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ACC 301 Exam #1 Study Guide

by: Danielle Notetaker

ACC 301 Exam #1 Study Guide ACC 301

Marketplace > Ball State University > Accounting > ACC 301 > ACC 301 Exam 1 Study Guide
Danielle Notetaker
GPA 3.8

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About this Document

Contains Chapters 1 and 2 summary, the financial statements, the multi-step income statement, examples of the multi-step income statement, examples of EPS, and examples of journal entries
Intermediate Accounting
Dr. Sharon Huang
Study Guide
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This 7 page Study Guide was uploaded by Danielle Notetaker on Friday February 12, 2016. The Study Guide belongs to ACC 301 at Ball State University taught by Dr. Sharon Huang in Summer 2015. Since its upload, it has received 78 views. For similar materials see Intermediate Accounting in Accounting at Ball State University.


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Date Created: 02/12/16
ACC  301  Exam  #1  Study  Guide     Chapter  1  Summary:   § The  overall  objective  of  accounting  =  to  help  users  make  rational  decisions   § FASB  –  actually  develops  accounting  standards   § SEC  –  has  the  final  authority  over  the  accounting  standards  &  can  overrule   FASB   § GAAP  –  Generally  Accepted  Accounting  Principles   § IRFS  –  International  Financial  Reporting  Standards   o They  promote  uniform  accounting  standards  across  countries   § Accounting  definition  =  the  identification,  measurement,  and  communication   of  financial  information  about  economic  entities  to  interested  parties     Chapter  2  Summary   INVERSE  TRIANGLE:   § Qualitative  characteristics:   o Relevance  –  info  that  makes  a  difference  in  a  decision   § Predictive  value  –  used  to  predict  future  expectations   § Confirmatory  value  –  confirm/correct  prior  expectations   § Materiality-­‐  if  omitting/mistaking  this  info  would  influence   decisions   o Faithful  Representation-­‐  numbers/descriptions  match  what  really   existed  or  happened   § Completeness  –  all  information  is  provided   § Neutrality  –  cannot  select  info  to  favor  one  party  over  another   § Free  from  error  –  no  mistakes   o Enhancing  Qualities   § Comparability  -­‐  info  is  reported  in  similar  manner   § Verifiability  –  independent  users  use  same  method  and  get  the   same  end  results   § Timeliness  –  having  info  in  a  relevant  time  span   § Understandability  –  users  can  see/understand  significance  of   info     The  Accounting  Cycle:   1. Journalization   2. Posting  (t-­‐accounts)   3. Trial  Balance   4. Adjustments   5. Adjusted  trial  balance   6. Financial  Statements   7. Closing  Entries   a. Close  all  nominal  (temporary  accounts)   b. Do  NOT  close  permanent  accounts  (everything  on  the  Balance  Sheet)         Financial  Statements  (MUST  go  in  this  order)   1. Income  Statement   Revenue   -­‐COGS   GP   -­‐expenses   Net  Income   2. Statement  of  Retained  Earnings   Beg.  R.E.   +acc.  adjustments   +NI   -­‐dividends   End  R.E.   3. Balance  Sheet   Assets  =  liabilities  +  equity   *The  end  R.E.  found  is  included  under  equity   *Also  included:  common  stock,  treasury  stock,  additional  paid  in  capital   *Treasury  stock  –  company  buys  back  their  own  stock  to  increase  prices   *Common  stock  –  par  value=$1.00   *Add.  paid  in  capital  –  amount  buyer  pays  over  par  value  for  common  stock   Ex:  par  value=$1.00  x  500  shares  =  $500.  $499  goes  to  add.  paid  in  capital   4. Statement  of  Cash  Flows  (need  comparative  balance  sheet)   Operating  +  Investing  +  Financing   § Operating:  starts  wi th  NI,  adjustments  for  things  that  were  not  cash,  such  as   depreciation,  change  in  A/R,  A/P   o Take  out  (subtract)  non -­‐cash  revenue   § Ex:  A/R   o Add  back  non-­‐cash  expense   § Ex:  depreciation  expense   § Investing:  making  or  collecting  loans,  getting  or  selling  investments ,  and   property,  plant,  &  equipment   o Ex:  Buying  land   § Financing:  involve  liability  and  owners  equity  items,  borrowing  and   repaying  creditors,  transactions  with  owners   o Ex:  paying  dividends,  issuing  common  stock                           Multi-­‐Step  Income  Statement:   Revenue   -­‐COGS   GP   -­‐operating  expense  ( advertising/selling/admin .)   income  from  continuous  operations   +-­‐  other/unusual  gain/loss  ( interest  revenue,  unrealized  loss  if  trading )   income  from  continuing  operation  before  income  tax   -­‐income  tax   income  from  continuing  operation   +-­‐  irregular  item  ( net  of  tax )   discontinued  operation   Net  Income     Other  comprehensive  income:   § Unrealized  gain/loss  on  available  for  sale  securities   § Translation  gain/loss  on  foreign  commerce       EPS  =  net  income  –  preferred  dividends                  Weighted  avg.  #  of  shares  outstanding     EPS  Example:   A  company  has  100,000  shares  of  common  stock  and  50,000  shares  of  preferred  stock  on   1/1/2014.  On  7/1/2014,  they  issue  another  100,000  shares  of  common  stock.  No  other   stock  was  bought  or  sold  during  2014.  What  is  th e  weighted  average  number  of  shares   outstanding?     100,000  x  (6/12)  +  (100,000+100,000)  x  (6/12)  =   150,000  weighted  avg.  #  of  shares   outstanding   *Do  NOT  include  preferred  stock!     Income  Statement  Problems:   Example  1:  This  Corporation  has  income  before  incom e  taxes  for  2014  of  $6,300,000.  In   addition,  it  suffered  a  pretax  loss  of  $770,000  from  a  discontinued  operation.  The   corporation’s  tax  rate  is  30%.  Prepare  a  partial  income  statement  with  income  before   income  taxes.  The  corporation  had  5,000,000  shares  of  common  stock  outstanding  during   2014.     Income  before  taxes         6,300,000   Income  tax  (30%)         (1,890,000)   Income  from  continuing  operations     4,410,000   Loss  from  discontinued  operation   770,000     Less:  applicable  tax     (231,000)               (539,000)   Net  income           $  3,871,000             Example  2:  This  Corporation  has  net  sales  of  $2,400,000  and  interest  revenue  of  $31,000   during  2014.  Expenses  for  2014  were  cost  of  goods  sold  $1,450,000,  administration   expenses  $212,000,  selling  expenses  $280,000,  and  interest  expense  $45 ,000.  They  had  a   gain  of  $35,000  from  one  unusual  and  infrequent  occurred  item.  The  company  also  has  a   loss  due  to  discontinued  operations  for  $20,000.  They  also  paid  dividends  to  preferred   stockholders  for  $30,000.    Their  tax  rate  is  30%.  The  corporation   had  100,000  shares  of   common  stock  authorized  and  70,000  shares  issued  and  outstanding  during  2014.   § Calculate  the  net  income  before  irregular  items  for  the  year  ended  December  31,   2014.  Use  the  multi-­‐step  format.   § Calculate  earnings  per  share  based  on  NI  be fore  irregular  items     Sales               2,400,000   -­‐COGS             (1,450,000)   Gross  Profit           950,000   -­‐Operating  expenses     admin.  exp.     212,000     selling  exp.     280,000   (492,000)   income  from  continuing  operations     458,000   +-­‐Other/Unusual  gain/loss     interest  rev.     31,000     interest  exp.     (45,000)     Gain  from  unusual  item  35,000   21,000   Income  before  tax         479,000   Income  tax  30%         (143,700)   NI  before  irregular  items       $335,300     EPS  =     net  income  –  preferred  dividends   Weighted  avg.  #  of  shares  outstanding     EPS  =  335,300  –  30,000  =  $4.36     70,000                                             Example  3:  Presented  below  is  information  related  to  a  company  at  December  31,  2014.   Assume  its  ending  retained  earnings  for  2013  is  0.     Sales  revenue                 $310,000   COGS                   140,000   Selling  &  Admin  expenses             50,000   Gain  on  sale  of  plant  assets             30,000   Unrealized  gain  on  available -­‐for-­‐sale  investments       10,000   Interest  expenses               6,000   Loss  on  discontinued  operations  (net  of  tax)         12,000   Dividends  declared  &  paid             5,000     The  company  decided  to  change  from  the  LIFO  to  FIFO.  This  change  would  have  increased   income  in  prior  years  by  a  total  of  $200,000.  Assume  tax  rate  is  0%.     Compute:   § Income  from  operations,  net  income,    comprehensive  income,    and  retained   earnings  balance  December  31,  2014.     Sales             310,000   -­‐COGS             140,000   GP             170,000   -­‐operating  expenses     Selling  &  Admin       (50,000)   Income  from  operations       120,000   +-­‐  Other/Unusual  gain/loss     gain  on  plant  assets     30,000   interest  exp.     (6,000)     24,000   income  from  continuing  operations     144,000   irregular  item     loss  on  discontinued  operations   (12,000)   Net  income           $132,000     Net  income           $132,000   +comprehensive  item         10,000   Comprehensive  income       $142,000     Beg.  R.E.     0   +Acc.  Adjustments   200,000   +NI       132,000   -­‐dividends     (5,000)   End.  R.E.     $327,000                   Journal  Entries   Example  1:   § May  1 ,  company  invests  $4,000  cash  in  exchange  for  common  stock  in  welding   corporation   § May  3 .  buys  equipment  on  account  for  $1,100   § May  13 ,  pays  $400  to  landlord  for  May  rent   § May  21 ,  bills  welding  company  $500  for  work  done     May  1:  Common  stock     4,000       Cash       4,000   May  3:  Equipment     1,100       A/P       1,100   May  13:  rent  expense     400       Cash       400   May  21:  A/R       500         Service  revenue   500     Example  2:   § Assume  that  on  February  1,  P&G  paid  $720,000  in  advance  for  2  years   insurance  coverage.  Prepare  February  1  journal  entry  and  the  annual   adjusting  entry  on  June  30   Feb.  1:  Prepaid  insurance     720,000       Cash         720,000   June  30:  Prepaid  exp.       150,000       Prepaid  insurance     150,000     Example  3:   § Lilly  Corporation  owns  a  warehouse.  On  November  1,  it  rented  storage  space   to  a  lessee  (tenant)  for  3  months  for  a  total  cash  payment  of  $2,400  received   in  advance.  Prepare  Lilly’s  November  1  journal  entry  and  then  the  December   31  annual  adjusting  journal  entry.   Nov.  1:  Cash     2,400       Unearned  rent   2,400   Dec.  31:  Unearned  rent   1,600       Rent  revenue     1,600               Example  4:   § 11/23  Bob  paid  $3,000  for  trash  service  for  December,  January,  &  February   11/23  Bob:      Prepaid  exp.     3,000           cash         3,000   11/23  Trash  Service:     cash       3,000           unearned  revenue   3,000               DEALOR  rule:   Debit:         Credit:   DEA         LOR   Dividends       liabilities   Expenses       owner’s  equity   Assets         revenue  


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