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ACCN 2010 Exam 3 Study Guide

by: Tara Watkins

ACCN 2010 Exam 3 Study Guide ACCN 2010

Marketplace > Tulane University > Accounting > ACCN 2010 > ACCN 2010 Exam 3 Study Guide
Tara Watkins

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This study guide includes the information that I felt would be relevant to the upcoming exam. It contains conceptual information as well as tips and example formats for the financial statements tha...
Financial Accounting
Christine Smith
Study Guide
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This 6 page Study Guide was uploaded by Tara Watkins on Monday April 18, 2016. The Study Guide belongs to ACCN 2010 at Tulane University taught by Christine Smith in Spring 2016. Since its upload, it has received 49 views. For similar materials see Financial Accounting in Accounting at Tulane University.


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Date Created: 04/18/16
Accounting 2010 Exam 3 Study Guide  Fraud occurs when records are tampered with o To be fraudulent, an act must:  Be committed by an employee  Be beneficial to that employee  Be harmful to the company in some way  Have an impact on the company’s financial statements  Fraud occurs due to weaknesses or deficiencies in the company’s internal controls o Reasons for fraud include:  1. Opportunity – the employee has the time and access to commit these acts  Opportunity is the most important reason  2. Rationalization - the employee feels that the company owes him/her more compensation because they work too hard or don’t get paid enough  3. Incentive/financial pressure – the reason why an employee might feel the need to commit fraud (ex. could be due to excessive amounts of debt, inability to pay bills, low income requiring multiple jobs just to make ends meet, etc)  Under the Sarbanes-Oxley (SOX) Act, Congress requires public companies to have sufficient internal controls to limit fraud as much as possible  Internal controls are the result of all policies and procedures that companies use to: o 1. Protect their assets  Ex. security systems for buildings, locks on doors, security tags o 2. Enhance the reliability of their accounting records  Ex. having separate log-ins for each person, password protecting the files, changing any company-wide passwords when an employee leaves the company (in small businesses), not sharing passwords with anyone, etc o 3. Increase operating efficiency  Ex. review each step of every process and make sure that it is being done efficiently o 4. Ensure that the company and its actions comply with all laws and regulations  Ex. making sure that everything complies with SEC, EPA, and OSHA standards  Internal controls are created and enhanced using the Segregation of Duties o Segregation of Duties is having different people in charge of each area of the business so that the records will be more secure  The four areas addressed are:  Custody  Authorization  Recordkeeping  Technology  One person should not be in charge of more than one of these areas o An exception to the Segregation of Duties is in small businesses where it would cost too much to hire that many employees  The best internal control for small businesses is the owner’s presence in the store  The best internal control tool is bank reconciliation o Bank reconciliations are when you take the amount that the bank says is in an account and the amount that your records show and try to make them equal  If the amounts do not equal after a bank reconciliation is correctly executed, fraud is likely occurring  Differences between the bank and book amounts are caused by:  1. Deposits in transit (timing) -  2. Outstanding checks (timing) – a check that was written but hasn’t been deposited into the bank yet  3. Errors (on either the bank or the book side)  4. Bank memorandum (ex. banks crediting interest)  Timing errors (deposits in transit and outstanding checks) never occur on the book side  NSF (not sufficient funds) checks get sent back and subtracted o Accounts Receivable balance is reinstated (debit Accounts Receivable, credit Cash) o Checks are all or nothing payments. If the entire amount is not available, none of the amount is paid o Service charges may apply  Either expense them or charge them to Accounts Receivable for the customer who wrote the NSF check  When performing a reconciliation, on the bank side: o Add Deposits in Transit o Subtract Outstanding checks o Add or subtract bank errors when applicable  When performing a reconciliation, on the book side: o Add/subtract amount of the differences in recording errors  Subtract when the amount written > the amount recorded (in the journal, debit an expense account and credit Cash)  Add when the amount written < the amount recorded o Add interest earned (in the journal, debit Cash and credit Interest Revenue ) o Subtract NSF checks (in the journal, debit Accounts Receivable and credit Cash) o Subtract Service Charges (in the journal, debit an expense account and credit Cash)  Cash is very important for companies because: o Credit is limited (ex. credit limits on credit cards) o With a large amount of cash, it can pay its bills and operate normally o With a small amount of cash, it might need to take out loans, issue stock, or use a credit account in order to pay bills (not a sustainable long-term option)  Statement of Cash Flows o Is used by many people to determine the company’s liquidity, solvency and financial state o Informs users:  1. Where the cash came from  2. What the cash was used for  3. What the change in the cash balance was o Is divided into the three different kinds of activities that a company can take part in:  Operating activities  Cash flow from operations  Used to determine net income  Ex. net income, increases and decreases in Accounts Receivable, increases and decrease in “Payable” accounts (salaries payable, accounts payable, etc)  Investing activities  Cash flow related to acquisition, sale, retirement, or disposal of long- term assets and other non-operating investments  Ex. buying equipment, buying land, buying a building, retiring equipment, selling equipment, discarding equipment  Financing activities  Cash flow related to transactions with non-trade creditors (such as financial institutions)  Ex. bank loans  Creating a Statement of Cash Flow o To prepare a Statement of Cash Flow, you will first need:  Comparative Balance Sheets (current and prior period’s balance sheets)  Income Statement  Selected transaction data o Then you must choose one of two preparation methods for the operating section  1. Direct method (Income Statement method) – deducts operating cash disbursements from operating cash receipts  2. Indirect method (Reconciliation method) – adjusts net income for items that did not actually affect cash  Accounts for the accrual basis of accounting used in calculating net income  Easier and cheaper than the direct method  Ex. deduct revenue that did not involve cash, add back expenses that were not related to cash o Helpful tips when working on the Operating Activities section:  Increases to assets will be subtracted  Decreases to assets will be added  Increase to liabilities will be added  Decreases to liabilities will be subtracted o The Cash starting balance plus the Net Increase in Cash gives you the ending cash balance o Ending cash balance should equal the amount of cash listed on the balance sheet o Example Format (values made up to show where addition/subtraction would occur): - Bolded and underlined words will change depending on whether the value is + or - - “Provided by” is used for a positive value while “used in” is for a negative value Company Name Statement of Cash Flows For the Year Ended December 31, 2015 Operating Activities Net Income $10,000 Adjustments made to reconcile net income to cash provided by/used in operating activities Increase in Accounts Receivable < 2,000 > Increase in Accounts Payable 1,350 < 650 > Net Cash provided by operating activities 9,350 Investing Activities Purchase of Land < 2,500 > Purchase of Equipment < 3,000 > < 5,500 > Net Cash provided by investing activities 3,850 Financing Activities Issuance of note receivable (loan) 6,000 Net Cash provided by investing activities 6,000 Net increase in cash 9,850 Beginning Balance in Cash (from Balance Sheet of prior year) XXXX Ending Balance in Cash (net increase + beginning balance 9,850 + XXXX should match current balance sheet cash value)  Owners of a sole proprietorship are fully liable  Owners of a corporation are not liable because the company is a completely separate entity o Corporations:  Can sue others and be sued (in the company’s name, never the owner’s name)  Sells stock  Has a certain number of authorized shares and cannot sell more than that number  “Ease of transferability of interest” – easy to transfer ownership because it is not a private individual, the company is separate from the person who owns it  Continuing life (no finite life span) o Disadvantages of corporations:  “Double taxation” – corporation pays corporate income taxes and then the stockholder has to pay income taxes on the dividends they receive  Stricter regulations than other forms of businesses  There are two sources of equity: o Contributed capital – investors buy stock  Stocks typically have a par value or stated value, which is the minimum amount that they can be sold for  Privileges of common stock:  Common stockholders can vote on who is on the Board of Directors during the annual shareholders meeting  It is a long-term investment because a shareholder buys the stock and then holds onto it until its value increases and then they sell it for a profit  Privileges of preferred stock:  Preference on dividends and first to receive any assets upon liquidation (a company must first pay off its liabilities, then a portion of liquidated assets are given to preferred stockholders if any assets are left)  Preferred stockholders have the “preemptive right”, which means that when new stock is released, preferred stockholders are given the option to buy a proportion of the new stock so that they will still hold the same proportion of ownership as before  Has an immediate return on the investment because of the dividends that are paid  Preferred stock is more expensive because of its immediate privileges  Additional Paid-In Capital (APIC)  For both common stock and preferred stock  An account that contains the excess values paid that are above the par or stated value of a share  To record the transactions, debit Cash, credit Common Stock or Preferred Stock (for the par value times the number of shares) and credit Additional Paid-In Capital (for Common Stock or Preferred Stock) for the difference  If a par or stated value is not given, there will be no APIC account o Earned Capital (Retained Earnings)  Retained earnings is accumulated owner’s equity increases  Treasury Stock o When a company buys its own stock from the available shares in the market o Is a contra account for owner’s equity  Reasons a company might hold treasury stock:  To create interest in the stock  To keep ownership  Decrease owner’s equity  If shares are offered to employees and no more authorized shares remain, the company must buy some shares back from those available in the market  3 types of dividends are possible o Cash  When a check is issued as a dividend  Most common o Property  When land, equipment, or buildings are issued as a dividend instead of a check o Stock  When additional stock is given to stockholders as a dividends  Stock splits o The total capital does not change o A memo must be issued to record this occurrence because:  The number of shares has changed  The par value has decreased o Does not require an entry in the general ledger or journal  Dividends cause equal decreases in owner’s equity (debit) and in cash (credit)  Determine how many shares of stock are outstanding by adding up the amount of shares issued minus the number of shares of treasury stock o Outstanding shares = issued shares – treasury stock shares  Example Format of the Shareholder’s Equity part of the Balance Sheet (numbers simply to illustrate what is added and what is included in this section of the balance sheet): o Preferred Stock would be recorded in the same format as Common Stock o Authorized, issued, and outstanding amounts of shares must be listed o Dividends Distributable would also be included if dividends had been declared o Do not put a dollar sign or double underline total stockholder’s equity (this is only the end of this section, not the end of the entire balance sheet) Company Name Balance Sheet As of December 31, 2015 Stockholder’s Equity Common Stock, $10 par value, 25,000 shares authorized $200,000 20,000 shares issued, 18,000 shares outstanding Additional Paid-In Capital, Common Stock 120,000 Total Paid-In Capital 320,000 Retained Earnings 586,500 Less: Treasury Stock at Cost, 2,000 shares < 20,000 > Total Stockholder’s Equity 886,500


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