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Principles of Accounting 1 Spring 2016
Study Guide for Final Exam
Saturday, April 30th, 8:15 – 10:15 am
∙ Multiple choice questions (50 @ 6.25 points each). Total possible points are 312.5.
∙ Maximum grade is 300! The extra points are to compensate for any weakness in the main test instrument and misunderstanding in the question wording.
∙ Students need to bring their own scantrons and #2 pencils. Do not mark your scantron until you have selected your FINAL answer. Eraser marks confuse the scantron grading machine. All adverse consequences of eraser marks and mismarks are the student’s responsibility. Bring extra scantrons.
∙ You are permitted to use a simple fourfunction calculator (cell phones are NOT simple fourfunction calculators). Instructors/exam proctors will check each student’s calculator while distributing the exams.
∙ This is a closed book, closed note, and closed neighbor exam. You are NOT permitted to have scratch paper. You are NOT to look around during the exam. You are to keep your scantron sheet covered to the extent possible. Questions regarding the exam cannot be asked during the exam period.
∙ You must turn in your exam and scantron with your name and the version letter of the exam on both. You will be asked to show a picture id when you turn in your exam and scantron.
∙ You will have 120 minutes to complete the exam. This includes time to fill in your scantron. Pencils down at 10:15 am.
∙ The exam covers Chapters 1 – 12. Approximately 40% of the exam will come from Chapters 1 – 9 and 60% from Chapters 10 – 12.
Chapters 1 and 2:
∙ Calculate components of:
income statement: revenue – expenses = net income/loss
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retained earnings statement = net income/loss dividends
balance sheet (for example, given selected financial information calculate the total current assets):
balance sheet format:
stockholder’s equity (CS + RE)
∙ Use the accounting equation to solve for an unknown.
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liabilities + OE = assets
∙ Analyze the effect of business transactions on the accounting equation. An accounting transaction occurs when assets, liabilities, or stockholders' equity items change as a result of some economic event. The accounting equation must always balance. Each transaction has a dual (doublesided) effect on the equation.
(Ch. 3 pg. 1) PRACTICE
∙ Identify activities as operating, investing, or financing.
Operating activities: generates revenue
Investing activities: buying resources a company needs to operate
Financing activities: outside funding
revenue recognition principle.
Recognize revenue in period in which performance obligation is satisfied.
∙ Calculate net income from an adjusted trial balance.
Adjusted trial balance: the balances of all accounts, including those adjusted, at the end of the accounting period.
The net income is determined by adding revenues and subtracting expenses.
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∙ Prepare adjusting journal entries for prepaid rent and interest. Prepaid expenses are costs that expire either with the passage of time. Chapter 5: Don't forget about the age old question of post bregmatic depression
∙ Interpret sales discounts.
Debit Sales Discount account. Credit the full amount to Accounts Receivables.
∙ Calculate cost of goods sold under a periodic system. Don't forget about the age old question of ir292
Recap: (adjusted cost of goods + beginning inventory) – ending inventory
∙ Calculate ending inventory using LIFO.
Calculate: unit cost for each of the units not sold (for LIFO, the first in will be in inventory the longest and will be ending inventory) x the number of units =
∙ Calculate cost of goods sold and gross profit using average cost.
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∙ Prepare a bank reconciliation.
∙ Calculate the amount of cash to borrow based upon a cash budget.
• 1. Add the beginning cash balance to receipts to determine total available cash.
• 2. Subtract disbursements to determine excess or deficiency.
• 3. Compare excess or deficiency with desired minimum cash to determine borrowing needs.
∙ (ADD) Cash receipts section includes expected receipts from the company's principal source(s) of cash, such as cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock.
∙ (LESS) The *Cash disbursements section shows expected payments for inventory, labor, overhead, and selling and administrative expenses. It also includes projected payments for income taxes, dividends, investments, and plant assets. Note that it does not include depreciation since depreciation expense does not use cash.
∙ (ADD) The Financing section shows expected borrowings and repayments of borrowed funds plus interest. Financing is needed when there is a cash deficiency or when the cash balance is less than management's minimum required balance.
∙ Calculate the cash received from an account receivable when a sales discount is taken.
∙ Prepare the adjusting entry to record the estimate of bad debt expense. ∙ Calculate the duration of a note receivable given the interest rate and interest expense.
time in terms of one year = interest expense / face value of note x interest rate
∙ Identify items classified as property, plant, and equipment.
resources that have physical substance (a definite size and shape), are used in the operations of a business, and are not intended for sale to customers. They are called various names—property, plant, and equipment; plant and equipment; and fixed assets. By whatever name, these assets are expected to provide service to the company for a number of years. Except for land, plant assets decline in service potential (ability to produce revenue) over their useful lives.
∙ Calculate depreciation expense and accumulated depreciation using straightline depreciation.
depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner Depreciation applies to three classes of plant assets: land improvements, buildings, and equipment. Land is not a depreciable asset. Straightline method, companies expense an equal amount of depreciation each year of the asset's useful life.
∙ Determine correct accounting for repairs and maintenance.
Ordinary Repairs expenditures to maintain the operating efficiency and productive life of the unit.
Debit Repair (or Maintenance) Expense.
Additions and Improvements costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
Debit the plant asset affected.
∙ Define current liability.
A debt that a company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.
∙ Prepare journal entries associated with notes payable.
interest formula: Date Cash xxx,xxx
Notes Payable xxx,xxx
Date Interest Expense x,xxx
Interest Payable x,xxx
∙ Determine proper classification (current or longterm) for a note payable on the balance sheet.
Those due for payment within one year of the balance sheet date are usually classified as current liabilities. Companies often identify current maturities of longterm debt on the balance sheet as longterm debt due within one year.
∙ Identify the correct journal entry to record sales tax.
∙ Understand the journal entry to record payroll.
∙ Identify the journal entry for unearned revenues.
When the company receives an advance, it increases (debits) Cash and increases (credits) a current liability account identifying the source of the unearned revenue. When the company recognizes revenue, it decreases (debits) the unearned revenue account and increases (credits) a revenue account.
∙ Calculate the selling price of a bond.
Bond prices for both new issues and existing bonds are quoted as a percentage of the face value of the bond. Face value is usually $1,000. Thus, a $1,000 bond with a quoted price of 97 means that the selling price of the bond is 97% of face value, or $970.
∙ Calculate the gain or loss on the redemption of a bond.
1. Determine and eliminate the carrying value of the bonds.
2. Record the cash paid.
3. Compute and record the gain or loss (the difference between the first two items).
(The carrying value of the bonds is the face value of the bonds less unamortized bond discount or plus unamortized bond premium at the redemption date.)
Ex: R & B Inc. issued $500,000, 10year bonds at a discount. Prior to maturity, when the carrying value of the bonds is $496,000, the company redeems the bonds at 98. Prepare the entry to record the redemption of the bonds.
∙ Interpret the corporate characteristic of limited liability.
Stockholder liability is limited to their investment.
∙ Understand the journal entry to record the issuance of common stock and calculate total shares issued.
∙ Define treasury stock.
corporation’s own stock that it has reacquired from shareholders, but not retired.
∙ Calculate preferred stock dividends.
Per share dividend amount is stated as a percentage of the preferred stock’s par value. Holders of preferred stock must be paid their annual dividend plus any dividends in arrears before common stockholders receive dividends
∙ Identify the declaration date, record date, or payment date associated with dividends.
∙ Identify the journal entry to record the declaration of a dividend. ∙ Define retained earnings.
is net income that a company retains for use in the business.
∙ Calculate total paidin capital.
total amount of cash and other assets paid in to the corporation by stockholders in exchange for shares of ownership.
1. Capital stock, which consists of preferred and common stock.
2. Additional paidin capital, which includes the excess of amounts paid in over par or stated value.
∙ Calculate total stockholders’ equity.
Stockholders' equity: total paidin capital and retained earnings treasury stockcommon (The owners' claim to assets.)
capital stock (preferred stock & common stock)
additional paidin capital
in excess ….. preferred stock
in excess ….. common stock
total additional paidin capital
total paidin capital
total paidin capital and retained earnings
less: treasury stockcommon
total stockholders equity:
∙ Identify the purpose of the Statement of Cash Flows and the three classifications of cash flows.
Reports the cash receipts and cash payments from operating, investing, and financing activities during a period, in a format that reconciles the beginning and ending cash balances. The information in a statement of cash flows helps investors, creditors, and others assess: The entity's ability to generate future cash flows. The entity's ability to pay dividends and meet obligations. The reasons for the difference between net income and net cash provided (used) by operating activities. The cash investing and financing transactions during the period.
THREE CLASSIFICATIONS OF CASH FLOWS.
1. Operating activities
2. Investing activities
3. Financing activities
∙ Distinguish among operating, investing, and financing activities.
1. Operating activities include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income.
2. Investing activities include (a) cash transactions that involve the purchase or disposal of
investments and property, plant, and equipment, and (b) lending money and collecting the loans.
3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.
∙ Identify the relationship between net income and operating cash flows during the maturity phase.
During the maturity phase, net cash provided by operating activities and net income are approximately the same. Cash generated from operations exceeds investing needs. Thus, in the maturity phase, the company starts to pay dividends, retire debt, or buy back stock.
∙ Using the indirect method, calculate net cash provided by operating activities. Company must convert net income from an accrual basis to a cash basis.
Net cash provided by operating activities.
The indirect method adjusts net income for items that do not affect cash to determine net cash provided by operating activities. It focuses on the differences between net income and net cash flow from operating activities.
∙ Calculate net cash provided by investing activities.
Investing activities include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment, and (b) lending money and collecting the loans.
∙ Calculate free cash flow.