Accounting 101 final exam
Fiscal Year
any consecutive 12 month period adopted by a business as its accounting year.
: There are 50,000 shares authorized, par value of $5 per share. Balance in the Common Stock account is $10,000. Treasury Stock has 500 shares with a balance of $7,000. How many shares are outstanding?
$10,000/$5 = 2,000 shares issued - 500 shares of Treasury Stock = 1,500 shares outstanding
If Beginning Retained Earnings is $14,000, Ending Retained Earnings is $31,000, and dividends are $3,000, what is Net Income?
$14,000 + Net Income - $3,000 = $31,000 Net Income = $20,000
An asset with a cost of 100,000 and an estimated useful life of 5 years with no salvage value is purchased January 1, 2012: Annual depreciation is (100,000-0)/5 = $20,000. What is Accumulated depreciation at December 31, 2015?
$20,000 * 4 years = $80,000
Example of determining cash proceeds from sale of a long-term asset - Review Page 605. Net Building (Cost - Accumulated Depreciation) beginning balance is $30,000 Net Building (Cost - Accumulated Depreciation) ending balance is $70,000 Depreciation expense is $12,000. A building was sold at a gain of $10,000. The cost of buildings acquired was $90,000. First, determine Book Value of building sold Beginning net building + cost of building acquired - Depreciation - Book value of building sold = Ending net building
$30,000 + $90,000 - $12,000 - Book Value of building sold = $70,000 Book value of building sold = $38,000 Next, solve for proceeds from sale of long term asset: Sales Proceeds = Book Value of Assets Sold + Gain - Loss Sales Proceeds = $38,000 + $10,000 = $48,000
An iron ore mine cost $30,000,000 with salvage value of $0 and is projected to produce 90,000,000 lbs. of iron ore. In year 1, 6,000,000 lbs. are extracted. What is the depletion expense in year 1?
$30,000,000 / 90,000,000 = $0.33 per lb. (Ignore salvage value in the calculation of depletion) 6,000,000 * .33 = $2,000,000 depletion expense Book Value after year 1 is $30,000,000 - 2,000,000 = $28,000,000
If a company makes a $5,000 loan on October 1 at 6% interest, what is the interest expense recorded on December 31?
$5,000 x 6% x 3/12 = $75
: 2016 beginning assets = $50,000 and ending assets = $60,000; 2016 beginning liabilities = $30,000 and ending liabilities = $35,000. What is the change in Stockholder's Equity in 2016? Answer = $5,000 increase.
$50,000 = $30,000 + x X = $20,000 beginning stockholder's equity $60,000 = $35,000 + x X = $25,000 ending stockholder's equity $25,000 - $20,000 = $5,000 increase in stockholder's equity
: $6,000 note payable at 8% interest for 6 months starting on September 1, 2016? What is the interest expense and journal entry at December 31, 2016?
$6,000 x 8% x 4/12 = $160 Interest Expense 160 Interest Payable 160
For an asset purchased in the middle of the year, record depreciation only for the time the asset is in service: Example: Equipment costing $16,000 with a residual value of $1,300 and an estimate useful life of 7 years was purchase on May 1, 2014. The asset was in service for 8 months (May through December). Depreciation expense for the first year is:
($16,000 - $1,300) / 7 years * 8/12 = $1,400
Be able to calculate the real rate of interest. If a company borrows $50,000 at 6% but is required to maintain a balance of $5,000, the real rate of interest is:
($50,000 * 6%) / ($50,000 - $5,000) $3,000 / $45,000 = 6.6%
A company pays rent in advance for 1 year on October 1 in the amount of $1,200, which is the amount on the unadjusted trial balance at the end of the year. What is the required adjusting entry on December 31?
(1,200/12 * 3 months = $300) Rent Expense 300 Prepaid Rent Expense 300 At the end of the year, the Prepaid Rent account has a balance of $900 ($1,200 - $300). The adjustment caused expenses to increase and assets to decrease
A machine costing $20,000 with a salvage value of $2,000 and an estimated useful life of 5 years is placed in service on June 1. What is straight line depreciation expense for the year?
(20,000 - 2,000)/5 = $3,600 per year *(7 months/12) = $2,100
ABC Company buys a delivery truck costing $35,000 with a salvage value of $5,000 with an estimated life of 100,000 miles. In year 1 the truck was driven 25,000 miles. In year 2, the truck was driven 30,000 miles. What is year 1 and year 2 depreciation expense?
(35,000 - 5,000) / 100,000 = .30 per mile Year 1 depreciation expense: 25,000 * .30 = $7,500 Year 2 depreciation expense: 30,000 * .30 = $9,000 The journal entry to record depreciation expense is: Depreciation Expense XXXX Accumulated Depreciation XXXX
= Depreciation Rate
(Cost - Salvage Value) / Estimated Life in Units
A computer cost $2,100 with a 3 year life and a $300 salvage value. What is the annual depreciation expense using the straight line method?
(Cost - Salvage Value)\Estimated life in years = Depreciation Expense ($2,100 - $300) \ 3 = $600 annual depreciation expense
A company buys a building with cash
- Total Assets, Liabilities, and Stockholder's Equity are unchanged. One asset increases while another asset decreases
Preferred Stock -
- a class of stock that provides certain advantages over common stockholders, including the right to receive dividends first and the right to receive assets ahead of common stockholders in the event of the company's liquidation. Normally preferred stockholders do not have the right to vote. There cannot be Preferred Stock without Common Stock. If there is only one class of stock it must be common stock. Unlike with debt and its related interest expense, preferred stock dividends do not have to be paid, there is no maturity date and dividends are not tax deductible.
Periodic Inventory System
- the business does not keep a continuous record of inventory on hand. At the period's end, a physical count of inventory is taken to determine ending inventory and cost of goods sold.
A company issues 40,000 shares of common stock, then buys back 8,000 shares, then reissues 2,500 shares.
. As a result, there are 40,000 shares issued and 34,500 outstanding (40,000 - 8,000 + 2,500) The journal entry to record the reacquisition by a company of 10,000 shares of its own $1 per share par value common stock for $20 per share (i.e. the current market value per share): Treasury Stock $200,000 Cash $200,000 If the above company reissues 5,000 of its treasury shares (5,000 * $20 purchase price = $100,000) for $24 per share (5,000 shares * $24 per share = $120,000), the journal entry is as follows: Cash $120,000 Treasury Stock $100,000 Paid in Capital-Treasury Stock $20,000 If the company then reissues the remaining 5,000 shares for $70,000, the journal entry is: Cash $70,000 Paid in Capital-Treasury Stock $20,000 Retained Earnings $10,000 Treasury Stock$100,000
A company fails to record interest income earned but not yet received
. Assets, retained earnings, and revenue are understated.
. Assets, retained earnings, and revenue are understated.
. Liablities would be overstated; revenue and retained earnings would be understated
Post Closing Trial Balance consists only of Permanent Accounts
. No temporary accounts (revenue, expense, and dividends) appear on the Post Closing Trial Balance because they have been closed to Retained Earnings and now have zero balances. The adjusted balances of the permanent accounts are unaffected by the closing process.
Errors are also accounted for on both the Bank side and the Book side of the reconciliation depending upon the nature of the error. Example: The bank records a deposit of $100 as a deposit of $110
. The $10 error must be subtracted from the balance per bank. Bank errors are added or subtracted from the Bank side. Book errors are added or subtracted from the book side.
To pay cash dividends, the company must have enough:
1) Retained Earnings and 2) Cash
Date of Declaration -
1) This is the date the Board of Directors formally obligates the company to the payment of dividends by declaring dividends. A liability is created (increased) and stockholder's equity is decreased on the declaration date, thereby requiring a journal entry. Retained Earnings Dividends Payable
Date of Payment -
1) on this date the dividend is paid, requiring this journal entry Dividends Payable Cash
A company pays $1,200 for insurance in advance for the period October 1, 2015 to September 30, 2016 What is the adjusting journal entry for December 31, 2015?
1,200/12 months = $100 per month. $100 x 3 months = $300 (October, November, December 2015). Insurance Expense 300 Prepaid Insurance 300 How much insurance expense would be recorded in 2016? Answer: $100 per month x 9 months = $900 (January through September)
If Common Stock is $30 million, $0.50 par and Paid in capital > Par = $400 million, how many shares were issued and what is the sales price of the stock?
30,000,000/.50 = 60,000,000 shares issued ($30,000,000 + $400,000,000)/60,000,000 = $7.17 sales price per share
The adjusted trial balance is the balance after adjusting journal entries are made to the unadjusted balance. Example: If the adjusted balance in an account is $500 and the unadjusted balance is $350, the adjustment amount is $150.
350 + X = $500 X = $500 - 350 X = 150
What is the journal entry on December 31? What is the balance left in the Unearned Revenue account on December 31 after the adjusting journal entry?
6,000/6 months = $1,000 per revenue per month. 2 months * $1,000 = $2,000 Unearned Revenue 2,000 Service Revenue 2,000 The balance remaining in Unearned Revenue is $4,000 ($6,000 - $2,000)
The Retained Earnings equation
Beginning Retained Earnings + Net Income - Net Loss -Dividends = Ending Retained Earnings
1000 shares of $50 par value, 4% preferred stock. Dividends are $6,000 in arrears. The company also has 8,500 shares of $1 par value common stock. The company declares $25,000 of dividends. How much do the preferred stockholders receive and how much goes to the common shareholders?
: Preferred receives $8,000 and Common receives $17,000 Preferred Stock annual dividend is calculated as follows: 1,000 shares * $50 * 4% = $2,000 per year Dividends in Arrears of $6,000 plus current year preferred stock dividend of $2,000 = $8,000 total preferred stock dividend. Total dividends: $25,000 Less: Preferred Dividend ($ 8,000) Common Stock Dividend $17,000 Common shareholders would receive therefore $2 per share ($17,000 dividend/8,500 common shares)
Know the supplies expense calculation
Beginning Supplies + Purchases - Ending Supplies = Supplies Expense
Treasury Stock -
A corporation's own stock that it has issued and reacquired. Issued Stock less Treasury Stock is Outstanding Stock, i.e. stock that has been issued by the company but is still outstanding (held by the stockholders). When a company purchases Treasury Stock, Stockholder's Equity is decreased. An asset (Cash) decreases. Treasury Stock (a contra-equity account which will have a debit balance) is increased. Therefore, purchase of Treasury Stock causes Stockholder's equity to decrease as a result.
For a return of a purchase - example purchase made on account
Accounts Payable Inventory
A consulting firm performs services on account (i.e. no cash is received at the time the services were performed. Journal entry is:
Accounts Receivable Sales Revenue
To record a credit sale, the journal entry under the perpetual system is:
Accounts Receivable Sales Revenue Cost of Goods Sold Inventory
If the asset is simply scrapped for no cash then there is no debit to cash:
Accumulated Depreciation XXXX Loss on Sale XXXX Asset XXXX
Average Cost -
After each purchase, a new weighted cost per unit is computed and assigned to each unit sold and to each unit in ending inventory.
Amortization - systematic reduction of the carrying value of intangibles on the books. The journal entry to record amortization is:
Amortization Expense XXXX Intangible Asset XXXX
Contra asset
An account linked to another account with a normal balance opposite to that of the linked account. An example is Accumulated Depreciation which is linked to a long term asset.
Historical Cost Principle
An accounting principle that states that companies should record assets at their cost.
Stock Split -
An increase in the number of issued and outstanding shares of stock coupled with a proportionate reduction in the value of the stock. Par value per share decreases with a stock split. Example: A 4 for 1 split with 100,000 shares outstanding and par value of $8 per share increases the number of shares to 400,000 and reduces par value to $2 per share. No journal entry made. Total par value and total stockholder's equity do not change after a stock split.
T-Account
An informal account form used to summarize transactions. It has an account title, a debit side, and a credit side.
Beginning Accounts Payable is $2,000, ending Accounts Payable is $3,000, payments on account are $800. What are purchases on account?
Answer = $2,000 + P - $800 = $3,000. P = $1,800
Retained Earnings had a beginning credit balance of $1,000. In closing journal entries Retained Earnings was credited for $1,100 in revenue and debited for $500 in expenses and $200 in dividends. What is the ending balance in Retained Earnings?
Answer: $1,400 credit balance.
Inventory control. Beginning inventory is 100. Additions (Purchases) are 25. Subtractions (Sales) are 10. Ending inventory should be 115.
Beginning amount + Additions - Subtractions = Ending amount 100 + 25 - 10 = 115
Be able to solve for a needed amount if one item is missing. Ex. If a desired ending cash balance is $500,000, how much more will be needed if beginning cash is $100,000, planned receipts are $800,000 and planned payments are $700,000.
Answer: $300,000. Beginning $100,000 + Receipts $800,000 - Payments $700,000 = Ending $200,000. If $500,000 is required, then the company needs an additional $300,000. $200,000 + X = $500,000 X = $300,000
A company borrows money from a bank
Assets (Cash) increase but Liabilities (Notes Payable) increase as well.
Also know that
Assets - Liabilities = Stockholder's Equity
Know the accounting equation
Assets = Liabilities + Stockholder's Equity
A company pays on an account payable
Assets decrease, Liabilities decrease, Stockholder's Equity is unchanged.
Know typical assets
Assets include accounts receivable, which are amounts owed to the company by its customers; Prepaid Expenses (amounts paid by the company but will become expenses later); land, property, equipment.
A company receives cash in exchange for providing services to a customer
Assets increase as cash goes up. Stockholder's Equity increases due to the increase in revenue.
A company sells stock for cash
Assets increase, Liabilities are unchanged, Stockholder's Equity increases.
- A company buys inventory on account
Assets increase, Liabilities increase, Stockholder's Equity is unchanged.
A company buys equipment with a note payable
Assets increase, Liabilities increase, Stockholder's Equity is unchanged.
Know how to calculate missing inventory. Example: Beginning Inventory is 100, purchases are 40, sales are 15. Actual inventory count at period's end is 109. How many are unaccounted for?
Beg Inv 100 + purchases 40 - sales 15 = Ending Inventory 125 Actual inventory count of 109 less calculated ending inventory 125 = Unaccounted for is 16
Know the formula to determine Cost of Goods Sold
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold
Remember the Cost of Goods Sold equation:
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold
Statement of Retained Earnings
Beginning retained earnings + Net Income - Dividends = Ending retained earnings. The items affecting retained earnings are thus revenues, expenses, dividends. If there is no beginning balance in retained earnings and no dividends, the balance in retained earnings is therefore net income or net loss for the year.
A 10 year $10,000 bond was issued on July 1 at 106 with 5% interest payable annually.
Bond issue price is therefore $10,000 * 106% = $10,600 Cash 10,600 Bond Premium 600 Bonds Payable 10,000
When a company receives a cash payment of $3,411 to fulfill a note receivable of which $411 is interest, what is the journal entry?
Cash $3,411 Notes Receivable $3,000 Interest Income $411
A company receives $6,000 revenue in advance on November 1 for 6 months of future consulting services.
Cash 6,000 Unearned Revenue 6,000
Know the journal entries for credit card transactions: Example: Sales of $1000 on a credit card with a 3% fee. The journal entry is as follows:
Cash 970 Service Fee Expense 30 Sales. 1,000
The journal entry to dispose of an asset sold for cash at a gain (more than book value) is:
Cash XXXX Accumulated Depreciation XXXX Asset XXXX Gain on Sale XXXX
The journal entry to dispose of an asset sold or scrapped for cash at a loss (less than book value) is:
Cash XXXX Accumulated Depreciation XXXX Loss on Sale XXXX Asset XXXX
Deferrals
Cash received or paid before revenues have been earned or expenses incurred. Unearned Revenue is cash received prior to earning the revenue. As goods are delivered or services provided, the liability unearned revenue decreases and revenue increases. As prepaid expense items expire or are otherwise used up, the asset prepaid expense decreases and expenses increase
Ordinary repairs are necessary to maintain an asset in its normal operating condition. These expenditures are debited to repairs expense, not to the asset itself. Example: Repair costs for a machine are debited to the machinery expense account.
Changing oil on a vehicle is an expense item. Adding new tires to a vehicle is an expense. Repainting assets is an expense.
Outstanding Checks -
Checks issued by a company and recorded on its books but have not yet been paid by the bank. These are subtracted from the balance per bank.
Expenses
Decreases to stockholder's equity and to retained earnings caused by using resources to deliver goods or provide services - i.e. business operating costs. Examples include rent, interest, cost of goods sold, advertising, wages, depreciation. Expenses may or may not be paid at the time the expenses are incurred. Expenses are recorded in the period incurred.
Deposits in Transit
Deposits that have been recorded on the company's books but not yet by the bank. These are added to the balance per bank.
Depreciation Expense equation
Depreciation Rate * Actual Units
Double Entry accounting
Each Transaction Involves At Least 2 Accounts (Dual Effect) And Debits Must Equal Credits When Recording Transactions
Stock Dividend -
Example: 200,000 shares outstanding of $1 par value stock. The market value is $10 per share. The company declares a 6% stock dividend. The dividend is calculated as follows: 200,000 shares * 6% = 12,000 Shares (total shares are now 212,000) 12,000 shares * $10 = $120,000 The journal entry to record the stock dividend is: Retained Earnings $120,000 Common Stock $12,000 Paid in Capital > Par $108,000
A company fails to record accrued wages expense.
Expenses and liabilities are understated while retained earnings is overstated.
A company fails to record an expense paid in a previous period
Expenses would be understated; assets and retained earnings overstated.
What is GAAP?
Generally Accepted Accounting Principles
Gross Profit
Gross Profit Percentage * Net Sales
Book Value =
Historical Cost less Accumulated Depreciation
Example: Recording income taxes incurred but not yet paid:
Income Tax Expense XXXX Income Taxes Payable XXXX
Benefits of extending credit to customers:
Increase sales, increase customer base, increase profits, benefits exceed costs.
Revenues
Increases to retained earnings by delivering goods or providing services. Examples: Sales Revenue, Service Revenue. Cash may or may not be received at the time the revenue is earned. Revenue is recorded when earned. Revenue is earned when goods are delivered or services are performed.
Transaction
an event that has a financial impact on a business and can be measured reliably.
Market Rate -
Interest rate investors demand for loaning their money; also called the effective rate
IASB?
International Accounting Standards Board
IFRS?
International Financial Reporting Standards.
Know the journal entries for the perpetual inventory system when a purchase is made on account:
Inventory Accounts Payable
For a cash purchase:
Inventory Cash
If inventory is purchased on credit by signing a note, the entry is:
Inventory Notes Payable
Timeliness
Issuance of interim reports example of what enhancing quality of relevance
What is a trial balance and what is its purpose?
It is a list of all accounts and their balances. Its purpose is to verify that total debits equal total credits. The wrong accounts may have been debited or credited but the Trial Balance would not be out of balance in this case - debits would still equal credits. A trial balance will show if debits do not equal credits. Financial statements can be prepared from the adjusted Trial Balance.
Review Safeguard Controls
Job rotation, mandatory vacations, alarms, security cameras, fidelity bonds which are insurance policies to reimburse employer for employee theft.
Debit means
Left
A company incurs wages expense which will not be paid until the next period.
Liabilities go up and expenses increase which in turn causes Retained Earnings to decrease. If the company incurs wages expense and it is paid in the current period, both Assests (Cash) and Retained Earnings decrease
$4,000 loan at 6% interest for 6 months.
Maturity Value = 4,000 + (4,000* 6% * 6/12) = $4,120
Two most common types of fraud:
Misappropriation of assets and untruthful financial reporting. Fraud is the intentional misrepresentation of facts to persuade another party to act in a way that causes injury or damage to that party. What are typical examples of misappropriation of assets? What is fraudulent financial reporting? Its purpose is to deceive investors and creditors into investing or loaning money they otherwise wouldn't have and to overstate assets and income to enable management to receive bonuses?
Free Cash Flow =
Net Cash provided by operating activities - Cash payments earmarked for investments in plant (capital) assets
Gross Margin or Gross Profit =
Net Sales - Cost of Goods Sold
- A company receives payment from a customer on account
No affect on total assets, liabilities, or Stockholder's Equity. One asset (cash) increases while another (accounts receivable) decreases.
When a company loans money, the journal entry is:
Notes Receivable XXXX Cash XXXX
Know the major sections on the Statement of Cash Flows:
Operating, Investing, and Financing Its purpose is to show the sources (i.e. how it was received) and uses (for what was it expended) of cash during the period. The operating activities are normally the most important.
Entity Assumption
Organization stands apart from other organizations and individuals as a separate economic unit
Stockholder's Equity
Paid-in capital (owner's investment in the company) and retained earnings (undistributed profits). Dividends are the distribution of earnings to the owners. Dividends reduce retained earnings.
Verifiability
Product company has attempted to determine the replacement cost of inventory. Three different appraisers arrive at substantially different amounts for this value. The president, nevertheless, decides to report the middle value for external reporting purposes. Which qualitative characteristics of information is lacking in these data
Business Organizations
Proprietorship, Partnership, S Corporation, Limited Liability Company and Corporation
Net Purchases =
Purchases - purchase returns and allowances - purchase discounts + freight in
Comparability
Qualitative characteristics being employed when companies in the same industry are using the same accounting principles
Rationalization -
an element of the fraud triangle in which the employee justifies his or her actions and convinces himself\herself that fraud is not wrong
What is net income?
Revenues - Expenses
Accruals -
Revenues earned (services performed or goods delivered) or expenses incurred before cash has been exchanged (see page 135). Under accrual accounting revenues are recorded in the period earned and expenses in the period incurred, regardless of when the cash is received or paid.
Credit means
Right
Net Sales Revenue =
Sales Revenue - Sales Discounts - Sales Returns and Allowances
Issued Shares -
Shares of stock sold to the public
Outstanding Shares -
Shares of stock that have been issued and are still held by the stockholders. Outstanding shares are reduced when a company buys back its own previously issued stock (i.e. Treasury Stock).
A company sells inventory
Stockholder's equity is increased by the revenue earned and decreased by expenses incurred.
If supplies purchased on account are not recorded, assets are understated and liabilities are understated. Think of the journal entry which was not recorded
Supplies xxx Accounts Payable xxx
Depletion -
Systematic reduction of a natural resource's carrying value on the books. Use the units of production method to calculate depletion.
What is the FASB?
The FASB is an independent full-time organization that was established in 1973 and has determine GAAP since then.
Capital Expenditures -
The asset is debited for capital expenditures instead of an expense account. Costs that extend an asset's useful life or improve its capacity or productivity are capital costs. Examples include adding a new wing to a building, rebuilding or overhauling a vehicle's engine, modification of the body for new use of a truck. Those costs that merely maintain the asset and keep it in normal working condition are normal expenses, not capital expenditures.
Be able to solve for a missing 4th item if 3 elements of the formula are given. Purchase discounts: A company buys $5,000 of inventory for terms of 2/15, n/30. They return $1,000 of inventory to the supplier, then pay the balance within the 15 day discount period.
The company receives an $80 discount ((5,000 - 1,000)*.02. The company pays $3,920 ((5,000 - 1,000) - $80)
What is the "Normal Balance"?
The direction of increase for an account. Assets and expenses normally have debit balances. Liabilities, Stockholders Equity accounts, and revenues normally have credit balances. Dividends normally has a debit balance.
Stable Monetary Unit Assumption
The reason for ignoring the effect of inflation in the accounting records, based on the assumption that the dollar's purchasing power is relatively stable.
Stockholders rights:
The right to vote; the right to receive distributions of the company's earnings (i.e. Dividends); the right to receive their proportionate share of the company's assets in the event of liquidation; and Preemption, which is the right of stockholders to maintain their proportionate share of ownership when new stock is issued. If a company issues 12,000 new shares of stock and you own 5% of the company's stock, you have the right to purchase 600 shares of this stock issue. Stockholders elect the Board of Directors. The Board of Directors selects the company's managers.
Remember when doing a bank reconciliation, ask the question what is it that the bank knows but the company doesn't'?
These items are added to \ subtracted from the balance per books. What is it that the company knows but the bank doesn't? These items are added to \ subtracted from the balance per bank. Example: Bank service charges and NSF (nonsufficient funds or hot check) charges are subtracted from the balance per books, not the balance per bank. Deposits in transit and outstanding checks are adjustments to the balance per bank, not the balance per books. Collections from customers on the bank statement are added to the balance per books. Interest shown on the bank statement is added to the balance per books. Items paid and deposits made before the date of the bank statement will appear on the bank statement. Those after that date will not be in time to make the bank statement.
Assets
Things of value; resources of the company; expected to produce future economic benefits
ccounts Receivable is a current asset that must be reported at Net Realizable Value
This is the amount companies expect to collect from their accounts receivable. Accounts Receivable Less: Allowance for Uncollectible Accounts = Net Realizable Value
FOB Shipping Point -
Title passes to the buyer at point of shipment. Buyer pays the freight and shipping costs. The goods become part of the buyer's inventory immediately on the date of shipment
FOB Destination -
Title passes to the buyer when goods reach the buyer's destination. Seller pays freight and shipping costs, and owns the goods while in transit. The goods do not become part of the buyer's inventory on the date of shipment but rather when they arrive at the buyer's destination.
: A company incurs wages expense of $500 per week (Monday through Friday) and pays wages to employees each Friday. This year ends on Tuesday. What is the adjusting journal entry?
Wages per day is $100, i.e. $500 per week / 5 days per week. Two days wages have not been paid ($100 x 2 days = $200). Wages Expense 200 Wages Payable 200 Wages Expense is an accrued expense and Wages Payable is an accrued liability
To record estimated warranty expense - enter estimated warranty cost in the following journal entry:
Warranty Expense Accrued Warranties Payable
Know how to calculate the balance of an account - the excess of debits over credits would mean a debit balance. The excess of credits over debits means a credit balance. Example: Beginning Accounts Receivable balance was $1,000. Sales on Account were $600 and cash collections from customers were $400. The ending balance would be a debit balance of $1,200.
X = Ending Balance in Accounts Receivable X = 1,000 beginning + $600 Increase - $400 decrease = $1,200
Notes receivable -
a current asset with a formal written agreement listing terms of the loan, including interest. The debtor is the borrower, the creditor is the lender. When a company loans money they are the creditor and the journal entry is: Notes Receivable XXXX Cash XXXX
Bank Reconciliation-
a document that identifies and explains the differences between the company's records of the cash account and the bank's records of the cash account.
CPA
a licensed accountant serving the general public rather than one particular company
Disclosure -
accounting principle that states that a company's financial statements should report enough information for users to make knowledgeable decisions about the company. Footnotes are an example of this principle.
Opportunity
an element of the fraud triangle in which the employee believes a chance exists to commit fraud, conceal it, and go unpunished due to weak internal controls.
Motive
an element of the fraud triangle in which the employee has a critical need or greed
Debenture Bonds -
are unsecured bonds - backed only by good faith and credit of the borrower
Term Bonds -
bonds that mature at the same time
Serial Bonds -
bonds that mature in installments over a period of time
What is Cost of goods sold?
deducted from revenue.includes only direct cost . reported separately because it is the largest expense item in most business.
Goodwill -
excess of the purchase price of a company above the fair market value of its net assets. Example if the fair market value of assets is $50,000,000, the fair market value of liabilities is $40,000,000, and the purchase price of the company is $14,000,000, then Goodwill is $4,000,000 (14,000,000 - (50,000,000-40,000,000))
Salvage (Residual) Value -
expected cash value of an asset at the end of its useful life. When an asset is fully depreciated, book value will equal residual value.
Cash Equivalents -
highly liquid, highly safe, investments that so closely resemble cash that they may be shown with cash on the balance sheet. These mature within 90 days. Examples include certificates of deposit and high-grade U.S. or foreign government securities that are very close to maturity (three months or less at the time of purchase). Cash and cash equivalents are shown as one amount on the balance sheet. Unrestricted cash in the checking account is shown on the balance sheet
Examples of liabilities (debts to third parties - long term and short term
include accounts payable - amounts owed to third parties backed by general credit standing of the company; notes payable - written promise of payment of a fixed amount by a specific date.
Callable Bonds -
issuer may buy back at a specified price and at the most favorable time to pay off bonds
Asset Impairment
long-term assets (such as Goodwill) must be tested for impairment yearly. Two step process: 1) Is Net Book Value > Estimated Future Cash Flows? If yes then impairment 2) Impairment loss is: Excess of Net Book Value above Fair Market Value
Convertible Bonds -
may be exchanged for stock
Review Cash Budgeting -
noncash items are not included (ex. depreciation)
Must maintain good internal control over accounts receivable -
separation of duties is essential. Need multiple people handling the functions surrounding receivables. The person who handles the accounts receivable receipts should not also record the accounts receivable transactions. One person should handle the receipts and pass them to a second person who records them. Those opening the mail should give cash to another person for handling. Those handling accounts receivable should not be the ones writing off the receivables.
Cash equivalents -
short term, highly liquid investments quickly convertible to cash.
Liabilities
obligations of the company - amount owed to parties outside the company
Date of Record -
on this date the shareholders of record will receive the dividend when it is paid - i.e. this date determines who will receive the dividend. No journal entry is required.
Closing Entries
prepared at the period's end which zero out temporary accounts. These temporary accounts are closed to Retained Earnings. They transfer net income or net loss and dividends to Retained Earnings. Closing entries prepare accounts for the next period.
Income Statement
reports results of operations for a period and shows revenues and gains minus expenses and losses- not for a specific date in time as does the balance sheet. The Income Statement may also show subtotals, such as Operating Income which is the results of a business's core activities. Operating Income excludes items such as interest and investment income.
Corporation
review characteristics. Corporation owners have limited liability but are subject to double taxation.
Downside of extending credit -
risk of non-collection - risk of bad debt expense. Bad debt expense is normal and is expected.
Statement of Cash Flows
shows sources (receipts) and uses (payments or disbursements) of cash. Major sections show Operating Activities, Investing Activities, and Financing Activ
Balance Sheet
shows the financial position of a company on a specific date in time. It is like a digital snapshot. At the close of business on a certain date, the Assets, Liabilities, and Stockholder's Equity of the company are shown.
Continuity (Going Concern) Assumption
states that businesses are assumed to continue into the foreseeable future
Depletion -
systematic reduction of a natural resource's carrying value on the books. It is computed using the units of production method. Natural resources include coal, oil, timber, minerals, gas.
Amortization -
systematic reduction of an intangible asset's value on the books. Intangible assets include patents (exclusive right to produce and sell an invention), trademarks (distinctive identification of products or services), copyright (the exclusive right to reproduce and sell a book, musical composition, film, other work of art, or computer program), goodwill (the excess of cost over fair market value of net assets acquired). Know their definitions. They are assets without physical substance. They can't be touched or seen. When amortizing use the shorter of legal or useful life. Amortization is recorded for assets with finite lives.
Par Value -
the Face Value or principal of the bond
Depreciation Expense
the allocation of the cost of a fixed asset over its estimated useful life
Depreciation -
the allocation of the cost of a fixed asset over its estimated useful life. It follows the expense recognition principle. As a fixed asset is utilized over time, accumulated depreciation increases and net book value decreases.
Accounting
the information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decisions makers
Authorized Shares -
the maximum number of shares of stock a company is authorized to sell. This is shown in the corporate charter.
Depreciation -
the process of allocating a plant asset's cost to expense over its estimated useful life. Plant assets include buildings, vehicles, furniture, equipment. Land is a fixed asset but it is not depreciated. Depreciation is a current year expense on the income statement as are other expenses, including repairs and maintenance expenses.
Stated Rate -
the rate of interest printed on the bond itself.
Secured Bonds -
those backed by collateral such as real estate
Mortgage Bonds -
those backed by real estate
Unsecured Bonds -
those backed by the credit of the issuer
Collusion
two or more employees work together to commit fraud such as stealing assets.
What is net loss?
when expenses are greater than revenue