ACT I Final

Bond Characteristics and Terminology

A bond issue is normally divided into a number of individual bonds. The principal is usually $1,000, or a multiple of $1,000. The interest on bonds may be payable annually, semiannually, or quarterly. Most bonds pay interest semiannually. Principle- The face amount of each bond. This is the amount that must be repaid on the dates the bonds mature. Bond Indenture- The contract between a corporation issuing bonds and the bondholders. Two Most Common Types of Bonds: Term Bonds- When all bonds of an issue mature at the same time. Serial Bonds- If the bonds mature over several dates

Where are non-cash investing and financing activities reported?

A company may enter into transactions involving investing and financing activities that do not directly affect cash. For example, a company may issue common stock to retire long-term debt. Although this transaction does not directly affect cash, it does eliminate future cash payments for interest and for paying the bonds when they mature. Because such transactions indirectly affect cash flows, they are reported in a separate section of the statement of cash flows. This section usually appears at the bottom of the statement of cash flows.

Record a bond redemption and recognize any gain or loss.

A gain is recorded if the price paid for redemption is below the bond carrying amount. A loss is recorded if the price paid for the redemption is above the carrying amount.

What is an unadjusted trial balance?

A listing of all a busniess' accounts and their debit or credit entries.

Allowance Method

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

Indirect Method:

A method of reporting the cash flows from operating activities as the net income from operations adjusted for all deferrals of past cash receipts and payments and all accruals of expected future cash receipts and payments.

What is a stock split? What is it's purpose?

A reduction in the par or stated value of a common stock and the issuance of a proportionate number of additional shares. A major objective of a stock split is to reduce the market price per share of the stock. This attracts more investors and broadens the types and numbers of stockholders.

Accounting Equation and the Effects of Business Transactions on it

Assets = Liabilities + Equity Twitter's accounting equation for a recent year is: Assets (3,366 million) = Liabilities ($416 million) + Stockholders' Equity ($2,950 million)

What are long-term assets?

Assets that are not classified as current assets. Long-term assets are reported on the balance sheet and represent a company's property, equipment, and other capital assets (reduced by depreciation) expected to be useable for more than one year.

Record Fringe Benefits

Benefits provided to employees in addition to wages and salaries. The cost of employee fringe benefits is recorded as an expense by the employer. To match revenues and expenses, the estimated cost of fringe benefits is recorded as an expense during the period in which the employees earn the benefits.

______ will never require an adjusting entry.

Cash

What are current assets?

Cash Inventory or Assets expected to be converted or consumed during a business' operating cycle Deferred Gross Profit on Installment Sales (Contra Asset) Receivables expected to be collected in 12 months or less

How are cash flows reported on the statement of cash flows?

Cash flows from operating activities = $XXX, Cash flows from investing activities = XXX Cash flows from financing activities = XXX Change in cash = $XXX Cash at the beginning of the period = XXX Cash at the end of the period = $XXX

Short-Term Notes Payable

Chapter 10, Exhibit 1

Closing Entires, Post-Closing Trial Balance

Closing Entries- The entries that transfer the balances of the revenue, expense, and dividends accounts to the retained earnings account. Post-Closing Trial Balance- The purpose of the post-closing (after closing) trial balance is to verify that the ledger is in balance at the beginning of the next period.

Recording current liabilities.

Current liabilities are debts that will be paid out of current assets and are due within one year.

Cash receipts are posted to the

Debit Side of the "T" Account

What are long-term liabilities?

Debts or obligations that will be paid beyond the 12 months.

Determine cash flow using both the direct method and the indirect method for the operating activities section.

Direct: Cash flows from operating activities: Cash received from customers $ XXX Cash payments for merchandise (XXX) Cash payments for operating expenses (XXX) Cash payments for interest (XXX) Cash payments for income taxes (XXX) Net cash flow from operating activities $XXX Indirect: Cash flows from operating activities: Net income $XXX Adjustments to reconcile net income to net cash flow from operating activities XXX Net cash flow from operating activities $XXX

Recording purchases of merchandise using the perpetual inventory system. How do you apply a purchase discount?

Discount of 2% on $3,000, $60.000; Interest for 20 days at a rate of 6% on $2,940, 9.80. Savings from taking the discount, $50.20.

Record Amortization of Bond Discount or Premium using the Straight-Line Method

Discount on bonds payable = $3,594 Term of bonds = 5 years Semiannual amortization = $359.40 ($3,594 ÷ 10 periods) Premium on bonds payable = $3,769 Term of bonds = 5 years Semiannual amortization = $376.90 ($3,769 ÷ 10 periods)

The company paid dividends of $3,000. Which of the following is the journal entry the company should record?

Dividends 3,000 Cash 3,000

Marvin Company negotiated the purchase of a new building for $250,000. Marvin paid a $100,000 down payment and will pay off the remainder over seven years. What affect does this transaction have on the accounting equation?

$150,000 net increase in assets and $150,000 increase in liabilities

Clayton Company purchased a new coffee maker in the amount of $3,500. Clayton paid $1,000 down and will pay the remainder in 60 days. What effect does this transaction have on the accounting equation?

$2,500 net increase in assets and $2,500 increase in liabilities

Given the following information, determine the amount of Cash on the balance sheet (assume there are only three assets). Liabilities equal $3,050; Stockholders' equity equals $25,000; Supplies equal $1,500; and Land equals $22,500.

$4,050 Assets = Liabilities + Stockholders' Equity

Cool Taste Company recorded $5,000 in sales on account for the week. What effect does this transaction have on the accounting equation?

$5,000 increase in assets and $5,000 increase in stockholders' equity.

Calculate Earnings Per Share for Common Stock

(Net Income - Preferred Stock Dividend) / average common stock outstanding

Given the following information, determine net income. The retained earnings balance on January 1, 2018, equals $58,000; dividends during 2018 total $18,350; and the retained earnings balance at December 31, 2018, equals $64,850.

-11,500 Retained earnings, beginning balance plus net income (or minus net loss) less dividends equal retained earnings, ending balance.

FOB Destination FOB Shipping Point

FOB Destination- This term means that the seller pays the freight costs from the shipping point to the buyer's final destination. When the seller pays the delivery charges, the seller debits Delivery Expense or Freight Out. Delivery Expense is reported on the seller's income statement as a selling expense. FOB Shipping Point- This term means that the buyer pays the freight costs from the shipping point to the final destination. Such costs are part of the buyer's total cost of purchasing inventory and are added to the cost of the inventory by debiting Inventory.

(T/F) The excess of the credits of an asset account over the debits is the balance of the account.

False

Payroll Liabilities

In accounting, payroll refers to the amount paid to employees for services they provided during the period. A company's payroll is important for the following reasons: 1. Payroll and related payroll taxes significantly affect the net income of most companies. 2. Payroll is subject to federal and state regulations. 3. Good employee morale requires payroll to be paid timely and accurately.

What information is communicated on a balance sheet, income statement, statement of retained earnings and statement of cash flow?

Income Statement- reports the revenues and expenses for a period of time, based on the revenue and expense recognition principles. Retained Earnings- reports the changes in the retained earnings for a period of time. the retained earnings statement is often viewed as the connecting link between the income statement and balance sheet. Balance Sheet- Assets and Liabilities. Assets are in the order that they will be converted into cash or used in operations. Statement of Cash Flow: 1. operating activities 2. investing activities 3. financing activities

Which financial statement reports financial data based on the revenue and expense recognition principles?

Income statement

Debit and Credit Rules to Business Transactions

Increases in assets are recorded on the debit (left side) of an account. Likewise, decreases in assets are recorded on the credit (right side) of an account. The excess of the debits of an asset account over its credits is the balance of the account.

Factors: Initial Cost, Expected Life, Estimated Residual Value

Initial Cost- The purchase price of a fixed asset plus all costs to obtain and ready it for use. Expected Useful Life- The estimated length of time a fixed asset will be used in normal operations. Residual Value- The estimated value of a fixed asset at the end of its useful life.

Which of the following is correct about T accounts?

It is the simplest form of account.

What are current liabilities?

Liabilities that are due in the upcoming year or the operating cycle of the business, whichever is longer, and which will be met through the transfer of a current asset or the creation of another current liability.

What are Contingent Liabilities?

Liabilities that may arise from past transactions if certain events occur in the future. Accounting for this depends on the following two factors: Likelihood of occurring Measurement

Intangible Assets: What are they?

Long-term assets that are useful in the operations of a business, are not held for sale, and are without physical qualities.

Estimate and record bad debt expense using the percentage of sales method and the aging of receivables method.

MISSING

What do you do if the customer pays you after you have written off his receivable?

MISSING

Natural Resources: What are they?

Naturally Occurring: An asset that is created through natural growth or naturally through the passage of time. For example, timber is a natural resource that naturally grows over time. Removed for Sale: The asset is consumed by removing it from its land source. For example, timber is removed for use when it is harvested, and minerals are removed when they are mined. Removed and Sold over More Than One Year: The natural resource is removed and sold over a period of more than one year. Depletion Rate = Cost of Resource/Estimated Total Units of Re-source

How do you apply Lower of Cost or Market? What is "net realizable value?"

Net Realizable Value = Estimated Selling Price - Direct Costs of Disposal

Included in the retained earnings statement are

Net income (loss) and dividends

Cash flow from -Operating Activities - What is reported here? -Investing Activities - What is reported here? -Financing Activities - What is reported here?

Operating Activities- 1. Direct - reports operating cash inflows (receipts) and cash outflows (payments) 2. Indirect - reports operating cash inflows (receipts) and cash outflows (payments) Investing Activities- show the cash inflows and outflows related to changes in a company's long-term assets. Financing Activities- show the cash inflows and outflows related to changes in a company's long-term liabilities and stockholders' equity.

Characteristics of Corporation

Page 563, Exhibit 1 and 2

Accounting for Bonds Issued at par, discount, and premium.

Par- If the market rate of interest is equal to the contract rate of interest, the bonds will sell for their face amount or at a price of 100. Discount- Bonds will sell at a discount when the market rate of interest is higher than the contract rate. Premium- Bonds will sell at a premium when the market rate of interest is less than the contract rate.

Permanent and Nominal Accounts. What accounts are permanent? What accounts are nominal?

Permanent- Term for balance sheet accounts because they are relatively permanent and carried forward from year to year. Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Common Stock, and Retained Earnings are permanent accounts. Nominal- Accounts that report amounts for only one period. Fees Earned and Wages Expense are temporary.

Calculate Ending Inventory or Cost of Goods Sold using FIFO, LIFO, Weighted Average methods for either Perpetual or Periodic.

Perpetual: -FIFO = Costs are included in the cost of goods sold in the order in which they were purchased. -LIFO = The cost of the units sold is the cost of the most recent purchases. -Weighted Average = a weighted average unit cost for each item is computed each time a purchase is made. Periodic: -FIFO= -LIFO= The cost of goods on hand at the end of the period is made up of the earliest costs. -Weighted Average = Uses the weighted average unit cost for determining the cost of goods sold and the ending inventory.

Special purpose funds and associated journal entries.

Petty Cash Fund- A special cash fund to pay relatively small amounts.

Types of Stock

Preferred- A class of stock with preferential rights over common stock. Common- The stock outstanding when a corporation has issued only one class of stock.

How do you calculate net income?

Revenues - Expenses = Net Income

When did you need to make entry to accrued revenue?

Revenues are reported on the income statement in the period in which a service has been performed or a product has been delivered. Cash may or may not be received from customers during this period.

Disposal of Fixed Asset

See Page 441

Selling of Fixed Asset

See Page 442

Interpret a Bond Quote to determine cash proceeds

See Page 525

Impact of changes in Market Rate of Interest on Price of a Bond

See Page 525, Exhibit 1

Types of Business Entities: Advantages and Disadvantages of Each

Service- Merchandising- Manufacturing-

How does the balance sheet of a service business differ from the balance sheet of a merchandising business?

Service: Fees Earned - Operating Expenses = Operating Income Merchandising: Sales - Cost of Goods Sold = Gross Profit. Gross Profit - Operating Expenses = Operating Income

What creates the balance the "unearned revenue" account? Why did you need to adjust it at the end of the period?

Some services have been provided by the end of the accounting period.

Which of the following statements provides a summary of cash receipts and cash payments for a specific period of time, such as a month or a year?

Statement of cash flows

Horizontal analysis of an income statement

compares the amount of each item on a current income statement with the same item on an earlier income statement.

The journal entry to pay creditors on account would include a

debit to Accounts Payable

The statement that reports net income or loss for a certain period in time is the

income statement.

Characteristics of Stock

o Authorized, Issued, Outstanding- The stock in the hands of stockholders. o Par Value- A dollar amount assigned to each share of stock. o No Par Value- o Non Par Value with Stated Value-

Direct method: Determine cash flow in and out from operations

o Cash received from customers o Cash Payment for merchandise o Cash payments for operating expenses o Cash payments for interest o Cash payments for income taxes

Liquidity Ratios = (Bigger the Better)

o Current Ratio = Current Assets/ Current Liabilities o Quick Ratio = Quick Assets ( Current Assets - Inventory - Prepaid Expenses)/ Current Liabilities

Computing and Recording Employee Payroll

o Gross Pay- o Withholdings- Federal Tax Withholding- State Tax Withholding- Social Security W/h Medicare W/H- Other Voluntary withholding • Insurance premiums- • Retirement- • Donations- o Net Pay-

Installment Notes

o Record issuance- Debit Cash Credit Notes Payable o Record Annual payments of installment notes-

Employers Payroll Taxes-Compute and Record

o Social Security- o Medicare- o Federal Unemployment- o State Unemployment-

The paying of an expense reduces

stockholders' equity

the rights of creditors come before the rights of _____________.

stockholders.

Paying an amount on account reduces

the amount owed on a liability.

The trial balance will include

the ending balance of each account.

Prepare a Bank Reconciliation.

Step 1. Enter the Cash balance according to bank from the ending cash balance according to the bank statement. Step 2. Add deposits not recorded by the bank. Identify deposits not recorded by the bank by comparing each deposit listed on the bank statement with unrecorded deposits appearing in the preceding period's reconciliation and with the current period's deposits. Examples: Deposits in transit at the end of the period. Step 3. Deduct outstanding checks that have not been paid by the bank. Identify outstanding checks by comparing paid checks with outstanding checks appearing on the preceding period's reconciliation and with recorded checks. Examples: Outstanding checks at the end of the period. Step 4. Determine the Adjusted balance by totaling the adjustments and adding (subtracting) the total to (from) the cash balance according to bank. Step 5. Enter the Cash balance according to company from the ending cash balance in the ledger. Step 6. Add credit memos that have not been recorded. Identify the bank credit memos that have not been recorded by comparing the bank statement credit memos to entries in the journal. Examples: A note receivable and interest that the bank has collected for the company. Step 7. Deduct debit memos that have not been recorded. Identify the bank debit memos that have not been recorded by comparing the bank statement debit memos to entries in the journal. Examples: Customers' not sufficient funds (NSF) checks; bank service charges. Step 8. Determine the Adjusted balance by totaling the adjustments and adding (subtracting) the total to (from) the cash balance according to company. Step 9. Verify that the adjusted balances determined in Steps 4 and 8 are equal.

Computing Depreciation Expense

Straight Line- A method of depreciation that provides for equal periodic depreciation expense over the estimated life of a fixed asset. Units of Activity- A method of depreciation that provides for depreciation expense based on the expected productive capacity of a fixed asset. Double Declining Balance- A method of depreciation that provides periodic depreciation expense based on the declining book value of a fixed asset over its estimated life.

Net Income

The difference between total revenue and total expenses when total revenue is greater

Objectives of Internal Control

The objectives of internal control are to provide reasonable assurance that: Assets are safeguarded and used for business purposes. Business information is accurate. Employees and managers comply with laws and regulations.

Determine cash at end of period

The statement of cash flows reports cash flows from operating activities followed by cash flows from investing and financing activities. The result of adding the net cash flows from operating, investing, and financing activities is the net increase or decrease in cash for the period. Cash at the beginning of the year is added to determine the cash at the end of the period. This ending cash amount must agree with cash reported on the end-of-period balance sheet.

Elements of Internal Control

The three internal control objectives can be achieved by applying the five elements of internal control. These elements are as follows: Control environment Risk assessment Control procedures Monitoring Information and communication

Cash Dividend Entries and Stock Dividend Entries

Three conditions for a cash dividend are as follows: Sufficient retained earnings Sufficient cash Formal action by the board of directors To Declare: Debit Cash Dividends Credit Cash Dividends Payable To Pay: Debit Cash Dividends Payable Credit Cash

What is the purpose of adjusting entries?

To assign revenues and expenses to the correct period. Before financial statements can be prepared, however, some accounts in the unadjusted trial balance must be adjusted. These adjustments are necessary because the transactions for NetSolutions were recorded using the accrual basis of accounting.

What is an adjusted trial balance?

Verifies the equality of the total debit and credit balances before the financial statements are prepared. If the adjusted trial balance does not balance, an error has occurred.

The normal balance of an asset account is

a debit

Included on the balance sheet are

assets, liabilities, and stockholders' equity.