Financial Accounting Midterm Exam
bank reconciliation goals
-Identify the deposits in transit. -Identify the outstanding checks. -Record other transactions on the bank statement and correct your errors.
Trial balance
-after processing all its transactions for the period, a trial balance is prepared -the trial balance lists all account balances in the general ledger -if the books are in balance, the total debits with equal the total credits -information from the trial balance is used to prepare financial statements
How are prepaid accounts recorded?
-also known as prepaid expenses 1. all expired and used prepaid accounts are recorded as regular expenses 2. all unexpired and unused prepaid accounts are recorded as assets (reflecting future use in future periods)
Revenues
-earned -credit -sales of goods or services to customers. they are measured at the amount the business charges the customer
Expenses
-incurred -debit -The costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities and supplies used in the office
Stockholders' equity
-investments and retained earnings -credit owners' claim to the business resources (common stock and retained earning)
Liabilities
-owe -credit -measurable amounts that the company owes to credits (notes payable -loans, accounts payable)
Assets
-own -debit -economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future (cash, supplies, furniture, equipment)
Controls from bank procedures
A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual.restricting access, documenting procedures, independently verifying
List the steps of the analyzing and recording process
1. Analyze each transaction and event from source documents 2. Record relevant transactions and events in a journal 3. Post journal information to ledger accounts 4. Prepare and analyze the trial balance
Posting Journal Entries
1. Identify the debit account in ledger 2. Enter the date 3. Enter the amount and description 4. Enter the journal reference 5. Compute the balance 6. Enter the ledger reference
What do liability accounts include?
Accounts payable, notes payable, accrued (accumulated) liabilities, unearned revenue
Each elements of accounting equation is made of several different what?
Accoutnts
Securities Act of 1933
Act requiring registration with the SEC before issuance of securities through interstate commerce.
Trial balance is prepared after what?
After processing all its transactions for the period
What are dividends?
Allowance, proceeds, bonus, coupon, returns
What are cash receipts?
Amount of cash that was received
What are accrued liabilities?
Amounts the you owe, but haven't yet paid. -Ex: wages payable
What is an account?
An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. (Assets = Liabilities + Equity)
Sarbanes-Oxley Act
An act of Congress in 2002 intended to bring reform to corporate accountability and stewardship in the wake of a number of major corporate scandals.
Retained earnings
An amount earned by a corporation and not yet distributed to stockholders.
Contributed capital
An entry on the shareholders' equity section of a company's balance sheet that summarizes the total value of stock that shareholders have directly purchased from the issuing company.
Accounting Cycle (class)
Analyze-journalize-post-record-trial balance-adjustments-adjusted trial balance-financial statements-closing-post closing trial
Accounting Cycle (book)
Analyze-record-summarize-prepare trial balance-reports financial statement
What is a transaction?
Any event in life of business that impacts accounting equation
Expanded Accounting Equation
Asset Accounts ....... =Liability Accounts + Equity Accounts - owner's capital, owner's withdrawals, revenues, expenses
Accounting Equation
Assets = Liabilities + Equity
The four financial statements
Balance sheet, income statement, statement of stockholder's equity, and statement of cash flows.
Internal control components
Most organizations use the following control components as a framework when analyzing their internal control systems. control environment, risk assessment, control activities, information and communication, monitoring actives
Whatever causes an account to increase is referred to as
Normal balance
What are liability accounts?
Obligations owed by a company
Where does the debit go on a T-Account?
On the left side
Where does credit go on a T-Account?
On the right side
An accounts balance is usually on what side? This is referred to as what?
On the side that increases the account. This is referred to as the "Normal Balance"
Monetary Unit Assumption
Only data that can be expressed in dollars ex: can't express "owner health" in dollars not adjusted based on inflation
What are equity accounts?
Owner's interest in assets after liabilities are paid
What is the process of transferring journals to ledgers?
Posting
What are source documents?
Provides evidence that transaction took place -Ex: Bill, check, invoice, etc
Dividends
distributions of a company's earning to its stockholders as a return on their investment (common stock and retained earnings: rev-expenses)
Retained earnings
earned capital; net income that has been kept in the company
Principles of control activities
establish responsibility, segregate duties, restrict access, document procedures, independently verify
fraud
generally defined as an attempt to deceive others for personal gain. corruption, asset misappropriation, financial statement fraud
Inventory
goods purchased or produced for sale to customers
Inventory
goods purchased or produced for sale to customers ex: merchandise at target
Accounts Receivable
held by a seller and refer to promises of payment from customers to sellers
Property, plant, and equipment (PPE)
includes land, factory buildings, warehouses, office buildings, machinery, office equipment, and other items used in the operations of the company.
Intangible and other assets
includes patents, trademarks, franchise rights, goodwill, and other items that provide future benefits, but do not possess physical substance.
Balance Column Accounts
includes transaction dates and explanation column ulike t-accounts
Long-term financial investments
investments in debt securities or shares of other firms that management does not intend to sell in the near future
American Institute of Certified Public Accountants (AICPA)
is the national professional organization of Certified Public Accountants (CPAs) in the United States It sets ethical standards for the profession and U.S. auditing standards for audits of private companies, non-profit organizations, federal, state and local governments.
what is a ledger?
journal/record book
Land Accounts
land owned
Debit
left side of t-account Dr.
permanent accounts
liabilities, assets, equity. permanent accounts track financial results from year to year
accrual adjustments
needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period. used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts. involves one asset and one revenue account, or one liability and one expense account.
Intangible and other assets
not physical: such as copyrighted material ex: copyright material removed from youtube
Unearned Revenue
obligation to provide a service ex: $50 to nation geographic, obligation to send magazines 5k flights to italy; Delta obligated to provide flights
adjusting entries always includes
one balance sheet and one income statement account
Accounts Payable
oral or implied promises to pay later, which usually arise from purchases of merchandise
Equity Accounts
owner's claim on a company's assets
Journalizing
processes of recording in a journal
Controls for cash receipts
receive cash in receiving cash in person at time of sale and receive cash through electronic transfer. to ensure that the business receives the appropriate amount of cash and safely deposits it in the bank.
timing of reporting expenses (accruing)
record expenses in the same period as the revenues with which they can be reasonably associated
accrual basis accounting
records revenues when they are earned and expenses in the same period as the revenues to which they relate, regardless of the timing of cash receipts or payments
Cash Account
reflects a company's cash balance
Asset Accounts
resources owned or controlled by a company hat have expected future benefits
Accrual Accounting
revenues and expenses are recorded when they happened
Revenue Accounts
revenues and expenses impact equity
revenue recognition principle (accruing)
revenues are recognized when they are earned
income statement adjustments
revenues are recorded when earned. expenses are recorded in the same period as the revenues to which they relate
Revenue Recognition
revenues are recorded when they are gained, no matter when cash is recieved
temporary accounts
revenues, expenses dividends. temporary accounts track financial results for a limited period of time
Credit
right side of t-account Cr.
service companies
sell service> collect cash> pay operating expenses>
Recording inventory sales
selling price: cash (debit) and sales revenue ( credit) cost: cost of goods sold (debit) and inventory (credit)
Short-term borrowings
short-term debt payable to banks or other creditors
Marketable securities
short-term investments that can be quickly sold to raise cash
Balance Sheet
shows business assets, liabilities and stockholders equity
Income statement
shows revenues, expenses and net income for a time period only revenue and expenses shown
Buildings Accounts
stores, offices, warehouses, and factories provide expected future benefits to those who control or own them
The statement of cash flows
summarizes how a business's operating, investing, and financing activities caused its cash balance to change over a particular period of time
adjustments help ensure what
that all revenues and expenses are reported in the period in which they are earned and incurred.
Earned capital
the cumulative net income (and losses) that has been retained by the company (not paid out to shareholders as dividends)
Current maturities of long-term debt
the current portion of long-term debt that is due to be paid within one year.
damaged conditioned goods
the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance.
without adjustments
the financial statements present an incomplete and misleading picture of the company's financial performance.
perpetual inventory system
the inventory records are updated "perpetually," that is, every time inventory is bought, sold, or returned, bar codes and optical scanners. continuous tracking and can estimate shrinkage
Additional paid-in-capital
the investment by stockholders in excess in of the amounts assignable to capital stock as par or stated value of the common stock.
FOB shipping point
the sale is recorded when the goods leave the seller's shipping department.
FOB destination
the sale is recorded when the goods reach their destination (the customer).
Why do you draw a line across the T-Account?
to record the balance
paid-in-capital
total amount mark cuban would invest into the corporation
If the books in the trial balance are in balance, then what should be equal?
total debits should equal the total credits
closing temporary accounts
transfer net income and dividends to retained earning. establish zero balances in all income statement and dividend accounts
Posting
transferring journal entry information to a ledger
periodic inventory system
updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period. no up to date records and can't estimate shrinkage BI + P - EI = CGS
Other long-term liabilities
various obligations, such as warranty and deferred compensation liabilities and long-term tax liabilities, that will be satisfied at least a year in the future.
Owner Investments
when an owner invests in a company, the invested amount is recorded in an account title Owner, Capital
Owner Withdrawals
when an owner withdrawals assets for personal use it decreases both company assets and total equity
Note Receivable
written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note
Examples of unearned revenue
RECORDED IN LIABILITY ACCOUNTS -magazine subscription collected in advance by a publisher; Unearned Subscriptions -sales of gift certificates by stores; Unearned Store Sales -season ticket sales by sports teams; Unearned Ticket Revenue
The balance sheet
Reports at a point in time: assets, liabilities, stockholders' equity. Assets= liabilities +stockholders' equity
The statement of retained earning
Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. Add net income, subtract dividends
What are asset accounts?
Resources owned by a company
Basic Accounting Equation
assets= liabilities + stockholders' equity
Can you substitute ledger with a T-Account?
Yes
Can you use more than 2 accounts for a journal ledger?
Yes
Statement of stockholder's equity
a financial statement that shows changes in a corporations ownership for a fiscal period
Note Payable
a formal promise, usually denoted by the signing of a promissory note, to pay a future amount
T-Account
a ledger account and is a tool used to understand the effect of one or more transactions
Unearned Revenue Accounts
a liability that is settled in the future when a company delivers its products of services
Trial Balance
a list of accounts and their balances at a point in time
Chart of Accounts
a list of all ledger accounts and includes an identification number assigned to eat account
General Ledger or ledger
a record containing all accounts used by a company
Account
a record of increases and decreases in a specific asset, liability, equity, revenue or expense item (analyzed, summarized, and presented in reports and financial statements)
Where is the 1st place that a transaction is recorded?
In a journal
Retained earnings
Income the company has earned since its inception, minus the dividends it has paid out to shareholders.
What is used to prepare financial statements?
Information from the trial balance
Financial accounting
Information system that identifies, records, and communicates the economic events of an organization for external users
control limitations
Internal controls can never completely prevent and detect errors and fraud for two reasons: benefits must exceed the cost and human error or fraud
internal control for cash
Internal controls for cash are important because the volume of cash transactions is enormous and because cash is valuable and portable and therefore poses a high risk of theft.
What is a T-Account?
It represents a ledger account and is a tool used to understand the effects of 1 or more transactions
What are the accounts with typical credit balances?
Liabilities, owner's equity, revenues
Asset accounts is equal to what?
Liability accounts + Equity accounts
How should you list the accounts in the trial balance?
List it first as assets, liabilities, equity, revenues, and then expenses (debts/loans)
What is a chart of accounts?
List of all accounts and includes an identifying number for each account
Trial balance lists all what?
Lists all account balances in general ledger
Investing activities
Methods companies use to acquire and dispose of assets in the course of production and sales.
Financing activities
Methods companies use to fund investment resources.
Operating activities
Methods companies use to produce, promote, and sell its products and services.
control for cash payments
Most cash payments involve writing a check or completing an electronic funds transfer. The primary goal of internal controls for all cash payments is to ensure that the business pays only for properly authorized transactions.
If there are errors in a trial balance, the errors can be found by tracing steps backwards. What are these steps?
1. Read up the columns of the trial balance 2. Ensure that postings from the ledger are accurate 3. Recompute balances in ledger 4. Ensure (secure) postings from journal to ledger are accurate 5. Ensure accuracy of journal entries
How do you find the T-Account balance?
1. Subtract the lower balance from the higher balance 2. Then place on side that is higher.
Journal & Posting Transactions
1. analyze transactions and source documents 2. Apply double-entry accounting(Left side-debit; Right side-credit for T-account) ------Assets = Liabilities + Equity 3. Record journal entry 4. Post entry to ledger
two closing journal entries are needed
1. debit revenue accounts and credit expense accounts. debit or credit the difference to retained earnings. 2. credit dividends declared and debit retained earnings
Sole proprietorship
A business owned by a single person. The owner is responsible for all aspects of operation, including accounting, financing, production, and distribution. Sole proprietorships are easy to establish because they usually involve little government interference.
Partnership
A business with two or more owners who are also usually involved in managing the business.
What affects the number of accounts needed?
A company's size and diversity of operations
Executory contract
A contract which has not yet been fulfilled by one or both parties that promises action in the event of a specified future occurrence.
Treasury stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use.
double-entry accounting system
A financial record keeping system in which each transaction affects at least two accounts; for each debit there must be an equal credit.
Income statement
A financial statement showing the revenue and expenses for a fiscal period.
Balance sheet
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
Corporation
A form of business organization that is characterized by a large number of owners who are not involved in managing the day-to-day operations of the company.
Securities and Exchange Commission (SEC)
A government agency formed by the 1934 Act, having primary responsibility for enforcing the Federal securities laws and regulating the securities industry. It protected investors, listened to complaints, issued licenses and penalized fraud.
Board of directors
A group of people elected by the stockholders to represent shareholders interests and oversee management.
cash paid to reimburse employees
A petty cash system is used to reimburse employees for small expenditures they have made on behalf of the organization.
Liability
A probable future economic sacrifice resulting from a past or current event.
Liability
A probable future economic sacrifice resulting from a past or current event. forced to transfer assets, company owes ex: ends in payable are liabilities: unearned revenue
Assets
A resource owned by the company that is expected to provide the company future economic benefits.
Assets
A resource owned by the company, expected to provide future economic benefits. ex. computer
What is there for each individual account?
A unique number
Each information pertaining to account will remain in the
Account
Generally accepted accounting principles (GAAP)
Accounting guidelines, formulated by the Federal Accounting Standards Board (FASB)
Financial accounting
Accounting information and analyses prepared for people outside the organization.
Managerial accounting
Accounting used to provide information and analyses to managers inside the organization to assist them in decision making.
Current assets
Assets that are expected to be converted to cash or used within one year
Non-current assets
Assets that will be in the business for longer than the financial period - usually one year.
Double-entry Accounting
At least two accounts are involved with one debit and one credit; total amount debited must equal the total amount credited; the accounting equation must not be violated
What is the balance of an account?
The difference between the increases and decreases in an account
What do the asset accounts include?
Cash, Land, Buildings, Equipment, Accounts Receivable, Notes Receivable, Supplies, Prepaid Expenses (assets)
What equity accounts increase equity?
Common stock and revenue
What do the equity accounts include?
Common stock, retained earnings, revenues, dividends, expenses
Common stock
Common stockholders have the right to vote at stockholders' meetings, sell or otherwise dispose of their stock, purchase their proportional share of any common stock later issued by corporation, receive the same dividend if any on each common share of the corporation, share in any assets remaining after creditors and preferred stockholders are paid.
Suppliers
Companies that provide material, human, financial, and informational resources to other companies
Solvency
Company's long-run financial viability and its ability to cover long-term obligations.
What is a ledger?
Complete collection of all accounts for an information system
The Sarbanes Oxley Act (SOX)
Contract incentives: stiff fines and prison terms. Reduce opportunities: internal control evaluation independent audit committee. encourage honesty: tip lines, whistleblower protection, ethic code
What is the mnemonic memory device used to remember all the normal balances for all the accounts?
DEAD COLR D ebit C redit E xpense O wner's Equity A ssets L iabilities D ividend R evenues
Equity
Debit - decreases Credit - increases
Liabilities
Debit - decreases Credit - increases
Assets
Debit - increases Credit - decreases
Debit does not mean _____ and credit does not mean ____.
Debit does not mean DECREASE and credit does not mean INCREASE.
What equity accounts decrease equity?
Dividends and expenses
Expense Recognition
Expenses are typically recorded in the period they are incurred, regardless of when cash is paid
Accrued liabilities
Expenses that have been incurred but have not been paid at the end of the accounting period
What are the accounts with typical debit balances?
Expenses, assets, and dividends
post trial balance
Final check that all debits still equal credits and that all temporary accounts have been closed. Contains balances for only permanent accounts.
Creditors
Financial institutions or individuals who provide loans.
Statement of cash flows
Financial statement that reports net cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.
Note Payable
Formal arrangement that includes the signing of a note
What are cash disbursements?
How much cash was paid
Stockholders' Equity
I get what is left over after creditors are happy - my claims to business assets
What is unearned revenue?
Revenue you haven't earned. -Ex: Customer pays you in advance for a service, but you haven't provided service yet. Ex: Unearned fees, unearned subscription
Deferred revenues
Revenues that have been collected but not earned; they are liabilities until the goods or services have been provided.
Net Income
Revenues-expenses =net income
Statement of Retained Earnings
Shows changes in Retained earnings for a specific time
What kind of dating period is used for the trial balance?
Shows particular balance on a particular date
Transactions occur through what?
Source documents
Economic Entity Assumption
Stops owners from putting their own transactions in the company's records ex; can't list my home investment accounts as assets or utilities as company expenses
Where is double entry accounting done in and what is double entry accounting?
T-Account; double entry accounting is where every debit has a credit. ------DEBITS = CREDITS------
Public Company Accounting Oversight Board (PCAOB)
The Public Company Accounting Oversight Board (PCAOB) was established pursuant to the Sarbanes-Oxley Act of 2002. The PCAOB establishes auditing and related professional practice standards to be used in the preparation and issuance of audit reports for "issuers."
What happens when journalizing transactions?
The accounts the is DEBITED is always written FIRST before the one that is CREDITED
Disclosure
The act of providing financial information to external users.
Historical cost
The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets.
Historical cost
The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets. buy house in 1995 at 10k will be noted as 10k in 2017
Expenses
The cost incurred to generate revenue, including the cost of the goods and services sold to customers as well as the cost of carrying out other business activities.
Revenue
The increase in equity resulting from the sale of good and services to customers.
inventory
The merchandiser's total cost of acquiring goods that it has not yet sold
Income
The net increase in equity from the company's operating activities. Income, also called net income, equals revenues minus expenses.
fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Planning activities
The process of identifying a company's goals, and the strategies adopted to reach those goals.
The income statement
The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit ( rev-exp.)
Dividends
When earnings are distributed to stockholders not a expense
T-Accounts are used to determine what?
To determine balances of accounts
What is the trial balance for?
To ensure posting process is correct
-cost of goods sold
Total cost of all goods that the merchandiser did sell to customers BE + P - EI = Cost of goods sold
sales revenue
Total selling price of all goods that the merchandiser did sell to customers
Account Balance
difference between total debits and total credits for an account, including beginning balance
Accumulated other comprehensive income or loss
accumulated changes in equity that are not reported in the income statement
note 1
accumulated depreciation- balance sheet. depreciation expense-income statement
note 2
accumulated depreciation-total amount depreciate. equipment-original cost
Solution to adjustments
adjustments are made to the accounting records at the end of the period to state assets liabilities revenues and expenses at appropriate amounts
after closing entries
all the income statement accounts and the dividend account will have a zero balance.
Long-term debt
amounts borrowed from creditors that are scheduled to be repaid more than one year in the future.
Accounts receivable
amounts due to the company from customers arising from the sale of products or services on credit
Accrued Liabilities
amounts owed that are not yet paid
Accounts payable
amounts owed to suppliers for goods and services purchased on credit.
Financial statements often have what?
amounts reported that are a summation of several ledger accounts
deferral adjustments
an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period. used to decrease balance sheet accounts and increase corresponding income statement accounts. one asset and one expense or one liability and one rev
Equipment Accounts
asset; includes cost of assets used in a store (counters, showcases, ladders)
balance sheet adjustments
assets are reported at amounts representing the economic benefits that remain at the end of the period. liabilities are reported at amounts owed at the end of the period
Prepaid Accounts
assets that represent prepayments of future expenses
Supplies Accounts
assets until they are used - when used, turn into expenses
cash paid to employees via eft
direct deposit. many companies use an imprest system.
relationship between inventory and cost of goods sold
beginning inventory + purchases+ goods available for sale>ending inventory (still here) and cost of goods sold (sold)
Post Reference Column
blank line between each journal entry ID numbers are later entered here after the ledger
merchandising companies
buy inventory> sell inventory> collect cash> operating expenses>
merchandisers earn revenue how
by transferring control of merchandise to a customer, either for cash or on credit.
adjusting journal entries never involve what
cash
Liabilities Accounts
claims by creditors against assets, which means they are obligations to transfer assets of provide products or services to others
Accounts receivable
company can receive cash in the future from customer purchases
Journal
complete record of each transaction in one place, shows debits and credits for each transaction
internal control objectives
consists of the actions taken by people at every level of an organization to achieve its objectives. operations, reporting, compliance
note 3
contra-account-opposes account it offsets
Expenses
cost gained because of selling goods and providing service; decreases equity
Prepaid expenses
costs paid in advance for rent, insurance, or other services
Cash
currency, bank deposits, certificates of deposit, and other cash equivalents
note 4
depreciation amount-depends on method used
Why adjustments are needed
designed to record most recurring daily transactions, particularly any involving cash. cash is not always received or paid in the period in which the company earns the related revenue or incurs the related expenses