Accounting EXAM 1 & 2

Financial Accounting must follow GAAP. What is GAAP?

Generally Accepted Accounting Principles (the rules of accounting) - focuses on historical data

Trial Balance:

LIST of all accounts in general ledger checks if D=C Order of Accounts: 1. Assets (listed in liquidity (quickly converted to cash) 2. Liabilities (currents, long-term last) 3. Equity (common stock, RE) 4. Dividends Declared 5. Revenues/Gains 6. Expenses/Losses

Rule of Thumb:

anything over 5% of NI is material

Information is more useful if...

decision makers can compare it with similar info from the same company / other companies

Larsen Company declared and paid a $3,000 cash dividend, The effect of the transaction on the Larsen Company would be to:

decrease the balance in the cash account and decrease stockholders' equity by $3,000.

4 Assumptions: Economic entity

firm keeps its activity separate and distinct from its owners, parents and subsidiaries are separate legal entities but the same economic entity for accounting

General Ledger:

grouping of all the T-accounts with their balances

Normal Balance:

the side of the account that is increased

The Accounting Equation:

Assets = Sources of Assets

Dividends Declared:

Dr / Cr + - NB

Assets:

Dr / Cr + - NB

Elements AT a moment of time

assets - probable future benefits liabilities - probable sacrifices equity - residual interest after deducing its liabilities ^^ all part of the balance sheet

Journal:

book of original entry (1st time event)

Statement of Financial Accounting Concepts (SFAC)

broad concepts that are intended to establish USEFUL AND CONSISTENT STANDARDS

4 Principals: Matching

when to incur expenses or loss

IN RE you do not use...

paid dividends (only declared)

Vaughn-Williams Co. has total assets of $600,000 and stockholders' equity of $320,000. It purchased $80,000 of supplies on account and collected $50,000 on account from its customers. As a result, the company's total assets would now be __________. $680,000 $80,000 $550,000 $360,000

$680,000

During the year, Patriot Partners had $245,000 in revenues, $120,000 in expenses, and $40,000 in declared dividends. What was the total change in Retained Earnings during the year? $85,000 increase $165,000 increase $165,000 decrease $125,000 increase

$85,000 increase

, Div >

, RE

Who decided whether to pay a dividend to stockholders

Board of Directors

Expenses/Losses:

Dr / Cr + - NB

Revenues/Gains

Dr / Cr - + NB

D... ebits increase

Expenses Assets Dividends

Which of the following accounts increases with a credit?

Retained Earnings

C... redits increase

Unearned revenue Revenue Liabilities Stock Holder's Equity

Which of the following is the accounting equation?

Which of the following is the accounting equation?

LIABILITES:

accounts payable, note payable, wages payable, taxes payable, unearned revenues, bonds payable

"posting" . means

adding data in ledger

Statements of changes in equity

all changes to: Contributed Capital & Retained Earnings Investments by owners: CC Withdrawal by owners: DD

4 Assumptions: Going Concern (Continuity)

assumes that firm will continue in foreseeable future justifies use of accruals/deferrals/AJE entries

remaining amount in an account is called the

balance

Fundamental Quality: Relevance

capable of making a difference in decision - predictive value: predict future expectations - confirmatory value: confirms/corrects prior expectations - materiality: if omit/error could influence decisions

revenue - expense =

dividends declared

Account:

record of all the changes in a particular account must be classified as 1 of the 10 elements

^ Revenue >

^ NI > ^ RE positive relationship

ASSETS:

cash, recievable, Investments, Prepaid Expenses, Land, Building, Equipment, Patents, Intangibles

Chart of Accounts

list all accounts and their identifying account numbers

Limited-liability Company (LLC)

one or many members business liable not owner

4 Principals: Revenue Recognition

when to recognize earned revenue and gains 1. sell 2. provide a service

During the month of July, the Scolari Corporation received $60,000 in investments from owners, paid $25,000 cash for supplies, and purchased $10,000 of supplies on account. The ending balance in the accounts payable account for the month of July is ________.

$10,000 credit The question specifically asks about accounts payable. Any information that doesn't affect accounts payable is irrelevant to answering this question. The only transaction given for Scolari that affects accounts payable is the purchase of supplies on account ($10,000); accounts payable is a liability account that carries a normal credit balance.

During the month of July, the Scolari Corporation received $60,000 in investments from owners, paid $25,000 cash for supplies, and purchased $10,000 of supplies on account. The ending balance in the accounts payable account for the month of July is ________. $10,000 credit $25,000 debit $15,000 debit $10,000 debit

$10,000 credit The question specifically asks about accounts payable. Any information that doesn't affect accounts payable is irrelevant to answering this question. The only transaction given for Scolari that affects accounts payable is the purchase of supplies on account ($10,000); accounts payable is a liability account that carries a normal credit balance.

During the year, Patriot Partners had $245,000 in revenues, $120,000 in expenses, and $40,000 in declared dividends. What was Patriot's net income for the year? $125,000 $85,000 $205,000 $245,000

$125,000 Patriot had revenues that totaled $245,000 and expenses totaling $120,000, resulting in net income of $120,000, calculated as $245,000 - $120,000.

Ending assets for CompuHelp equal $650,000 and the beginning retained earnings account was $325,000. If net income during the period was $225,000 and dividends were $150,000, what were ending liabilities? $175,000 $250,000 $25,000 $400,000

$250,000

Net income for the period was $245,000. The retained earnings account had a beginning balance of $25,000. If the company paid dividends of $15,000 during the year, what is the ending balance in retained earnings? $255,000 $10,000 $25,000 $245,000 $230,000

$255,000

The accounts receivable account had a beginning balance of $100,000, cash received on account was $120,000, and sales on account were $50,000. The ending Accounts Receivable balance was ________.

$30,000 debit The first step in this problem is to recall that asset accounts such as accounts receivable carry a debit balance. Secondly, setting up a t-account would allow a visual of this scenario:

The accounts receivable account had a beginning balance of $200,000, cash received on account was $240,000, and sales on account were $100,000. The ending Accounts Receivable balance was ________.

$60,000 debit

^ Expenses >

, NI > , RE negative relationship

1. real (permanent accounts:

- always stay open - they are balance sheet accounts ( assets, liability, equity: CS + RE)

2. Nominal (temporary):

- closed at the end of an accounting period - income statements and dividends declared (revenues, expenses, dividends)

Fundamental Quality: Faithful Representation

- completeness: all necessary info is present - neutrality: info cannot be bias - free from error

3. Mixed accounts:

- have both real / nominal - adjusted at end of AP - EX: purchases account divided into inventory and COGS

net assets =

Assets - Liabilities (NET means something has been deducted)

Ending assets for Smith company equal $600,000 and the beginning retained earnings account was $300,000. If net income during the period was $250,000 and dividends were $50,000, what were ending liabilities? $500,000 $250,000 $175,000 $100,000

$100,000

Types of Business

Suppliers (supply raw materials) , Manufactures / Producers (transform into products), Distributors / Wholesalers (sell to retailers), Retailers (sell to customers), Service Firms (provides specific service, becoming more important to US economy)

Which sequence of actions correctly summarizes the accounting process?

Journalize transactions, post to the accounts, prepare a trial balance

Also called the statement of financial position

Balance Sheet

Expenses:

COGS, Cost of Sales, anything ending in expense

A business makes a cash payment of $12,000 to a creditor. Which of the following occurs?

Cash is credited for $12,000.

Contra Account:

EXS: Accumulated Depr., ADA, Sales Discount, Purchase Discount

Adjunct Account:

EXS: transportation-in, premium on BP or NR

Sue Mason owns a bagel shop as a sole proprietorship. Sue includes her personal home, car, and boat on the books of her business. Which of the following is violated? The stable-monetary-unit assumption Going-concern assumption Entity assumption Cost principle

Entity assumption

____________ represents the "insider claims" of business. Liabilities Divdends Equity Revenue

Equity

Which of the following statements regarding financial statements is NOT correct? Assets and liabilities are only reported on the balance sheet. The statement of cash flows reports cash flows from operating, investing, and capital activities. Revenues and expenses are only reported on the income statement. The ending balance of retained earnings is shown on both the statement of retained earnings and the balance sheet.

The statement of cash flows reports cash flows from operating, investing, and capital activities.

liquidity + solvency

ability to repay its short-term debt ability to repay its short-term debt PLUS interest

Current assets include __________. accounts receivable and equipment cash and land cash and accounts receivable prepaid expenses and building

cash and accounts receivable

organizations use _______ to list their accounts and their account numbers

chart of accounts

12 Steps of Accounting Cycle

events / transactions journalize events post to Ledger unadjusted TB end of period Adjusted journal entries Post to Ledger adjusted TB prepare financial statements closing entries post to Ledger post-closing TB

dividends are NOT...

expenses and they never affect net income direct deductions of RE

Revenues ___ stockholder's equity and RE expenses ___ stockholder's equity and RE

increase decrease

a _____ is a group of T accounts

ledger

4 Assumptions: Periodicity

life can be divided into artificial time periods justifies AJE / closing entries

what is the most important item in financial statements

net income

Non-business entities:

organized not for profit 1. Private Organizations (hospitals, universities, cooperatives, charities) 2. Government (Fed gov., state and local gov.)

EQUITY:

residual interest in assets after liabilities have been deducted 1. Capital 2. Owner's Equity 3. Stockholders' Equity insiders claim on business

Transactions:

sold inventory to customer purchased new delivery truck paid our employees for the last 2 weeks of work

Treasury Stock

stock amounts paid by the company to repurchase its own stock

Posting to the Ledger:

transfer amounts entered in the journal to the general ledger made of 3 accounts: 1. real (permanent accounts 2. Nominal (temporary) accounts 3. Mixed accounts

(SEC) The Securites and Exchange Commission has legal authority to establish GAAP but allows (FASB) Financial Accounting Standards Board to...

update and create rules

Ending assets for Smith company equal $600,000 and the beginning retained earnings account was $300,000. If net income during the period was $250,000 and dividends were $50,000, what were ending liabilities? $175,000 $500,000 $100,000 $250,000

$100,000 $600,000 = X + $500,000 $100,000 = X So, Liabilities are $100,000.

Which of the following would most likely need accounting information to make a decision?

All of these need accounting information to make a decision. Investors and Creditors Regulatory bodies Individuals

Ravel Co. purchased supplies with $200,000 of its cash. As a result, there was __________.

Ravel Co. purchased supplies with $200,000 of its cash. As a result, there was __________.

what is net income (profit)

excess of revenues over expenses

4 Financial Statements: Statement of Retained Earnings

"what you keep" net income explains how "net income" and "dividends" cause financial position to change for PERIOD OF TIME uses element : WITHDRAWAL OF OWNERS - dividends declared - sharing of profit with owners Beginning Retained earnings + net income or loss - dividends declared = ending retained earnings

During the month of July, the Scolari Corporation received $60,000 cash from investors, paid $25,000 cash for supplies, and purchased $10,000 of supplies on account. The ending balance in the Commons Stock account for the month of July is:

$60,000 credit

3 Types of Business activities:

1. Operating - daily things to generate revenue and expenses 2. Investing - acquiring long-term assets (land, equipment) 3. Financing - How is a company financing its operations? Debt or equity?

Enhancing qualities:

Comparability + Consistency, Verifiability, Timeliness, Understandability

Where do you find net sales?

Consolidated Statements of Income

Double Entry Accouting:

Debit (left) = Credit (Right)

Equity (CS + RE):

Dr / Cr - + NB

Liabilities:

Dr / Cr - + NB

Which of the following statements is correct? Financial and managerial accounting information are analyzed together by both internal and external users of accounting information. Financial accounting provides information for decision makers inside the entity, such as business managers. Financial accounting provides information for decision makers outside the entity. Managerial accounting provides information for decision makers outside the entity.

Financial accounting provides information for decision makers outside the entity.

How a Company performed during the year: Company's financial position:

Income Statement Balance Sheet

Which of the following statements is correct regarding correcting accounting errors? Mistakenly posting a $400 debit as a $40 debit while correctly recording the credit is a slide error that can be uncovered by dividing the trial balance difference by 9. Mistakenly recording a $4,500 accounts balance as $5,400 is a slide error that can be uncovered by dividing the trial balance difference by 9. Mistakenly recording a $4,500 accounts balance as $5,400 is a transposition error that can be uncovered by dividing the trial balance difference by 2. Mistakenly posting a $400 debit as a $40 debit while correctly recording the credit is a transposition error that can be uncovered by dividing the trial balance difference by 9.

Mistakenly posting a $400 debit as a $40 debit while correctly recording the credit is a slide error that can be uncovered by dividing the trial balance difference by 9.

Which of the following statements is correct regarding correcting accounting errors?

Mistakenly posting a $400 debit as a $40 debit while correctly recording the credit is a slide error that can be uncovered by dividing the trial balance difference by 9. Slide errors ($400 instead of $40 for example) and transposition errors ($4,500 instead of $5,400) can both be uncovered by dividing the trial balance difference by 9, then searching through the journal and ledger for this amount. Slide errors and transposition errors can not be uncovered by dividing the difference by 2.

Which of the following statements regarding business organizations is NOT correct? The business is liable for company debts in a Limited Liability Company. People in a company are called members. In a limited liability partnership, each partner is only liable for partnership debts to the extent of his or her investment in the partnership. The owner of a proprietorship is personally liable for all the business debts.

People in a company are called members.

Why is the income statement the first financial report prepared? The income statement is prepared first because its result, Net Income, is the most important financial measurement used by decision makers. The income statement is prepared first because accounts included on the income statement are all temporary accounts that must be closed before preparing the remaining financial statements. The income statement is prepared first because its result, Net Income, is needed as part of the other financial statements. There is no required order for preparing financial statements. The income statement can be completed at any point in the financial reporting process.

The income statement is prepared first because its result, Net Income, is needed as part of the other financial statements.

A company in its first year of business earned revenues of $100,000 but collected only $80,000 in cash from its customers. Which of the following is correct? The income statement will show revenues of $100,000, the balance sheet will show accounts receivable of $20,000, and the statement of cash flows will show cash collected from customers of $100,000. The income statement will show revenues of $80,000, the balance sheet will show accounts receivable of $100,000, and the statement of cash flows will show cash collected from customers of $80,000. The income statement will show revenues of $100,000, the balance sheet will show accounts receivable of $20,000, and the statement of cash flows will show cash collected from customers of $80,000. The income statement will show revenues of $80,000, the balance sheet will show accounts receivable of $100,000, and the statement of cash flows will show cash collected from customers of $80,000.

The income statement will show revenues of $100,000, the balance sheet will show accounts receivable of $20,000, and the statement of cash flows will show cash collected from customers of $80,000. The income statement will show revenues of $100,000, the balance sheet will show accounts receivable of $20,000, and the statement of cash flows will show cash collected from customers of $80,000. Recall, according to the revenue recognition principle, revenues are recorded when earned, not necessarily when cash is received. Therefore, revenues would be recorded for the entire $100,000 on the income statement. The uncollected portion of the revenues will remain in accounts receivable on the balance sheet, and only the portion of cash collected, $80,000, will appear on the statement of cash flows.

4 Principals: Full Disclosure

info must allow users to make informed decisions can be contained in notes/ supplementary sources

The owner of Shady Grove Company has the bookkeeper write company checks to pay for his personal items. This violates __________. the entity assumption the stable-monetary-unit assumption the matching principle the materiality concept

the entity assumption

paid-in capital

the amount stockholders have invested in the company - reps the value of a company above the par

All of the following represent business transactions except: cash dividends were paid. the owner paid her personal home mortgage. common stock was sold for cash. a car was given to the business in exchange for common stock.

the owner paid her personal home mortgage.

Barton Industries had the following asset accounts at year end: Cash $10,000 Accounts Receivable 2,500 Supplies 750 Equipment 12,000 Building 70,000 Land 112,000 What are Barton's total current assets? $25,250 $13,250 $10,750 $83,250

$13,250

Net income for the period was $200,000. The retained earnings account had a beginning balance of $25,000. If the company paid dividends of $20,000 during the year, what is the ending balance in retained earnings? $25,000 $230,000 $155,000 $205,000 $245,000

$205,000

During the month of July, the Scolari Corporation received $60,000 cash from investors, paid $25,000 cash for supplies, and purchased $10,000 of supplies on account. The ending balance in the Commons Stock account for the month of July is: $60,000 credit $60,000 debit $35,000 debit $35,000 credit

$60,000 credit The only transaction affecting common stock is the investments from investors ($60,000); equity accounts carry a normal credit balance.

Elements DURING a period of time

1. investments by owners - increases net assets by owners 2. distributions to owners - decrease in net assets to owners dividends 3. Comprehensive income -change in net assets of an entity (usually net income + other stuff) 4. Revenues: increases in net assets from ongoing major/central operations 5. Expenses: decreases in net assets from ongoing major/central operations 6. Gains: increases net assets from peripheral or incidental operations 7. Losses: decreases net assets from peripheral or incidental operations ^ all part of income statements

Internal Users

CEO/ CFO managers Daily operating decisions / long-range planing Communicated (no rules)

Liquid assets that can be converted to cash

Cash Equivalents EX: certificate of deposit , U.S. treasury bill

** How are Financial Statements linked Together?

Income Statement Revenue - COGS = Gross Profit - Operating expenses +/- Gain or Loss = INC B-4 Tax - Inc Tax Exp = *NET INCOME > Beg RE Retained Earnings * Beg. RE (Jan 1) + Net Income - Dividends Declared = End RE (Dec 31) > RE Balance Sheet Assets = Liability + Equity Equity = CS + * RE Cash Flow Statement Operations + Investing + Financing = Change in Cash + Beg. Cash (Jan. 1) = End Cash (Dec 31)

Which of the following events increases the equity in a business? Sale of inventory Purchase of inventory Payment of interest on a loanInvestments from stockholders Payment of rent Investments from stockholders

Investments from stockholders

External Users (Financial Accounting)

Investors, Creditors, Suppliers, Government Communicated by Financial Statements (ISBS) Makes decisions to invest

Accounting is the....

Language of Business

JayBird Jewelers reported the following in its statement of cash flows: Net cash provided by operating activities $147,000 Net cash used by investing activities 122,000 Net cash provided by financing activities 15,000 What is the total net increase or decrease in cash reported by JayBird? Net increase of $254,000 Net increase of $284,000 Net increase of $40,000 Net decrease of $10,000

Net increase of $40,000

Inflation has been about​ 2.5% for some time. VillageVillage Realtors is considering measuring its land values in​ inflation-adjusted amounts. You get an especially good buy on a laptop paying only $ 300 when it normally costs $ 800. What is your accounting value for this laptop Burger King sold a store location to McDonalds. How can Burger King determine the sale price of the storelong dash—by a professional​ appraisal, Burger King original​ cost, or the amount actually received from the​ sale? General Motors wants to determine which division of the company—Chevrolet or Cadillac —is more profitable.

Stable-monetary-unit assumption Historical cost principle Historical cost principle Entity Assumption

Which financial statement shows cash collected from customers? Statement of retained earnings Two or more of the above Statement of cash flows Income statement Balance sheet

Statement of cash flows

Business Ethics Leadership Alliance (BELA) holds four values vital to all their practices. Which of the following is one of the core value of BELA?

Transparency Accountability Legal compliance

1 Constraint: Cost Constraint

benefit should exceed cost or providing it

Short-term liabilities

beyond 30-60 days

Long-term Debit Liabilities

beyond a year

Assets in order of liquidity:

cash, short-term investments, accounts receivable, inventory, long term assets

4 Principals: Measurement

how we value assets and liabilities 2 Bases: Historial Cost - original "cost" of asset or liability - considered very verifiable - HC FOR ASSET: cash + expenditures to get asset ready for use - HC FOR LIABILITY: equivalent price established by exchange transaction 2 Bases: Fair Value - historical cost = fair value (market value)

During the current year, a corporation earned income of $30,000, sold common stock for cash of $50,000, paid dividends of $25,000, and paid off debt of $5,000. The retained earnings account ________. increased $5,000 decreased $5,000 increased $30,000 stayed the same

increased $5,000 Recall that retained earnings is computed on the statement of retained earnings: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings In this case, we are not given beginning retained earnings but we are given enough information to determine the change in retained earnings (net income of $30,000 - dividends of $25,000). Therefore, the change in retained earnings is an increase of $5,000.

4 assumptions: Monetary unit

money is the common denominator proper basis for money measurement stable, regardless of inflation or deflation

corporations

must sign charter limited liability for owners, continuity for life, ease in transfer of ownership, double taxation

Revenues:

sales revenue, service revenue, net sales, fees earned, rent revenue, interest income, dividend revenue

4 Financial Statements: Statement of Cash Flows

show sources of firm's cash over PERIOD OF TIME Where did company get cash and what did they spend?

4 Financial Statements: Balance Sheet

show the position of a company at a POINT OF TIME (snapshot) shows the accounting equation is in balance 1. Assets 2. Liability 3. Equity

4 Financial Statements: Income Statement

shows result for a PERIOD OF TIME 4. Revenues: increases in net assets from ongoing major/central operations 5. Expenses: decreases in net assets from ongoing major/central operations 6. Gains: increases net assets from peripheral or incidental operations 7. Losses: decreases net assets from peripheral or incidental operations