Exam 1 Review Study Guide (Summaries from Chapter 1-4 and Practice Q&A)
Exam 1 Review Study Guide (Summaries from Chapter 1-4 and Practice Q&A) HRMA 2340
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This 11 page Study Guide was uploaded by Yennie Handika on Thursday September 29, 2016. The Study Guide belongs to HRMA 2340 at University of Houston taught by Agnes L DeFranco in Fall 2016. Since its upload, it has received 17 views. For similar materials see Systems of Accounting in Hospitality in Accounting, Finance at University of Houston.
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Yennie Handika University of Houston Exam 1 Review Study Guide Summaries from Chapter 1-4 + Exam 1 Practice Review Questions & Answers Sources: Hospitality Financial Accounting Second Ed Book & Lectures at University of Houston Chapter 1 – Hospitality Accounting in Action 1. Accounting helps to identify, record, and communicate economic events. 2. Accounting users: a. Internal i. Management – to plan, control, evaluate business operations b. External i. Investors (owners) – to buy or sell their financial interests ii. Creditors (suppliers or bankers) – to lend money or not iii. Taxing authorities, regulatory agencies, customers, labor unions, economic planners 3. Chief Accounting Officer is called controller (or Director of Finance), which is part of hotel’s executive committee (GM and all department heads). 4. 3 major fields of accounting jobs: a. public accounting – auditing, taxation, or management consulting b. private (managerial) accounting – cost accounting, tax accounting, general accounting, budgeting, accounting information systems, internal auditing c. not-for-profit accounting – in hospitals, universities, and foundations, or in local, state, and federal governmental units 5. Forms of business: a. Proprietorship – owned by 1 person, personally liable for all debts, receives all profits/losses, requires capital b. Partnership – owned by 2 or more people, each has unlimited personal liability c. Corporation – separate legal entity with multiple ownership, limited liability for shareholders, unlimited life 6. FASB/Financial Accounting Standards Board (private organization) and SEC/Securities & Exchange Commission (governmental agency) establish GAAP. 7. IASB – International Accounting Standards Board 1 Yennie Handika University of Houston 8. Accounting Principles: a. Cost Principle i. Assets should be recorded at their historical cost ii. Cost is reliable – objectively measured and verifiable 9. Accounting Assumptions: a. Monetary Unit Assumption i. Accounting records only contain data that can be expressed in terms of $$$ ii. Units of measure stays constant over time b. Economic Entity Assumption i. Activities of economic entity should be kept separate and distinct from the owner’s affairs ii. Any organization or unit in society 10. Basic Accounting Equation (A=L+OE) a. Assets – resources owned by the business that have future economic benefit b. Liabilities – creditorship claim on total assets/ debts c. Owner’s Equity – ownership claim on total assets, made up of: i. Capital ii. Retained Earnings – represent the cumulative profits or (losses) that were reinvested in the business 1. + Revenues 2. – Expenses 3. – Withdrawals/ Dividends 11. Steps in Accounting Cycle: a. Analyze Transactions b. Journalizing c. Posting d. Trial Balance e. Adjustments f. Adjusted Trial Balance g. Financial Statements h. Closing Entries i. Post Closing Trial Balance 12. Uniform System of Accounts: a. USALI – Uniform System of Accounts for the Lodging Industry b. USAR – Uniform System of Accounts for Restaurants c. USFRC – Uniform System of Financial Reporting for Clubs d. USFRS – Uniform System of Financial Reporting for Spas Chapter 2 – Accounting Principles 2 Yennie Handika University of Houston 1. GAAP – general guide for financial reporting purposes. Generally accepted means that the principles must have SAS (substantial authoritative support). 2. The FASB’s conceptual frameworks are: a. Objectives of financial reporting i. Provide information that is useful to those making investment and credit decisions ii. Help assessing future cash flows iii. Help identifying assets and liabilities, and changes in these are clearly identified b. Qualitative characteristics of accounting information (RRCC) i. Relevance – timely ii. Reliability – free of error/bias iii. Comparability – can be compared to other enterprises iv. Consistency – same accounting principles from one year to next c. Elements of financial statements – a set of definitions to describe basic terms used in accounting d. Operating guidelines i. Assumptions 1. Monetary unit 2. Economic entity 3. Time period – economic life of a business is divided into periods (months, years, etc.) 4. Going concern – enterprise will continue in operation to carry out its objectives ii. Principles 1. Revenue recognition – revenue is recognized as it is earned 2. Matching – expenses are recognized in which efforts are made to generate revenues 3. Full disclosure – circumstances and events that make a difference are disclosed 4. Cost – assets are recorded at their historical cost iii. Constraints 1. Materiality – an item’s impact on a firm’s overall financial condition and operations 2. Conservatism – when in doubt, choose the one that will least likely overstate assets and income 3 Yennie Handika University of Houston 3. IASC (International Accounting Standards Committee) – US a member – works to obtain conformity in international accounting practices. 4. Four financial statements: a. For a specific period of time: i. Income Statement – revenue & expenses ii. Retained Earning Statement (+ revenues – expenses – withdrawals/dividends) iii. Cash flows – cash inflows (]s) and cash outflows (payments) b. On a specific date: i. Balance Sheet – A, L, OE 5. Transaction analyses: a. Services rendered for cash (cash service revenue ) b. Purchase of ads on account (ads expense account payable ) c. Services rendered for cash and credit (service revenue cash accounts receivable ) d. Billed client for cash (accounts receivable service revenue ) e. Receipt of cash on account (cash accounts receivable ) 6. Always 3-line title Company Name Name of Financial Statement For Month Ended… OR Date (September 30, 2016) Chapter 3 – The Recording Process 1. Journal (the book of original entry) discloses in one place the complete effects of transaction, provides chronological record of transactions, and prevents or locates errors. 2. 3 parts of journalizing: a. Date of transaction b. Accounts and amounts to be Dr/Cr c. Brief explanation 3. Simple entry – involve only 2 accounts 4. Compound entry – involve 3+ accounts 5. Ledger is the entire group of accounts maintained by a company. It keeps in one place all the info about changes in specific account balances. 6. Posting – the procedure of transferring journal entries from journal to ledger accounts. It accumulates the effect of journalized transactions in individual accounts. 4 Yennie Handika University of Houston 7. Chart of Accounts – lists the accounts and the account numbers that identify their location in the ledger. 8. Trial balance is the list of accounts and their balances at a given time. The primary purpose is to prove the equality of debits and credits after posting; it also uncovers errors in journalizing and posting. Always in the order of A, L, Capital, Retained Earnings (revenue – expenses – dividends). 9. Double-entry system = each transaction must be recorded in at least 2 different accounts. 10. Normal balances (+): a. Dr normal balance: AWE (Assets, Withdrawals/dividends, Expenses) b. Cr normal balance: LRC (Liabilities, Revenues, Capital) 11. Advantages of a computerized system: speedy, efficient, timely, and accurate. Chapter 4 – Adjusting the Accounts 1. Fiscal Year = 12 month (1 year) reporting period 2. Cash basis – revenue is recorded when cash is received and expense is recorded when cash is paid, NOT GAAP. 3. Accrual-basis accounting means the revenue is recorded when earned and expense is recorded when incurred, rather than when the company receives or pays cash, regardless of when the cash changes hands. 4. Adjusting entries are needed at the end of an accounting period to ensure that revenues are recorded in the period in which they are earned and that expenses are recognized in the period in which they are incurred. 5. 4 types of adjusting entries: a. Prepayments: i. Prepaid Expenses (Assets) ii. Unearned Revenues (Liabilities) b. Accruals (get paid later): i. Accrued Expenses ii. Accrued Revenues 6. Prepaid Expense – our company paid for something in advance to consume in the future, it will expire with passage of time or through use/consumption. E.g.: insurance, supplies, rent, buildings, equipment. In adjustment (for current assets): … Expense/… Cost xxx Prepaid…/…Inventory xxx (explanation) 5 Yennie Handika University of Houston 7. Depreciation is a form of prepaids. Useful life – judgmental assessment made on the date of purchase on how long the company plans to use the asset. 8. Depreciation (straight-line) expense for the period = (cost – salvage value)/ estimated useful life 9. Accumulated Depreciation is a contra asset account to a long- term asset. The normal balance is a Cr. In adjustment (for long term assets): Depreciation Expense – asset xxx Accumulated Depreciation – asset xxx (explanation) 10. Unearned Revenues – our costumers pay CASH in advance for something we provide them in the future, e.g.: rent, customer deposits, airline ticket sales. Revenue is EARNED when we provide the good or service. In adjustment: Unearned Revenues xxx Revenues xxx (explanation) 11. Accrued Expenses – we already received the goods or services but have not yet received the bill, we OWE. E.g.: interest expense, taxes, salaries. Matching principle. In adjustment (always comes in pairs): Expense xxx Payable xxx (explanation) 12. Accrued Revenues – we already provided the goods or services but not yet billed the customers. E.g.: interest revenue, rent revenue, commissions and fees. Revenue Recognition principle. In adjustment: Accounts Receivable xxx Revenue xxx (explanation) 13. Each adjusting entry affects a balance sheet account and an income statement account. 14. Summary (account balances before adjustment): a. Prepaid Expense i. Dr: Expense (understated) ii. Cr: Asset (overstated) b. Unearned Revenue i. Dr: Unearned Revenue (L) (overstated) 6 Yennie Handika University of Houston ii. Cr: Revenue (understated) c. Accrued Expense i. Dr: Expense (understated) ii. Cr: Payable (understated) d. Accrued Revenue i. Dr: Accounts Receivable (A) (understated) ii. Cr: Revenue (understated) 7 Yennie Handika University of Houston Exam 1 Practice Review Questions Transaction Analysis 1. Dec 1, owner invested $100,000 in business. 2. Dec 2, owner obtained a loan from a local bank for $20,000 and signed a note. 3. Dec 3, purchased kitchen equipment, $60,000. Paid 10% down payment and owe the rest by signing a note. 4. Dec 4, bought office supplies on account $2,500. 5. Dec 11, met with client, signed contract to provide food for a function in a week. The total event is at $15,000. Client paid a 10% deposit. 6. Dec 12, met with client, discussed a possible $300,000 extravagant wedding reception. 7. Dec 15, bought food inventory for $2,350. 8. Dec 15, paid office manager payroll $3,500. 9. Dec 16, bought food inventory on account for $1,000. 10. Dec 17, catered first function, billed client for the remaining 90%. 11. Dec 20, paid catering staff hourly wages of $3,880 12. Dec 21, catering a corporate lunch event and received a check for $3,000. 13. Dec 25, received check from client for payment of the Dec 17 function. 14. Dec 29, paid office supplies that were purchased on Dec 4. 15. Dec 31, paid utility bill of $900. 16. Dec 31, paid rent of $3,140. 17. Dec 31, purchased food inventory of $2,500 on account. 18. Dec 31, owner withdrawals, $500. Adjustments 1. Prepaid rent for the year is $48,000. Adjust for the month of January. 2. The insurance you purchased for the year is at $18,000; adjust for the usage of the last quarter of the calendar year. 3. $15,000 was in unearned revenue at the beginning of March. By the end of the month, you determined that $8,000 had been earned. Please adjust to reflect the proper amounts in the accounts. 4. Equipment with a cost of $360,000 is supposed to last for 10 years. 8 Yennie Handika University of Houston Adjust the depreciation for equipment for the month of May. 5. On March 1, there was $15,000 of food items in the storeroom. The total food purchased during the month was $25,000. At the end of the month, only $7,000 worth of food remained in storage. Please adjust for the cost of food sold for the month of March. 6. The last payday for March was on March 26 and April 9 will be the next. Your 10 hourly staff worked everyday in March, and their hourly pay comes to $100/person/day. Please adjust for this expense. 9 Yennie Handika University of Houston Exam 1 Practice Review Answers Transaction Analysis 19. Dec 1, owner invested $100,000 in business. (Cash/Capital Stock) 20. Dec 2, owner obtained a loan from a local bank for $20,000 and signed a note. (Cash/Notes Payable) 21. Dec 3, purchased kitchen equipment, $60,000. Paid 10% down payment and owe the rest by signing a note. (Equipment 60,000/Cash, 6,000, NP 54,000) 22. Dec 4, bought office supplies on account $2,500. (Office Supplies/Accts Payable) 23. Dec 11, met with client, signed contract to provide food for a function in a week. The total event is at $15,000. Client paid a 10% deposit. (Cash/Unearned Revenue, 1,500) 24. Dec 12, met with client, discussed a possible $300,000 extravagant wedding reception. (not a transaction) 25. Dec 15, bought food inventory for $2,350. (Food Inventory/ Cash) 26. Dec 15, paid office manager payroll $3,500. (Salary Expense/Cash) 27. Dec 16, bought food inventory on account for $1,000. (Food Inventory/ AP) 28. Dec 17, catered first function, billed client for the remaining 90%. (AR/Revenue, 13,500) 29. Dec 20, paid catering staff hourly wages of $3,880. (Wages Expense/Cash) 30. Dec 21, catering a corporate lunch event and received a check for $3,000. (Cash/Food Revenue) 31. Dec 25, received check from client for payment of the Dec 17 function. (Cash/AR, 13,500) 32. Dec 29, paid office supplies that were purchased on Dec 4. (AP/Cash, 2,500) 33. Dec 31, paid utility bill of $900. (Utility Exp/Cash) 34. Dec 31, paid rent of $3,140. (Rent Exp/Cash) 35. Dec 31, purchased food inventory of $2,500 on account. (Food Inventory, AP) 10 Yennie Handika University of Houston 36. Dec 31, owner withdrawals, $500. (Withdrawals/Cash) Adjustments 7. Prepaid rent for the year is $48,000. Adjust for the month of January. (Rent Exp/Prepaid Rent, 4,000) 8. The insurance you purchased for the year is at $18,000; adjust for the usage of the last quarter. (4 qrts per year, 18000/4 = 4500; Insurance Exp/Prepaid Insurance, 4,500) 9. $15,000 was in unearned revenue at the beginning of March. By the end of the month, you determined that $8,000 had been earned. Please adjust to reflect the proper amounts in the accounts. (Unearned Rev/Revenue, 8,000) 10. Equipment with a cost of $360,000 is supposed to last for 10 years. Adjust the depreciation for equipment for the month. (Dep Exp-Equipment/Accumulated Dep-Equipment, 3,000) 11. On March 1, there was $15,000 of food items in the storeroom. The total food purchased during the month was $25,000. At the end of the month, only $7,000 worth of food remained in storage. Please adjust for the cost of food sold for the month of March. (Cost of Food Sold/Food Inventory, 33,000) 12. The last payday for March was on March 26 and April 9 will be the next. Your 10 hourly staff worked everyday in March, and their hourly pay comes to $100/person/day. Please adjust for this expense. (5 x 10 x 100 = 5,000; Wages Exp/Wages Payable, 5,000) 11
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