ACG 2021 Exam 1 Review (Chapters 1-3) Spring 2016

The Company used $900 of supplies throughout the year. Record the adjusting entry.

***DOESN'T INCLUDE CASH*** Supplies Expense: Debit for $900 Supplies: Credit for $900 A = L + S.E. -900 = 0 + -900 Balanced.

A company purchases a building for $220,000 on January 1st, 2013. The building has an expected useful life of 10 years and will be depreciated with the straight-line method.

- 01/01/13: Building: Debit for $220,000 Cash: Credit for $220,000 - 12/31/13 Adjusting Entry: Depreciation = Asset Cost / Asset Life = 220,000 / 10 years = $22,000 a year Depreciation Expense: Debit for $22,000 Accumulated Depreciation: Credit for $22,000

A company receives $12,000 in advance on 06/01/2013 from a customer for services to be performed equally throughout the next year.

- 06/01/2013: Cash: Debit for $12,000 (asset) Unearned Revenue: Credit for $12,000 (liability) - 12/31/2013 Adjusting Entry: Unearned Revenue: Debit for $7,000 Service Revenue: Credit for $7,000 $12,000 / 12 months = $1,000 per month x 7 months passed = $7,000 earned

Example for Adjusting Journal Entries: A company pays $6,000 to cover the subsequent 12 months' rent on 07/01/2013.

- 07/01/2013 (regular journal entry): Prepaid Rent: Debit for $6,000 Cash: credit for $6,000 - Prepare Adjusting Entry 12/31/13 (adjusting journal entry): $6000 in prepaid rent account (P.R.) divided by 12 months = $500 per month X 6 months passed = $3,000 used. Rent Expense: Debit for $3,000 Prepaid Rent: Credit for $3,000

A company performs services worth $1,100 on 09/01/2014 (on account). The customer pays in full on 09/31/2014.

- 09/01/2014: Accounts Receivable: Debit for $1,100 Service Revenue: Credit for $1,100 A = L + S.E. 1,100 = 0 + 1,100 Balanced. - 09/31/2014: Cash (increase): Debit $1,100 Accounts Receivable (A.R.) (decrease): Credit for $1,100 Lost rights to receive money, since we already received the money. A = L + S.E. -$1,100 = 0 + -$1,100

On 11/1/12, a company receives a loan from the bank for $60,000. The loan (principal and all of the interest) is due in 6 months and carries an interest rate of 8%.

- 11/01/12: Cash: Debit for $60,000 Notes Payable: Credit for $60,000. - 12/31/12 Adjusting Entry: Principal x Rate x time (*fraction of year*) * denominator is ALWAYS 12 (1/12, 2/12, 3/12,...) $60,000 x 8% x (2/12) = $800 Interest Expense: Debit for $800 Interest Payable: Credit for $800

What are the different types of ASSETS?

- Cash (liquid asset) - Accounts Receivable: amounts the company expects to receive from customers. - Inventory: items for sale by company. - Property, Plant and Equipment: Land, Buildings, Computers, Store Fixtures and Manufacturing Equipment. - Prepaid Expenses: prepayments for items such as rents and insurance that will be utilized at a future date.

What are the two functions of financial accounting?

- measure business activities of a company - communicate those measurements to external parties for decision-making purposes.

Order of Financial Statements:

1. Income Statement 2. Statement of Stockholder's Equity 3. Balance Sheet 4. Statement of Cash Flows

Statement of Cash Flows:

1. Operating Cash Flows, 2. Investing Cash Flows, and 3. Financing Cash Flows. * need to know ending balance from balance sheet before preparing the statement of cash flows*

What constitutes an Expense Account?

1. Rent 2. Wages 3. Insurance 4. Furniture/Fixtures 5. Utilities 6. Supplies 7. Marketing

What constitutes a Revenue Account?

1. sales of products 2. warranty 3. contracts 4. repairs

If a company has 1,000 shares and one shareholder possesses 100 of those shares, what percentage of the shares does the shareholder actually own of the company's assets?

10%

Journal entry example: Purchased Land for $3,000 cash.

Accounts Involved: - Land Account - Cash Account Land (increases); Debit account for $3,000 Cash (decreases); Credit account $3,000 Assets increases $3000, Assets decreased $3000, therefore the net effect is 0. Nothing happened to assets, liabilities, and stockholders' equity. On the balance sheet: A = L + S.E. 0 = 0 + 0 Balanced.

Journal Entry Example: Receive $750 for consulting services rendered.

Accounts Involved: - Cash - Service Revenue Cash (increases): Debit for $750 Service Revenue (increases): Credit for $750 Cash is an asset Services Revenues: Revenue account On the Balance Sheet: A = L + S.E. 750 = 0 + 750 Balanced

What are the different types of LIABILITIES?

Accounts Payable: amounts owed to vendors for the purchase of materials or services (short term). Notes Payable: amounts due to another party for loaning money to the company (long term). Receivable: the firm will receive dollars; a resource to the firm that can be utilized in the future (always an asset). Payable: the firm owes money to creditors, such as suppliers or the bank (always a liability). Unearned Revenue: advanced payment of cash received by the company for services or products to be furnished in the future. **Revenue hasn't been earned!**

Journal Entry Example: Perform services worth $650 on account; payment is due in 2 weeks.

Accounts Receivable (increases) = assets Service Revenue (increases): revenue account Accounts Receivable: Debit for $650 Service Revenue: Credit for $650 A = L + S.E. 650 = 0 + 650 Balanced

What account methods does GAAP use?

Accrual-Basis

Unpaid Salaries at the end of the year are $3,200:

Adjusting Entry (at the end of the year): Salaries Expense: Debit for $3,200 (Retained Earnings) Salaries Payable: Credit for $3,200 (Liability) Nothing happened to assets. Nothing NET happened over here. Liabilities increased.

What is accounting?

An information system; measures business activities, processes data into reports, and communicates results to people who make decisions about the company. Also known as the language of business.

On 06/01/13, ABC Company receives $12,000 in advance for an annual contract to provide pest control services in the future over the next 12 months. Revenue will be earned equally each month. As of 12/31/12, ABC Company: a. Would have a $5,000 liability b. Would have a $7,000 asset c. Would have a $1,000 expense d. Would have a $1,000 revenue

Answer: A Explain: refer to flashcard #67

What will be the result if no adjusting entry is made at the end of the accounting period to record the actual use of supplies? a. liabilities would be overstated b. assets would be overstated c. assets would be understated d. liabilities would be understated.

Answer: B Explain: We would have overstated assets by $900. Refer to Flashcard #59.

Which of the following is included in the accounting cycle? a. statement of stockholders' equity b. balance sheet c. all of these are included in the accounting cycle d. unadjusted trial balance e. recording of journal entries.

Answer: C

Paying rent in advance for one full year would include a: a. debit to cash and a credit to accounts receivable b. debit to supplies and a credit to accounts receivable c. debit to prepaid rent and a credit to cash d. debit to rent and a credit to cash

Answer: C Explain: refer to journal entry in flashcard #57.

Which two accounts are affected if a business provides a service to a customer for $500? a. unearned revenue and cash b. accounts receivable and revenue c. cash and revenue d. accounts payable and expenses e. inventory and cash

Answer: Cash and revenue

A customer gives Beach Body Fitness $500 in advance for training sessions. Presently, Beach Body Fitness has not given the customer any of these training sessions. In which account would this amount be placed? a. accounts receivable b. expenses c. accounts payable d. unearned revenue e. revenue

Answer: D Explain: Because the business has not yet provided the good or service, the amount is placed in the unearned revenue account.

When a company performs a service on account for a customer, which of the following would occur? a. Expenses would decrease b. Assets would decreases c. Net income would decrease d. Stockholders' equity would increase

Answer: D Explain: When we perform a service on account, we have more service revenue (increase in service revenue and an increase in accounts receivable). Accounts receivable is an asset. When we perform a service account, we don't actually get the money, but we have the right to receive money. The more service revenue, the more equity we have.

The financial statements for ABC Company are prepared on 12/31/12 based on an accrual accounting basis. No interest has been paid for the monies borrowed under the 6 month $60,000 promissory note signed on 11/01/12. The interest and principal are due at maturity with an annual interest rate of 8%. How should ABC account for the interest at 12/31/12? a. Debit interest receivable and credit interest payable in the amount of $2,400 for each account. b. Debit interest expense and credit interest payable in the amount of $800 for each account. c. Do not record at this time. Record the interest when the bank sends the bill. d. Debit interest payable and credit interest expense in the amount of $400 for each account.

Answer: D Explain: refer to flashcard #64.

Which of the following are amounts earned from selling products or services? a. expenses b. assets c. liabilities d. dividends e. revenues

Answer: E

A company pays in advance for rent. At the end of the accounting period, how should the accounts be adjusted? a. Debit prepaid rent, Credit Revenue. b. Debit rent expense, Debit prepaid rent. c. Debit prepaid rent, Credit rent expense. d. Credit rent expense, Credit prepaid rent. e. Debit rent expense, Credit prepaid rent.

Answer: E Explain: At the end of the month, prepaid rent will decrease and rent expense will increase; therefore, the company debits rent expense and credits prepaid rent for the amount of rent owed that accounting period.

Balance Sheet Formula:

Assets = Liabilities + Stockholder's Equity

Accounting Equation: Debit and Credit Rules

Assets = Liabilities + Stockholders Equity Create T-Accounts for each of the three accounts Debit on the left, Credit on the Right.

Journal Entry Example: Pay Monthly Rent of $1,200.

Cash (decreases) = asset account Rent Expense (increases) = Expense account Rent Expense: Debit for $1,200 Cash: Credit for $1,200 A = L + S.E. -1200 = 0 + -1200 Balanced

Journal Entry Example: Pay Dividends of $1,000 to shareholders.

Cash (decreases) = assets Dividends (increases) = Stockholders' equity Dividends: Debit for $1,000 Cash: Credit for $1,000 A = L + S.E. -1,000 = 0 + -1,000

Statement of Stockholder's Equity Formulas:

Common Stock Equation: Beginning Common Stock + Issuance of New Common Stock = End Balance of Common Stock (Beg. C.S. + Issuance = End. C.S.) Retained Earnings Equation: Beginning Retained Earnings + Net Income - Dividends = End Balance of Retained Earnings. (Beg. R.E. + N.I. - Div. = End. R.E.)

C.r.:

Credit

Accounting Equation: Debit and Credit Rules (Liabilities)

D.r. Decreases C.r. Increases

Accounting Equation: Debit and Credit Rules (Stockholders' Equity)

D.r. Decreases C.r. Increases

Accounting Equation: Debit and Credit Rules (Assets)

D.r. Increases C.r. Decreases

D.r.:

Debit

Preparing Closing entries given the following end of year account balances: Supplies Expense: $1,200 Depreciation Expense: $3,100 Salaries Expense: $16,400 Service Revenue: $34,700 Interest Revenue: $1,200 Dividends: $6,200

Expenses: Normal Debit Balance Revenues: Normal Credit Balance Dividends: Normal Debit Balance Credit all expense accounts (supplies expense, depreciation expense and salaries expense to close them out): R.E. : $20,700 Supplies Expense: $1,200 Depreciation Expense: $3,100 Salaries Expense: $16,400 Debit all revenue accounts: Service Revenue: $34,700 Interest Revenue: $1,200 R.E. : $35,900 Credit Dividends: R.E. : $6,200 Dividends: $6,200

True/False: Cash is an adjusting entry

False Cash is NOT an adjusting entry

Two primary users of accounting information for decision-making:

Investors Creditors

What is a contra-asset?

It is directly connected to an asset and its normal balance is opposite to that asset.

What does it mean when something is "on account?"

It means that it will involve either of these accounts: Accounts receivable Accounts payable

How does one know if a question is asking for an adjusting entry?

Look for things like: "At the end of the year..." "Record adjusting Entry..."

What is net loss?

More expenses and less revenues.

Dividends:

Not an expense; a distribution to owners; follows the same rules as expenses in the accounting equation.

What are the different types of STOCKHOLDERS' EQUITY?

Paid in Capital (Common Stock): external source; amount shareholders have invested in the business. Retained Earnings: internal source; cumulative amount of net income (revenue less expenses) earned and kept in business less dividends paid out.

How does one find the interest expense?

Principal x Rate x time (*fraction of year*) * denominator is ALWAYS 12 (1/12, 2/12, 3/12,...)

What are the Pros and Cons of a corporation?

Pros: limited liability, stockholders are not personally responsible for financial obligations of a corporation. Cons: double taxation; corporate income is taxed, shareholders taxed on distributions of earnings (dividends).

Accounting Equation: Debit and Credit Rules (Stockholders' Equity) cont.

R.E.: Revenues - Expenses - Dividends Rev: D.r. decreases, C.r. increases Expenses: D.r. increases, C.r. decreases Dividends: D.r. increases, C.r. decreases C.S.: D.r. decreases, C.r. increases

Income Statement Formula:

Revenues - Expenses = Net Income

Journal Entry Example: Purchase $300 of supplies "on account."

Supplies (increases) = assets Accounts Payable (increases) = liability Supplies: Debit for $300 Accounts Payable: Credit for $300. A = L + S.E. 300 = 300 + 0 Balanced.

True/False: Anytime we debit something, we put it first.

True

True/False: If there is a net loss, you still record the net loss on the statement of stockholders' equity and income statement.

True

True/False: The more dividends you have, the less retained earnings you have.

True

True/False: When revenue increases, it is credited.

True

True/False: When we credit something, we indent it on the balance sheet.

True

Normal Balance:

What is done to increase the balance of an account? Example: Assets increases with a debit, so assets normal balance is debit. The normal balance is whatever is done to increase the balance of an account (Debit or Credit).

What is considered to be the language of business?

accounting

Revenues:

amounts earned from selling products and services to customers.

Liabilities:

amounts owed to creditors

Expenses:

cost of providing products and services

Other types of users of accounting information:

customers suppliers managers employees competitors regulators tax authorities

Net Income:

difference between revenues and expenses

Financing Activities:

involves funding from external sources Example: individual invests $1,000 in a business in return for company stock; bank loan for $1,000.

Investing Activities:

involves purchase and sale of long term resources Example: purchased lemonade stand to operate business for $1,000.

Operating Activities:

involves transactions in primary operations of business Example: purchase inventory (lemonade) to sell $1,000, selling (lemonade) to 1,000 customers for $2.00 per cup.

Sole Proprietorship:

owned by a single person

Partnership:

owned by more than one person

Corporation:

owned by multiple shareholders through shares of "stock"

Stockholders' Equity:

owners claim to resources (stockholders of the corporation).

Investors:

primary users of accounting information for present and potential capital providers.

Creditors:

primary users of accounting information that use bonds and banks for investment and lending decisions.

Assets:

resources owned by the company

Stock Ownership:

signifies ownership in a corporation; represents a claim on part of the corporation's assets and earnings