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ACC 200 Midterm 1 Study Guide

by: Dallin Childs

ACC 200 Midterm 1 Study Guide ACC 200

Marketplace > Brigham Young University > Accounting > ACC 200 > ACC 200 Midterm 1 Study Guide
Dallin Childs
GPA 3.89

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This study guide covers the basic terms and equations that will be needed on Midterm 1. Good luck studying, and good luck on the exam!
Principles of Accounting
Melissa Larson
Study Guide
Accounting, midterm, Math
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This 4 page Study Guide was uploaded by Dallin Childs on Monday January 4, 2016. The Study Guide belongs to ACC 200 at Brigham Young University taught by Melissa Larson in Summer 2015. Since its upload, it has received 273 views. For similar materials see Principles of Accounting in Accounting at Brigham Young University.


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Date Created: 01/04/16
ACC 200 MIDTERM 1 STUDY GUIDE Using Accounting Information to Make Decisions In a business. . . . 1. What do I need? a. Inventory and Equipment i. Inventory - anything that you want to sell ii. Equipment - other things that you own, keep and use to run the business. b. Prepaid expense - an expense I will pay in advance for, for example, insurance. The idea is that if you were to cancel it, they would give you the cash back. i. Prepaid expense is on the balance sheet, all other expenses will be on the income statement. c. Accounts Payable - Used to pay for inventory. This happens when a supplier lends a business the products under the conditions you will pay for them when you sell them. The supplier holds the products as collateral. The goal is to sell the product and make a profit. This is usual interest-free for the 6 months, then interest payments after that. This is a way to finance your inventory. 2. Where will I get the money? (balance sheet)? a. Retained Earnings - earnings kept inside the company to use at a later date for growth or purchasing more inventory, etc. i. Retained Earnings are not cash. It is an accumulation of all the money the company has ever made from the beginning of time. 3. How much money can I expect to make (income statement)? Dividends are not expenses! They are optional, the board elects to pay them out, not on the income statement. THE ACCOUNTING EQUATION Assets = Liabilities + Owners Equity Assets – Property or right which holds a probable future value for the company. This could be buildings, inventory, or accounts receivable, etc. Liabilities - Outsiders (debt financing) Owners' Equity - Capital contribution or stock OR Retained Earnings (Equity Financing) INCOME STATEMENT Revenues - Expenses = Income Fixed Costs - same costs, no matter what. Rent, salary, insurance, etc. Variable costs - only applicable if I sell something. Product costs, etc. ASSETS Receivables - money owed to a company because someone purchased a good or service and is contracted to pay later. i.e. Zion's Bank's entire business model is to hold and lend money, making all of their money on interest.  Accounts Receivable and Notes Receivable are two types of receivables. Accounts Receivable are generally more short term (30 - 60 days) and Notes Receivable are longer term. Prepaid Expense - Very Important! This is not an expense, and does not go on the income statement. It is an asset on the balance sheet.  This is something that you pay in advance, for example, 6 months of business insurance. It is listed as an asset because you have paid for it, but haven't received the benefits yet.  Assets are something that provides future benefit. This moves to an expanse as you receive the insurance for each given month. Property, Plant, and Equipment (PP&E) - pretty self-explanatory. Anything a company owns such as land, buildings, etc. LIABILITIES Accounts Payable - Money a company owes, usually because it has purchased inventory and agreed to pay upon purchase of the items Unearned Revenue - Also important! This is a liability, not anything else, even though it includes the word revenue.  A company has an obligation to perform services which people have already paid for but have not been provided.  A good example of this is airline companies. People purchase plane tickets in anticipation of traveling with the company in the future. Cash comes in and the company must earn that at a later date. Accrued Liability - "accrue" means to build up over time.  A good example of this is utilities. Utilities are only paid once a month, but lights, heat, ac, etc. are used throughout the month. Until a company pays the utilities, this is a liability which they have accrued.  Another good example is taxes. A company accrues taxes on every sale they make throughout the year, but taxes are only paid once a year during tax season. RETAINED EARNINGS - a cumulative count of all the earnings generated by the business which are then retained or kept in the business to finance future operations.  For example, Wal-Mart uses a portion of the profit they receive from sales of their inventory to purchase more inventory, thus avoiding future liabilities.  This count starts the day the business is created and never resets. Measuring Assets -  When reporting assets, there are options. Historical Cost or Fair Value, meaning the price you paid, or the market price for that asset. Right now, GAAP requires historical cost to be reported. Entity Concept - Where does the business end?  Defining who is the business entity. This is difficult in small businesses where owners use assets for both business and personal things. Personal assets should not be included.  Also an issue in a large company such as Berkshire Hathaway, which owns many different companies. o There is a difference between subsidiaries and investments. If a company owns 50% or more of another company, it is a subsidiary. If this is the case, all of the subsidiary's assets and liabilities are included with yours when you prepare your balance sheet. Consolidated financial statement. o If a company owns less than 50% of another company, it is listed as an investment. THE INCOME STATEMENT Format (must be memorized): Sales (Cost of Goods Sold) --------------------------------------- Gross Profit (Operating Expenses)* o Depreciation Expense o Rent Expense o Utility Expense o Wage Expense --------------------------------------- Operating Income (Interest Expense) (Tax Expense) --------------------------------------- Net Income Earnings Per Share * Not a comprehensive list of operating expenses-just some examples Cost of Goods Sold (CoGS) - an expense account sometimes referred to as Cost of Sales (COS)  When product is purchased for re-sale it is an asset (inventory). Once the inventory is sold it becomes an expense to the company. OPERATING EXPENSES Depreciation Expense  When Equipment and Buildings are purchased they are recorded as Assets  They become expenses to the Company over the life of the Asset (2-40).  We like to see depreciation go up because it means we are purchasing more assets and growing, etc. Bad Debt Expense Also referred to as Uncollectible Accounts Expense When a company makes a sale on account it is an asset (Accounts Receivable) Not all customers will pay their accounts in full. Bad Debt Expense is re-classifying the asset into an expense. Return on Sales is defined as Cash vs Accrual Accounting Cash Accounting:  Revenue recorded when you COLLECT the CASH.  Expense recorded when you SPEND the CASH. Accrual Accounting:  Revenue: Recorded when you EARN the revenue  Expense: recorded when you use the cash. Under the Accrual Method, the accountant must make some assumptions. (How much work has been completed, how long will the asset last, etc.)


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