ACT 205 Study Guide for Exam 1
ACT 205 Study Guide for Exam 1 ACT 205
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This 11 page Study Guide was uploaded by Rachel Rheingold on Friday September 16, 2016. The Study Guide belongs to ACT 205 at Colorado State University taught by Sally Plasterer Whitney in Fall 2016. Since its upload, it has received 90 views.
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Date Created: 09/16/16
Study Guide for Exam 1 Chapter 1: A Framework for Financial Accounting 1. Define accounting a. Accounting is the language of businesses b. Is has 2 main goals i. Measure the businesses activities ii. Communicate these activities to external users 2. Describe the primary forms of business’ organization a. 3 forms of business organizations i. corporations – legally separate from stockholders (owners) ii. sole proprietorship – only one owner iii. sole partnership – two or more owners (partnership) 3. Distinguish between the two types of users of accounting information and give examples a. Investors – decide whether to buy stock b. Creditors – decide whether to lend money 4. Classify an account based on its economic characteristics a. Bk 5. Explain the three principal types of business activities a. 3 business activities i. financing activities – includes transactions the company has with investors and creditors 1. issuing stock 2. borrowing money from a local bank ii. investing activities – includes transactions involving the purchase and sale of resources to benefit the company for the future 1. equipment 2. supplies iii. operating activities – includes transactions that relate to the primary operations of the company 1. rent 2. salaries 3. utilities 4. taxes 5. advertising 6. Describe the content and purpose of each of the financial statements a. classify an account as to the statement on which it appears i. Income Statement 1. Reports a company’s revenues and expenses 2. Reported over a period of time a. Revenues – Expenses = Net Income ii. Statement of Stockholders Equity 1. Reports a company’s common stalk and retained earnings 2. Reported over a period of time 3. Stockholders’ Equity = Common Stalk + Retained Earnings iii. Balance Sheet (“Selfie”) 1. Reports a company’s assets, liabilities, and stockholders’ equity 2. Reported on a particular date in time a. Assets = Liabilities + Stockholders’ Equity iv. Statement of Cash Flows 1. Records a company’s cash receipts and cash payments 2. Reported over a period of time a. Net Cash Flow operating + Net Cash Flow investing + Net Cash Flow financing = total change in cash 7. State the basic accounting equation and use it to analyze company financial data a. Assets = Liabilities + Stockholders Equity i. Used on a balance sheet 2 8. Prepare an income statement, balance sheet, statement of shareholders’ equity using a set of financial information 3 4 Chapter 2: The Accounting Cycle: During the Period 5 1. Analyze the effect of business transactions on the basic accounting equation a. 2. Define debits and credits and explain how they are used to record business transactions a. Explain the normal balance for different types of accounts and whether the account increases with debits or credits b. Basic Accounting Equation i. Debit – left (increase) 1. Assets ii. Debit – left (decrease) 1. Liabilities 2. Stockholders’ equity iii. Credit – right (increase) 1. Liabilities 2. Stockholders’ Equity iv. Credit – right (decreases) 1. Assets c. Expanded Accounting Equation i. Debit – left (decrease) 1. Liabilities 2. Stockholders’ Equity 3. Common Stalk 4. Retained Earnings 5. Revenues ii. Debit – left (increase) 1. Assets 2. Expenses 3. Dividends iii. Credit – right (decrease) 1. Assets 2. Expenses 3. Dividends iv. Credit – right (increase) 1. Liabilities 2. Stockholders’ Equity 6 3. Common Stalk 4. Retained Earnings 5. Revenues 3. Analyze and record basic accounting transactions using journal entries Date Debit Credit Account Name…………………………………………Amount Account Name…………………………………………………………………… Amount (description of transaction) Jan. 31 Debit Credit Equipment…………………………...................... $3000 Cash……………………………………………………………………… ………… $3000 4. Post journal entries to ledgers and T-accounts and compute ending balances 7 8 Chapter 3: The Accounting Cycle: End of the Period 1. Explain the revenue recognition principle and the matching principle a. Revenue recognition principle i. When a company provides services or goods, that’s when they record the revenue for the company’s 1. If Ryan buys a plane ticket in March but the trip in in June, the company doesn’t record the revenue until Ryan takes the flight in June b. Matching principle i. Most expenses are recorded in the same period as the revenues they help to generate. 9 1. Under a bonus plan, an employee earns a $50,000 bonus based on her performance within a year. The bonus is paid in the following year. 2. The bonus expense should be recorded within the year when the employee earned it 2. Differentiate between the cash basis and the accrual basis of accounting a. Cash basis 3. Explain why adjusting entries are needed, and identify the major types of adjusting entries Point of Accruel- Basis Cash-Basis Difference Revenue When goods and When cash is Recognition services are received provided to customers Expense In the period costs When cash is paid Recognition are used to help produce revenues GAAP Part of GAAP Not part of the GAAP 4. Prepare an adjusted trial balance and explain its purpose a. Its purpose is to recalculate the balances in the ledger T accounts 5. Prepare closing entries and explain their purpose a. Its purpose is to transfer all the temporary accounts b. Reduce the balances of the accounts to zero 6. Prepare a post-closing trial balance and explain its purpose a. Its purpose is to have all of the update account balances in closing entries 7. Describe the required steps in the accounting cycle 10 a. Chapter 2 i. Analyze transactions ii. Record the transactions in a journal entry iii. Post the journal entries to a general ledger iv. Prepare an initial trial balance b. Chapter 3 i. Record and post adjusting journal entries ii. Prepare an adjusted trail balance iii. Prepare the financial statements ie income statement, statement of stockholder’s equity, balance sheet, etc. iv. Record and post-closing journal entries v. Prepare a post-closing trial balance 11
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