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ACCT 2101 Midterm/Exam One

by: Jeanine McDonald

ACCT 2101 Midterm/Exam One ACCT 2101

Marketplace > Georgia State University > Accounting > ACCT 2101 > ACCT 2101 Midterm Exam One
Jeanine McDonald

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Study guide from brightspace.
Kris J. Clark (P)
Study Guide
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This 6 page Study Guide was uploaded by Jeanine McDonald on Tuesday February 9, 2016. The Study Guide belongs to ACCT 2101 at Georgia State University taught by Kris J. Clark (P) in Fall 2015. Since its upload, it has received 177 views. For similar materials see PRIN OF ACCT I in Accounting at Georgia State University.


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Date Created: 02/09/16
Principles of Accounting 1 Spring 2016 Study Guide for Midterm 1 Saturday, February 13 , 10:00 am – 12:00 pm Chapter 1:  Identify the advantages and disadvantages of the corporate form of business  organization. CORPORATION Advantages: Easier to transfer ownership. Easier to raise funds No personal liability Disadvantages: Higher taxes.  Identify internal and external users of financial information. Internal users: 1) managers  External users: 1) investors 2) creditors  Define and identify assets, liabilities, and stockholders’ equity accounts and the  accounting equation. Accounting equation  Assets = Liabilities + Stockholders’ Equity Assets: resources owned by a business Liabilities: Debts & obligations of the business. Represent the claims of creditors  on assets. Stockholder’s Equity: claims of owners on assets of business. (Equals common  stock added with retained earnings.)  Identify activities as operating, investing, or financing. Operating Activities: using resources for operation and/or generating revenue Examples: revenues, inventory, accounts receivable, expenses, liabilities, net  income, net loss Investing Activities: acquiring resources a company needs to operate Examples: property, plant, equipment, assets, investments Financing Activities: collecting funds for business Two kinds:  + Borrowing money or debt financing – examples: liabilities, notes payable,  bonds payable Issuing stock – dividends (payments to stockholders)  Calculate components of the income statement, retained earnings statement, and  balance sheet and identify the interrelationships. Income Statement = Revenue ­ Expenses Format: Revenues  – Expenses =Net Income/Loss +net income if sum is positive +net loss if sum is negative +The Net Income/Loss will be used in a Retained Earnings Statement Retained Earnings Statement = Net Income/Loss  ­ Dividends Format: Net Income/Loss ­ Dividends = Retained Earnings +Retained Earnings will be used in a Balance Sheet under Stockholder’s Equity Balance Sheet:     Assets = Liabilities + Stockholder’s Equity Format: Assets  = Liabilities  + Stockholder’s Equity  Identify the purpose of the auditor’s report. This is the auditor’s opinion on the fairness of the presentation of the financial  position and results of operations and their conformance with the generally  accepted accounting principles. Chapter 2:  Identify the different categories of assets found on the balance sheet. Current assets, long­term investments, property, plant, and equipment, intangible  assets  Define a current asset. Cash, debt investments, accounts receivable, notes receivable, inventory, supplies, prepaid insurance  Calculate earnings per share. Earning per share =  (net income – preferred dividends) / average common shares outstanding  Identify the reasons companies pay dividends. Dividend payments can be deducted for income tax purposes but interest  payments cannot. Stockholders will be satisfied.  Calculate the current ratio and understand its purpose. Current Ratio = Current Assets / Current Liabilities  Measures the ability of the company to survive over a long period of time.  Interpret a high debt to assets ratio. More creditors are providing finances than stockholders  Define free cash flow. A measurement to provide additional insight. Free cash flow = cash provided by operations – capital expenditures – cash  dividends  Define Generally Accepted Accounting Principles (GAAP) and the characteristic  “relevant”. A set of rules and practices, having substantial authoritative support, that the accounting  profession recognizes as a general guide for financial reporting purposes Relevant: would make a difference in a business decision. Provides information with  predictive value , or accurate expections about the future, and has confirmatory value, or  confirms or corrects prior expectations. Chapter 3:  Analyze the effect of business transactions on the accounting equation. Dual effect on the accounting equation.   Identify the characteristics of the double­entry system.  Each transaction must affect two or more accounts to keep the basic accounting  equation in balance. To debit one account, you must credit another. Debits must  equal credits.   Identify the sequence of steps in the recording process. 1) Determine what type of account is involved 2) determine what items increased  or decreased and by how much 3) translate the increases and decreases into debits  and credits  Prepare or analyze journal entries. 1) enter date of transaction 2) credit or debit at least two accounts  The balance should be equal: assets = liabilities + stockholder’s equity  Identify source documents. Evidence of the transaction. Example: sales slip, check, bill, cash register tape  Apply debit/credit rules and normal account balances. If debits are greater than credits, it is a DEBIT account. If credits are greater than  debits, it is a CREDIT account, chart of accounts, posting,  The normal account balance is whichever account is greater.  Analyze account activity and calculate ending account balances. Assets account should be equal to liabilities + stockholders’ equity.  Identify the purpose of a trial balance. Proves that debits equal credits.  Chapter 4:  Apply the revenue recognition principle. Recognize revenue in the accounting period in which performance obligation is satisfied.  Calculate net income using the accrual basis of accounting. Revenues are recognized when services performed, even if cash was not received. Expenses are recognized when incurred, even if cash was not paid.  Identify why adjusting entries are needed and analyze the impact of not making  adjusting entries. Ensure that revenue recognition and expense principles are followed If adjustments aren’t made Assets or Expenses could be understated or overstated. Accrued revenues: shows receivables exist, records the revenues for services  performed.  Accrued expenses: records the obligations, recognizes the expenses  Prepare adjusting journal entries. Journals are prepared each month. An accrued revenue account will be added to each appropriate account using the  double­entry system.  Ex: $350 of service was performed. Accounts Receivable  Oct. 31 $2000        |              _ Oct. 31 Adj. $350  |              _ Oct. 31 Bal. $2350 |              _ Debit $350 (This is a debit because assets increase with accounts receivable). Service Revenue _ ______                 |                   Oct. 31 $2000    __                           |              Oct. 31 Adj. $350 _                                       |Oct. 31 Bal. $2350           _     Credit $350 (This is a credit because revenue is included in stockholder’s equity,  NOT assets.) For accrued expenses, the amount of expenses (ie. interest) that will accumulate  during the time span is divided by the time span that money will be borrowed to  equal the amount that will be paid each month. Ex: $5000 (note payable) x 12% (annual interest) x (*1/12) = monthly payment  plus interest * The interest is divided by 12, even if the payment is due earlier, because the  interest is an annual rate of 12%. This number will be used to adjust the Interest expense and Interest payable Interest Expense Oct.31 Adj. 50    |                     _ Oct. 31 Bal. 50    |                      _ Interest Payable _               | Oct. 31 Adj. 50 _               | Oct. 31 Bal. 50  Define depreciation. Allocating the costs of assets to a number of years.   Identify the characteristics of the adjusted trial balance. Each account is analyzed to see if it’s up to date and balanced. Debits on left. Credits on right.  Identify the purpose of closing entries. Proves the equality of the permanent account balances that the company carries  forward into the next accounting period. All temporary accounts will have zero  balances.  Calculate the retained earnings balance after closing entries. Income summary ­ > Retained Earnings  Retained Earnings – Dividends= Retained Earnings Balance


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