Principles of Accounting 1 Fall 2018
Study Guide for Midterm 1
∙ Multiple choice questions (50 @ 5.20 points each). Total possible points are 260.
∙ Maximum grade is 250! The extra points are to compensate for any weakness in the main test instrument and misunderstanding in the question wording.
∙ Students need to bring their own scantrons (form 882E) and #2 pencils. Do not mark your scantron until you have selected your FINAL answer. Eraser marks confuse the scantron grading machine. All adverse consequences of eraser marks and mismarks are the student’s responsibility; therefore, bring an extra scantron. Do not write notes before or during the exam on your scantron. All work should be written on the exam.
∙ You are permitted to use a simple fourfunction calculator (cell phones, scientific, financial, programmable, and graphing calculators are NOT simple fourfunction calculators). Instructors/exam proctors will check each student’s calculator while distributing the exams.
∙ This is a closed book, closed note, and closed neighbor exam. You are NOT permitted to have scratch paper. You are NOT to look around during the exam. You are to keep your scantron sheet covered to the extent possible. Questions regarding the exam cannot be asked during the exam period.
∙ During the exam period, cell phones and all devices that can connect to the internet should be turned off or on silent and any ear piece should be removed. If an instructor or exam proctor sees a cell phone during the exam period, the student will receive a zero on the exam. Put your cell phones away!
∙ You must turn in your exam and scantron with your name and the version letter of the exam on both. You will be asked to show a picture id when you turn in your exam and scantron.
We also discuss several other topics like Is rna or protein for genetic material?
∙ You will have 120 minutes to complete the exam. This includes time to fill in your scantron. Do not start writing on the exam before you are instructed to begin.
∙ The exam covers Chapters 1 – 4.
∙ Identify the advantages of the sole proprietorship, partnership, and corporate form of business organizations.
o SOLE PROPRIETORSHIP:
ADVANTAGES = simple to establish; owner controlled; tax
DISADVANTAGES = proprietor personally liable; financing may be difficult; transfer of ownership may be difficult
ADVANTAGES = simple to establish; shared control; tax
advantages; broader skills and resources
DISADVANTAGES = partners personally liable; transfer of
ownership may be difficult
ADVANTAGES = easy to transfer ownership; greater capital
raising potential; lower legal liability
DISADVANTAGES = unfavorable tax treatment
∙ Identify internal and external users of financial information.
o INTERNAL USERS = users within the organization
EXAMPLES: Managers who need accounting information to plan, organize, and run business operations We also discuss several other topics like What does convergence mean?
o EXTERNAL USERS = users who are outside the organization
EXAMPLES: Investors and Creditors (Stockholders)
∙ Define and identify assets, liabilities, and stockholders’ equity accounts and the accounting equation.
o ACCOUNTING EQUATION: ASSETS = LIABILITIES +
o ASSETS = resources owned by a business
o LIABILITIES = debts and obligations of the business
o STOCKHOLDERS’ EQUITY = claims of owners on the assets of the business
∙ Identify activities as operating, investing, or financing.
o FINANCING = borrowing from creditors; selling shares of stock to investors
o INVESTING = land, building, equipment, cash, investments in debt or equity securities of another company
o OPERATING = revenue, expenses, net income, net loss
∙ Calculate components of the income statement, retained earnings statement, and balance sheet and identify the interrelationships. We also discuss several other topics like What is organic chemistry useful for?
o INCOME STATEMENT = REVENUE – EXPENSES
o RETAINED EARNING STATEMENT = BEGINNING RETAINED EARNINGS + NET INCOME – DIVIDENDS
o BALANCE SHEET = ACCOUNTING EQUATION
o INTERRELATIONSHIP = NET INCOME FROM THE INCOME STATEMENT IS ADDED TO BEGINNING RETAINED EARNINGS TO DETERMINE ENDING RETAINED EARNINGS ENDING RETAINED EARNINGS (REPORTED ON RETAINED EARNINGS STATEMENT) IS ALSO REPORTED ON THE BALANCE SHEET THE ENDING AMOUNT OF CASH SHOWN ON THE STATEMENT OF CASH FLOWS MUST AGREE WITH THE AMOUNT OF CASH ON THE BALANCE SHEET
∙ Identify the purpose of the auditor’s report.
o Auditor, a CPA, a professional accountant, who conducts an independent examination of the financial accounting data presented by a company o Auditor gives an “unqualified” opinion, meaning the auditor has no reservations concerning the material validity of the presented information, if the financial statements present the financial position, results of
operations, and cash flows in accordance with accepted accounting standards.
∙ Identify, define, and/or calculate the different sections of a classified balance sheet.
LONG TERM INVESTMENTS
PROPERTY, PLANT, AND EQUIPMENT (PPE)
o LIABILITIES: If you want to learn more check out Who did beowulf rescue?
LONG TERM LIABILITIES
o STOCKHOLDERS’ EQUITY:
∙ Define and identify a current asset(s).
o CURRENT ASSETS = Assets that are expected to be converted to cash or used in the business within a short period of time, usually one year
o EXAMPLES = cash, shortterm investments, receivables, inventories and prepaid expenses Don't forget about the age old question of What does production focus on in respect to the firm?
o On the balance sheet, current assets are listed in the order in which the company expects to convert them into cash (order of liquidity).
∙ Calculate earnings per share.
o EARNINGS PER SHARE = NET INCOME – PREFERRED STOCK DIVIDENDS / AVERAGE COMMON SHARES OUTSTANDING ∙ Calculate the current ratio and understand its purpose.
o CURRENT RATIO = CURRENTS ASSETS / CURRENT
o MEASURE OF SHORTTERM ABILITY TO PAY OBLIGATIONS o COMPUTED BY DIVIDING CURRENTS ASSESTS BY CURRENT LIABILITIES If you want to learn more check out What happens to waves in the event of destructive interference?
o MORE DEPENDABLE INDICATOR OF LIQUIDITY THAN WORKING CAPITAL
o DOES NOT TAKE INTO ACCOUNT COMPOSITION OF CURRENT ASSETS
∙ Identify a solvency concern.
o SOLVENCY = ability of the enterprise to survive over a long period of time
∙ Define Generally Accepted Accounting Principles (GAAP), the quality “verifiability”, and the concept of “full disclosure”.
o A set of rules and practices, having substantial authoritative support, that the accounting professions recognizes as a general guide for financial reporting purposes.
o Relevance Accounting information has relevance if it would make a difference in a business decision.
∙ Analyze the effect of business transactions on the accounting equation. o Assets have to equal liabilities + stockholders equity.
o Also think about buying supplies. This is a little bit different from the accounting equation. This will increase assets for supplies and decrease assets because your buying with cash. So, some things like this will have two asset transactions instead of an asset transaction and a liability
∙ Prepare or analyze journal entries.
o When you are preparing or analyzing journal entries make to:
o Disclose the complete effects of a transaction.
o Provides a chronological record of transactions.
o Helps to prevent or locate errors because the debit and credit amounts can be easily compared.
∙ Apply debit/credit rules and normal account balances.
o Debit must equal credits.
o Debit on left side
o Credit on right side and INDENTED
∙ Analyze account activity and calculate ending account balances. o For instance, when you do tcharts, do a tchart for cash and add up the total. For service revenues you would do the same and add up the total. ∙ Identify the purpose of a trial balance.
o PURPOSE is to prove that debits equal credits.
o Characteristics of Trial balance:
A list of accounts and their balances at a given time.
Accounts are listed in the order in which they appear in the ledger. May also uncover errors in journalizing and posting.
Useful in the preparation of financial statements
∙ Apply the revenue recognition principle.
o Companies recognize revenue in the accounting period in which the performance obligation is satisfied.
∙ Calculate net income using the accrual basis of accounting.
o The revenues are recognized WHEN SERVICE IS PREFORMED, regardless if payment is given so calculate revenue WHEN SERVICE IS PREFORMED.
o Expenses are recognized WHEN INCURRED REGARDLESS of when they are paid off
∙ Identify why adjusting entries are needed and analyze the impact of not making adjusting entries.
o They are needed to:
o Ensure that the revenue recognition and expense recognition principles are followed.
o Are required every time a company prepares a financial statement. o Includes one income statement and one balance sheet account.
o Never include cash.
∙ Prepare adjusting journal entries.
∙ Define depreciation.
o Buildings, equipment and motor vehicles (longlived asset) are recorded as assets, rather than an expense in the year acquired.
o Companies report a portion of the cost of a longlived asset as an expense (depreciation) during each period of the asset's useful life.
o Depreciation does not attempt to report the actual change in the value of the asset.
∙ Identify the characteristics of the adjusted trial balance.
o After all, adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).
o The adjusted trial balance's purpose is to prove the equality of debit balances and credit balances in the ledger.
o The adjusted trial balance is the primary basis for the preparation of the financial statements.
∙ Identify the purpose of closing entries.
o Prove the equality of the permanent account balances that the company carries forward into the next accounting period. All temporary accounts will have zero balance.
∙ Calculate the retained earnings balance after closing entries. o If 200 dollars supply expense is debited, we need to credit 200 dollars supply expense in order to 0 out. After that we would debit 200 dollars Retained earnings and then credit supplies expense 200.