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Acct 2101 Test 1

by: Penelope Young

Acct 2101 Test 1 Accounting 2101

Penelope Young

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Fall 15 Acct 2101 Test 1
Principal of Accounting
Kris Clark
Study Guide
50 ?




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This 67 page Study Guide was uploaded by Penelope Young on Tuesday July 12, 2016. The Study Guide belongs to Accounting 2101 at Georgia State University taught by Kris Clark in Fall 2015. Since its upload, it has received 5 views. For similar materials see Principal of Accounting in Accounting (ACCT) at Georgia State University.

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Date Created: 07/12/16
Accounting 1 T est 1 09/22/2015 CHAPTER 1 Accounting- The information system that identifies, records, and communicates the economic events of an organization to interested users. ▯ Identify the advantages and disadvantages of the corporate form of business organization. ▯ Corporation: A business organizes as a separate legal entity owned by stockholders. (Many owners)  Advantages o Easy to transfer ownership o Greater capital raising potential/ Easy to raise funds o Unfavorable tax treatment o Stocks are easy to sell o Become stockholders for investing a little bit of money o No personal Liability  Disadvantages o Corporate stockholders usually pay higher taxes ▯ Identify internal and external users of financial information.  Internal users- of accounting information are mangers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors, and company officers. o Might ask questions such as:  Is cash sufficient to pay dividends to Microsoft stockholders? (Finance)  Can we afford to give General Motors employees pay raises this year? (Human Resources)  What price for an Apple iPod will maximize the company’s net income? (Marketing)  Which Pepsico product line is the most profitable? Should any product lines be eliminated? (Management)  External users- users who are outside of the organization. There are several kinds. Investors use accounting to make decisions to buy, hold, or sell stock. Creditors such as suppliers and bankers use accounting information to evaluate the risks of selling or credit or lending money. o Might ask questions such as:  Is General Electric earning satisfactory income?  How does Disney compare in size to profitability to Time Warner? (Last one and this one Investors)  Will United Airlines be able to pay its debts as they come due? (Creditors) ▯ Define and identify assets, liabilities, and stockholders’ equity accounts and the accounting equation. ▯ ASSESTS= LIABILITIES+ OWNERS EQUITY  Assets- Resources owned by a business  Liabilities- Amounts owed to creditors in the form of debts and other obligations.  Owners Equity- The owners claim to assets. ▯ Identify activities as financing, investing, and operating. ▯ Example: Tootsie Roll ▯ Financing: came from personal saving’s and likely came from outside sources like banks. ▯ Investment: Invested the cash in equipment to run the business, such as mixing equipment and delivery trucks. ▯ Operating- Then he started making and selling the candy. ▯ Financing- to start or expand a business the owner or owners quite often need cash from outside sources.  Two primary sources are: o Borrowing money (debt financing)  Amounts owed are liabilities  Party to whom amounts are owed are creditors  Notes payable and bonds payable are different types of liabilities. o Issuing (selling) shares of stock for cash  Payments to stockholders are called dividends. ▯ Investing- involve the purchase of resources (assets) needed to operate the business.  Resources owned by a business are called assets.  Land (Property)  Building (Plant)  Equipment  Cash  Investments in debt or equity securities of another company. ▯ Operating- once a business has the asset’s it needs, it can begin it operation.  Revenues- Amounts earned from the sale of products (sales, revenue, service revenue, and interest revenue.)  Inventory- Goods available for sale to customers.  Accounts Receivable- Rights to receive money from a customer as the result of a sale. o Credit Card is considered cash. o Macy’s card would be accounts receivable.  Expenses- cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).  Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.  Net Income- when revenues exceed expenses  Net loss- when expenses exceed revenues. If negative in (…) ▯ Calculate components of the income statement, retained earnings statement, and balance sheet and identify the interrelationships. ▯ Income Statement- Shows how successfully a business performed during a period of time. Reports the revenue and expenses for a specific time frame. ▯ *Reports revenues and expenses for a specific period of time. ▯ *Net Income- revenues exceed expenses. ▯ *Net loss- expenses exceed revenues ▯ *Past net income provides information for predicting.  Revenues- Expenses o Revenues o – cost of goods sold o =gross profit o –operating expenses o =net income or net loss ▯ Retained Earnings Statement- Indicates how much income was distributes as dividends and how much was retained in the business. ▯ *Statements show amounts and causes of changes in retained earning during a period. ▯ *Time period is the same a that covered in the income statement. ▯ *Users can evaluate dividend payment practices.  Before Balance  +Net Income Net income is needed to determine ending balance in retained earnings  -Dividends  =Ending Retained Earnings ▯ Balance Sheet- Presents a picture at a point in time of what a business owns and what it owes. ▯ *Reports assets and claims to assets at a specific point in time. ▯ *Assets have to come first and then liabilities and owners equity.  Assets (Cash, Accounts Receivable, Prepaid Insurance, Equipment, Inventory)  =Liabilities (Notes Payable, Accounts Payable, Unearned service revenue, Salaries and wages payable, Interest payable)  +Owners Equity (Common + Preferred Stock+ Retained Earnings) ▯ Statement of Cash Flows: Shows sources of cash during a period of time and how much cash was used. ▯ Answers= ▯ *Where did cash come from during the period? ▯ *How was cash used during the period.? ▯ *What was the change in cash in the cash balance during the period?  Cash flow operating activities  +Cash flow investing activities  +Cash flow finance activities  =Net cash from financing activities  Net increase in cash  Cash at beginning of period  Cash at the end of period ▯ ▯ ▯ ▯ ▯ Identify the purpose of the auditor’s report. Auditors opinion as to fairness of presentation of financial position and results of operations and their conformance with generally accepted accounting principles.  Auditor, a CPA who conducts an independent examination of the financial accounting data presented by a company.  They give unqualified opinion, meaning they have no reservations concerning the material validity of the presented information, if the financial statements present the financial position, results of operations, and cash flow in accordance with accepted accounting standards. ▯ CHAPTER 2 ▯ Identify the different categories of assets found on the balance sheet.  Current Assets  Long-Term Investments  Property, Plant, Equipment  Intangible Assets ▯ Define a current asset.  Current Assets o Assets that a company expects to convert to cash or use up within one year or the operating cycle, which ever is longer. o Operating Cycle is the average time it takes from the purchase of inventory to the collection of cash from customers. o Common types of current assets are  Cash  Investments  Receivables  Inventories  Prepaid Expenses ▯ Calculate earnings per share.  Earnings Per Share (EPS) = (Net Income – Preferred Dividends)/ Average Commons Shares Outstanding ▯ Identify the reasons companies pay dividends.  Companies also must at least maintain dividends at current levels to satisfy investors  Provide certainty about the companies finical well being.  They attract investors. o If company does not pay it is so they can reinvest in the company.  Maybe if people feel like they are making money they will invest more money? ▯ Calculate the current ratio and understand its purpose.  Current Ratio= (Current Assets/ Current Liabilities) o Liquidity Ratios measures the short-term ability of the company to pay it’s maturing obligations and meet unexpected needs for cash. o One liquidity ratio is current ratios.  One potential weakness of the current ratio is that it does not take into account is the composition assets.  For example, a satisfactory current ratio does not disclose whether a portion of the current assets is ties up in slow moving inventory.  The composition of the current assets matters because a dollar of cash is more readily available to pay the bills than dollar inventory.  Example, suppose a company’s cash balance declined while its merchandise inventory increased substantially. If it increased because the company is having difficulty selling its products, then the current ratio might not fully reflect the reduction on the company’s liquidity.  A current ratio of 2 means that the company has twice as many current assets as current liabilities and has little risk of not meeting its current obligations. ▯ Interpret a high debt to assets ratio.  Debt to Assets Ratio= (Total liabilities/ Total assets) o It measures the percentage of total financing provided by creditors rather than stockholders. Debt financing is more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of debt financing, the risker the company. o The adequacy of this ratio is often judged in the light of the company’s earnings. Generally, companies with relatively stable earnings, such as public utilities, can support higher debt to assets ratio than can cyclical companies with widely fluctuating earnings, such as many high tech companies. o This ratio means that the company has three times as much debt as equity. ▯ Define free cash flow. ▯ Free cash flow= cash provided by operations- capital expenditures- cash dividends  Cash provided by operations= how much money the business makes  Capital Expenditures= plant, property, equipment  Cash dividends= dividends in cash ▯ Define Generally Accepted Accounting Principles (GAAP) and the characteristic “relevant”.  Generally Accepted Accounting Principles (GAAP)- A set rules and practices, having substantial authorities support, that the accounting profession recognizes as a general guide for financial reporting purposes.  Relevance: Accounting information would have relevance if it would make a difference in a business decision. Information in considered relevant if it provides information that has predictive value, that is, helps provide accurate expectations about the future, and has confirmatory values, that is, confirms or corrects prior expectations. Materiality is a company specific aspect of relevance. An item is material when its size makes it likely to influence decision of an inventors. ▯ CHAPTER 3 ▯ Analyze the effect of business transactions on the accounting equation.  Transactions are economic events that require recording in the financial statements. o Not all activities represent transactions. o Assets, liabilities, or stockholders’ equity items change as a result of some economic event. o Duel effect on the accounting equation  ▯ Identify the characteristics of the double-entry system. ▯ Each transaction has a dual (double-side) effect on the equation.  Record of increase and decreases in a specific asset, liability, equity, revenue, or expense item.  Debit= Left  Credit= Right  Each transaction must affect two or more accounts to keep basic accounting equation in balance.  Recording done by debating at least one account and crediting another.  DEBITS = CREDIT o If Debts are greater then credit, the accounts will have a debit balance. o If Credit are greater than Debits, the accounts will have a credit balance. ▯ Identify the sequence of steps in the recording process. ▯ ▯ The Journal:  Book of original entry.  Transactions recorded in chronological order.  Contributions to the recording process. 1. Discloses the compete effects of a transaction. 2. Provides a chronological record of transaction. 3. Helps to prevent or locate errors because the debit and credit amounts can easily be compared. ▯ Prepare or analyze journal entries. ▯ (Just Know How To Do It) ▯ Identify source documents. ▯ Source documents- such as a sales slip, a check, a bill, or a cash register tape, provide evidence of the transaction. ▯ Apply debit/credit rules and normal account balances.  Debit- Assets and Expenses go up with debit, this is it’s normal account balance.  Credit- Liabilities, Owners Equity, and Revenues go up with credit, this is it’s normal account balance. ▯ Analyze account activity and calculate ending account balances. ▯ (Just Know How To Do It) ▯ Identify the purpose of a trial balance. ▯ Trial Balance  A list of accounts and their balances at given time.  Accounts are listed in the order in which they appear in the ledger.  Purpose is to prove that debits equal credit.  May also undercover errors in journalizing and posting.  Useful in the preparation of financial statement. o The trial balance my balance even when  A transaction is not journalized.  A court journal entry in not posted.  A journal entry is posted twice.  Incorrect accounts are used in Journalizing or posting  Or… offsetting errors are made in recording the amounts of a transaction. ▯ CHAPTER 4 ▯ Apply the revenue recognition principle.  Companies recognize revenue in the accounting period in which the performance obligation is satisfied.  Basically, when you do the service, is the date you record it. ▯ Calculate net income using the accrual basis of accounting.  Transactions recorded in the periods in which events occur.  Revenues are recognized when services performed, even if cash is not received.  Expenses are recognized when incurred, when cash was not paid. (Look at slide 12 as an example) ▯ Identify why adjusting entries are needed and analyze the impact of not making adjusting entries. ▯ In order for revenues to be recorded in period in which the performance obligations are satisfied, and for expenses to be recognized in the period in which they are incurred, companies make adjusting entries.  Ensure that the revenue recognition and expense recognition principles are followed.  Are required every time a company prepares financial statements.  Includes one income statement account and one balance sheet account.  Never include cash! o Adjusting entries are necessary because the trial balance the first pulling together of the transaction data- may not contain up to date and complete data. This is for several reasons 1. Some events are not recorded daily because it is not efficient to do so. Ex: are the use of supplies and the earning of wages by employees. 2. Some costs are not recorded during the accounting periods because these costs expire with the passage of time rather than as a result of recurring daily transactions. Ex: charges related to the use of buildings and equipment, rent, and insurance. 3. Some items may be unrecorded. Ex: Utility service bill that will not be received until the next accounting period. ▯ Prepare adjusting journal entries. ▯ (Do examples) ▯ Define depreciation.  The process of allocating the cost of an asset to expense over its useful life. o Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets rather than an expense, in the year acquired. o Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset’s useful life. o Does not attempt to report the actual change in the value of the asset. ▯ Identify the characteristics of the adjusted trial balance.  Adjusted Trial Balance- prepared after all adjusting entries have been journalized and posted.  Its purpose is to prove equality of the total debit and credit balance in the ledger after all adjustments have been made.  Financial statements can be prepared directly from the adjusted trial balance.  Order that it needs to be prepared in: o Income statement -> Retained Earnings Statement-> Balance Sheet ▯ Identify the purpose of closing entries.  The purpose of the post-closing trial balance is to prove the equality of the permanent account balances the the company carries forward into the next accounting period. All temporary accounts will have a zero balance. o At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholders’ equity account- retained earnings.  Temporary:  All revenue accounts  All expense accounts  Dividends  Permanent:  All asset accounts  All liability accounts  Stockholders’ equity accounts o Closing entries produce a zero balance in each temporary account. ▯ Calculate the retained earnings balance after closing entries. ▯ (Just know how to do it) ▯ Chapter 5: ▯ Analyze the flow of costs for a merchandising company. ▯ ▯ Beginning inventory ▯ + Purchase, net Available for sale ▯ - Ending inventory ▯ Cost of good sold ▯ ▯ How to calculate net purchase ▯ Purchases ▯ + Freight ▯ - Purchase discounts ▯ - Purchase returns and allowances ▯ Net Purchase ▯ Perpetual System-keeps up with how much inventory sold within the next couple moments, up to date, real time. Ex: Bank statement on my phone. ▯ Facts:  Maintain detailed records of the cost of each inventory purchase and sale.  Records continuously, shows inventory that should be on hand for every item.  Company determines cost of goods sold each time a sale occurs. ▯ Advantages of the perpetual system:  Traditionally used for merchandise with high unit values  Shows the quantity and cost of the inventory that should be on hand at any time.  Provides better control over inventories than a periodic system. Periodic System- wait till end of the accounting period. NOT very detailed. Ex: You will not see that inventory is missing (possibly theft) until end of the accounting period. Facts:  Does not keep a detailed record of the goods on hand.  Cost of Good Sold determines by count at the end of the accounting period.  Example calculations of Cost of Good Sold: ▯ Beginning inventory (100,000) ▯ + Purchase, net +(800,000) ▯ Available for sale (900,000) ▯ - Ending inventory -(125,000) ▯ Cost of good sold 775,000 ▯ Analyze purchase discounts and other costs associated with the purchase of inventory. ▯ Purchase Discounts: ▯ Credit Terms may permit buyer to claim a cash discount for prompt payment. ▯ Advantages:  Purchaser saves money.  Seller shortens the operating cycle by converting the accounts receivables into cash earlier. Examples/ Common Terms 2/10, n/30 : 2% discount if paid within 10 days, otherwise net amount due in 30 days. 1/10 EOM : 1% discount if paid within first 10 days of next month. n/10 EOM : 1% net amount due within the first 10 days of the next month. If she takes a discounts: ▯ #1 Account Payable 3,500 ▯ Inventory 70 ▯ Cash 3,430 ▯ If she does not take discounts: ▯ #3 Account Payable 3,500 ▯ Cash 3,500 Other Cost Associated FOB Shipping Point:  Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.  Buy pays freight costs.  FOB shipping point= Add as inventory in the books. EX: When I order something from Target. My responsibility when it goes to FedEx. (Inventory, cash) FOB Destination:  Ownership of the goods remain with the seller until the goods reach the buyer.  Seller pays the freight costs.  Freight costs incurred by the seller are an operating expense. EX: Buy on eBay and they pay for the shipping. Their responsibility till I get it. (Freight out/ expense, cash) Purchase Returns and Allowances Purchasers may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Return: Return goods for credit if the sale was made on credit, or for cash refund if the purchase was for cash. EX: When I returned the strip dress from target this summer. Purchase Allowance: May choose to keep the merchandise if the seller will grant a reduction of the purchase price. EX: When I got a discount on my homecoming dress b/c the zipper. ▯ #1 Accounts Payable 300 ▯ Inventory 300 ▯ Define inventory: ▯ A complete list of items such as property, goods in stock, or the contents of a building. (Anything you can sell (widgets)) It is a current asset ▯ Goods available for future sales to customers are considered inventory.  Companies may purchase inventory for cash or on account (credit).  They normally record purchases when they receive the goods from the seller. Every purchase should be supported by business documents that provide written evidence of a transaction.  Each cash purchase should be supported by a canceled check or a cash register receipt indicating the items purchases and amounts paid.  Companies record cash purchases by an increase (debit) in Inventory and a decrease (credit) in Cash. Identify when sales revenue is recorded.  Made using cash or credit (on account)  Sales revenue, like service revenues, is recorded when the performance obligation is satisfied.  Performance obligation is satisfied when the goods are transferred from the seller to the buyer.  Sales invoice should support each credit sale. - This is what you do for the perpetual system #1 Cash OR Accounts Receivable xxx Sales Revenue xxx #2 Cost of goods sold xxx Inventory xxx Identify contra revenue accounts. Like Sales Returns and Allowances, Sales Discounts is a contra revenue account to Sale Revenue, which means it is offset against a revenue account on the income statement. The normal balance of sales returns and allowances is a debit. Companies use a contra account, instead of debiting sales revenue, to disclose in the accounts and in the income statement in the amount of sales return and allowances.  Sales Discounts and sale returns and allowances are apart of contra revenue accounts. Calculate net sales, cost of goods sold, gross profit, and the gross profit rate. Net Sales: Sales Revenue - Sales Return and Allowances - Sales Discounts Net sales Cost of Good Sold: ▯ Beginning inventory ▯ + Purchase, net ▯ Available for sale ▯ - Ending inventory ▯ Cost of good sold Gross profit: Sales Revenue – Cost of Goods Sold Gross profit rate: Gross Profit / Net Sales ▯ Chapter 6: ▯ Calculate ending inventory based upon the physical count and ownership of goods. ▯ HW 6-1 ▯ - Consignment goods not included in inventory ▯ - If inventory becomes worthless, you cannot include it. ▯ - Take inconsideration of goods in transit, FOB destination or FOB shipping. ▯ - Study E6-2 from class book example ▯ EX: Illustration: Crivitz TV Company purchases three identical 50-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each. These facts are summarized below. ▯ ▯ Calculate ending inventory under FIFO. ▯ ▯ Kam Company has the following units and costs. ▯ ▯ Units ▯ Unit Cost Inventory, Jan. 1 ▯  8,000 ▯ $11 ▯ Purchase, June 19 ▯ 13,000 ▯  12 ▯ Purchase, Nov. 8 ▯  5,000 ▯  13 ▯ If 9,000 units are on hand at December 31, what is the cost of the ending inventory under FIFO? ▯ A.) 99,000 ▯ B.) 108,000 ▯ C.)113,000 ▯ D.) 117,000 ▯ Calculate cost of goods sold under LIFO. ▯ Kam Company has the following units and costs. ▯ Units ▯ Unit Cost ▯ Inventory, Jan. 1 ▯  8,000 ▯ $11 ▯ Purchase, June 19 ▯ 13,000 ▯  12, ▯ Purchase, Nov. 8 ▯  5,000 ▯  13 ▯ If 9,000 units are on hand at December 31, what is the cost of the good sold under LIFO. ▯ (8,000 +13,OOO+5,000) – 9000 = 17,000 ▯ (5,000 * 13) = 65,000 ▯ (13,000 * 12) =144,000 ▯ 144,000 + 65,000 = 209,000 ▯ Given sales, inventory transactions, expenses, and tax rate, calculate net income. ▯ Sales Revenue ▯ - Sales Returns and Allowance ▯ - Sales Discounts Net Sales ▯ - Cost of Good Sold ▯ Gross Profit ▯ - Operating Expense ▯  Income before taxes ▯ - Income tax expense ▯  Net Income ▯ PRACTICE HW 5-6 ▯ Apply the lower of cost or market basis to inventory and identify the accounting convention it represents. When the value of the inventory is lower than it’s cost.  Companies can “write down” the inventory to its market value in the period in which the price decline occurs.  Market value = Replacement Cost  Example of conservatism (allows you to anticipate future losses but not future gains.) EX: ▯ Calculate inventory turnover. ▯ = Cost of Goods Sold / Average Inventory ▯ * Average inventory = beginning inventory/ ending inventory ▯ Define LIFO reserve. ▯ Firms using LIFO must report the amount that inventory would increase ( occasionally decrease) if the FIFO method had been used. ▯ ▯ This reporting enables analysts to make adjustments to compare companies that use different cost flow methods ▯ ▯ Ending inventory under LIFO + LIFO reserve = Ending inventory under FIFO LIFO-FIFO  Fifo had higher cots than lifo when: o cogs available for sale are the same o ending inventory are different. o Cogs are different o Grossprofit is different  Creating a different net income ▯ Interpret the effect on the financial statements of an error in the physical inventory count. ▯ Inventory errors affect the computation of cost of goods sold and net income in two periods.  An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.  Over the two years, the total net income is correct because the errors offset each other.  Ending inventory depends entirely on the accuracy of taking and costing the inventory. ▯ Chapter 7: ▯ Identify the three factors that contribute to fraudulent activity. ▯  Financial pressure – Employees sometimes commit fraud because of personal financial problems caused by too much debit.  Or they might commit fraud because they want to lead a lifestyle that they cannot afford on the their current salary.  Opportunity – (Most important from fraud triangle.) For an employee to commit fraud, the workplace environment must provide opportunities that an employee can exploit.  Opportunities occur when the workplace lacks sufficient controls to deter and detect fraud. ▯ EX: inadequate monitoring of employee actions can create opportunities for theft and can embolden employees because they believe they will not be caught.  Rationalization – In order to justify their fraud, employees rationalize their dishonest action. ▯ EX: Employees sometimes justify fraud because they believe they are underpaid while the employer is making lots of money. These employees feel justified stealing because they believe they should be paid more. Identify the requirements for internal controls enacted by the Sarbanes-Oxley Act.  Applies to publicly traded of internal control.  Required to maintain a system of internal control.  Corporate executives and board of directors must ensure that these controls are reliable and effective.  Independent outside auditors must attest to the adequacy of the internal control system.  SOX created the Public Company Accounting Oversight Board (PCAOB) ▯ Methods and measures adopted to: 1. Safeguard assets 2. Enhance accuracy and reliability of accounting records 3. Increase efficiency of operations. 4. Ensure compliance and laws and regulations. ▯ Five primary components  control environments  risk assessment  control activities  information and communication  monitoring ▯ Given a scenario, identify the internal control principles being violated. 1. Human Resource Controls  Bond employees who handle cash  Rotate employees’ duties and require vacations  Conduct background checks EX: Because of all the tools we have today, we need to make sure everything is the way it’s suppose to be. The main reason that people do not take vacations is because they are trying to hide something. This is why many companies say that vacations are mandatory. 2. Document Procedures  Companies should use prenumbered documents, and all documents should be accounted for.  Employees should promptly forward source documents for accounting entries to the accounting department. EX: This is the reason that documents are numbered, you can tell which ones are missing. 3. Segregation of Duties  Different Individuals should be responsible for related activities.  The responsibilities for recordkeeping for an asset should be separate from the physical custody of that asset. EX: If someone is working in the balance books the other person should be in custody of cash on hand. So break up the duties. *The more people involved in a scandal which increase the chance of them being caught. 4. Physical Controls ▯ EX:  Television monitors and garment sensors to detect theft.  Safes, Vaults, and safety deposit boxes for cash and business papers.  Alarms to prevent break-ins.  Time clocks for recording time worked.  Computer facilities with pass key access or fingerprint or eyeball scans  Locked warehouses and storage cabinets for inventories and records. 5. Independent Internal Verification  Records periodically verified by employee who is independent.  Discrepancies reported to management. ▯ EX: Going back to the segregation of duties, someone else who is separate should check their work. Just have someone who is unbiased towards each employer and put them in a situation. Make sure that the checking is random. 6. Establishment of Responsibility  Control is most effective when only one person is responsible for a given task.  Establishing responsibility often requires limiting access only to authorized personnel, and then identifying these personal. EX: If someone worked at a bank, each teller gets their own cashbox. ▯ THERE ARE MANY EXAMPLES IN THE SLIDE. GO BACK AND PRACTICE ▯ Identify internal controls for cash. ▯ Limitations of Internal Control  Costs should not exceed benefit.  Human Element  Size of the business ▯ Cash Receipt Controls ▯ -Establishment of Responsibility:  Only designated personal are authorized to handle cash receipts (cashiers) ▯ -Documentation Procedure:  Use remittance advice (mail receipts), cash register tapes or computer records, and deposit slips. ▯ -Segregations of Duties  Different individuals receive cash, record cash receipts and hold the cash. ▯ -Human Resource Controls  Bond personal who handle cash; require employees to take vacations can conduct background checks. ▯ -Independent Internal Verification  Supervisors count cash receipts daily, assistant treasure compares total receipts to bank deposits daily. ▯ - Physical Control  Store cash in safes and bank vaults: limit access to storage areas; use cash registers. ▯ Cash Receipt Controls: (Over the Counter Receipts) ▯ Important internal control principle-segregation of record keeping from physical custody. ▯ ▯ Cash Receipt Controls: (Mail Receipts)  Should be opened by two people; a list prepared, and each check endorsed “For Deposit Only”  Each mail clerk signs list to establish responsibility for the data.  Original copy of the list, along with the checks, is sent to the cashier’s department.  Copy of the list is sent to the accounting department for recording. Clerk also keeps a copy. ▯ Cash Disbursement Control ▯ Generally, internal control over cash disbursements is more effective when companies pay by check or electronic funds transfer (EFT) rather than by cash. ▯ Applications:  Voucher System Controls  Petty Cash Fund ▯ Cash Disbursement Control: Voucher System  A network of approval by authorized individuals, acting independently, to ensure all disbursements by check are proper.  A voucher is an authorized form prepared for each expenditure in a voucher system. ▯ Control Features: Use if a Bank ▯ The use of a bank contributes significantly to good internal control over cash,  Minimizes the amount of currency on hand.  Creates a double record of bank transactions.  Bank Reconciliation. ▯ Control Features: Use if a Bank : Bank Statements ▯ Debit Memorandum  Bank service charge.  NSF (not sufficient funds) ▯ Credit Memorandum  Collect notes Receivable  Interest Earned Prepare a bank reconciliation. (This problem will not contain any errors as reconciling items.) Reconciling Items:  Deposits in Transit  Outstanding Checks  Banks Memoranda  Errors – prob. won’t contain ▯ *Above all are TIME LAGS ▯ BANK ▯ Beginning Balance Per Bank ▯ + Deposit in Transit ▯ - Outstanding Checks ▯ Correct Balance ▯ BOOK ▯ Beginning Balance Per Book ▯ + Notes collected by bank ▯ - NSF (bounced) checks ▯ - Check printing or other service charge ▯ Correct Balance ▯ REVIEW 7-14 ▯ Prepare journal entries related to petty cash. ▯ Petty Cash Fund: used to pay small amounts. ▯ Involves:  Establishing the fund ▯ March 1 Petty Cash 100 ▯ Cash 100  Making payments from the fund  Replenishing the funds ▯ REVIEW 7-15 ▯ (PRACTICE WITH JOURNAL ENTRIES) ▯ Chapter 8: ▯ Define trade receivables. ▯ - Notes and accounts receivable that result from sales transactions. ▯ Account Receivables- Amounts customers owe on account that result from the sale of goods and services. ▯ EX: ▯ Illustration: Assume that Jordache Co. on July 1, 2014, sells merchandise on account to Polo Company for $1,000 terms 2/10, n/30. Prepare the journal entry to record this transaction on the books of Jordache Co. ▯ Jul. 1 Accounts Receivable 1,000 ▯ Sales Revenue 1,000 ▯ Illustration: On July 5, Polo returns merchandise worth $100 to Jordache Co. ▯ Jul. 5 Sales returns and allowances 100 ▯ Accounts Receivable 100 ▯ Illustration: On July 11, Jordache receives payment from ▯ Polo Company for the balance due. ▯ Jul. 11 Cash 882 ▯ Sale discounts ($900 x .02) 18 ▯ Accounts Receivable 900 ▯ Illustration: Some retailers issue their own credit cards. Assume that you use your JCPenney Company credit card to purchase clothing with a sales price of $300. ▯ Accounts Receivable 300 ▯ Sales Revenue 300 ▯ Assuming that you owe $300 at the end of the month, and JCPenney charges 1.5% per month on the balance due ▯ Accounts Receivable 300 ▯ Interest Receivable 300 ▯ Notes Receivables- Written promise (formal instrument) for amount to be received. ▯ - Companies may grant credit in exchange for a promissory note- a written promise to pay a specified amount of money on demand or at a definite time.  Primary Notes may be used: o When individuals and companies lend or borrow money o When amount of transaction and credit period exceed normal limits o In settlement of accounts receivable. ▯ Illustration: Brent Company wrote a $1,000, two-month, 8% promissory note dated May 1, to settle an open account. Prepare entry would Wilma Company makes for the receipt of the note. ▯ May 1 Notes Receivable 1,000 ▯ Accounts Receivable 1,000 ▯ Illustration: Wolder Co. lends Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest note. If Wolder presents the note to Higley Inc. on November 1, the maturity date, Wolder’s entry to record the collection is: ▯ Nov 1 Cash 10,375 ▯ Notes Receivable 10,000 ▯ Interest Revenue 375 ▯ ($10,000 X 9% X 5/12 =375) ▯ Nontrade receivables- such as interest, loans, to officers, advance to employees, and income tax refundable. ▯ Calculate net accounts receivable. ▯ Gross Accounts Receivable – Allowance for doubtful accounts = net accounts receivable ▯ AR 10,000 ▯ 10% allowances doubt (1000) (How much $ you are expecting not to make) ▯ Net 9000 ▯ Bad Debit Expense 1000 ▯ Allowance- for Doubtful accounts 1000 ▯ Net accounts receivable = the amounts you expect to make ▯ *What happens to net accounts during write off’s? Nothing ▯ Identify the accounting period bad debt expense from credit losses associated with accounts receivable should be recorded. ▯ Exercise 8-5 from homework (Means you subtract) ▯ Using the allowance method, prepare the adjusting entry for bad debt expense. ▯ Exercise 8-5 from homework ▯ - Actual uncollectible are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account written off as uncollectible. ▯ Prepare journal entries associated with a note receivable and interest revenue. ▯ Exercise 8-7 from homework ▯ Analyze the accounts receivable turnover and average collection period. ▯ Exercise 8-10 Submission from homework ▯ Accounts Receivable Turnover:  Assess the liquidity of the receivables.  Measure the number of times, on average, a company collects receivables during the period. ▯ Average Collection period  Use the assess effectiveness of credit and collection policies.  Collection period should not exceed credit term period. ▯ Identify methods to accelerate the receipt of cash from receivables.  A common way to accelerate receivables collection is a sale to a factor. A factor is a finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers. ▯ Chapter 9: ▯ Using the historical cost principle, calculate the cost of land and equipment. ▯ Cost of land: ▯ All necessary costs inquired in making land ready for its intended use increase (debit) the Land account. ▯ Cost typically include: 1. Cash purchase price 2. Closing sots such as title and attorney’s fees, 3. Real estate brokers’ commission, and 4. Accrued property taxes and other liens on the land assumed by the purchaser. ▯ Illustration: Assume that Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’s commission, $8,000. ▯  Land Cash price property (100,000) 100,000 Net removal cost of warehouse (6,000) 6,000 Attorney’s fees (1,000) 1,000 Real estate broker’s commission (8,000) 8,000 115,000 HW 9-3 Cost of equipment: Include all costs incurred in acquiring the equipment and preparing it for use. Cost Typically Include: 1. Cash purchase price 2. Sales TAX 3. Freight Changes 4. Insurance during transit paid by this purchaser 5. Expenditures required in assembling, installing, and test the unit. ▯ Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. ▯ Compute the cost of the delivery truck. ▯  Truck ▯ Cash Price 22,000 ▯ Sales Taxes 1,320 ▯ Painting and lettering 500 ▯ Cost of Delivery Truck 23,820 Prepare the journal entry to record these costs: Equipment 23,820 License expense 80 Prepaid insurance 1600 Cash 25,500 ▯ Identify the factors in computing depreciation. ▯ ▯ Calculate depreciation expense using the straight-line method. ▯ HW 9-5 ▯ Cost – Salvage value = Deprecation = Straight line method ▯ Useful life in years ▯ ▯ - Make sure you look how many months are left in year, if more than 1 year is involved. ▯ Given a scenario, calculate the book value of a long-lived asset. ▯ Cost – Accumulated Depreciations = Book value ▯ Calculate depreciation expense after a change in salvage value. ▯ HW 9-6 ▯ Calculate the gain or loss on the disposal of a plant asset. ▯ P9-3A ▯ Calculate return on assets. ▯ P9-6A ▯ Return on Assets: Net Income Average Total Assets ▯ Identify where intangible assets are found on the balance sheet. ▯ ▯ - Patents ▯ - Copyrights ▯ - Franchise or license ▯ - Trademarks ▯ - Trade names ▯ - Goodwill  Intangible assets with a theoretically infinite life such as goodwill cannot be amortized and therefor do not appear on the balance.  If the intangible assets have an identifiable value and lifespan they appear on the balance sheet as long term assets valued according to their purchase prices and their amortization prices. ▯ ▯ ▯ Chapters 1 and 2: Calculate components of the income statement, retained earnings  statement, and balance sheet (for example, given selected financial  information calculate the total current assets).    Income Statement  shows how successfully a business performed during a  period of time.  Revenue ­ Expense Net income o Reports revenues and expenses for a specific period of times o Net Income: revenues exceed expenses  needed to determine the ending balance in retained earnings o Net loss­ expenses exceed revenues o Past net income provides information for predicting Revenue – Expenses Revenues ­Cost of Goods sold = Gross profit ­Operating Expenses = Net Income / Net Loss     Retained Earnings Statement  Indicates how income was distributes as  dividends and how much was retained in the business Retained Earnings (BB)  + Net Income ­Dividends Retained Earnings (EB) o Statement shows amounts and causes of changes in retained earnings  during the period o Time period is the same as that covered by the income statement o Users can evaluate dividend payment practices Ending balances is retained earnings is needed in preparing the  balance sheet     Balance Sheet Presents a picture at a point in time of what a business owns and  what it owes o Reports assets and claims to assets at a specific point in time o Assets (Cash, Accounts Receivable, Prepaid Insurance, Equiptment,  Inventory) o = Liabilities (Notes Payable, Accounts Payable, Unearned Service  Revenue, Salaries and Wages payable, Interest Payable) o + Stockholders’ Equity (Common + Preferred Stock + Retained  Earnings) **heading of a balance sheet must identify the company, the statement,  and the date Assets o  **Current Assets  [CIRIP]  Cash   Investments  Receivables  Inventories  Prepaid expense o Long­ Term Investments  Investment in stock and bonds  Long term assets  Long term notes receivable o Plant, Property and Equipment (PPE)  Long useful lives   Currency used in operations  Land, building, Equipment, Delivery vehicles, and furniture  **Depreciation allocating the cost of assets to number of years  **Accumulated depreciation­ total amount of depreciation  expensed thus far in the asset’s life o Intangible Assets  Assets that do not have a physical substance  Goodwill  Patents  Copyrights  Trademarks/trade names + Liabilities o Current Liabilities  (Notes Payable)  (Accounts Payable)  (Unearned Service Revenue)  (Salaries and Wages Payable)  (Interest Payable) o Long­ Term Liabilities   Bond payable  Mortgages Payable  Long Term Notes Payable  Lease Liabilities  Pension Liabilities = Stockholders Equity o Common Stock+ Preferred Stock Retained Earnings  Rev – Exp – Div DEAD  CLOR or hand    ebit   redit Expenses Liabilities Assets Owner’s Equity Dividends Revenue Use the accounting equation to solve for an unknown  . Chapter 3: Analyze the effect of business transactions on the accounting equation . System of Collecting and processing transaction data and communicating financial  information to decision makers  Transactions are economic events that require recording in the financial  statements o Not all activities represent transactions o Assets, liabilities, or stockholders’ equity items change as a result of some  economic event o Dual effect on the accounting equation Ex) is the following events recorded in the accounting records? Purchase computer yes Discuss guided trip options with potential customers  no Pay rent  yes Basis Accounting Equation  Assets= Liabilities +  Stockholders’ Equity  Common Stock+ Retained Earnings** Revenue – Expenses­ Dividend [**Retained Earnings  = Profit of company ] Identify activities as operating, investing, or financing.  Operating activities­ involve providing guide services o Once a business has the asset’s it needs, it can begin it’s operating.   Investing activities­ include the purchase or sale of long lived assets used in operating  the business, or the purchase or sale of investment securities o Involves the purchase of resources (assets) needed to operate the business  Financing activities­ are borrowing money issuing shares of stock, and paying dividends o To start or expand a business the owner(s) quite often need cash from outside  sources Chapter 4: OK   Apply the revenue recognition principle. Companies recognize revenue in the accounting period in which the  performance obligation is satisfied  o The day you complete the service, is the date you record  o Customer request service Service performed  Cash received  Ex) Assume Conrad Dry Cleaners cleans clothing on June 30, but customers do not claim and pay for their clothes until the first week of July. The journal entries for June and July  would be? June  Accounts Receivable  0 Service Revenue 0 July Cash 100 Accounts Receivable  100 Ex) [Wiley 4­1] Southwest Airlines sells you an advance December  purchase airline ticket in September for your  flights home at Christmas Ultimate electronics sells you a home theater  At time of delivery on a “no money down and full payment in 3  months” promotional deal The Toronto Blue Jays sells season tickets  Online to games in the Skydome. Fans can  Per game basis over the season Purchase the ticket at any time, although the  Season doesn’t officially begin until April.  The major league baseball season runs from  April through October You borrow money in August form RBC Evenly over the loan term Financial Group. The loan and the interest  are repayable in full in November  In August, you order a sweater from Sears  using online catalog. The sweater arrives in  September  September, which you charge to your Sears  Credit card. You receive and ay the Sears bill  In October  OK   Calculate net income from an adjusted trial balance. Trial Balance­ Each account is analyzed to determine whether it is complete and  up to date Revenue (service revenue)­ Expenses (total expenses) from adjusted trial balance Ex) Wiley 4­12  OK   Prepare adjusting journal entries for prepaid rent and interest.  **Prepaid rent [Slides 2­21 – 4­26] o Adjusting entries  Examples  Insurance, supplies, advertising, rent, depreciation  Reason for adjustments  Prepaid expense recorded in assets accounts have been used  Accounts before adjustments  Assets overstated & Expense understated  Adjusting Entry  Dr Expenses  Cr Assets Ex) Jan 1 Prepaid Rent 600 Cash 600         Feb 1 Rent expense   100 Prepaid Rent 100  OK Interest   Ex) loan borrowed on October 1 of $100, 12% annual interest rate Oct 1 Cash 100      Notes Payable 100 Dec 31 Interest Expense    3       Interest Payabl3 [        100 x 12% = 12 12 x 3/12= 3    ] Chapter 5: Interpret sales discounts. Offered to customers to promote prompt payment of the balance due Contra­revenue account (debit) to Sales Revenue Ex) Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800  less purchase returns and allowances of $300) on May 14, the last day of the discount  period. Prepare the journal entry PW Audio Supply make the record the receipt on May  14 May 14   Cash  3,430    Sales discounts 70 Accounts receivable 3,500 [Discount: $3,800 ­ $300 x 2% = 70] If failed to pay discount, full payment of $3,500 of June 3 June 3  Accounts payable 3,500 Cash 3,500 Ex) Solar Co. sold $502,200 of merchandise to Rooney Co., terms 2/10, n/30. Paid on  Dec 13.  502,200 x 2% = 10,044 502,200 – 10,444 = 492,156 Terms:  2/10, n/30 o 2% discount if paid within 10 days, otherwise net amount due within 30  days  1/10 EOM o 1% discount paid within first 10 days of next month  n/10 EOM o Net amount due within the first 10 days of the next month OK   Calculate cost of goods sold under a periodic system.  No running account of changes in inventory  Ending inventory determined by physical count  Cost of goods sold not determined until the end of the period (Do not keep detailed record of the goods on hand) (COGs determined by the count at the end of the accounting period)  Beginning inventory +Purchases, net  (purchases + freight­ purchase returns allowances­ discounts) =Goods available for sale ­ Ending Inventory =Cost of goods sold Ex) Cost of goods sold Inventory, January 1 36,000 Purchase 325,000 Less: Purchase returns and allowances 10,400 Purchase discounts    6,800   17,200 Net purchases 307,800 Add: Freight­in    12,200 Cost of goods purchased         + 320,000 Cost of goods available for sale 356,000 Inventory, December 31          ­    40,000 Cost of goods sold 316,000  Wiley 5­10 {4} Chapter 6: OK   Calculate ending inventory using LIFO. Last­in, First­out (LIFO)   Costs of the latest goods purchased are the first to be recognized in  determining cost of goods sold  Seldom coincides with actual physical flow of merchandise  Exception include goods sorted in piles, such as coal or hay **ending inventory is the FISH (first in, still here) **newest/ freshest sold first (out) Calculate cost of goods sold and gross profit using average cost.  Average cost:  o Allocates COGs available for sale on the basis of weighted­average  cost incurred o Applies weighted­average unit cost to the unit on hand to determine  cost of the ending inventory   Cost of goods sold of Average Cost o Goods available for sale – Ending Inventory = COGs  Gross Profit Sales Revenue o Net sales – COGs           ­ Sales Return and Allowances


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