AC 210 Final Exam Study Guide
AC 210 Final Exam Study Guide AC 210
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This 13 page Study Guide was uploaded by Kristen Marie on Saturday June 20, 2015. The Study Guide belongs to AC 210 at University of Alabama - Tuscaloosa taught by Jordan Rippy in Summer 2015. Since its upload, it has received 457 views. For similar materials see Intro to Accounting in Accounting at University of Alabama - Tuscaloosa.
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Date Created: 06/20/15
AC 210 Exam 1 Study Guide Chapter One Organizational Forms Business owned by 1 person Owner is personally liable for all debts of business Business is owned by 2 or more people Each partner is personally liable for all debts of business Business is a separate legal entity Owners shareholders are not personally liable for all debts of the business The Accounting System The system of analyzing recording summarizing and reporting the results of a business s activities Divided into three activities Operating Investing and Financial Two types of accounting reports reports prepared periodically to provide information to external users creditorsinvestors Creditors Banks and Suppliers Investors Stockholders Managerial detailed financial plans and continually updated reports about the operating performance of the company The financial reports of a business is assumed to include the results of only that business s activities Economic resources controlled by the company that have measurable value and are expected to provide future benefits to the company Measurable amounts owed by the business to creditors Owners claim to the business resources Sales of goods or services to customers The cost of doing business necessary to earn revenues Distributions of a company s earnings to its stockholders as a return on their investment Financial Statements Reports the amount of revenue less expenses for a period of time Uses Revenue Expenses Net Income Reports the way the net income and the distribution of dividends affected the financial position of the company during the period Reports the amount of assets liabilities and stockholder s equity of a business at a point in Uses Assets Liabilities Stockholder s Equity Reports the operating investing and financial activities that caused increases and decreases in cash during the period Activities that are directly related to running the business to earn profit Activities that involve buying and selling productive resources with long lives Any borrowing from banks repaying back loans receiving contributions from stockholders paying time dividends Using Financial Statements Creditors 1 Is the company generating enough cash to make payments on its loans Statement of Cash Flows 2 Does the company have enough assets to cover its liabilities Balance Sheet Investors 1 What is the immediate return through dividends on my contributions Statement of Retained Earnings 2 What is the long term return through stock price increases resulting from the company s pro ts Income Statement Accounting Standards Financial Accounting Standards Board primarily responsible for setting the underlying rules of accounting in the US Generally Accepted Accounting Principles rules of accounting created by FASB for the use in the US Chapter Two The Balance Sheet Assets Resources presently owned by the business that generate future economic benefits Liabilities Amounts presently owed by a business Stockholder s Equity The amount invest and reinvested in a company by its stockholders Financing and Investing Activities Two sources of financing 1 Debt Financing the business obtains through loans 2 Equity Financing the business obtains through owners contribution and reinvestments of profit Study the Accounting Methods A systematic accounting process is used to capture and report the nancial effects of a company s transactions 1 ow do the transactions affect the accounting equation which accounts a Every transaction has as least two effects on the basic accounting equation b A L SE Accounting equation must balance A summary of all account names and corresponding account numbers used to record financial results in the accounting system ASSETS LIABILITIES STOCKHOLDERS39 EQUITY 39 quotv 11 1 391 39tlquot 2 7 I i f 15 fl 1 1111413121LEI 2L39 L L Transactions are recorded to general journal Ledger is used to summarize the effects of the journal entries on each account track the running total of all transactions A list of all accounts with ending balance Debits should equal credits balance sheet that shows a subtotal for current assets and current liabilities Assets that will be used up or converted into cash within the next 12 months Resources that will be used for or converted into cash more than 12 months after the balance sheet date 6th and obligations that will be paid settled or fulfilled within 12 months of the balance sheet date Debts and obligations that will be paid settled or fulfilled more than 12 months after the balance sheet date Chapter Three The Income Statement Amounts earned by selling goods and services to customers Costs of business necessary to earn revenue The excess of revenues over expenses Dividing the company s long life into meaningful and shorter chunks of time such as months quarters and years Accrual Basis Accounting Records revenues when they are earned and expenses in the same period as the revenues to which they relate as the revenues of the timing of cash receipts or payments Revenues are recognized when they are earned Record expenses in the same period as the revenues with which they can be reasonably associated The Expanded Accounting Equation Revenues are recorded with credits recording of revenue increases Stockholders Equity Expenses are recorded with debits recording of expenses decreases Stockholders Equity Unadjusted Trial Balance Lists all accounts with normal balance where the account increases Cash Asset Accounts Payable Liability Chapter 4 Why adjustments are needed Revenues are recorded when earned Expenses are recorded in the same period as the revenues to which they relate Assets are reported at amounts representing the economic benefits that remain at the end of the period Liabilities are reported at amounts owed at the end of the period Deferral Adjustment Haven t recorded it yet but will in the future Balance Sheet Income Statement m m gtlt 49 Supplies Supplies Expense Pg Prepaid rent Rent Expense Prepaid Insurance Insurance Expense Unearned Revenue Sales Revenue g T3 3 2 D Income statement increase accounts Balance sheet decrease accounts Accrual Adjustment Earned revenue or incurred expense but have not recorded it because it will not be received or paid until a later period m Balance Sheet Income Statement g 40 Interest Receivable Interest Revenue g lt Rent Receivable Rent Revenue quot 14 Income Tax PaYable Income Tax Expense if E Wages Payable Wages Expense g Interest Payable Interest Expense Additional Comments Adjusting journal entries never involve cash Adjusting entries always include one balance sheet and one income statement account Dividends are not expenses they are a reduction of retained earnings Closing Temporary Accounts Revenue Assets Temporary Expenses Liabilities Permanent Accounts Dividends Retained Earnings Contributed Capital Accounts Two closing entries are needed 1 Debit Revenue accounts and credit Expense accounts Debit or credit the difference to Retained Earnings 2 Credit Dividends Declared and debit Retained Earnings Chapter 5 Accounting Fraud 39ncentive The Fraud Triangle Opportunity Rationalize Possible Incentives to Commit Fraud Creating Business Opportunities Satisfying Personal Greed Satisfy loan covenants Enhance job security Increases equity financing Increase personal wealth Attract business partners Obtain bigger paycheck Opportunity to Commit Fraud Internal controls are the methods that a company uses to protect against theft of assets to enhance the reliability of accounting information to promote efficient and effective operations and to ensure compliance with laws and regulations The SarbanesOxley SOX Act Counteract Incentives Stiffer fines and prison terms Reduce Opportunities nterna control report from management Anonymous tip lines Stronger oversight by directors Whiste blower protection nterna control audit by external auditors code of ethics Encourage Honesty Comparative Financial Statements Compares the performance of a company over two years Multistep Income Statements Compares the income loss from operations over 3 years Statement of Stockholder s Equity Contributed Capital Retained Earnings Beginning Balance 0 100 Net Income 50 Dividends 10 Shares Issued 125 Shares Purchased 15 Ending Balance 110 140 Independent Auditors Auditors are Certified Public Accountants who are independent of the company Companies are given one of two opinions Financial statements are presented in accordance with GAAP Financial statements fail to follow GAAP or not able to complete needed tests SEC Filings Public companies are requires to electronically file certain reports with the SEC Annual filing of financial information Quarterly filing of financial information Reports significant business events Globalization and IFRS International Financial Reporting Standards IFRS are accounting rules established by the International Accounting Standards Board for use in over 100 countries around the world Most firms use GAAP and only GAAP however there are a few which use both There are no requirements to use IFRS Comparison to Common Benchmarks To help interpret amounts on the nancial statements it s useful to have points of comparison benchmarks Time series analysis compares a company s results for one period to its own results over a series of time periods Crosssectional analysis compares the results of one company with those of others in the same section of the industry Chapter 6 Operating cycles not much inventory lots of inventory finished goods purchase inventory from other companies takes raw materials to turn into finished goods Common Control Principles 1 Establish responsibility Assign each task to only one employee 2 Segregation of Duties Do not make one employee responsible for all parts of a process 3 Restrict access Do not provide access to assets or information unless it is needed to fulfill assigned responsibilities 4 Document procedures Prepare documents to show activities that have occurred 5 Independently verify Check others work Control Limitation Internal controls can never completely prevent and detect errors and fraud 1 Benefits vs Cost 2 Human Error or Fraud Bank Procedures and Reconciliation Banks provide services that help businesses to control cash in several ways 1 Restricting access 2 Documenting procedures 3 Independently verifying A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash account Perpetual Inventory System System which works with barcodes and optical scanners Periodic Inventory System Inventory is physically counted at the end of the period Sales Transactions Merchandisers earn revenues by transferring ownership of merchandise to a customer either for cash or on credit 1 Buyer s responsibility 2 Seller s responsibility Every merchandise sale has two components each of which requires an entry in a perpetual inventory system 1 Selling price 2 Cost Cost of Goods Sold expense account Sales Returns and Allowances When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory the customer can 1 Return them for a full refund 2 Keep them and ask for a reduction in the selling price called an allowance Two entries required Sales on Account and Sales Discounts A is a sales price reduction given to customers for prompt payment of their account balance Discount induces faster payment from customer Summary of SalesRelated Transactions Gross Pro t Percentage Chapter 7 Inventory Management Decisions The primary goals of inventory managers are to 1 Maintain a sufficient quality to meet customers needs 2 Ensure quality meets customers expectations and company standards 3 Minimize the costs of acquiring and carrying the inventory Types of Inventory Merchandisers Manufactures 0 Buy finished goods 0 Buy raw materials 0 Sell finished goods 0 Produce and sell nished goods Becomes Becomes Balance Sheet and Income Statement Reporting 9 Balance Sheet 9 Income Statement Cost of Goods Sold Equation Beginning Inventory Purchases Cost of Goods Sold Ending Inventory COGAS BI P Inventory Costing Methods Accounting policy election How your inventory is reported This is considered when deciding on income tax and income reporting Goal Calculate cost of Goods Sold expense on US and Ending Inventory Asset on BS Individual items identified as sold First In First Out Inventory that is purchased first is sold first Last In First Out Inventory that is purchased most recently is sold first Total Cost Total of Units Must be able to identify the follow for Inventory Costing Methods 0 What is COGS o Ending Inventory Inventory Cost Flow Computations Must know the following for each method 0 What is the Cost of Goods Available for Sale 0 What is the of units in Ending Inventory 0 What is the Cost of Goods Sold 0 What is the Cost of Ending Inventory Advantages of Inventory Methods Weighted Average Smooths out price changes FIFO Ending inventory approximates current replacement cost LIFO Better matches current costs in cost of goods sold with revenues Lower Cost of Market When the value of inventory falls below its recorded cost the amount recorded for inventory is written down to its lower market value Recording Inventory Transactions Recording the purchase of inventory on credit Recording costs associated with the inventory added to cost of 2 price per unit is usually in between FIFO and LIFO asset Recording the return of some inventory to supplier Sales discount offered by supplier 210 11 30 less any return difference is reduction in inventory Chapter 8 Pros and Cons of Extending Credit Advantages Disadvantages 1 Increases the seller s revenues 1 Increased wage costs 2 Bad debt costs 3 Delayed receipt of cash Accounts Receivable and Bad Debt Jun 1 Jun U Bad debt known I Record sales on account Record estimate of bad debts ill Annunl HurtIvaltlv l quot l quoth39 l quotl quot quot39quot r Lquot I luwnnulul lhllllllllttllil 0x A I I ulltn quot VI HHI39 clr Allowance for Doubtful Accounts xA Balance Sheet cr Accounts Recenvable A duh Accounts RetaIvath Less Allowance for Doubtful Accounts Accounts Receivable Net Innunhuy Allowance Method Follows a twostep process 1 Make an endof period adjustment to record the estimated bad debts in the period creditsales occur 2 Remove writeoft speci c customer balances when they are known to be uncollectable Methods for Estimating Bad Debts Estimates bad debt expense by multiplying the historical percentage of bad debt losses by the current period s credit sales Estimates the ending balance in the Allowance for Doubtful Accounts Account Recoveries Collection of a previously written off account Accounted for in two parts 1 Put the receivable back on the books by recording the opposite of the writeoff 2 Record the collection of the account Notes Receivable and Interest Revenue A company reports Notes Receivable if it uses a promissory note to document its right to collect money from another party Notes Receivable charge interest from the day they are created to they day they are due maturity date 1 Sign notepay out cash 2 Accrue interest revenue at year end 3 Receive payment of all principal and interest Calculating Interest Interest Principal X Interest Rate X Time Chapter 9 Longlived Assets Something you can physically touch Exists but cannot physically touch Patent Trademark etc Acquisition of Tangible Assets Acquisition cost includes 1 Purchase price 2 All expenditures needed to prepare the assets for its intended use Land Buildings Equipment 0 Purchase cost 0 Purchaseconstruction cost 0 Purchaseconstruction cost Legal fees Legal fees Sales taxes 0 o o 0 Surveying fees 0 Appraisal fees 0 Transportation costs 0 Broker s commission 0 Architectural fees 0 Installation costs The total cost of a combined purchase of land and building is allocated in proportion to their relative market values Ex Building and Land purchased for 400000 Appraised value for building 325000 and Land 175000 Total Appraised value is 500000 325000 175000 065 500000 500000 Maintenance Costs Incurred during Use Ordinary Expense Extraordinary Capitalize Depreciation Expense 035 Land 140000 Building 260000 A cost allocation process that matches costs of operational assets with periods benefited by their use contraasset account permanent account Depreciation calculations require three amounts for each asset 1 Acquisition cost purchase price costs 2 Estimated useful life 3 Estimated residual value leftover value salvage value Depreciation Methods 1 Straightline 2 Unitsof production 3 DoubleDecliningBalance StraightLine Formula Unitsof Production Methods DoubleDecliningBalance Method Asset Impairment Loss Impairment is when the estimated future cash ows from a longlived asset falls below its book value by 0 Casualty 0 Obsolescence equipment is no longer vw 0 Lack of demand for the asset s services Disposal of Tangible Assets 1 Update depreciation to date of disposal 2 Record the disposal I if cash received is greater than asset s book value if cash received is less than asset s book value Intangible Assets Patent trademark copyright etc same as depreciation Amortization Expense directly credits assets Impact of Depreciation Differences o Accelerated depreciation in the early years of an asset s useful life results in higher depreciation expense lower net income and than would result in using straightline depreciation 0 Setting an asset with a resulting from accelerated depreciation might result in a 0 Selling the same asset with a resulting from straightline depreciation might result in a Chapter 10 The role of Liabilities Liabilities are created when a company 0 Buys goods and services on credit 0 Obtains shortterm loans 0 Issues longterm debt Current Liabilities Accounts Payable Increases credited when a company receives goods or services on credit Decreases debited when a company pays on its account Liabilities that have been incurred but not yet paid Accrued Payroll Payroll Deductions are either required by law or voluntarily requested by employees and create a current liability for the company 1 Income tax 2 FICA tax 3 Other deductions charitable donations union dues etc Employers have other liabilities related to payroll 1 FICA tax a matching contribution 2 Federal unemployment 3 State unemployment tax Notes Payable Four key events occur with any note payable 1 Establishing the note 2 Accruing interest incurred by not yet paid 3 Recording interest paid 4 Recording the principal paid Current Portion of LongTerm Debt Long term debt is divided into two portions Current debt that is due within one year Noncurrent debt that is due beyond one year Additional Current Liabilities payments collected from customers at time of sale create a liability that is due to the state government Cash received in advance of providing services created a liability of services due to the customer LongTerm Liabilities Common LongTerm Liabilities 1 Longterm notes payable 2 Deferred income taxes 3 Bonds payable are financial instruments that outline the future payments at company promises to make in exchange for receiving a sum of money now Bonds Key elements of a Bond 1 Maturity date 2 Face value 3 Stated interest rate the bond price involves present value computations and is the amount that investors ae willing to pay on the issue date for the bonds 0 Premium Market interest rate is lower than stated interest rate 0 Face value Market interest rate is the same as the stated interest rate 0 Discount Market interest rate is higher than stated interest rate Bond Retirement Complete journal entry Bonds Payable XX Cash XX Contingent Liabilities are potential liabilities that arise from past transactions or events but their ultimate resolution depends is contingent on a future event 0 Probable Make a journal entry to record the liability 0 Possible Make a note on financial statement 0 Remote Do nothing Chapter 1 1 Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership 0 Simple to become an owner 0 Easy to transfer ownership 0 Provides limited liability Because a corporation is a separate legal entity it can 0 Own assets 0 Incur liabilities 0 Sue and be sued 0 Enter into contracts Stockholder Benefits 0 Voting rights vote on board of directors 0 Dividends payments of company s retained earnings 0 Residual claims claim on what s leftover company goes out of business not bankruptcy o Preemptive rights first dibs on new stock Equity vs Debt Financing Advantages of equity and debt financing Advantages of equity Advantages of debt Equity does not have to be repaid Interest on debt is tax deductible Dividends are optional Debt does not change stockholder control Authorization Issuance and Repurchase of Stock The maximum number of shares a company can offer publicly Issued and unissued Comprised of outstanding and treasury stock Issued shares that are owned by stockholders Issued shares that have been reacquired by the corporation Stock Authorization is an arbitrary amount assigned to each share of stock when it is authorized is the amount that each share of stock will sell for in the market Stock Issuance the first time a corporation issues stock to the public Seasoned new issue Subsequent issues of new stock to the public Cash XX Common Stock XX Additional PaidIn Cap XX Stock Exchanged between Investors Transactions between two investors do not affect the corporation s accounting records Stock Used to Compensate Employees Employees pay packages can include stock options Gives the employees the option to acquire company stock at a predetermined price Repurchase of Stock A corporation repurchases its stock to l Distribute excess cash to stockholders 2 Send a signal that the company believes its stock is worth acquiring 3 Obtain shares to reissue for the purchase of other companies 4 Obtain shares to reissue to employees as part of stock option plans Dividends on Common Stock 0 Declared by board of directors 0 Not legally required 0 Creates liability at declaration o Requires sufficient Retained Earnings and Cash Dividend Dates Liability created Company decides who will receive the dividend Liability eliminated and paid Stock Dividends Distribution of additional shares of stock to stockholders 0 No change in total stockholders equity 0 No change in par value 0 All stockholders retain same percentage ownership Corporations issue stock dividends to l Remind stockholders of the accumulating wealth in the company 2 Reduce the market price per share of stock 3 Signal that the company expects strong financial performance in the future Small stock dividend less than 2025 Large stock dividend more than 2025 Record at current market value of stock Record at par value of stock Stock Splits An increase in the number of shares and the corresponding decrease in par value per share Retained earnings is not affected A stock split creates more pieces of the same pie Preferred Stock Issuance 0 Priority over common stock 0 Usually has fixed dividend rate 0 Usually has no voting rights The current preferred dividends must be paid before paying any dividends to common stock Any unpaid dividends from previous years dividends in arrears must be paid before common dividends are paid Retained Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating Chapter 12 Business Activities and Cash Flows The Statement of Cash Flows focuses attention on 0 Cash received and paid for daytoday activities with customers suppliers and employees Cash paid and received from buying and selling longterm assets Cash received and paid for exchanges with lenders and stockholders Operating Activities Cash in ows and out ows that directly relate to revenues and expenses reported on the Income Statement In ows Out ows Cash provided by Cash used for Collecting from customers Purchasing services and goods for resale Receiving dividends Receiving interest Investing Activities In ows Cash provided by Sale or disposal of Property Plant and Equipment Sale or maturity of investments in securities Financing Activities In ows Cash provided by Borrowing from lenders through formal debt contracts Issuing stock to lenders Relationship to Other Financial Statements Information needed to prepare a Statement of Cash Flows 0 Comparative Balance Sheets 0 Income Statement 0 Additional details concerning selected accounts Cash Flows from Operating Activities Indirect Method Paying salaries and wages Paying income taxes Paying interest Out ows Cash used for Purchase of Property Plant and Equipment Purchase of investments in securities Out ows Cash used for Repaying principal to lenders Repurchasing stock from owners Paying cash dividends to owners The indirect method adjusts Net Income by analyzing noncash items 1 Net Income 2 Add back noncash expenses 3 Address changes in Current Assets and Current Liabilities
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