ACCOUNTING EXAM ONE

Identify and define the different sections of a classified balance sheet.

A classified balance sheet groups together similar assets and similar liabilities, using a number of standard classifications and sections. This is useful because items within a group have similar economic characteristics. A classified balance sheet generally contains the standard classifications listed in Illustration 2-1.

Prepare adjusting journal entries.

Accrued revenues Revenues for services performed but not yet received in cash or recorded. Accrued expenses Expenses incurred but not yet paid in cash or recorded.

Calculate the retained earnings balance after closing entries.

Close the revenue accounts to Income Summary. Close the expense accounts to Income Summary. Close Income Summary to Retained Earnings. Close Dividends to Retained Earnings.

Define and identify a current asset(s).

Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer.

Define depreciation.

Depreciation is the process of allocating the cost of an asset to expense over its useful life.

Calculate earnings per share.

Earnings per share (EPS) measures the net income earned on each share of common stock. net income- preferred dividends/ weighted average shares outstanding

Identify the purpose of closing entries.

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

Define free cash flow.

Free cash flow describes the net cash provided by operating activities after adjusting for capital expenditures and dividends paid.Define free cash flow.

Define and be able to calculate components of the retained earning statement

If Sierra is profitable, at the end of each period it must decide what portion of profits to pay to shareholders in dividends. In theory, it could pay all of its current-period profits, but few companies do this. Why? Because they want to retain part of the profits to allow for further expansion. High-growth companies, such as Google and Facebook, often pay no dividends. Retained earnings is the net income retained in the corporation.

Define and Identify Assets.

Resources owned by a business are called assets. Examples of assets are.... Cash, Accounts Receivable, property, plant, and equipment, Prepaid Expenses, Inventory, Supplies, Short-term Investments

Identify the characteristics of the double-entry system.

The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase.

Prepare or analyze journal entries

Transactions are initially recorded in chronological order in a journal before they are transferred to the accounts. For each transaction, the journal shows the debit and credit effects on specific accounts. (In a computerized system, journals are kept as files, and accounts are recorded in computer databases.) Companies may use various kinds of journals, but every company has at least the most basic form of journal, a general journal. The journal makes three significant contributions to the recording process: 1.It discloses in one place the complete effect of a transaction. 2.It provides a chronological record of transactions. 3.It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

Identify and Define operating activities.

These are the company's core business activities, such as manufacturing, distributing, marketing and selling a product or service. Operating activities should generally provide the majority of a company's cash flow and largely determine whether a company is profitable. Examples of operating activities are... Expenses Revenues Supplies

Calculate net income using the accrual basis of accounting.

Under the accrual basis of accounting, expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid.

Analyze the effect of business transactions on the accounting equation.

Transaction analysis is the process of identifying the specific effects of economic events on the accounting equation. The accounting equation must always balance. Each transaction has a dual (double-sided) effect on the equation. For example, if an individual asset is increased, there must be a corresponding: •Decrease in another asset, or •Increase in a specific liability, or •Increase in stockholders' equity.

Identify internal and external users of financial information.? (Chapter One)

(Internal Users) Internal users of accounting information are managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors, and company officers. In running a business, managers must answer many important questions, as shown in the Illustration (External Users)--There are several types of external users of accounting information. Investors (owners) use accounting information to make decisions to buy, hold, or sell stock. Creditors such as suppliers and bankers use accounting information to evaluate the risks of selling on credit or lending money.

Define Generally Accepted Accounting Principles (GAAP) and the characteristic "relevant".

A set of accounting standards that have substantial authoritative support and which guide accounting professionals. bodies, in consultation with the accounting profession and the business community, determine these accounting standards. The Securities and Exchange Commission (SEC) is the agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies. The Financial Accounting Standards Board (FASB) is the primary accounting standard-setting body in the United States. The International Accounting Standards Board (IASB) issues standards called International Financial Reporting Standards (IFRS), which have been adopted by many countries outside of the United States. Today, the FASB and IASB are working closely together to minimize the differences in their standards

Identify the purpose of a trial balance.

A trial balance lists accounts and their balances at a given time. A company usually prepares a trial balance at the end of an accounting period. The accounts are listed in the order in which they appear in the ledger. Debit balances are listed in the left column and credit balances in the right column. The totals of the two columns must be equal. The trial balance proves the mathematical equality of debits and credits after posting. Under the double-entry system, this equality occurs when the sum of the debit account balances equals the sum of the credit account balances. A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at MF Global discussed in the Feature Story. In addition, a trial balance is useful in the preparation of financial statements. These are the procedures for preparing a trial balance: 1.List the account titles and their balances. 2.Total the debit column and total the credit column. 3.Verify the equality of the two columns.

Identify why adjusting entries are needed and analyze the impact of not making adjusting entries.

Adjusting entries are necessary because the trial balance—the first pulling together of the transaction data—may not contain up-to-date and complete data. This is true for several reasons: 1. Some events are not recorded daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees. 2. Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples are charges related to the use of buildings and equipment, rent, and insurance. 3. Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period

Define and Identify liabilities.

Amounts owed to creditors—in the form of debt and other obligations—are called liabilities. Examples of liabilities are... Notes Payable. Accounts Payable. Salaries Payable. Wages Payable. Interest Payable. Other Accrued Expenses Payable. Income Taxes Payable

Identify the characteristics of the adjusted trial balance.

An adjusted trial balance is a listing of all the account titles and balances contained in the general ledger after the adjusting entries for an accounting period have been posted to the accounts. The adjusted trial balance is an internal document and is not a financial statement.

Identify the purpose of the auditor's report.

An auditor's report is prepared by an independent outside auditor. It states the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles. An auditor is an accounting professional who conducts an independent examination of a company's financial statements. Only accountants who meet certain criteria and thereby attain the designation certified public accountant (CPA) may perform audits. If the auditor is satisfied that the financial statements provide a fair representation of the company's financial position and results of operations in accordance with generally accepted accounting principles, then the auditor expresses an unqualified opinion. If the auditor expresses anything other than an unqualified opinion, then readers should only use the financial statements with caution. That is, without an unqualified opinion, we cannot have complete confidence that the financial statements give an accurate picture of the company's financial health.

Apply debit/credit rules and normal account balances.

In its simplest form, an account consists of three parts: (1) the title of the account, (2) a left or debit side, and (3) a right or credit side. Because the alignment of these parts of an account resembles the letter T, it is referred to as a T-account The term debit indicates the left side of an account, and credit indicates the right side. They are commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as is commonly thought. We use the terms debit and credit repeatedly in the recording process to describe where entries are made in accounts. For example, the act of entering an amount on the left side of an account is called debiting the account. Making an entry on the right side is crediting the account. .

Identify and Define investing activities.

Investing activities involve the purchase of the resources a company needs in order to operate. A growing company purchases many resources, such as computers, delivery trucks, furniture, and buildings. Examples of operating activities are... Investing

Identify and Define financing activities.

It takes money to make money. The two primary sources of outside funds for corporations are borrowing money (debt financing) and issuing (selling) shares of stock in exchange for cash (equity financing). Examples of operating activities are... Bonds Payable Notes Payable Accounts Payable

Calculate the current ratio and understand its purpose.

Liquidity ratios measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. One liquidity ratio is the current ratio, computed as current assets divided by current liabilities. The current ratio is a more dependable indicator of liquidity than working capital.What does the ratio actually mean? Best Buy's 2014 current ratio of 1.41:1 means that for every dollar of current liabilities, Best Buy has $1.41 of current assets. Best Buy's current ratio increased in 2014. When compared to the industry average of .88:1, Best Buy's liquidity seems strong. It is lower than hhgregg's but not significantly so. Current Ratio= Total Current Assets/Current Labilities

Identify the advantages of the sole proprietorship, partnership, and corporate form of business organizations. (Chapter One)

Sole proprietorship- A business owned by one person is a sole proprietorship. It is simple to set up and gives you control over the business. Small owner-operated businesses such as barber shops, law offices, and auto repair shops are often sole proprietorships, as are farms and small retail stores. Partnership- A business owned by two or more persons associated as partners is a partnership. Partnerships often are formed because one individual does not have enough economic resources to initiate or expand the business. Sometimes partners bring unique skills or resources to the partnership. You and your partners should formalize your duties and contributions in a written partnership agreement. Retail and service-type businesses, including professional practices (lawyers, doctors, architects, and certified public accountants), often organize as partnerships. Corporation- A business organized as a separate legal entity owned by stockholders is a corporation. Investors in a corporation receive shares of stock to indicate their ownership claim. Buying stock in a corporation is often more attractive than investing in a partnership because shares of stock are easy to sell (transfer ownership). Selling a proprietorship or partnership interest is much more involved. Also, individuals can become stockholders by investing relatively small amounts of money. Therefore, it is easier for corporations to raise funds. Successful corporations often have thousands of stockholders, and their stock is traded on organized stock exchanges like the New York Stock Exchange. Other factors to consider in deciding which organizational form to choose are taxes and legal liability. If you choose a sole proprietorship or partnership, you generally receive more favorable tax treatment than a corporation.

What is thee Sarbanes-Oxley Act of 2002?

The Sarbanes-Oxley Act of 2002 (SOX) is an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud.

Define and be able to calculate components of the balance sheet

The balance sheet reports assets and claims to assets at a specific point in time. Claims to assets are subdivided into two categories: claims of creditors and claims of owners. As noted earlier, claims of creditors are called liabilities. The owners' claim to assets is called stockholders' equity.

Interpret a high debt to assets ratio.

The debt to assets ratio is one measure of solvency. It is calculated by dividing total liabilities (both current and long-term) by total assets. It measures the percentage of total financing provided by creditors rather than stockholders. Debt financing is more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of debt financing, the riskier the company. The higher the percentage of total liabilities (debt) to total assets, the greater the risk that the company may be unable to pay its debts as they come due. Illustration 2-15 shows the debt to assets ratios for Best Buy and hhgregg, along with the industry average. Total liabilities/ Total assets= X%

Define and be able to calculate components of the income statement.

The income statement reports a company's revenues and expenses and resulting net income or loss for a period of time.Why are financial statement users interested in net income? Investors are interested in a company's past net income because it provides useful information for predicting future net income. Investors buy and sell stock based on their beliefs about a company's future performance. If investors believe that Sierra will be successful in the future and that this will result in a higher stock price, they will buy its stock. Creditors also use the income statement to predict future earnings. When a bank loans money to a company, it believes that it will be repaid in the future. If it didn't think it would be repaid, it wouldn't loan the money. Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses.

Apply the revenue recognition principle.

The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied. For example, If I perform services for you in 2016, but did not get paid until 2017, I need to record reanvues for 2016 not 2017.