Accounting II Final
Understand the transaction analysis model, its purpose and the implication of debits and credits for each account
"T-account" is merely a shorthand term for the entire ledger account. The T-account has a left side, called the debit side, and a right side, called the credit side. Assets- Debit (+)/ Credit (-) Liabilities- Debit (-)/ Credit (+) Stockholders' Equity: Contributed Capital- Debit (-)/ Credit (+) Retained Earning- Debit (-)/ Credit (+)
Know which accounts are classified as current and noncurrent assets and current and noncurrent liabilities
Current Assets- Cash, AR, Supplies, Prepaid expenses, and Other current assets Noncurrent Assets- Investments, Property and equipment (net), Notes Receivable, Intangibles, Other assets Current Liabilities- Accounts Payable, Accrued expenses payable Noncurrent Liabilities- Unearned franchise fees, NP, Other ling-term liabilities
Know the income statement equation
Gross profit= sales - cost of goods sold Net income= gross profit - expenses.
Notes Payable would be classified as a _____.
Non-current Liability.
As discussed in the lecture, ______ are economic resources with probable future benefits.
None of the above. (Stockholders' Equity, Liabilities, Gains, and Losses are not economic resources with probable future benefits.)
Know the definition of the revenue principle and its implications
Recognize revenues when delivery has occurred or services have been rendered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured. If cash is received before the company delivers goods or services, the liability account UNEARNED REVENUE is recorded. When the company delivers the goods or services UNEARNED REVENUE is reduced and REVENUE is recorded. When cash is received on the date the revenue is earned, the following entry is made: company delivers and Cash received. If cash is received after the company delivers goods or services, an asset ACCOUNTS RECEIVABLE is recorded. When the cash is received is the ACCOUNTS RECEIVABLE is reduced.
Know the qualitative characteristics of financial reporting, which are the primary and which are the secondary characteristics, and what is meant by each characteristic
Relevancy, Reliability, Comparability, and Consistency. Primary Characteristics- Relevancy: predictive value, feedback value, and timeliness; Reliability: verifiability, representational faithfulness, and neutrality. Secondary Characteristics- Comparability: across companies; Consistency: over time.
Understand the purpose of the Accounting System
The accounting system collects financial data and produces reports used by both internal decision makers and external decision makers
Understand the four different financial statements: balance sheet What is its purpose? Equation? The accounts it is associated with? The interconnected relationship with the others?
The balance sheet shows an entity's economic resources and claims against those resources. Assets = Liabilities + Owner's Equity It is associated with Assets (Cash, Short-Term Investment, Accounts Receivable, Notes Receivable, Inventory (to be sold), Supplies, Prepaid Expenses, Long-Term Investments, Equipment, Buildings, Land, Intangibles), Liabilities (Accounts Payable, Accrued Expenses, Notes Payable, Taxes Payable, Unearned revenue, Bonds Payable), and Owner's Equity (Contributed Capital, Retained Earnings)
Understand the four different financial statements: cash flow statement What is its purpose? Equation? The accounts it is associated with? The interconnected relationship with the others?
The cash flow statement reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing. For the equation, you just add (or subtract) operating, investing, and financing activities and then subtract it from beginning cash to get the ending cash. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings; Ending retained earnings from the statement of retained earnings is one of the two components of stockholders' equity on the balance sheet; The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the balance sheet
Know the definition of the matching principle and its implications
The matching principle is when resources are consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid. If cash is paid before the company receives goods or services, an asset account, PREPAID EXPENSE, is recorded. When the expense is incurred PREPAID EXPENSE is reduced and an EXPENSE is recorded. When cash is paid on the date the expense is incurred, the following entry is made: expense incurred AND cash paid. If cash is paid after the company receives goods or services, a liability PAYABLE is recorded. When cash is paid the PAYABLE is reduced.
Understand the difference between financial and managerial accounting reports and which are used for internal versus external decision making
The objective of financial reporting is to provide useful economic data to external users for decision making and for assessing future cash flows of the business; Managerial accounting reports are for internal use to assist managers with day-to-day operations.
Understand the operating cycle and the implications of timing, recognition and measurement
The operating cycle begins with the purchase or manufacture of products or supplies on credit, then payment to suppliers, then the delivery of products or providing service to customers on credit, and then ends with receiving of payment from customers. The time period: the long life of a company can be reported over a series of shorter time periods. Recognition Issues: When should the effects of operating activities be recognized (recorded)? Measurement Issues: What amounts should be recognized?
Understand the purpose of financial statement adjustments
The purpose of adjustments is that because transactions occur over time, ADJUSTMENTS are required at the end of each fiscal period to get the revenues and expenses into the "right" period.
Understand what the importance of Financial Notes that should always accompany financial statements
They provide the reader with supplemental information about the financial condition and results of operations of the company
Know the objective of financial reporting
To provide useful economic information to external users for decision making and for assessing future cash flows.
Know the order of preparation of financial statements and why it is important to follow this order
1. Income Statement 2. Statement of Stockholders' Equity 3. Balance Sheet 4. Statement of Cash Flows
Understand the order in which financial statements are typically organized and the purpose of the order
1. Income statement 2. statement of stockholders' Equity 3. Balance Sheet 4. Statement of Cash Flows You need the net income from the income statement for the statement of stockholders' equity. You need the ending retained earnings for your retained earnings for your balance sheet. You need the assets from the balance sheet for the change in cash on your statement of cash flows.
Be able to explain what the three main sections of the Cash Flow Statement are and what each section represents
1. Operating activities (cash inflows and outflows directly related to earnings from normal operations) 2. Investing activities (cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies) 3. Financing activities (cash inflows and outflows related to the external sources of financing (owners and creditors) for the enterprise)
Know what the chart of accounts is and understand the purpose and key elements
A chart of accounts lists all account titles and their unique numbers. Includes all accounts involved with the four financial statements
Know the definitions of assets, liabilities and owners' (stockholders') equity
Assests- Economic resources with probable future benefits owned or controlled by the entity. Measured by the historical cost principle. Liabilities- Probable debts or obligations (claims to a company's resources) that result from a company's past transactions and will be paid with assets or services. Entities that a company owes money to are called creditors. Stockholder's Equity- The financing provided by the owners and by business operations. Often referred to as contributed capital.
Understand the accounting equation and know which "side" of the equation refers to a company's economic resources and which "side" of the equation refers to the sources for financing those economic resources
Assets = Liabilities + Stockholder's Equity, Assets refers to a company's economic resources and Liabilities + Stockholder's Equity refers to the sources for financing those economic resources
Know in which section of the balance sheet the following accounts are listed: Cash, Inventory, Accounts Receivable, Prepaid Expenses, Supplies, Fixed Assets, Accounts Payable, Unearned Revenue, Notes Payable, Contributed Capital, Retained Earnings
Assets: Cash, Inventory, Accounts Receivable, Prepaid Expenses, Supplies, Fixed Assets Liabilities: Accounts Payable, Unearned Revenue, Notes Payable Stockholder's Equity: Contributed Capital and Retained Earnings
Understand the importance of independent auditors
Auditors express an opinion as to the fairness of the financial statements. Independent auditors have responsibilities that extend to the general public. The PCAOB issues detailed auditing standards that auditors must follow.
Know different types of expenses (COGS, Payroll, Rent, Etc.)
Costs of Goods sold- how much it costs to produce your good Payroll- the amount you pay yourself and other employees Rent- the amount you pay each month to your landlord to keep your business space Advertising- any money you spend on advertising (flyers, magazine inserts etc.) General and Administrative expenses- the costs of paper clips or whatever Depreciation- non-cash expense
You're notified that a business owes your company $4,000 for equipment that was purchased the prior month has declared bankruptcy. You decided to write off the entire amount owed. Record the transaction.
Debit Bad Debt Expense $4,000 and credit Accounts Receivable $4,000.
Your company completes a sale of $4,000 to a customer. $1,500 of the transaction is received as a cash payment and the remainder will be paid to your company in 30 days. Record the transaction.
Debit Cash $1,500, debit Accounts Receivable $2,500 and credit Sales $4,000.
Your company makes a journal adjustment to account for $110 in depreciation on your Fixed Assets. How do you record the transaction?
Debit Depreciation Expense by $110 and credit Fixed Assets by $110.
You pay Christmas Bonuses to all of your employees totaling $4,500. What would be the best way to record the transaction.
Debit Employee Bonuses Expense $4,500 and cred Cash $4,500.
Your company purchases $2,690 in parts that will be used in the manufacture of equipment that will be sold. The purchase is made with cash. Record the transaction.
Debit Inventory by $2,690 and credit Cash by $2,690.
Understand the difference between deferred revenues & expenses and accrued revenues & expenses and the reason these typically require adjustments
Deferred revenues are previously recorded liabilities that were created when cash was received in advance, and that must be reduced for the amount of revenue actually earned during the period. Deferred expenses are previously recorded assets (Prepaid Rent, Supplies, and Equipment) that were created when cash was paid in advance and that must be reduced for the amount of expense actually incurred during the period through use of the asset. Accrued Revenues are revenues that are earned but not recorded because the cash will be received after the services were performed or goods were delivered. Accrued Expenses are expenses that are incurred but not recorded because cash will be paid after the goods or services were used.
Understand the key elements of the income statement and accounts that are associated with each section
Elements of the Income Statement: Revenues, Expenses, Gains, Losses Accounts associated: Revenues- Assets, Liabilities Expenses- Assets, Liabilities Gains- Assets, Liabilities Losses- Assets, Liabilities
Understand the principle of transaction analysis
Every transaction affects at least two accounts (duality of effects). The accounting equation must remain in balance after each transaction.
Know how to forecast expense numbers by using a historical "percentage of sales" method as discussed in class (Expense/Total Sales = Expense as a % of sales, then if you take that percentage and multiply it by future projected sales, you will get a projected expense figure)
Expense/Total Sales = Expense as a % of sales Expense as a % of sale * Future projected sales= Projected expense figure
True or False: As discussed in lecture, in most cases, the term "credit" means that the particular account will increase and the term "debit" means that the particular account will decrease.
False.
T/F: Interest expense is reported on the income statement as an operating expense.
False. Interest expense results from the cost of borrowing money. Borrowing money is a financing activity; thus the expenses resulting from this are not classified as operating expenses.
True or False: Revenue is recognized within the income statement during the period in which cash is collected.
False. Revenue is recognized within the income statement during the period in which revenue is earned.
True or False: Using cash to purchase office supplies which will be consumed later results in an increase in expenses and a decrease in assets as of the time of purchase.
False. Total assets remain unchanged from this transaction and no expense is recorded. The supplies are to be used later, thus the asset account of supplies increases. An expense is recorded as the supplies are consumed.
Understand GAAP, what it stands for, the purpose of it and its origins
Generally Accepted Accounting Principles, Our accounting system has a long and distinguished history. An Italian monk named Luca Pacioli, published the first elements of double-entry bookkeeping in 1494. Prior to 1933, the management teams of most companies were largely free to choose their own financial reporting practices.
When it comes to preparing financial statements, understand who the "The Players" are and what their differences are
Investors, Creditors, and Managers. Managers are the internal decision makers while Investors and Creditors make the external decisions.
Understand how management might utilize financial statements versus external parties
Marketing managers and credit managers use customers' financial statements to decide whether to extend credit. Purchasing managers use suppliers' financial statements to decide whether suppliers have the resources to meet the demand for products. Employees' union and human resource managers use the company's financial statements as a basis for contract negotiations over pay rates.
Understand the nature of business transactions
Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return.
Understand which accounts "carry forward" to the next month's financial statements versus the ones that do not
Net Income, Contributed Capital, Retained Earnings, Stockholders' Equity, and Accounts Payable or Accounts receivable not sent/received for that month all carry forward to the next month.
Understand the types of "inflows" and "outflows" of cash for each section of the balance sheet
Operating: Collecting AR (-Accounts Receivable (A)), paying AP (-Accounts Payable(L)), Prepay rent (+Prepaid Rent (A)), Pay interest (-Retained Earnings (SE)), Sale for cash (+Retained Earnings (SE)) Investing: Purchase equipment for cash (+Equipment (A)), Sell investment securities for cash (-Investments (A)) Financing: Pay back debt to bank (-Notes Payable-Bank (L)), Issue stock for cash (+Common stock and Paid-In-Capital (SE))
Understand how to perform a journal entry
Reference, Account titles, the amounts that were debited and credited on each account.
An increase in assets or settlements of liabilities from ongoing operations is otherwise known as ______.
Revenue.
Understand the difference between revenue, gains, expenses and losses
Revenues- increases in assets or settlement of liabilities from ongoing operations Expenses- decreases in assets or increases in liabilities from ongoing operations. Gains- increases in assets or settlement of liabilities from peripheral transactions Losses- decreases in assets or increases in liabilities from peripheral transactions
Understand the accounting process
Start of New Period --> During the Period (Analyze transactions; Record journal entries in the general journal; Post amounts to the general ledger) --> At the End of the Period (Prepare a trial balance to determine if debits equal credits; Adjust revenues and expenses and related balance sheet accounts (record in journal and post to ledger); Prepare a complete set of financial statements and disseminate it to users; Close revenues, gains, expenses, and losses to Retained Earnings (record in journal and post to ledger) --> repeat
Know the two steps involved in transaction analysis (identify and classify accounts and effects, ensure the accounting equation remains balanced) and the processes involved in each
Step 1: Identify and classify accounts and effects (Identify the accounts (by title) affected and make sure at least two accounts change. Classify them by type of account. Was each account an asset (A), a liability (L), or a stockholders' equity (SE)? Determine the direction of the effect. Did the account increase [+] or decrease [-]?) Step 2: Verify account equation is in balance. (Verify that the accounting equation (A = L + SE) remains in balance.)
Understand the four different financial statements: income statement What is its purpose? Equation? The accounts it is associated with? The interconnected relationship with the others?
The income statement reports the revenues less the expenses of the accounting period. Revenue - Expenses = Net Income. It is associated with Revenue (Sales Revenue, Fee Revenue, Interest Revenue, Rent Revenue) and Expenses (Cost of Goods Sold, Wages Expense, Rent Expense, Interest Expense, Depreciation Expense, Advertising Expense, Insurance Expense, Repair Expense, Income Tax Expense).
Know the purpose of the double-entry bookkeeping method and be able to perform sample entries
The purpose of the double-entry bookkeeping method is to account for every transaction and to know which accounts were affected.
Understand the four different financial statements: statement of retained earnings What is its purpose? Equation? The accounts it is associated with? The interconnected relationship with the others?
The statement of retained earnings reports the way that net income and distribution of dividends affected the financial position of the company during the accounting period. Beginning Retained Earnings + Net Income + Dividends = Ending Retained Earnings. The accounts include Beginning Retained Earnings, Net Income, Dividends, and Ending Retained Earnings.
Know what the trial balance statement is used for, how it is formatted, and what key components are included.
The unadjusted trial balance is a listing of individual accounts, usually in financial statement order. Ending debit or credit balances are listed in two separate columns. Total debit account balances should equal total credit account balances.
True or False: A business entity's accounting system creates financial accounting reports which are provided to external decision makers.
True. The accounting system collects financial data and produces reports used by both internal decision makers and external decision makers.
T/F: Expenses are decreases in assets or increases in liabilities incurred in order to generate revenues.
True. Expenses are decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period.
Know the definitions of the accrual and cash methods of accounting and understand the differences of both
accrual method of accounting is assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or received. Cash accounting is when you record the transaction when the money leaves your account, not when you perform the transaction.
Understand how to use a t-account
debit-left, credit-right.
