ACCY201, Final Exam STUDY GUIDE
ACCY201, Final Exam STUDY GUIDE Accy 201
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This 20 page Study Guide was uploaded by Mallory McClurg on Monday May 2, 2016. The Study Guide belongs to Accy 201 at University of Mississippi taught by Barton, Whitney in Spring 2016. Since its upload, it has received 41 views. For similar materials see Intro to Accounting Principles I in Accounting at University of Mississippi.
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ACCY201, FINAL EXAM STUDY GUIDE 1 Chapters 1-11 Chapter 1 The Accounting Equation: Assets = Liabilities + Equity Assets = Liabilities + Contributed Capital – Retained Earnings Assets = Liabilities + Common Stock – Dividends + Revenues – Expenses Assets: resources a company owns or controls, which are expected to yield future benefits (called Receivables) Liabilities: creditor’s claim on assets; reflect the company’s obligations to provide assets, products, or services to others (called Payables); i.e. wages payable to employees, accounts payable to suppliers, notes payable to banks, and taxes payable to the government Equity: the owner’s claim on assets, (also called Net Assets or Residual Equity); increases from revenues and owner investments called stock issuances; decreases from dividends and expenses Revenues: increase equity (via net income) from sales of products and services to customers; i.e. sales of products, consulting services provided, facilities rented to others, and commissions from services Expenses: decrease equity (via net income) from costs of providing products and services to customers; i.e. costs of employee time, use of supplies, advertising, utilities, and insurance fees Accounting Principles: Measurement Principle: AKA Cost Principle; states that accounting information must be based on actual cost, which is measured on cash or equal-to-cash basis; emphasizes reliability and verifiability, and information based on cost is considered objective (doesn’t matter if someone thinks the asset is worth more/less than the money paid for it) Revenue Recognition Principle: states that revenue is recognized when earned, which is when services are performed or a seller transfers the ownership of products to the buyer; can be paid on credit at a future date; must be measured by the cash received plus the cash value of amount on credit or amount of any other items received Expense Recognition Principle: AKA Matching Principle; states that a company must record expenses it incurred to generate the revenue reported; key to modern accounting ACCY201, FINAL EXAM STUDY GUIDE 2 Chapters 1-11 Full Disclosure Principle: states that a company must report the details behind financial statements that would impact users’ decisions; often found in the footnotes of statements Accounting Assumptions: Going Concern Assumption: states that accounting information must reflect a presumption that the business will continue operating instead of being closed or sold Monetary Unit Assumption: states that companies should express transactions and events in monetary units Time Period Assumption: states that the life of a company can be divided into time periods such as months or years, and that useful reports can be prepared for those periods Business Entity Assumption: states that a business must be accounted for separately from other business entities, including its owner(s) Chapter 2 Analyzing and Reporting Accounts: Analyze each transaction and event from source documents Record relevant transactions and events in a journal Post journal information to ledger accounts Prepare and analyze trial balance Types of accounts: Asset Accounts: Cash – reflects a company’s cash balance Accounts Receivable – refer to promises of payment from customers to sellers; called credit sales Note Receivable – promissory note that is written by a buyer to pay a specified sum of money at a future date Prepaid Accounts – AKA prepaid expenses, or expenses expected to be incurred in one or more future accounting periods; i.e. insurance, rent Supplies Accounts – supplies are assets until they are used; i.e. office supplies, cleaning supplies; once supplies are used, they are transferred to expense accounts Equipment Accounts – record the cost of the equipment minus accumulated depreciation Buildings Accounts Land Accounts – land is an asset; the cost of building located on the land is recorded in a separate account Liability Accounts: ACCY201, FINAL EXAM STUDY GUIDE 3 Chapters 1-11 Accounts Payable – oral or implied promises to pay at a later date which usually arise from the purchase of merchandise, supplies, equipment, etc Notes Payable – formal promise, usually in the form of a promissory note, to pay a future amount; can be short-term or long-term depending on the payment date Unearned Revenue Accounts – refers to a liability that is settled in the future when a company delivers its products or services, but the payment is collected in advance Accrued Liabilities – amounts owed that are not yet paid i.e. wages payable, taxes payable, interest payable Equity Accounts: Owner Investments – when an owner invests in a company in exchange for its common stock Owner Distributions – AKA dividends; when a corporation distributes assets to its owner, it decreases both company assets and total equity Revenue Accounts – inflow of net assets from providing products and services to customers increases equity through increases in revenue accounts; i.e. rent revenue, commissions earned, sales Expense Accounts – outflow of net assets in helping generate revenues decreases equity through increases in expense accounts Ledger: a record containing all accounts used by a company Chart of Accounts: list of all ledger accounts and includes an identification number assigned to each account Journal: gives a complete record of each transaction in one place, as well as the debits and credits for each transaction Posting: the process of transferring journal entry information to the ledger T-Accounts: represent a ledger account and is a tool used to understand the effects of one or more transactions Double Entry Accounting: demands the accounting equation remain in balance and thus requires that for each transaction At least two accounts are involved, with at least one debit and one credit The total amount debited must be equal to the amount credited Normal Balances in the accounting equation: an account with a normal debit balance is increased with debit entries and decreased with credit entries, and vice versa Assets: normal DEBIT balance ACCY201, FINAL EXAM STUDY GUIDE 4 Chapters 1-11 Liabilities: normal CREDIT balance Common Stock: normal CREDIT balance Dividends: normal DEBIT balance Revenues: normal CEDIT balance Expense: normal DEBIT balance Chapter 3 Closing Process: occurs at the end of the accounting period after the financial statements have been completed; it resets revenue, expense, and dividends account balances to zero at the end of each period, which also updates the Retained Earnings account for the balance sheet Identify accounts for closing Record and post the closing entries Prepare a post-closing trial balance Recording Closing Entries: purpose is to transfer the end-of- period balances in revenue, expense, and dividend accounts to the permanent Retained Earnings account; zeroing these accounts will prepare them for the upcoming period ACCY201, FINAL EXAM STUDY GUIDE 5 Chapters 1-11 Close Credit Balances in Revenue Accounts to Income Summary: Date Type of Revenue ($$) Another Type of Revenue ($) Income Summary ($$+$) To close Revenue accounts. Close Debit Balances in Expense Accounts to Income Summary: Date Income Summary ($$$+$$+$) Type of Revenue ($$) Another Type of Revenue ($) Another Type of Revenue ($$$) To close Expense accounts. Close Income Summary to Retained Earnings: Date Income Summary ($$$) Retained Earnings ($$$) To close Income Summary account. Close Dividends Account to Retained Earnings: Date Retained Earnings ($$) Dividends ($$) To close the Dividends account. Classified Balance Sheet: organizes assets and liabilities into important subgroups that provide more information to decision makers Current Assets – i.e. cash, short-term investments, accounts receivable, short-term notes receivable, inventory, prepaid expenses Long-Term Investments – i.e. notes receivables, stock/bond investments Plant Assets – i.e. equipment, land, machinery, buildings Intangible Assets – i.e. patents, trademarks, franchises, goodwill Current Liabilities – i.e. notes payable, unearned revenues, taxes payable, wages payable Long-Term Liabilities – i.e. mortgages payable, notes payable, bonds payable Equity – i.e. common stock, retained earnings Retained Earnings: the accumulated revenues minus the accumulated expenses and dividends ACCY201, FINAL EXAM STUDY GUIDE 6 Chapters 1-11 Chapter 4 Gross Profit: AKA gross margin; net sales minus the cost of goods sold Cost of Goods Sold: seller’s cost of the merchandise that he sells during a period Merchandiser’s Cost Flow for a Single Time Period: Beginning Inventory + Net Purchases = Merchandise Available for Sale Merchandise Available for Sale = Ending Inventory + Cost of Goods Sold (So, basically…) Merchandise Available for Sale – Ending Inventory = Cost of Goods Sold (And…) Merchandise Available for Sale – Cost of Goods Sold = Ending Inventory Interpreting Credit Terms: (1/10, n/10 EOM) means that if the buyer repays the seller within 10 days, he will receive a 1% discount; otherwise, he will have to pay the net price by 10 days past the end of the month (2/10, n/60) means that the full payment is due within a 60- day credit period, but the buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date Recording the Sale of Merchandise: always include an entry for the revenue and an entry for the cost of goods sold Sale of Merchandise on Credit: Date Accounts Receivable ($$$) Sales ($$$) Sold merchandise on credit. Date Cost of Goods Sold ($$) Merchandise Inventory ($$) To record the cost of Nov. 3 sale. Return of Merchandise: Date Sales Returns & Allowances ($$$) Accounts Receivable ($$$) Customer returns merchandise from prior sale. Date Merchandise Inventory ($$) Cost of Goods Sold ($$) To add the re-sellable returned goods back into inventory. Sale of Merchandise on Credit with Discount: ACCY201, FINAL EXAM STUDY GUIDE 7 Chapters 1-11 Date Accounts Receivable ($$$) Sales ($$$) Sold merchandise on credit under terms (2/10, n/EOM). Date Cash ($$) Accounts Receivable ($$) Received payment for sale by the end of the month, but not within discount period. Date Cash (sale amount x .98) ($$) Sales Discounts (sale amount x .02)($) Accounts Receivable ($$+ $) Received payment for sale within discount period. Sale of Merchandise on Credit with Allowances (price reductions for defective items): Date Sales Returns & Allowances ($) Accounts Receivable ($) To record the sales allowance of a prior sale. Adjusting Entries for Merchandisers: include entries for prepaid expenses (including depreciation), accrued expenses, unearned revenues, and accrued revenues, and merchandise inventory Shrinkage: Date Cost of Goods Sold ($$) Merchandise Inventory ($$) To adjust for shrinkage revealed by a physical count of inventory. Chapter 5 Determining Inventory Items: Goods in Transit – if the goods are sent on terms FOB destination, then the seller will record the items in his own inventory; if they’re sent on terms FOB shipping point, then the buyer record the items in his inventory Goods on Consignment – the consignor reports the goods in his inventory, not the consignee Damaged or Obsolete Goods – not counted in inventory if they cannot be sold; if they can be sold at a reduced price, then they are included in inventory at their estimated value, or net realizable value ACCY201, FINAL EXAM STUDY GUIDE 8 Chapters 1-11 Determining Inventory Costs: the cost of an inventory item includes its invoice cost minus any discount, and plus any incidental costs (insurance, storage, freight) necessary to put it in a place and condition for sale. ACCY201, FINAL EXAM STUDY GUIDE 9 Chapters 1-11 FIFO: an inventory costing method that sells the units the business acquired first, leaving the costs of the most recent purchases in ending inventory; it assigns the lowest amount to cost of goods sold, yielding the highest gross profit and net income Date Goods Cost of Goods Balance Purchased Sold Aug. 1 Beginning 10 @ $91 Balance = $910 Aug. 3 15 @ $106 = 10 @ $91 $1,590 15 @ $106 = $2,500 Aug. 14 10 @ $91 5 @ $106 10 @ $106 = $530 = $1,970 Aug. 17 20 @ $115 = 5 @ $106 $2,300 20 @ $115 = $2,830 Aug. 28 10 @ $119 = 5 @ $106 $1,190 20 @ $115 10 @ $119 = $4,020 Aug. 31 5 @ $106 2 @ $115 28 @ $115 10 @ $119 = $2,600 = $1,420 Totals = $4,570 (cost of goo= $1,420 sold reported on incom(ending inventory statement) reported on income statement) ACCY201, FINAL EXAM STUDY GUIDE 10 Chapters 1-11 LIFO: an inventory costing method that sells the most recently acquired units; comes closest to matching current costs of goods sold with revenues; assigns the highest amount to cost of goods sold, yielding the lowest gross profit and net income; this yields a temporary tax advantage by postponing the payment of some income tax Date Goods Cost of Goods Balance Purchased Sold Aug. 1 Beginning 10 @ $91 Balance = $910 Aug. 3 15 @ $106 = 10 @ $91 $1,590 15 @ $106 = $2,500 Aug. 14 15 @ $106 5 @ $91 5 @ $91 = $455 = $2,045 Aug. 17 20 @ $115 = 5 @ $91 $2,300 20 @ $115 = $2,755 Aug. 28 10 @ $119 = 5 @ $91 $1,190 20 @ $115 10 @ $119 = $3,945 Aug. 31 10 @ $119 5 @ $91 13 @ $115 7 @ $115 = $2,685 = $1,260 Totals = $4,730 (cost of = $1,260 good sold reported on (ending inventory income statement) reported on income statement) Chapter 6 Principles of Internal Control: Establish responsibili.ies Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. Apply technological controls. Perform regular and independent reviews. ACCY201, FINAL EXAM STUDY GUIDE 11 Chapters 1-11 Petty Cash Funds: the allocation of a business’ funds to an account that will pay for postage, courier fees, minor repairs, and low-cost supplies Establishing a Petty Cash Fund: Date Petty Cash ($$) Cash ($$) Reimbursing the Petty Cash Fund: Date Miscellaneous Expenses ($$) Delivery Expense ($) Office Supplies Expense ($$$) Cash ($$+$+$$$) Increasing the Petty Cash Fund: Date Petty Cash ($$) Cash ($$) Decreasing the Petty Cash Fund: Date Cash ($) Petty Cash ($) Reimbursing a Shortage/Overage in the Petty Cash Fund: Date Miscellaneous Expenses ($$$) Cash Over and Short ($) Cash ($$$+$) Principles of Cash Management: it is the treasurer’s job to manage a company’s cash Encourage collection of receivables – by offering discounts or having cash-only sales policies, companies try to receive future payments as quickly as possible so the company can use the money Delay payment of liabilities – the longer the delay of payments, the longer the company has to use the money Keep only necessary levels of assets – the less money tied up in idle assets, the more money the company has to invest in productive assets Plan expenditures – money should be spent only when it is available; companies mist look at seasonal and business cycles to plan expenditures Invest excess cash – excess cash earns no return and should be invested Bank Reconciliation: a report explaining the differences between the checking account balance according to the depositor’s records and the balance reported on the bank statement ACCY201, FINAL EXAM STUDY GUIDE 12 Chapters 1-11 Outstanding checks (adjust Bank balance) Deposits in transit/outstanding deposits (adjust Bank balance) Deductions for uncollectible items and for services (adjust Book balance) Additions for collections and for interest (adjust Book balance) Errors (adjust Bank or Book balance, depending on situation) Chapter 7 Recording Bad Debts: when a company grants credit to customers and some customers don’t pay what they promised, then a company uses one of two methods to write the bad debts off Direct Write-Off Method: records the loss from an uncollectible account receivable when it is determined to be uncollectible; does NOT use estimates Recording Direct Write-Off: Date Bad Debts Expense ($$$) Accounts Receivable - customer ($$$) To write off an uncollectible account. Recovering Direct Write-Off Debt: although uncommon, sometimes a payment is eventually collected for a debt that was already written off; in this case, an adjusting entry would need to be made Date Accounts Receivable – customer ($$$) Bad Debts Expense ($$$) To reinstate amount that was previously written off. Date Cash ($$$) Accounts Receivable – customer ($$$) To record full payment of account. Allowance Method: matches the estimated loss from uncollectible accounts receivable against the sales they helped produces Two advantages over Direct Write-Off method: Records estimated bad debts expanse in the period when the related sales are recorded Reports accounts receivable on the balance sheet at the estimated amount of cash to be collected Recording Estimated Allowances: Date Bad Debts Expense ($$$) Allowance for Doubtful Accounts ($$$) To record estimated bad debts. ACCY201, FINAL EXAM STUDY GUIDE 13 Chapters 1-11 Recording Allowances Debt: Date Allowance for Doubtful Accounts ($$$) Accounts Receivable - customer ($$$) To write off an uncollected account. Recovering Allowances Debt: when a customer fails to pay and the account is written off as uncollectible, his or her credit standing is jeopardized; to restore his/her credit standing, they sometimes volunteer to pay all or part of the amount owed; a company must reverse the write off and then records the collection of payment Date Accounts Receivable – customer ($$$) Allowance for doubtful accounts ($$$) Date Cash ($$$) Accounts Receivable – customer ($$$) Estimating Bad Debts: Percent of Accounts Receivable method – assumes that a given percent of the company’s receivables is uncollectible; percentage is based on past experience and is impacted by current conditions such as economic trends and customer difficulties; allowance account balance is adjusted to equal the estimate of uncollectible payments Aging of Receivables method – uses both past and current receivables information to estimate the allowance amount; specifically, each receivable is classified by how long it is past its due date; estimates of uncollectible amounts are made assuming that the longer one is past its due date (usually divided into 30- day periods), the less likely it is to be collected Calculating Interest on a Note Receivable: Principle of Note x Interest Rate x Time Expressed in Fraction of Year = Interest Selling Receivables: Date Cash ($$) Factoring Fee Expense ($) Accounts Receivable ($$+$) Sold accounts receivable for cash, less % fee. Pledging Receivables: Date Cash ($$$) Notes Payable ($$$) ACCY201, FINAL EXAM STUDY GUIDE 14 Chapters 1-11 To borrow with a note secured by pledging receivables. Chapter 8 Plant Assets: tangible assets used in a company’s operations that have a useful life of more than one accounting period Depreciation: the process of allocating the cost of a plant asset to expense in the accounting periods benefitting from its use; accumulated depreciation is a contra-asset account with a normal credit balance; factors determining depreciation are: Cost – all reasonable expenditures to acquire and prepare goods Salvage value – estimate of assets’ value at the end of period Useful life – length of time it is productively used ACCY201, FINAL EXAM STUDY GUIDE 15 Chapters 1-11 Types of Depreciation: Straight-line depreciation – (cost – salvage value) / useful life in periods Units-of-production depreciation – Depreciation per unit = (cost – salvage value) / total units of production Depreciation expense = depreciation per unit (x) units produced in period Double Declining Balance depreciation – 100% / useful life = straight line rate 2 (x) straight line rate = double declining balance rate Double declining balance rate (x) beginning-period book value = Depreciation Expense Expenditures: Revenue Expenditures – AKA income statement expenditures, additional costs of plant assets that do not materially increase the assets life or productive capabilities; recorded as expenses and deducted from revenues in the current period’s income statement; i.e. cleaning, repainting, adjustments, etc. Capital Expenditures – AKA balance sheet expenditures, additional costs of plant assets that provide benefits extending past the current period; debited to asset accounts and reported on the balance sheet; i.e. roofing replacement, plant expansion, major overhauls of machinery and equipment, etc. Disposing of Plant Assets: an asset may be discarded when it is no longer useful to the company and it has no market value; when accumulated depreciation equals the asset’s cost, it is said to have zero book value Record depreciation up to the date of disposal – this also updates Accumulated Depreciation. Record the removal of the disposed asset’s account balances – including its Accumulated Depreciation Record any cash (and/or other assets) received or paid in the disposal Record any gain or loss – computed by comparing the disposed asset’s book value with the market value of any assets received Recording the Disposal of an Asset: Date Acc. Depreciation – Machinery ($$$) Machinery ($$$) To discard fully depreciated machinery. ACCY201, FINAL EXAM STUDY GUIDE 16 Chapters 1-11 Recording Disposal of an Asset that is Not Fully Depreciated: Date Depreciation Expense ($$$) Acc. Depreciation – Equipment ($$$) ACCY201, FINAL EXAM STUDY GUIDE 17 Chapters 1-11 Record Gain or Loss: Date Acc. Depreciation – Equipment ($$) Loss/Gain on Disposal ($) Equipment ($$+ $) To discard equipment and record gain/loss on sale. Recording the Sale of a Plant Asset at Book Value: Date Cash ($) Acc. Depreciation – Equipment ($$) Equipment ($$+ $) Recording the Sale of a Plant Asset Above Book Value: Date Cash ($) Acc. Depreciation – Equipment ($$) Gain on Disposal of Equipment ($$$) Equipment ($$$ $) Recording the Sale of a Plant Asset Below Book Value: Date Cash ($$) Loss on Disposal of Equipment ($) Acc. Depreciation – Equipment ($$$) Equipment ($$$ $) Chapter 9 Known Liabilities: AKA definitely determinable liabilities; usually set by agreements, contracts, or laws and are measurable; include accounts payable, notes payable, payroll, sales taxes, unearned revenues, and leases Short-term Notes Payable: written promise to pay a specified amount on a definite future date within one year or within the company’s operating cycle, whichever is longer; a company that purchases merchandise on credit can sometimes extend the credit period by signing a note to replace an account payable; such notes can also arise when money is borrowed from a bank Note Given to Extend Credit Period: Date Accounts Payable – customer ($$+$) Cash ($$) Notes Payable – customer ($) ACCY201, FINAL EXAM STUDY GUIDE 18 Chapters 1-11 To record partial payment and note for payment on an account. Date Notes Payable – customer ($$) Interest Expense ($) Cash ($$+ $) To record payment of note with interest. ACCY201, FINAL EXAM STUDY GUIDE 19 Chapters 1-11 Note Given To Borrow From a Bank: Date Cash ($$$) Notes Payable ($$$) To record the borrow of cash with a note. Date Notes Payable ($$) Interest Expense ($) Cash ($$+$) To record payment of note with interest. End of Period Adjustments for Short-Term Notes: Date Interest Expense ($$) Interest Payable ($$) To record accrued interest on notes. Date Interest Expense ($$) Interest Payable ($) Notes Payable ($$$) Cash ($$+$+$$ $) To record payment of note with interest. Chapter 10 Bonds Payable on the Balance Sheet: Long-Term Liabilities Bonds payable, %, due December 31 $$$ Less Discount on Bonds Payable $$ $$$+$$ (carrying/book value) Long-Term Liabilities Bonds payable, %, due December 31 $$$ Plus Premium on Bonds Payable $$ $$$+$$ (carrying/book value) Issuing Bonds at a Discount: Date Cash ($$) Discounts on Bonds Pay. ($) Bonds Payable ($$+$) Sold bonds at a discount on their issue date. Issuing Bonds at a Premium: Date Cash ($$+$) Premium on Bonds Pay. ($) Bonds Payable ($$) Sold bonds at a premium on their issue date. ACCY201, FINAL EXAM STUDY GUIDE 20 Chapters 1-11 Calculating Semi-Annual Interest Paid to Bondholders: Principle x Rate x .5 Chapter 11 Stockholder’s Equity: AKA a corporation’s equity or corporate capital Paid-in/contributed capital – the total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock Retained Earnings – the cumulative net income (and loss) not distributed as dividends to its stockholders Issuing Par Value Stock at a Premium: a premium on stock occurs when a corporation sells its stock for more than par (or stated) value Date Cash ($$$+$$) Common Stock, $ Par Value ($$$) Paid-in Capital in Excess of Par value, Common Stock ($$) To record sale and issuance of $ par value common stock at $/share. Effects of Par Value Stock at Premium on the Balance Sheet: the Paid-in Capital in Excess of Par Value amount is added to the Par Value of the stock in the Equity section of the Balance Sheet Stockholder’s equity Common stock - $ par value; # shares authorized; # shares issued and outstanding $$$ Paid-in capital in excess of par value, common stock $$ Retained earnings $ Total stockholder’s equity $$$+ $$+$ Earnings Per Share: AKA net income per share; the amount of net income earned per share of a company’s outstanding common stock Net Income – Preferred Dividends Basic Earnings Per Share = Weighted avg. common shares outstanding
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