Accounting Exam 1 and 2 study guide

4 underlying assumptions (Exercise E1-20, p.44)

*economic entity * all economic events with a particular economic entity can be identified *Going Concern* in the absence of information to the contrary, a business entity will continue to operate indefinately *Periodicity* the economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting *Monetary Unit* a unit or scale of measurement can be used to measure financial statement elements, a common denominator is needed to measure all business activities

What is the Accounting equation?

Assets= Liabilities + Stockholder's Equity (Common stock + Retained earnings) Assets= Liabilities+Common Stock+Retained Earnings

4 types of Adjusting entries *

4 types Prepayments / Deferrals 1. Prepaid Expenses—Pay cash (or have an obligation to pay cash) to purchase an asset in the current period that will be recorded as an expense in a future period. 2. Deferred Revenues—Receive cash in the current period that will be recorded as a revenue in a future period. Accruals 3. Accrued Expenses—Record an expense in the current period that will be paid in cash in a future period. 4. Accrued Revenues—Record a revenue in the current period that will be collected in cash in a future period.

Statement of Cash flows definition Whats in it?

A financial statement that measures activities involving cash receipts and cash payments over a period of time. business title Statement of cash flows cash flows from operating activities cash flows from investing activities cash flows from financing activities net increase in cash cash at the beginning of the year cash at the end of the year

Balance sheet definition Whats in it? (see below)

A financial statement that presents the financial position of the company on a particular date.

revenue recognition and matching principles

Revenue recognition: Revenues are recorded in the period in which the goods or services are provided to customers Revenue recognition principle revenue recognition principle states that we record revenue in the period in which we provide goods and services to customers Expense recognition Expenses are reported in the same period as the revenues they help to generate Commonly referred to as the matching principle Companies typically report expenses in the same period as the revenues they help to generate (a concept commonly referred to by accountants as the matching principle). Implied in this principle is a cause-and-effect relationship between revenue and expense recognition. In the same period we report revenues, we should also record all expenses incurred to generate those revenues.

whats the equation for the income statement

Revenues - Expenses = Net Income.

SOX (p. 167)

Sarbanes-Oxley Act known as the public company accounting reform and investor protection act of 2002 and commonly referred to as SOX, the act establishes a variety of guidelines related to auditor-client relations and internal control procedures

allowance for uncollectable accounts slides

bad debit expense accounts receivable outstanding some not collected

Advantages/Disadvantages of sole proprietorship?

business owned by one person -Adv: lower taxes compared to corporations (personal income tax rate which is lower than the corporate income tax rate) -Dis: owners must have sufficient personal funds to finance the business, in addition to the ability ot borrow money, neither offer limited liability

Advantages/Disadvantages of Partnership?

business owned by two or more people -Adv: lower taxes compared to corporations (personal income tax rate which is lower than the corporate income tax rate) -Dis: owners must have sufficient personal funds to finance the business, in addition to the ability ot borrow money, neither offer limited liability

November 1: issue common stock in exchange for $13,000 cash

cash- (Debit, left) 13,000 common stock- credit (right)

debit/credit stuff, transactions what side is debit/what side is credit? for each of the accounts indicate whether we use a debit or credit to increase the balance of the account:

debit-left, credit-right dividends increase- debit expenses increase- debit liabilities increase- credit owners equity- credit revenues- credit

what are all the investing activities?

generally include cash transactions for the purchase and sale of investments and long-term assets (resources owned by a company that are thought to provide benefits for more than one year) -purchase equipment

see how to do discounts at the beginning of chapter 6, maybe chapter 5; doctor example giving 10% discount how to we record journal entry

highlight

calculate: expense/exact cost of asset of a building (see asset slide chapter 7)

highlighted

activity based dep. method; use miles to drive a truck example

highlighted see chapter 7 slide, study in book

What are all the operating activities? (you will be asked to add them together)

include cash receipts and cash payments for transactions involving revenue and expense activities during the period. in other words, they include the cash effects of the same activities that are reported in the income statement to calculate net income. -salaries, rent, from customers,

November 30: pay $5,000 rent for November

rent expense: 5,000 (debit, left) Cash: -5000 (credit, right)

understand the effects of debits and credits on accounts p. 70-72, Exercise BE2-10, p.87)

see above, dealor and examples

The 4 different contra accounts and what balance they have (contra asset, contra revenue accounts) 3 accounts (chapter 4 or 5)

see in book, take picture, and online page

Trial Balance p.81

see phone

From homework know how to record salary/expenses not paid (acct rec./salary expenses)

see phone and credit/debit section

Financial statements (p. 128-129)

see phone pics

over estimation/underestimation, what happens when these occur

see slide with piggy bank and highlight

know discount terms exact date sold date cost paid seee if qualify for 2% discount when collect cash w/discount, what's the journal entry?

see slides, highlight

What are the 3 types of business

sole proprietorship, partnership and corporation.

what is account payable

sometimes called trade accounts payable, are amounts the company owes to suppliers of merchandise or services that it has bought on credit.

November 4: purchase supplies for $1,000 on account

supplies- (debit, left) 1,000 Accounts payable- (credit, right) 1,000

purchase office supplies on account for $1,400

supplies: $1,400 (debit, left) notes payable: $1,400 (credit, right)

difference between accrual-basis accounting and cash-basis accounting

the timing which revenue and expenses are recorded, Cash basis is entered when the payment is received for services, where accrual basis is when the payment is entered at the time if sale even if payment has yet to be received.

Cash controls (preventive and detective, p. 170)

*Controls over cash receipts* -Each day: an employee should open mail and list checks -Each day: a different employee should deposit cash and checks into the company's bank account -As soon as possible: a separate employee should record cash receipts in the accounting records -Accept credit cards or debit cards to limit the amount of cash handled *Controls over cash disbursements* -Disbursements should be made by check, debit card, or credit card -Authorize all expenditures; authorizing employee should not also prepare the check -Checks should be serially numbered and should require two signatures for large amounts -Periodically agree debit and credit card statements to purchase receipts -Set maximum purchase limits -Separate cash disbursement and cash receipt duties

Accruals

cash is paid after expense is incurred (payable) or after revenue is earned (receivable)

Fairbanks corporation received $6,000 from customers on account

cash: $6,000 (debit, left) Accounts receivable: $6,000 (credit, right)

november 22: provide services to customers for $11,000 cash

cash: +11,000 (debit, left) service revenue: +11,000 (credit, right)

november 26: collect $7,000 on account from customers

cash: +7000, debit (left) accounts receivable (asset) : -7000, credit (right)

what kind of account is accumulated depreciation

contra asset, credit

2 questions on *Adjusting Entries* -allowance on uncollectable accounts over/underestimate

highlight in ppt, find

accounts receivable 100,000; 3% not collected

highlight in ppt, find

What are the 4 financial statements? (Know whats in them see paper)

income statement balance sheet statement of cash flows statement of stockholder's equity

what do we report in the 4 financial statements? income statement? Balance Sheet? Statement of Stockholder's equity? statement of cash flows?

income statement: Balance sheet: statement of stockholder's equity: statement of cash flows:

know 2 accounts affected in certain scenerios DEALOR

increases (Debit), decreases (Credit) D- dividends E- Expenses (salary expense, utility expense, rent expense) A- Assets (cash, Equipment, accounts receivable, supplies) Increases (credit), decreases (debit) [retained earnings salaries payable accts payable] L- Liabilities (accounts payable, notes payable) O- Owner's/Stockholder's Equity R- Revenue (service revenue)

Accounts payable

liability, you owe them money

november 24: pay $1,400 on the note from spartan corporation

notes payable: 1400, (debit, left) cash: -1400 (credit, right)

journal entries p.72

pictures on phone

deferred unearned revenue

receive cash, but have not provided the service yet, obligation to person=liability

who are internal users of a company?

refer to managers who use accounting information in making decisions related to the company's operations, information provided for internal users is known as managerial accounting

Statement of Stock Holder's Equity (net income-dividends= Retained Earnings Column)

retained earnings= beginning retained earnings+net income- dividends

know how to do journal entries like pay rent pay utilities, etc

see above

What are all the financing activities?

transactions with lenders such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends -issue common stock -borrow from a bank -pay dividends

Closing - temporary & permanent accounts (will not be tested on actually preparing a closing entry).

transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of retained earnings account heres how: all revenue accounts have credit balances. to transfer these balances to retained earning account, we debit each of these revenue accounts for its balance and credit retained earnings for the total similarly, all expense and dividend accounts have debit balances. So, we credit each of these accounts for its balance and debit retained earnings for the total *see in notes*

Assets

Resources of a company

november 20: pay employees $3,000 for the first half of the month

Salary Expense: 3,000 (debit, left) Cash: -3,000 (credit, right)

analyze the impact of external transactions on the accounting equation (Exercise E2-4, p.89)

*Paint houses in the current month for 15,000 on account* Assets increase and Stockholders Equity increases *Purchase painting equipment for 16,000 cash* One asset (equipment) increases and another asset (cash) decreases *Purchase office supplies on account for 2,500* Assets increase and liabilities increase *Pay employee salaries of 3,200 for the current month* Assets decrease and SH Equity decreases *Purchase advertising to appear in the current month, 1,200* Assets decrease and SH Equity decreases *Pay office rent of 4,400 for the current month* Assets decrease and SH Equity decreases *Receive 10,000 from customers in Accounts Receivable* One asset (cash) increases and another asset (accounts receivable) decreases *Receive cash of 5,000 in advance from a customer that plans to have his house painted in the following month* Assets increase and Liabilities increase

Prepayments

- cash is paid or received before incurring the expense or earning the revenue. This type adjusting entry always involves an initial entry when the cash is paid or received. That entry is NOT the adjusting entry. Note that the Prepayments involve a "setup" entry when the cash is received or paid out. This is NOT the adjusting entry (see examples).

Internal controls over cash receipts should include the following:

-Make a list of checks received, including the amount and payer's name, every day. -Have a designated employee deposit checks into the bank each day. This person should be different from the person who receives cash and checks. -Have another employee record cash receipts in the accounting records as soon as possible. Have cash receipts verified by comparing the bank deposit slip with the accounting records. -Accept credit cards or debit cards, to limit the amount of cash handled.

Internal controls over cash disbursements should include the following:

-Make all disbursements by check, debit card, or credit card to provide a record for the transaction. -Verify the accuracy of the purchase and authorize all expenditures before purchase. The employee authorizing payment should be different from the person preparing the check. -Make sure checks are serially numbered. Require two signatures for larger checks. -Check amounts shown in the debit card and credit card statements against purchase receipts. -Set maximum purchase limits and give approval to purchase above these amounts only to upper-level employees. -Separate duties of cash disbursements from cash receipts.

2/10 mean, n/30 means

2% discount in 10 days, pay within 30 days no discount

income statement definition whats in it?

A financial statement that reports the company's revenues and expenses over an interval of time. Company Title Income Statement Service Revenue: 7,600 Expenses: Salaries Expense 1,350 Utilities Expense 1,000 Total Expenses 2,350 Net Income (rev-exp) 5,250

Statement of Stockholder's equity Whats in it?

A financial statement that summarizes the changes in stockholders' equity over an interval of time. business title statement of stockholder's equity common stock RE Total SE beg balance (dec. 1) issuances Add: net income less: dividends Ending balance (dec. 31)

Examples of Revenue Items *

Amount that is expensed immediately, being matched with revenues of the current accounting period. expenditure incurred for purchase of raw material, and stores required for manufacturing saleable goods, repair and maintenance expense (any expense used in a company/small business)

Liabilities

Amounts owed to creditors

Expanded accounting equation p. 70

Assets = Liabilities + Contributed capital + Beginning retained earnings + Revenue - Expenses - Dividends Assets = Liabilities + Owner's Equity + Revenue - Expenses - Dividends

Expenses

Costs of providing products and services

Accrued expenses

Debit to expense account and credit to payable account (liability)

Prepaid expenses

Debit to expense account and credit to prepaid asset account.

Accrued revenues

Debit to receivable account (asset) and credit to revenue account.

Unearned revenues

Debit to unearned revenue (liability) account and credit to revenue account.

Dividends

Distributions by a corporation to its stockholders

printed on its own

Example of an accrued expense: Received a utility bill for utilities incurred in the current month: Utility Expense $560 Accounts Payable $560 Example of an accrued revenue: Performed a service and billed the customer: Accounts Receivable $1,500 Service Revenue $1,500 Note that adjusting entries do not involve cash!

Bank Reconciliation- printed on its own

Bank reconciliation a. Reconciling bank's cash balance -Add deposits outstanding -Subtract checks outstanding -Add or subtract any bank errors b. Reconciling company's cash balance -Subtract NSF checks -Subtract debit card purchases -Subtract EFT payments -Subtract bank service charges -Add notes collected by bank -Add interest paid by bank -Add or subtract company errors

Know the Shipping Terms

FOB Shipping point/destination FOB stands for "free on board" and indicates when title (ownership) passes from the seller to the buyer. FOB shipping point means title passes when the seller ships the inventory, not when the buyer receives it. In contrast, if the seller ships the inventory FOB destination, then title transfers to the buyer when the inventory reaches its destination. when title is passed to buyer from seller- find in ppt

IFRS (know what it means, read paragraph), see phone too

International financial reporting standards

four financial statements, the link among them and the order prepared? pp. 20-18 definitions, Exercise E1-10 p.40

The income statement describes how the assets and liabilities were used in the stated accounting period. The cash flow statement explains cash inflows and outflows, and it will ultimately reveal the amount of cash the company has on hand, which is also reported in the balance sheet. By themselves, each financial statement only provides a portion of the story of a company's financial condition; together, they provide a more complete picture. The sequence of financial statements is: income statement, statement of retained earnings, balance sheet and statement of cash flows.

November 28: pay $1,000 to the local utility company for november gas and electricity

Utility expense: 1,100 (debit, left) cash: -1,100 (credit, right)

Advantages/Disadvantages of Corporation?

an entity that is legally separate from its owners and even pays its own income tax. some owned by many stockholder's, some just one individual. -adv: limited liability, and the ability to raise capital and transfer ownership; additional taxes and more paperwork

Accounts receivable

asset, people owe you/us money

Cash & cash equivalent (definition)

Cash Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts, such as checks received from customers, and cash equivalents. Cash equivalents Short-term investments that have a maturity date no longer than three months from the date of purchase.

studymate activities to memorize terms- chapter 1 and 2

Accounting equation Equation that shows a company's resources (assets) equal creditors' and owners' claims to those resources (liabilities and stockholders' equity). Assets Resources owned by a company. Auditors Trained individuals hired by a company as an independent party to express a professional opinion of the accuracy of that company's financial statements. Corporation An entity that is legally separate from its owners. Dividends Cash payments to stockholders . Economic entity assumption All economic events with a particular economic entity can be identified. Expenses Costs of providing products and services. Going concern assumption In the absence of information to the contrary, a business entity will continue to operate indefinitely. Liabilities Amounts owed to creditors. Materiality The impact of financial accounting information on investors' and creditors' decisions. Monetary unit assumption A unit or scale of measurement can be used to mearsure financial statement elements. Net income Difference between revenues and expenses. Partnership Business owned by two or more persons. Periodicity assumption The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting. Retained earnings Cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. Revenues Amounts earned from selling products or services to customers. Sole proprietorship A business owned by a single person. Stockholder's equity Stockholders', or owners', claims to resources, which equal the difference between total assets and total liabilities.

November 10: provide services to customers on account for $9000

Accounts Receivable- (Asset) (debit, left), 9,000 Service Revenue- (credit, right); $9,000

november 15: pay creditors on account $1,100

Accounts payable: -1, 100 (debit, left) cash: -1,100 (credit, right)

chapter 3 and 4 terms

Accrual-basis accounting Record revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle) Accrued expense When a company has incurred an expense but hasn't yet paid cash or recorded an obligation to pay. Accrued revenue When a company has earned revenue but hasn't yet received cash or recorded an amount receivable. Adjusted trial balance A list of all accounts and their balances after we have updated account balances for adjusting entries. Adjusting entries Entries used to record events that occur during the period but that have not yet been recorded by the end of the period. Book Value an asset's original cost less accumulated depreciation Cash-basis accounting Record revenues at the time cash is received and expenses at the time cash is paid. Classified Balance Sheet entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account Closing entries Entries that transfer the balances of all temporary accounts (revenues, expenses, expenses and dividends) to the balance of the retained earnings account. Contra Account an account with a balance that is opposite, or "contra", to that of its related accounts Deferred revenues when a company receives cash in advance from a customer for products or services to be provided in the future Depreciation the process of allocating the cost of a long term asset to expense over its useful life Matching principle Recognize expenses in the same period as the revenues they help to generate. Permanent Accounts all accounts that appear in the balance sheet; account balances are carried forward from period to period Post-closing trial balance A list of all accounts and their balances at a particular date after we have updated account balances for closing entries. Prepaid expenses The costs of assets acquired in one period that will be expensed in a future period. Revenue recognition principle Record revenue in the period in which it's earned. Temporary Accounts all revenue, expense, and dividend accounts; account balances are maintained for a single period and then closed (or zeroed out) and transferred to the balance of the retained earnings account at the end of the period Bank Reconciliation Matching the balance of cash in the bank account with the balance of cash in the company's own records. Cash Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts, such as checks received from customers, and cash equivalents. Cash equivalents Short-term investments that have a maturity date no longer than three months from the date of purchase. Checks outstanding Checks the company has written that have not been subtracted from the bank's record of the company's balance. Collusion Two or more people acting in coordination to circumvent internal controls. Deposits outstanding Cash receipts of the company that have not been added to the bank's record of the company's balance. Fraud Triangle the three elements present for every fraud motivation, rationalization, and opportunity Earnings quality The ability of net income to report the true underlying performance of the company. Internal control A company's plan to (1) improve the accuracy and reliability of accounting information and (2) safequard the company's assets. NSF checks Checks drawn on nonsufficient funds or "bad" checks from customers. occupational fraud the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources Petty cash fund Small amount of cash kept on hand to pay for minor purchases. purchase cards company-issues debit cards or credit cards that allow authorized employees to make purchases on behalf of the company Sarbanes-Oxley Act known as the public company accounting reform and investor protection act of 2002 and commonly referred to as SOX, the act establishes a variety of guidelines related to auditor-client relations and internal control procedures separation of duties authorizing transactions, recording transactions, and controlling related assets should be separated among employees

Revenues

Amounts recorded when the company sells products or services to customers

November 2: purchase equipment with a long term note for $3500 from spartan corporation

Equipment- (debit, left) 3,500 Accounts payable- (credit, right) 3,500

printed on its own

Example of Prepaid expense: Setup entry March 1. Prepaid Insurance of $12,000 for a one-year policy ($1,000 per month): Prepaid Insurance (asset account) $12,000 Cash $12,000 Adjusting entry made December 31st to expense the 10 months of insurance expense: Insurance Expense $10,000 Prepaid Insurance (reduces asset) $10,000 Example of Unearned revenue: Setup entry July 1. Received $2,000 for golf lessons to be performed in August: Cash $2,000 Unearned revenue (liability account) $2,000 Adjusting entry made August 20th when golf lesson is given (earned): Unearned revenue (reduces liability account) $2,000 Service revenue $2,000

What is financial Accounting?

Measurement of business activities of a company and communication of those measurements to external parties for decision-making purposes.

Differences between IFRS and GAAP for chapters 3 & 4 (See Appendix D or "Ch 4 Class 2" slides)

Like U.S. GAAP, international accounting standards require the equity method when the investor exerts significant influence over investees (which they call "associates"). A difference, though, is that IFRS requires that the accounting policies of investees be a be adjusted to match those of the investor when applying the equity method. U.S. GAAP has no such requirement.

Bank reconciliation

Matching the balance of cash in the bank account with the balance of cash in the company's own records. see phone and powerpoint

Account classifications-normal balance in each? accounts in each?

know debits and credits and accounts that go in each category cash asset debit petty cash asset debit accounts receivable asset debit AdvertisementUpgrade to remove ads supplies-office asset debit supplies-store asset debit prepaid insurance asset debit accounts payable liability credit sales tax payable liability credit capital stock stockholder's equity credit retained earnings stockholder's equity credit dividends stockholder's equity debit income summary stockholder's equity no normal balance sales revenue credit sales discount contra-revenue debit sales returns and allowances contra-revenue debit purchases cost of merchandise debit purchases discounts contra-cost of merchandise credit purchases returns and allowances contra-cost of merchandise credit advertising expense expense debit cash short and over either an "other expense" or "other revenue" no normal balance rent expense expense debit equipment asset debit notes payable liability credit Land or Building accounts asset debit Prepaid rent asset debit Fees revenue credit Unearned Revenue (Customer has paid for service but the service has not been provided) Liability Credit

what are tangible assets?

land land improvements buildings equipment natural resources physical substance

Know what goes in the balance sheet (Accts rec/Accts payable, etc)

name of business/corporation Balance Sheet Assets: Liabilities: cash Equip Accounts payable land notes payable Total liabilities: Stockholder's Equ: Common Stock: Retained Earni: Total SE: total assets: = Total liab & SE:

do companies always measure accurately?

no

who are external users of a company?

on the other hand, are not involved in the operations of the company but hold some financial interest, transactions the firm conducts with a separate economic entity, financial accounting

Examples of Expense Items

operating expenses (salaries, rent, utilities), Depreciation expense, interest expense, income tax expense

Stockholder's Equity

owners', claims to resources, which equal the difference between total assets and total liabilities.

what are intangible assets?

patents trademarks copyrights franchises goodwill lack of physical substance existence often based on legal contract

posting and T-accounts (p.74)

pictures on phone

Adjusted trial balance (p. 126-127)

ppt.