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