Accounting 2101 Midterm 1 Study Guide
Accounting 2101 Midterm 1 Study Guide Accounting 2101
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This 7 page Study Guide was uploaded by Nisha Esmail on Wednesday September 21, 2016. The Study Guide belongs to Accounting 2101 at Georgia State University taught by Kris Clark in Fall 2016. Since its upload, it has received 321 views. For similar materials see Principal of Accounting I in Accounting at Georgia State University.
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Date Created: 09/21/16
Principles of Accounting 1 Fall 2016 Study Guide for Midterm 1 Chapter 1: Identify the advantages of the sole proprietorship, partnership, and corporate form of business organizations. o Sole Proprietorship – control everything in business Simple establishment Owner controlled Tax advantages o Partnership – need people to help you in business Simple establishment Shared controlled (all skill sets are needed) Broader skills and resources Tax advantages as well o Corporation – easier to get money Easier to transfer ownership Easier to raise funds No personal liability Identify internal and external users of financial information. o Internal employee / accounting management (marketing, finance) o External – investors, creditors, etc (people who manage things outside of company) Define and identify assets, liabilities, and stockholders’ equity accounts and the accounting equation. o Assets property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies Examples Cash, account receivable, buildings, equipment, supplies, inventory o Liabilities sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events Examples Notes payable, account payable, mortgage payable, salaries and wages payable, income taxes payable o Stockholder Equity portion of the balance sheet that represents the capital received from investors in exchange for stock Examples Common stock, retained earnings o Accounting Equation : assets = liabilities + stockholder equity Identify activities as operating, investing, or financing. o Operating Revenues – amounts earned from sale Inventory – goods available to sell Accounts receivable – right to money from sale Expenses – cost of assets consumed or service used Net income – revenues > expenses Net loss – revenues < expenses o Investing Computers, trucks, etc Resources owned are assets o Financing Borrow money (amounts owed are liabilities) People you owe are creditors Issue (sell) stock for cash (equity) Payments to stockholders are dividends Calculate components of the income statement, retained earnings statement, and balance sheet and identify the interrelationships. o Income statement = net income calculation Total Revenues – Total expenses = net income / net loss o Retained Earnings Statement = calculate ending retained earnings Beginning retained earnings + net income (from income statement) – dividends = ending retained earnings o Balance Sheet Add total assets Add total liabilities Add stockholder equity Common stock Retained earnings (from retained earnings statement) Find totals for all Identify the purpose of the auditor’s report. a. Purpose = Opinion to fairness of presentation of finance position and results of operation / conformance with accepted accounting principles b. ONLY CPA’S CAN DO THIS Chapter 2: Identify and define the different sections of a classified balance sheet. o Assets CURRENT ASSETS LONG TERM INVESTMENTS (held more than a year) Stock investments Investment in real estate LONG TERM ASSETS Land Buildings LONG TERM NOTE RECEIVABLE Non marketable equity investments PROPERTY PLANT EQUIPMENT Include accumulated depreciation INTANGIBLE ASSETS o Liabilities and Stock Holder Equity Current liabilities Long term liabilities Mortgages long term notes payable stockholder equity Define and identify a current asset(s). o Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer Operating cycle is average time it takes from the purchase of inventory, to the sale of goods, and then to the collection of cash from customers Examples Cash Investments Receivable Inventories Prepaid expenses Calculate earnings per share (profitability ratio) o Net income – preferred dividends Weighted average common shares outstanding (add beginning+ending / divide by 2) Calculate the current ratio and understand its purpose. (liquidity ratio ability to pay obligations) o Current assets / current liabilities o Measure the short term ability to pay maturing obligations and to meet unexpected cash needs Interpret a high debt to assets ratio (solvency ratio financing by creditors) o Total liabilities / total assets o Higher the percentage = higher debt Define free cash flow. o Describes the net cash provided by operating activities after adjusting for capital expenditures and dividends pay o Free cash flow = net cash provided by operating activities – capital expenditures – capital dividends Define Generally Accepted Accounting Principles (GAAP) and the characteristic “relevant”. o Set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes o Relevance if makes a difference in business decisions if provides info that has predictive value helps provide accurate expectations about future if provides confirmatory value – confirms or corrects prior expectations materiality – if size makes it likely to influence the decision of investor or creditor (company specific aspect) Chapter 3: Analyze the effect of business transactions on the accounting equation. o Transactions are economic events that require recording in the financial statements o Not all activities represent transactions o Assets, liabilities, or stockholder equity items change as result of economic event Purchase computer = recorded Discuss opinions = not recorded Pay rent = recorded Hire new employee = not recorded Identify the characteristics of the doubleentry system. o Each transactionsss affects two or more accounts to keep equation in balance o Recording done by debiting at least one account and crediting another o Debits must always equal credits!!!! Identify the sequence of steps in the recording process. o Determine what type of account is involved o Determine what items increased or decreased and by how much o Translate the increases and decreases into debits and credits Prepare or analyze journal entries. o Example: issue common stock in exchange for 10,000 cash CASH IS DEBIT COMMON STOCK IS CREDIT o Example 2 Purchase equipment for 5000 EQUIPMENT IS DEBIT CASH IS CREDIT Identify source documents. o General journal – posts transactions with both items occurring o General ledger – posts transactions under same account Aka cash transactions together Equipment transactions together Apply debit/credit rules and normal account balances. o Side where balance is found o Asset accounts normally have debit balances o Liabilities and capital usually have credit balances Analyze account activity and calculate ending account balances. o If credits are greater than debits, there is a credit balance o If debits are greater than credits, there is a debit balance Identify the purpose of a trial balance. o List of accounts and balances at given time o Accounts are listed in order in which they appear in ledger o Purpose is to prove debits equal credits o Also can uncover errors in journalizing o Useful in preparing financial statements Chapter 4: Apply the revenue recognition principle. o Companies recognize revenue in the accounting period in which performance obligation is satisfied o Clean clothing in june – customer pays in july REVENUE IS RECORDED IN JUNE Calculate net income using the accrual basis of accounting. o Transactions recorded in the periods in which the events occur o Revenues are recognized when service is performed even if cash not received o Expenses are recognized when incurred, even if cash not paid Ex. Paint building in 2016 – expenses are 50,000, customer does not pay 80,000 bill until 2017 ACCRUAL BASIS o Revenue = 80,000 o Expense = 50,000 o Net income = 30,000 Identify why adjusting entries are needed and analyze the impact of not making adjusting entries. o Ensure that revenue recognition and expense recognition principles are followed o Are required every time a company prepares financial statements o Includes one income statement account and one balance sheet account o Made to record the revenue for services performed during the period and to show the liability remains o Also results in decrease (a debit) to liability account and an increase (credit) to revenue account o Not adjusting = assets overstated, expenses understated, liabilities overstated, revenues understated Prepare adjusting journal entries. o Ex. In oct sierra corp, performed guide services for 200 that weren’t billed before oct 31 ACCRUED REVENUE Oct 31 o Accounts receivable = 200 (debit) Service revenue = 200 (credit) o Ex. Sign 3 month note payable amount 5000, with annual interest rate 12% ACCRUED INTEREST Oct 31 o 5000 x 12% x 1/12 = 50 o Interest expense = 50 (debit) Interest payable = 50 (credit) o Ex. Paid salaries on oct 26, next payment not until nov 9. Employees receive 2000 weekly salaries or 400 a day, therefore accrued salaries are 1200 on oct 21 (400*3 days) ONLY RECORD FOR THE MOTH Oct 31 o Salaries and wage expense = 1200 (debit) Salaries wage payable = 1200 (credit) Define depreciation. o Allocating cost of a tangible asset over its useful life, losing value. Identify the characteristics of the adjusted trial balance. o Purpose is to prove the equality of debit and credit balances in ledger o It is the primary basis for the prep of financial statements o FINANCIAL STATEMENTS ARE PREPARED DIRECTLY FROM ADJUSTED TRIAL BALANCE Income statement Retained earnings statement Balance sheet Identify the purpose of closing entries. o Transfer temporary account balances to permanent stockholder equity account – retained earnings o Produce a zero balance in each temporary account o Prove equality of the permanent account balances that company carries forward into the next accounting period Calculate the retained earnings balance after closing entries. o Add all debits and credits o Should equal each other
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