Log in to StudySoup
Get Full Access to Hunter College - ACCOU 101 - Study Guide - Midterm
Join StudySoup for FREE
Get Full Access to Hunter College - ACCOU 101 - Study Guide - Midterm

Already have an account? Login here
Reset your password

HUNTER COLLEGE / OTHER / Accounting 101 / hunter college accounting

hunter college accounting

hunter college accounting


School: Hunter College
Department: OTHER
Course: Introduction to Accounting 1
Term: Spring 2017
Tags: Accounting, Intro to Accounting, and basic accounting equation
Cost: 50
Name: Introduction to Accounting 1 final exam study guide
Description: Chapter 1 through 11 except chapter 7. very detailed and a wonderful study guide.
Uploaded: 04/10/2017
31 Pages 126 Views 1 Unlocks

BTA 111: Intro to Accounting 1 CHAPTER 1 Accounting in Action - Accounting consists of three basic activities; it identifies records and  communicates the economic events of an organization to interested users. - This also includes the bookkeeping function; a part of the accounting  process that involves only the recording of economic events - Those that use accounting data are categorized as internal or external users. - Internal users of accounting information are managers who plan, organize  and run the business. o Marketing o Finance o Human resources o Management - External users are individuals and organizations outside a company who  want financial information about the company o Investors: use accounting information to decide whether to buy, hold  or sell ownership shares of a company. o Creditors: use accounting information to evaluate risks of granting  credit or lending money - Ethics o Regulators and law makers concerned that the economy would suffer if investors lost confidence in corporate accounting. o Effective financial reporting depends on sound ethical behavior o Recognize an ethical situation and the ethical issues involved  Use your personal ethics to identify ethical situations and issues. Some businesses and professional organizations provide written  codes of ethics for guidance in some business situations o Identify and analyze the principal elements in the situation  Identify the stakeholders- persons or groups who may be  harmed or benefited. Ask the question: what are the  responsibilities and obligations of the parties involved? o Identify the alternatives, and weigh the impact of each alternative on  various stakeholders.  Select the most ethical alternative, considering all of the  consequences. Sometimes there will be one right answer. Other  situations involve more than one right solution; these situations  require an evaluation of each and a selection of the best  alternative o Accounting plays an important role for a wide range of business  organizations worldwide. Just as the integrity of the numbers matters  for business, it matters at least as much at not-for-profit organizations.  Proper control and reporting help ensure that money is used the way  donors intended. Donors are less inclined to give to an organization of  the think the organization is subject to waste or theft. The accounting  challenges of some large international not-for-profit rival those of some of the world’s largest businesses. BTA 111: Intro to Accounting 2 o An error is the result of an unintentional mistake; it is neither ethical  nor unethical. An irregularity is an intentional misstatement, which is  viewed as unethical - Generally Accepted Accounting Principles (GAAP) o The accounting profession has developed standards that are generally  accepted and universally practiced. o GAAP are the standards that are generally accepted and universally  practiced. These standards indicate how to report economic events o Other standard-setting bodies are  Financial Accounting Standards Board (FASB)  Securities and Exchange Commission (SEC)  International Accounting Standards Board (IASB) o On another note, over 100 countries use the International Financial  Reporting Standards (IFRS). The differences between the US and  international standards are not generally significant.  Similarities ∙ The basic techniques for recording business transactions  are the same for US and international companies ∙ Both international and US accounting standards  emphasize transparency in financial reporting. Both sets  of standards are primarily driven by meeting the needs of  investors and creditors ∙ The three most common forms of business organizations,  proprietors, partnerships, and corporations, are also found in countries that use international accounting standards  Differences ∙ International standards are referred to as International  Financial Reporting Standards (IFRS), developing by the  International Accounting Standards Board. Accounting  standards in the United States are referred to as generally accepted accounting principles (GAAP) and are developed by the Financial Accounting Standards Board. ∙ IFRS tends to be simpler in its accounting and disclosure  requirements; some people say it is more “principles based” GAAP is more detailed; some people say it is more “rules-based” ∙ The internal control standards applicable to Sarbanes Oxley (SOX) apply only to large public companies listed on US exchanges. There is continuing debate as to whether  non-US companies should have to comply with this extra  layer of regulation - Historical cost principle o Dictates that companies record assets at their own cost - Fair value principle o States that assets and liabilities should be reported a fair value (the  price received to sell an asset or settle a liability)BTA 111: Intro to Accounting 3 - Selection of which principle to follow generally relates to trade-offs between  relevance and faithful representation - Relevance means that financial information is capable of making a  difference in a decision - Faithful representation means that the number and descriptions match  what really existed or happened; they are actual factual - Monetary Unit Assumption  o Requires that companies include in the accounting records only  transaction data that can be expressed in terms of money - Economic Entity Assumption o Requires that activities of the entity be kept separate and distinct from  the activities of its owner and all other economic entities - Forms of Business Ownership o Proprietorship  Owned by one person  Owner is often the manager/operator  Owner receives any profits, suffers any losses, and is personally  liable for all debts o Partnership   Owned by two or more persons  Often retail and service-type businesses  Generally unlimited personal liabilities  Partnership agreement o Corporation  Ownership divided into shares of stock  Separate legal entity organized under state corporation law  Limited liability - Sarbanes-Oxley Act (SOX) o A law passed by Congress intended to reduce unethical corporate  behavior o As a result of SOX, top management must now certify the accuracy of  financial information. In addition, penalties for fraudulent financial  activity are much more severe. Also, SOX increased the independence  requirements of the  Basic Equation Assets = Liabilities + Owner’s  Equity

∙ Where did cash come from?

If you want to learn more check out eipt

outside auditors who review the accuracy of corporate financial  statements and  increased the oversight role of  boards of directors. - The Basic Accounting Equation o Assets = Liabilities + Owner’s Equity  Provides the underlying framework for recording and  summarizing economic events  Assets are claimed by either creditors or owners  If a business is liquidated, claims of creditors must be paid  before ownership claims - Assets o Resources a business ownsBTA 111: Intro to Accounting 4 o Provide future services or benefits o CASE  Cash  Accounts Received  Supplies  Equipment - Liabilities o Claims against assets (debts and obligations) o Creditors (party whom money is owed) o PU  Payable  Undeserved Revenue - Owner’s Equity Owner’s Equity Equation Owner’s Capital – Owner’s Drawings +  Revenues - Expenses

∙ What was the change in cash balance?

∙ What was cash used for?

Don't forget about the age old question of scsu accounting
Don't forget about the age old question of gato inc had the following inventory situations
We also discuss several other topics like cu econ
If you want to learn more check out mark 3000
We also discuss several other topics like bod pod denver

o Ownership claim on total assets o Referred to as residual equity o Investment by owner are the assets the owner puts into the business o Revenues result from business activities entered into for the purpose  of earning income  Sales, fees, service, commissions, interest, dividends, etc. o Drawings: an owner may withdraw cash or other assets for personal  use o Expenses are the cost of assets consumed or services used in the  process of earning revenue  Salaries, rent, utilities, tax, etc. - Transactions are a business’s economic events recorded by accountants o External transactions involve economic events between the  company and some outside enterprise o Internal transactions are economic events that occur entirely within  one company o May be internal or external o Not all activities represent transactions o Each transaction has a dual effect on the accounting equation o The two sides of the equation must always be equal (balanced) - Financial Statements o Income Statement  Reports the revenues and expenses for a specific period of time  Lists revenues first, followed by expenses  Shows net income (or net loss)  Does not include investment and withdrawal transactions  between the owner and the business in measuring net income  The income statement is sometimes referred to as the  statement of operations, earning’s statement, or profit and loss  statement o Owner’s Equity Statement  Reports the changes in owner’s equity for a specific period of  timeBTA 111: Intro to Accounting 5  The time period is the same as that covered by the income  statement o Balance Sheet  Reports the assets, liabilities, and owner’s equity at a specific  date  Lists assets at the top, followed by liabilities and owner’s equity  Total assets must equal total liabilities and owner’s equity  It is a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end) o Statement of Cash Flow  Information on the cash receipts and payments for a specific  period of time  Answers the following ∙ Where did cash come from? ∙ What was cash used for? ∙ What was the change in cash balance? - Career Opportunities o Public Accounting  Careers in auditing, taxation, and management consulting  serving the general public o Private Accounting  Careers in industry working in cost accounting, budgeting,  accounting information systems, and taxation o Governmental Accounting  Careers with the IRS, the FBI, the SEC, public colleges and  universities, and in state and local governments o Forensic Accounting  Uses accounting, auditing,  and investigative skills to conduct investigations into theft and  fraud CHAPTER 2 The Recording Process - The Account o A record of increases and decreases in a specific asset, liability,  owner’s equity, revenue, or expense item o An account can be illustrated in a T-account formBTA 111: Intro to Accounting 6 o Debit = Left o Credit = Right - Double-Entry system o Each transaction must affect two or more accounts to keep the basic  accounting equation in balance o Recording done by debiting at least one account and crediting at least  one other account o Debits must equal Credits  Assets: Debits should exceed credits  Liabilities: credits should exceed debits  Normal balance: is on the increase side  Owner’s investments and revenues increase owner’s equity  (credit)  Owner’s drawings and expenses decrease owner’s equity  (debit) o If the sum of Debit entries are greater than the sum of Credit entries,  the account will have a debit balance o If the sum of Credit entries are greater than the sum of debit entries,  the account will have a credit balance o The purpose of earning revenues is to benefit the owner(s) o The effect of debits and credits on revenue accounts is the same as  their effect on Owner’s Capital o Expenses have the opposite effect: expenses decrease owner’s equity - Steps in the recording process o Business documents, such as a sales slip, a check, or a bill, provide  evidence of the transaction o The recording process  Analyze each transaction  Enter transaction in a journal  Transfer journal information to ledger accounts - The Journal o Book of original entry o Transactions recorded in chronological order o Contributions to the recording process  Discloses the complete effects of a transaction  Provides a chronological record of transactionsBTA 111: Intro to Accounting 7  Helps to prevent or locate errors because the debit and credit  amounts can be easily compared - Journalization: entering transaction data in the journal - The Ledger o General Ledger contains all the asset, liability and owner’s equity  accounts  o Posting: transferring journal entries to the ledger accounts  - Limitations of a Trial Balance - Trial balance may balance even when o A transaction is not journalized o A correct journal entry is not posted o A journal entry is posted twice o Incorrect accounts are used in journalizing or posting o Offsetting errors are made in recording the amount of a transaction - Dollar Signs o Do not appear in journals or ledgers o Typically used only in the trial balance and financial statements o Shown only for the first item in the column and for the total of that  column. - Underlining o A single line is placed under the column of figures to be added or subtracted o Totals are double underlined CHAPTER 3 Adjusting the Accounts - Time Period Assumption (Periodicity assumption) o Accountants divide the economic life of a business into artificial time  periods; generally a month, quarter or a year. o Monthly and quarterly time periods are called  interim periods o Most large companies must prepare both quarterly and annual financial statementsBTA 111: Intro to Accounting 8 o Fiscal year: accounting time period that is one year in length o Calendar year: January 1 to December 31 - Accrual Basis Accounting o Transactions recorded in the periods in which the events occur o Companies recognize revenues when they perform services (rather  than when they receive cash) o Expenses are recognized when incurred (rather than when paid) o In accordance with GAAP - Cash-Basis Accounting o Revenues recognized when cash is received o Expenses recognized when cash is paid o Cash-basis accounting is not in accordance with GAAP - Revenue Recognition Principle o Recognize revenue in the accounting period in which the performance  obligation is satisfied o Only when cash is received for services rendered can it be recognized - Expense Recognition Principle o Match expenses with revenues in the period when the company makes  efforts that generate those revenues - Full Disclosure Principle o Requires that companies disclose all circumstances and events that  would make a difference to financial statement users - Adjusting Entries o Ensure that the revenue recognition and expense recognition principles are followed o Necessary because the trial balance may not contain up to date and  complete data o Required every time a company prepares financial statements o Will always include one income statement account and one balance  sheet account o Types of adjusting entries  (Deferral) Prepaid expenses: expenses paid in cash before  they are used or consumed  (Deferral) Unearned Revenues: cash received before services are performed  (Accrual) Accrued Revenues: Revenues for services  performed but not yet received in cash or recorded  (Accrual) Accrued Expenses: Expenses incurred but not yet  paid in cash or recorded - Deferrals- are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged. There are two types o Prepaid expenses  Payment of cash, that is recorded as an asset to show the  services or benefit the company will receive in the futureBTA 111: Intro to Accounting 9  Insurance, supplies, advertising, rent, equipment, buildings o Unearned revenues  Receipt of cash that is recorded as a liability because the service has not been performed  Rent, airline tickets, subscriptions, customer deposits  Adjusting entry is made to record the revenue for services  performed during the period and to show the liability that  remains at the end of the period - Depreciation o Buildings, equipment and motor vehicles (assets that provide service for many years) are recorded as assets, rather than an expense, on the date acquired o The process of allocating the cost of an asset to expense over its useful life o Does not attempt to report the actual change in the value of the asset (Allocation concept, not a valuation concept) o Accumulated depreciation is called a contra asset account o Offsets related asset account on the balance sheet o Book value is the difference between the cost of any depreciable asset and its accumulated depreciation - Accruals are made to record o Revenues for services performed but not yet recorded at the statement date o Expenses incurred but not yet paid or recorded at the statement date o Accrued Revenues  Rent, interest, services  Adjusting entry shows the receivable that exists and records the  revenues for services performedBTA 111: Intro to Accounting 10 o Accrued Expenses  Rent, interest, taxes, salaries  Adjusting entry records the obligation and recognizes the  expense - Adjusted trial balance o Prepared after all adjusting entries are journalized and posted o Purpose is to prove the equality of debit balances and credit balances  in the ledger o Is the primary basis for the preparation of financial statements - Alternate Adjusting Entries o When a company prepays an expense, it debits that amount to an  expense account o When it receives payment for future services, it credits the amount to a revenue account - Prepaid Expenses o Company may choose to debit an expense account rather than an  asset account. This alternative treatment is simply more convenient - Unearned Revenues o Company may credit a revenue account when they receive cash for  future services - Qualities of Useful Information o Relevance  Make a difference in a business decision  Provides information that has productive value and confirmatory  value  Materiality is a company specific aspect of relevance ∙ An item is material when its size makes it likely to  influence the decision of an investor or creditor. o Faithful Representation  Information accurately depicts what really happened  Information must be  ∙ Complete (nothing important has been omitted) ∙ Neutral (is not biased towards one position of another ∙ Free from error o Comparability results when different companies use the same  accounting principles o Information is verifiable if independent observers, using the same  methods, obtain similar results o Information has the quality of understandability if it is presented in a  clear and concise fashion o Consistency means that a company uses the same accounting  principles and methods from year to year o For accounting information to have relevance, it must be timely - Monetary Unit o Requires that only those things can be expressed in money are  included in the accounting records - Economic EntityBTA 111: Intro to Accounting 11 o States that every economic entity can be separately identifies and  accounted for - Time Period o States that the life of a business can be divided into artificial time  periods - Going Concern o The business will remain in operation for the foreseeable future - Cost Constraint o Accounting standard setters weigh the cost that companies will incur to provide the information against the benefit that financial statement  users will gain from having the information available CHAPTER 4 - Worksheet o Multiple column form used in preparing financial statements o Not a permanent accounting record o Prepared using the 5 step process  Prepare a trial balance on the worksheet  Enter adjustment data  Enter adjusted balances  Extend adjusted balances to appropriate statement columns  Total the statement columns, compute net income, and  complete worksheet o Use of a worksheet allows for the continuous process of preparing  financial statements with all the information placed on one place. - Closing Entries o Closing entries formally recognize in the ledger the transfer of   Net income and owner’s drawings to owners capital o Closing entries are generally only at the end of the annual accounting  period o Produce a zero balance in each temporary account - Posting Closing Trial Balance o The purpose is to prove the equality of the permanent account  balances carried forward into the next accounting period - Accounting Cycle o Analyze business transactions o Journalize the transactions o Post to ledger accounts o Prepare a trial balance o Journalize and post adjusting entries o Prepare an adjusted trial balance o Prepare financial statements o Journalize and post-closing entries o Prepare a post-closing trial balance - Correcting entries o Made whenever an error is discovered o Must be posted before closing entries o Instead of preparing a correcting entry, it is possible to reverse the  incorrect entry and then prepare the correct entry.BTA 111: Intro to Accounting 12 - Standard Classifications - Current Assets o Assets that a company expects to convert or use up within one year or  the operating cycle, whichever is longer o Operating cycle is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers o They are usually listed in the order they expect to convert them into  cash - Long-Term investments o Investments in stocks and bonds of other companies o Investments in long-term assets such as land or building that is not  currently being used in operating activities o Long-term notes receivable - Property, Plant, and Equipment (Fixed Assets or Plant Assets) o Long useful lives o Currently used in operations o Depreciation- allocating the cost of assets to a number of years o Accumulated Depreciation- total amount of depreciation expensed  thus far in the asset’s life - Current Liabilities o Obligations the company is to pay within the coming year or its  operating cycle, whichever is longer o Usually lists notes payable first, followed by accounts payable. Other  items follow in order of magnitude o Common examples are accounts payable, salaries and wages payable,  notes payable, interest payable, income taxes payable current  maturities of long-term obligations o Liquidity- ability to pay obligations expected to be due within the next year - Owner’s Equity o Proprietorship: one capital account o Partnership: capital account for each partner o Corporation: common stock and retained earnings - Reversing Entries o It is often helpful to reverse some of the adjusting entries before  recording the regular transactions of the next period o Companies make a reversing entry at the beginning of the next  accounting period o Each reversing entry is the exact opposite of the adjusting entry made  in the previous periodBTA 111: Intro to Accounting 13 o The use of reversing entries does not change the amounts reported In  the financial statements CHAPTER 5 - Merchandising Companies o Buy and sell goods o Wholesale to retailer to consumer o The primary source of revenues is referred to as sales revenue or  sales - Income Measurement o Sales Revenue - Cost of Goods Sold = Gross Profit o Gross Profit – Operating Expenses = Net Income (Loss) - Cost of Goods Sold o The total cost of merchandise sold during the period - Operating Cycles o The operating cycle of a merchandising company ordinarily is longer  than that of a service company - Flow of Costs o Companies use either a perpetual inventory system or a periodic  inventory system to account for inventory - Perpetual System o Maintain detailed records of the cost of each inventory purchase and  sale o Records continuously show inventory that should be on hand for every  item o Company determines cost of goods sold each time a sale occurs o Advantages  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 o Do not keep detailed records of the goods on hand o Cost of goods sold determined by count at the end of the accounting  period  - Recording under Perpetual System o Made using cash or credit (on account) o Normally record when goods are received from the seller o Purchase invoice should support each credit purchase - Freight Costs o Ownership of the goods passes to the buyer when the public carrier  accepts the good from the seller o Ownership of the goods remains with the seller until the goods reach  the buyer o Freight costs incurred by the seller are an operating expense - Purchase Returns and Allowances o Purchaser may be dissatisfied because goods are damaged or  defective, of inferior quality, or do not meet specifications o Purchase returnBTA 111: Intro to Accounting 14  Return goods for credit if the sale was made on credit, or for a  cash refund if the purchase was for cash o Purchase allowance  May choose to keep the merchandise if the seller will grant a  reduction of the purchase price - Purchase Discounts o Credit terms may permit buyer to claim a cash discount for prompt payment o Advantages  Purchaser saves money  Seller shortens the operating cycle by converting the accounts  receivable into cash earlier o 2/10, n/30  2% discount if paid within 10 days, otherwise net amount due  within 30 days o 1/10 EOM  1% discount if paid within first 10 days of next month o n/10 EOM  net amount due within the first 10 days of the next month - Recording sales under a perpetual system o Made using cash or credit (on account) o Sales revenue, like service revenue, is recorded when the performance  obligation is satisfied o Performance obligation is satisfied when the goods are transferred  from the seller to the buyer o Sales invoice should support each credit sale  - Sale Returns and Allowances o “flip side” of purchase returns and allowances o Contra-revenue account to sales revenue (debit) o Sales not reduced (debited) because  Would obscure importance of sales returns and allowances as a  percentage of sales  Could distort comparisons - Sales DiscountBTA 111: Intro to Accounting 15 o Offered to customers to promote prompt payment of the balance due o Contra-revenue account (debit) to Sales Revenue - Adjusting Entries o Generally the same as a service company o One additional adjustment to make the records agree with the actual  inventory on hand o Involves adjusting Inventory and Cost of Goods Sold - Closing Entries o Sales Revenue to Income Summary o Expenses (Returns and allowances, discounts, COGS, Freight-Out) to  Income Summary o Income Summary to Owner’s Capital o Drawing’s to Owner’s Capital - Multi-Step Income Statement o Shows several steps in determining net income o Two steps relate to principal operating activities o Distinguishes between operating and non-operating activities  - Single-Step Income Statement o Subtract total expenses from total revenues o Two reasons for using the single step format  Company does not realize any profit until total revenues exceed total expenses  Format is simpler and easier to read. - Determining Cost of Goods sold under a periodic system o No running account of changes in inventory o Ending inventory determined by physical count o Cost of goods sold not determined until the end of the period - Recording Merchandise Transactions o Record revenues when sales are made o Do not record cost of merchandise sold on the date of sale o Physical inventory count determines  Cost of merchandise on hand  Cost of merchandise sold during the period o Record purchases in Purchases account o Purchase returns and allowances, Purchase discounts, and Freight costs are recorded in separate accountsBTA 111: Intro to Accounting 16 CHAPTER 6 - Classifying Inventory o Merchandising companies: Inventory o Manufacturing company: raw materials, work in progress, finished  goods - Physical Inventory o Perpetual system  Check accuracy of inventory records  Determine amount of inventory lost due to wasted raw  materials, shoplifting, or employee theft o Periodic system  Determine the inventory on hand  Determine the cost of goods sold for the period o Involves counting, weighing, or measuring each kind of inventory on  hand o Companies often take inventory   When the business is closed or business is slow  At the end of the accounting period - Determining Ownership of Goods o Goods in transit should be included in the inventory of the company  that has legal title to the goods. Legal title is determined by the terms  of sale o FOB Shipping Point  When the buyer pays for the freight costs  Ownership of the goods passes to the buyer when the public  carrier accepts the goods from the seller o FOB Destination  When the seller pays for the freight costs  Ownership of the goods remains with the seller until the goods  reach the buyer - Consigned Goods o To hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods - Cost Flow Methods o cost includes all expenditures necessary to acquire goods and place  them in a condition ready for sale o unit costs are applied to quantities to compute the total cost of the  inventory and the cost of goods sold using the following costing  methods  specific identification  FIFO  LIFO  Average cost - Specific Identification o Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory  Practice is relatively rare  Most companies make assumptions about which units were soldBTA 111: Intro to Accounting 17 - Cost Flow Assumptions o Do not need to be consistent with the physical movement of the goods o FIFO  Costs of the earliest goods purchased are the first to be  recognized in determining cost of goods sold  Often parallels actual physical flow of merchandise  Companies determine the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed. o 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  Exceptions include goods stored in piles, such as coal or hay o Average-Cost  Allocates cost of goods available for sale on the basis of  weighted-average unit cost incurred  Applies weighted-average unit cost to the units on hand to  determine cost of the ending inventory - Balance Sheet Effects o A major advantage of the FIFO method is that in a period of inflation,  the costs allocated to ending inventory will approximate their current  cost o A major shortcoming of the LIFO method is that in a period of inflation,  the costs allocated to ending inventory may be significantly  understated in terms of current cost - Tax Effects o Both inventory and net income are higher when companies use FIFO in  a period of inflation o LIFO results in the lowest income taxes (because of lower net income)  during times of rising prices - Inventory Errors o Affects 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 - Presentation o Balance Sheet: inventory classified as current asset o Income Statement: cost of goods sold is subtracted from sales o There should also be a disclosure of the  Major inventory classifications  Basis of accounting  Costing method - Lower-of-Cost or Net BTA 111: Intro to Accounting 18 o When the value of inventory is lower than its cost  Companies must ‘write down’ the inventory to its net realizable  value  Net realizable value: amount that a company expects to realize  (receive from the sale of inventory  Example of conservatism - Inventory Management o High inventory levels: may incur high carrying costs o Low inventory levels: may lead to stock-outs and lost sales o Inventory turnover measures the number of times on average the  inventory is sold during the period InventoryTurnover=Cost of Goods Sold Average Inventory o Days in inventory measures the average number of days inventory is  held Days∈Inventory=Days∈Year(365) InventoryTurnover - Gross Profit Method o A method of estimating the cost of ending inventory by applying a  gross profit rate to net sales - Retail Inventory Method o Retail companies establish a relationship between cost and sales price o Company applies cost-to-retail percentage to ending inventory at retail prices to determine inventory at costBTA 111: Intro to Accounting 19 o CHAPTER 8 - Fraud o Dishonest act by an employee that results in personal benefit to the  employee at a cost to the employer. o Three factors that contribute to the fraudulent activity  Opportunity  Financial pressure  Rationalization - The Sarbanes-Oxley Act (SOX) o Applies to publicly traded US corporations o Required to maintain a system of internal control o Corporate executives and boards of directors must ensure that these  controls are reliable and effective o Independent outside auditors must attest to the adequacy of the  internal control system o SOX created the Public Company Accounting Oversight Board (PCAOB) - Internal Control o Methods and measures adopted to  Safeguard assets  Enhance the reliability of accounting records  Increase efficiency of operations  Ensure compliance with laws and regulations o Five primary components  A control environment  Risk assessment  Control activities  Information and communication  Monitoring - Establishment of Responsibility o Control is most effective when only one person is responsible for a  given task o Establishing responsibility often requires limiting access only to  authorized personnel and then identifying those personnel - Segregation of DutiesBTA 111: Intro to Accounting 20 o Different individuals should be responsible for related activities o The responsibility for record-keeping for an asset should be separate  from the physical custody of that asset - Documentation Procedures o Companies should use prenumber documents, and all documents  should be accounted for o Employees should promptly forward source documents for accounting  entries to the accounting department - Physical Controls o Television monitors and garment sensors to detect theft; safes, vaults,  and safety deposit boxes for cash and business papers; time clocks for  recording time worked; locked warehouses and storage cabinets for  inventories and records; computer facilities with pass key access or  fingerprint or eyeball scans; Alarms to prevent break-ins. - Independent Internal Verification o Records periodically verified by an employee who is independent o Discrepancies reported to management - Human Resource Controls o Bond employees who can handle cash o Rotate employees’ duties and require vacations o Conduct background checks - Limitations of Internal Control o Costs should not exceed benefit o Human element o Size of business - Cash Receipt Controls o Establishment of responsibility  Only designated personnel are authorized to handle cash  receipts (cashiers) o Documentation Procedures  Use remittance advice (mail receipts), cash register tapes or  computer records, and deposit slips o Segregation of duties  Different individuals receive cash, record cash receipts, and hold the cash o Human resource controls  Bond personnel who handle cash; require employees to take  vacations; conduct background checks o Physical controls  Store cash in safes and bank vaults; limit access to storage  areas; use cash registers  Independent internal verification ∙ Supervisors count cash receipts daily; assistant treasurer  compares total receipts to bank deposits daily - Cash Controls o Over-the-counter receipts  Important internal control principle- segregation of record keeping from physical custody o Mail receiptsBTA 111: Intro to Accounting 21  Mail receipts should be opened by two mail clerks, a list  prepared, and each check endorsed “For Deposits Only”  Each mail clerk signs the 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. Clerks also keep a copy - Cash Disbursement Controls o Generally, internal control over cash disbursement is more effective  when companies pay by check or electronic funds transfer (EFT) rather  than by cash o One exception is payments for incidental amounts that are paid out of  petty cash o Establishment of responsibility  Only designated personnel are authorized to sign checks  (treasurer) and approve vendors o Documentation procedures  Use pre-numbered checks and account for them in sequence;  each check must have an approved invoice; require employees  to use corporate credit cards for reimbursable expenses; stamp  invoices “paid” o Segregation of duties  Different individuals approve and make payments; check-signers do not record disbursements o Independent internal verification  Compare checks to invoices; reconcile bank statement monthly o Human resources controls  Bond personnel who handle cash; require employees to take  vacations; conduct background checks o Physical controls  Store blank checks in safes, with limited access; print check  amounts b machine in indelible ink - Voucher Disbursement Controls o A network of approvals by authorized individuals, acting  independently, to ensure all disbursements by check are proper o A voucher is an authorization form prepared for each expenditure in a  voucher system - Petty Cash Fund o Is used to pay small amounts o Involves  Establishing the fund  Making payments from the fund  Replenishing the fund - The use of a bank contributes significantly to good internal control over cash o Minimizes the amount of currency on hand o Creates a double record of bank transactions o Bank reconciliationBTA 111: Intro to Accounting 22 - Only an authorized employee should make a bank deposit - Writing checks o Written order signed by depositor directing bank to pay a specified  sum of money to a designated recipient - Bank Statements o Debit memorandum  Bank service charge  NSF (not sufficient funds) o Credit memorandum  Collect notes receivable  Interest earned - Reconciling the Bank Account o Reconcile balance per books and balance per bank to their correct or  true balance o Reconciling items  Deposits in transit  Outstanding checks  Bank memorandums  Errors - Electronic Funds Transfer (EFT) System o Disbursement systems that uses wire, telephone, or computers to  transfer cash balances between locations o EFT transfers normally result in better internal control since no cash or  checks are handled by company employees - Cash Equivalents o Are short-term, highly liquid investments that are both:  Readily convertible to known amounts of cash,   So near their maturity that their market value is relatively  insensitive to changes in interest rates - Restricted Cash o Cash that is not available for general use but rather is restricted for a  special purpose CHAPTER 9 - Amounts due from individuals and other companies that are expected to be  collected in cash o Accounts receivable  Amounts owed by costumers on accounts that result from the  sale of goods and services o Notes receivable  Written promises for amounts to be received, normally requires  the collection of interest o Other receivables  Nontrade receivables such as interest, loans to officers,  advances to employees, and income taxes - Types of Receivables o Three accounting issues  Recognizing accounts receivableBTA 111: Intro to Accounting 23  Valuing accounts receivable  Disposing of accounts receivable o Recognizing accounts receivable  Service organizations record a receivable when it performs  service on account  Merchandiser records accounts receivable at the point of sale of  merchandise on account - Valuing Accounts Receivable o Current asset o Valuation (cash realizable value) - Uncollectible accounts receivable o Sales on account raise the possibility of accounts not being collected o Companies record credit losses as debits to Bad Debt Expense - Methods of accounting for uncollectible accounts o Direct write off  Theoretically undesirable ∙ No matching ∙ Receivable not stated at cash realizable value ∙ Not acceptable for financial reporting o Allowance method  Losses are estimated ∙ Better matching ∙ Receivable stated at cash realizable value ∙ Required by GAAP - Allowance method for Uncollectible Accounts o Companies estimate uncollectable accounts receivable o Debit bad debt expense and credit allowance for doubtful accounts (a  contra-asset account) o Companies debit allowance for doubtful accounts and credit accounts  receivable at the time the specific account is written off as  uncollectible - Estimating the allowance o Management estimates what percentage of credit sales will be  uncollectible. This percentage is based on past experience and  anticipated credit policy o Management establishes a percentage relationship between the  amount of receivables and expected losses from uncollectible accounts - Percentage of sales o Emphasizes matching of expenses with revenues o Adjusting entry to record bad debts disregards the existing balance in  allowance for doubtful accounts - Allowance method o Aging the accounts receivable- customer balances are classified by the length of time they have been unpaid - Disposing of accounts receivables o Companies sell receivables for two major reasons  Receivables may be the only reasonable source of cash  Billing and collection are often time-consuming and costlyBTA 111: Intro to Accounting 24 o Sale of receivables  Finance company or bank  Buys receivables from businesses and then collects the  payments directly from the customers  Typically charges a commission to the company that is selling  the receivables  Fee ranges from 1-3% of the receivables purchased - Credit card sales o Recorded the same as cash sales o Retailer pays card issuer a fee of 2-6% for processing the transactions - Companies may grant credit in exchange for a promissory note. A promissory  note is a written promise to pay a specified amount of money on demand or  at a definite time. Promissory notes may be used o When individuals and companies lend or borrow money o When amount of transaction and credit exceed normal limits o In settlement of accounts receivable - Notes receivable o To the payee, the promissory note is a note receivable o To the maker, the promissory note is a note payable - Determining the maturity date o Note is expressed in terms of months or days - Computing interest o When counting days, omit the date the note is issued, but include the  due date - Valuing notes receivable o Report short-term notes receivable at their cash (net) realizable value o Estimate of cash realizable value and bad debt expense are done  similarly to accounts receivable o Allowance for doubtful accounts is used - Disposing of notes receivable o Notes may be held to their maturity date o Maker may default and payee must make an adjustment to the  account o Holder speeds up conversion to cash by selling the note receivable o Honor of notes receivable  Maker pays it in full at its maturity o Dishonor of notes receivable  Not paid in full at maturity  No longer negotiable - Presentation and AnalysisBTA 111: Intro to Accounting 25 o Identify in the balance sheet or in the notes each major type of  receivable o Report short-term receivables as current assets o Report both gross amount of receivables and allowance for doubtful  account o Report both bad debt expense and service charge expense as selling  expenses o Report interest revenue under “other revenues and gains” CHAPTER 10 - Plant Assets o Physical substance (a definite size and shape) o Are used un the operations of a business o Are not intended for sale to customers o Are expected to be of use to the company for a number of years - Historical Cost Principle o Requires that companies record plant assets at cost o Cost consists of all expenditures necessary to acquire an asset and  make it ready for its intended use - Land o All necessary costs incurred in making the land ready for its intended  use increase (debit) the Land account o Costs typically include  Cash purchase price  Closing costs such as title and attorney’s fees  Real estate brokers’ commissions   Accrued property taxes and other liens on the land assumed by  the purchaser - Land Improvements o Structural additions made to land. Cost includes all expenditures  necessary to make the improvements ready for their intended use o Limited useful lives o Expense the cost of land improvements over their useful lives o Driveways, parking lots, fences, landscaping, and underground  sprinklers - Buildings o Includes all costs related directly to purchase or construction o Purchase costs  Purchase price, closing costs and real estate broker’s  commission  Remodeling and replacing or repairing the roof, floors, electrical  wiring, and plumbing o Construction costs  Contract price plus payments for architect’s fees, building  permits, and excavation costs - Equipment o Include all costs incurred in acquiring the equipment and preparing ir  for useBTA 111: Intro to Accounting 26 o Costs  Cash purchase price  Sales tax  Freight charges  Insurance during transit paid by the purchaser  Expenditures required in assembling, installing and testing the  unit - Ordinary Repairs o Expenditures to maintain the operating efficiency and productive life of the unit o Referred to as revenue expenditures - Additions and Improvements o Costs incurred to increase the operating efficiency, productive  capacity, or useful life of a plant asset o Referred to as capital expenditures  - Depreciation o Process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner o Process of cost allocation, not asset valuation o Applies to land improvements, buildings, and equipment, not land o Depreciable because the revenue-producing ability of asset will decline over the asset’s useful life - Depreciation Methods o Straight-line method  Expense is the same amount for each year  (Cost – Salvage Value) / (Useful life (in years)) = Annual  depreciation expense o Units-of-activity   companies estimate total units of activity to calculate  depreciation cost per unit  expense varies based on units of activity  depreciable cost is cost less salvage value  (Cost / Total units of activity) * units of activity during the year = annual depreciation expense o Declining balance method  Accelerated method  Decreasing annual depreciation expense over the asset’s useful  life  Twice the straight line rate with double declining balance  Rate applied to book value - Depreciation and Income taxes o IRS does not require tax payers to use the same depreciation method  on the tax return that is used in preparing financial statements o Taxpayers must use the straight-line method or a special accelerated depreciation method called the modified accelerated cost recovery  system (MACRS) o MACRS is not acceptable under GAAP - Revising periodic depreciationBTA 111: Intro to Accounting 27 o Accounted for in the period of change and future periods (Change in  estimate) o No change in depreciation reported for prior years o Not considered an error - Disposal of plant assets o Companies dispose of plant assets in three ways; retirement, sale or  exchange o Record disposal up to the date of disposal o No cash is received o Decrease the asset account o Decrease accumulated depreciation account - Sale of plant assets o Compare the book value of the asset with the proceeds received from  the sale  If proceeds exceed the book value, a gain on disposal occurs  If proceeds are less than the book value, a loss on disposal  occurs - Natural Resources o Consist of standing timber and underground deposits of oil, gas, and  minerals o Physically extracted in operations o Replaceable only by an act of nature o Cost is the price needed to acquire the resource and prepare it for its  intended use - Depletion o The allocation of the cost to expense in a rational and systematical  manner over the resources useful life o Companies generally use units of activity method o Depletion generally is a function of the units extracted - Intangible Assets o Rights, privileges, and competitive advantages that result from  ownership of long-lived assets that do not possess physical substance o Have a limited life or indefinite life o Patents, copyrights, goodwill, trademarks, franchises, etc. - Amortization o is to intangibles what depreciation is to plant assets and depletion is  to natural resources - Patents o Exclusive right to manufacture, sell, or otherwise control an invention  for a period of 20 years from the date of the grant o Capitalize costs of purchasing a patent and amortize over its 20-year  life or its useful life, whichever is shorter o Expense and R&D costs in developing patent o Legal fees successfully defending patent are capitalized to the Patent  account - Copyrights o Give the owner the exclusive right to reproduce and sell an artistic or  published work o Extend for the life of the creator plus 70 yearsBTA 111: Intro to Accounting 28 o Cost of the copyright is the cost of acquiring and defending it o Amortized to expense over useful life - Trademarks and trade Names o Word, phrase, jingle, or symbol that identifies a particular enterprise or product o Legal protection for indefinite number of 20-year renewal periods o Capitalize acquisition costs o No amortization - Franchises o Contractual arrangement between a franchiser and a franchisee o Franchise (or license) with a limited life should be amortized to  expense over it’s useful life o If the life in indefinite, the cost is not amortized - Goodwill o Includes exceptional management, desirable location, good customer  relations, skilled employees, high quality products o Only recorded when an entire business is purchased o Goodwill is recorded as the excess of purchase rice over the fair value  of the net assets acquired o Not amortized - Research and Development Costs (R&D Costs) o All costs are expensed when they are incurred o Expenditures that may lead to intangible assets or new products - Exchange of plant assets o Ordinarily companies record a gain or loss on the exchange of plant  assets o Most exchanges have commercial substance o Commercial substance if the future cash flows change as a result of the exchange CHAPTER 11 - What is a Current Liability o A debt that a   Company expects to pay within one year   The operating cycle, whichever is longer o Current liabilities include notes payable, accounts payable, unearned  revenues and accrued liabilities such as taxes payable, salaries and  wages payable and interest payable - Notes Payable o Written promissory note o Frequently issued to meet short-term financing needs o Requires the borrower to pay interest o Issued for varying periods - Sales Taxes Payable o Sales taxes are expressed as a stated percentage of the sales price o Selling company (retailer)  Collects tax from the customer  Enters tax separately in cash register or includes in total receipts  Remits the collections to the state’s department of revenueBTA 111: Intro to Accounting 29 - Unearned Revenue o Revenues received before the company  Delivers goods   Provides services - Current Maturities of Long-term Debt o Portion of long-term debt that come due In the current year o No adjusting entry required - Contingent Liability o Potential liability that may become an actual liability in the future o Three levels of probability  Probable  Reasonably possible  Remote - Product Warranties o Promise made by a seller to a buyer to make good on a deficiency of  quantity, quality, or performance in a product o Estimated cost of honoring product warranty contracts should be  recognized as an expense in the period in which the sale occurs - Liquidity o Refers to the ability to pay maturing obligations and meet unexpected  needs for cash - Current Ratio o Permits us to compare the liquidity of different-sized companies and of  a single company at different times Current Assets−current Liablities=WorkingCapital Current Assets Current Liabilities=Current Ratio - Payroll o Pertains to both  Salaries ∙ Managerial, administrative, and sales personnel (monthly  or yearly)  Wages ∙ Stores clerks, factory employees, and manual laborers  (rate per hour) o Involves computing three amounts: Gross Earnings, Payroll Deductions  and Net Pay - Gross Earnings o Total compensation earned by an employee (wages or salaries, plus  any bonuses and commissions) - Payroll Deductions o Voluntary  Insurance, pensions, and/or Union Dues  Charity o MandatoryBTA 111: Intro to Accounting 30  FICA taxes ∙ Social security and Medicare taxes: supplement  retirement, employment disability, and medical benefits  Federal income taxes ∙ Employers are required to withhold income taxes from  employees’ wages ∙ Withholding amounts are based on gross wages and the  number of allowances claimed  State and city income taxes ∙ Most states (and some cities) require employers to  withhold income taxes from employees’ earnings - Net Pay o Gross earnings minus payroll deductions - Employer Payroll Taxes o Payroll tax expense results from three taxes that governmental  agencies levy on employers o FICA taxes  Same rate and maximum earnings as the employee’s o Federal unemployment tax  FUTA tax rate is 6.2% of first $7000 of taxable wages  Employers who pay the state unemployment tax on a timely  basis will receive an offset credit of up to 5.4%. therefore, the  net federal tax rate is generally 0.8% o State unemployment tax  SUTA basic rate is usually 5.4% on the first $7000 of wages paid - Filing an Remitting Payroll taxes o Companies must report FICA taxes and federal income taxes withheld  no later than one month following the close of each quarter o Companies generally file and remit federal unemployment taxes  annually on or before January 31 of the subsequent year. Companies  usually file and pay state unemployment taxes by the end of the month following each quarter o Employers must provide each employee with a Wage and Tax  Statement (Form W-2) by January 31BTA 111: Intro to Accounting 31 - Internal Control for Payroll o As applied to payrolls, the objectives of internal control are   To safeguard company assets against unauthorized payments of  payrolls  To ensure the accuracy and reliability of the accounting records  pertaining to payrolls  - Paid Absences o Paid absences for vacation, illness, and holidays. Accrue a liability if  Payment of the compensation is probable  The amount can be reasonably estimated - Postretirement benefits o Benefits that employers provide to retired employees for  Healthcare and life insurance ∙ Companies enstimate and expense postretirement costs  during the working years of the employee ∙ Companies raraely sets up funds to meet the cost of the  future benefits o Pay as you go basis for these costs o Major reason is that the company does not receive  a tax deduction until it actually ppays the medical  bill  Pensions ∙ An arrangement whereby an employer provides benefits  to employees after they retire for services they provided  while they were working ∙ Companies record pension costs as an expense ∙ Actuaries estimate the employer contribution by  considering mortality rates, employee turnover, interest  and earning rates, early retirement frequency, future  salaries, etc. o Companies account for post-retirement benefits on the accrual basis
Page Expired
It looks like your free minutes have expired! Lucky for you we have all the content you need, just sign up here