The person to whom the corporation owes money
Normal Balance
The type of balance expected of an account based on its effect on the accounting equation.
Continuity (or Going-Concern) Assumption
This assumption assumes that a company will continue to operate long enough to carry out its existing commitments.
Liability
This obligation to repay a creditor
financial statements
To effectively communicate a company’s activities to decision-makers, detailed transactions are summarized and reported in a set of standardized reports
Percentage of Sales Method
Total Credit Sales x Percentage of sales estimated to default = estimated bad debt expense
operating cycle
a company is the average time that it takes a company to purchase goods, resell the goods, and collect the cash from customers.
Sales Discount
a price reduction offered by a company to ensure prompt payment.
Sales Allowance
a price reduction offered by the seller, to induce the buyer to keep slightly damaged goods.
Account
a record of increases and decreases in each of the basic elements of the financial statements.
Accounting cycle
a simple and orderly process based on a series of steps and conventions.
Cash flows from financing activities
any cash flow related to obtaining capital of the company. This category includes the issuance and repayment of debt, common stock transactions, and the payment of dividends.
Cash flows from investing activities
any cash flow related to the acquisition or sale of investments and long-term assets such as property, plant, and equipment.
Cash flows from operating activities
any cash flows directly related to earning income. This category includes cash sales and collections of accounts receivable as well as cash payments for goods, services, salaries, and interest.
Long-term investments
are similar to short-term investments except for the duration of holding; they can include land and buildings not currently used in operations.
How will the lender of the promissory note record the note on its books?
as an asset
Notes to the financial statements (or footnotes)
clarify and expand upon the information presented in the financial statements.
Current assets
consist of cash and other assets that are reasonably expected to be converted into cash within one year or one operating cycle, whichever is longer.
Capital expenditures
capital expenditures extend the life of the asset, expand productive capacity, increase efficiency, or improve quality of product. Added to the asset account and are subject to depreciation
The account which records differences between amounts of cash deposited & amounts from the register tapes is called ___________
cash over & short
Securities and Exchange Commission (SEC)
has the power to set accounting rules for publicly traded companies.
Property, plant and equipment
includes tangible productive assets used in operations, like land, buildings, equipment, and furniture.
All adjusting entries will affect at least one ______ account and one _______ account.
income statement / balance sheet
Which of the following items would be added to the company's cash balance on a bank reconciliation?
interest earned
Adjusting entries
journal entries made at the end of an accounting period to record the completed portion of partially completed transactions
Intangible assets
lack physical substance and include patent, trademarks, copyrights and goodwill.
LIFO
last in, first out
Operating Assets
long lived assets used by company in the normal course of operations to generate revenue
Noncurrent assets
long term assets
According to the Sarbanes-Oxley Act of 2002, who is primarily responsible for establishing & maintaining a system of internal control over the company's financial reporting?
management of the company
Sales Returns
merchandise returned by the customer to the seller.
Long-term Liabilities common examples
notes payable, bonds payable
What is the distinguishing characteristic between accounts receivable and notes receivable?
notes receivable specify an interest rate and a maturity date at which any interest and principle must be repaid
Example of a debit memo
notice of a bank service charge
Example of a credit memo?
notice of interest earned on a checking account
While preparing a bank reconciliation, what would be subtracted from the balance per bank statement?
outstanding checks
Which allowance method approach is considered to be an income statement approach to establishing bad debts?
percentage of net credit sales
Deferred (or prepaid) expenses
prepayments are recorded as assets
Management's Discussion and Analysis
presented in the annual report, is management's explanation used to highlight favorable and unfavorable trends and significant risks facing the company.
Accrued expenses
previously unrecorded expenses that have been incurred but not yet paid in cash
Depreciation
process of allocating the cost of a tangible fixed asset to expense over the assets useful life.
Building costs include
purchase price, closing costs, architectural fees, building permits, excavations, remodeleing
Land Cost includes:
purchase price, real estate commissions, closing costs, clearing and grading, demolitions of unwanted buildings
Land Improvement costs:
purchase price, sales taxes, installations costs
Equipment costs:
purchase price, sales taxes, transortation costs, insurance, installation costs, cost of trial runs
Deferred (or unearned) revenues.
ransactions for which a company has received cash but has not yet earned the revenue
retained earnings statement
reports how much of the company’s income was retained in the business and how much was distributed to owners over a period of time.
income statement
reports how well a company has performed its operations (revenues, expenses, and income) over a period of time.
balance sheet
reports the resources (assets) owned by a company and the claims against those resources (liabilities and stockholders’ equity) at a specific point in time.
statement of cash flows
reports the sources and uses of a company’s cash over a period of time.
Matching Principle
requires that an expense be recorded and reported in the same period as the revenue that it helped generate.
Revenue recognition principle
revenue is recognized, or recorded, in the period in where revenue has been earned and the collection of cash is reasonably assured.
Cash-basis accounting
revenue is recorded when cash is received, regardless of when it is actually earned
An incentive used by a company to induce the customer to keep damaged goods is called a __________
sales allowance
An incentive used by a company to encourage prompt payment is called a ____________
sales discount
debit
side left
credit
side right
Discount Bond
sold below par (face) value
Premium Bond
sold for more than the face value when the stated interest rate is higher than the market interest rate
Steps of the Accounting Cycle
step 1: analyze transactions step 2: journalize transactions step 3: post to the ledger step 4: prepare a trial balance step 5: adjust the accounts step 6: prepare financial statements step 7: close the accounts
Financial Accounting Standards Board (FASB)
the SEC has delegated this authority
What is true regarding the two allowance procedures used to estimate bed debts?
the aging of accounts receivable method takes into account the existing balance in the Allowance for Doubtful Accounts
When the service potential of asset is used...
the assets cost is allocated as an expense
Expenses
the cost of assets used, or the liabilities created, in the operation of the business.
Perpetual Inventory System
up to date balances of inventory accounts 24/7
Revenue
the increase in assets that results from the sale of products or services.
Long-term liabilities
the obligations of the company that will require payment beyond one year or the operating cycle, whichever is longer. Â Â
Expense recognition (or matching) principle
the process of identifying an expense with a particular time period; expense is recorded when it is incurred, regardless of when cash is paid
What is Accounting?
the process of identifying, measuring, recording, and communicating financial information about a company's business activities so decision makers can make informed decisions.
generally accepted accounting principles (GAAP)
were developed by several different organizations over a number of years.
balance sheet is organized...
to help users identify the economic similarities and differences between the various items within the balance sheet.
purpose of the balance sheet
to report the financial position of a company (its assets, liabilities, and stockholders' equity) at a specific point in time.
A reduction in the price granted by the seller for a particular class of customers is called a _____________
trade discount