Final Exam Study Guide
Final Exam Study Guide COB 241
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This 12 page Study Guide was uploaded by acgreene on Wednesday October 7, 2015. The Study Guide belongs to COB 241 at James Madison University taught by Briggs in Fall 2015. Since its upload, it has received 35 views. For similar materials see Financial Accounting in Business at James Madison University.
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Date Created: 10/07/15
CHAPTER 1 Three sources of assets From creditors when a business receives cash from its creditors it is under the obligation to return the cash at some future date From investors When a business receives assets from its investors it commits to use the assets in a manner that benefits the investors the business commitment to the stockholders is From operations salesearningsincome the distribution of assets generated through earnings not a legal requirement taken out of retained earnings does not appear on income statement increase in the business s commitments to its stockholders retaining your assets instead of distributing them Assets Liabilities Equity Assets Liabilities Common Stock Retained Earnings increases both total assets and total liabilities three types are equity liabilities and revenue CS 120000 Cash 120000 trading one asset for another asset the amount of one asset decreases and the amount of another asset increases resulting in unchanged total assets Land 50000 Cash 50000 matches the expenses With the revenues that occurred during a specific period REVENUES EXPENSES NET INCOME I I39GVCIIUCS CXCCGd CXPCIISCS I CXPCIISCS CXCCGd I39GVCIIUCS explains effects of transactions on stockholder s equity during the accounting period Beginning CS balance Beginning RE balance total Stockholders equity CS issued net income leldendS total assets balance With equal liabilities and equity A L E explains how a company obtained and used cash during the accounting period through operating investing and financing activities Operating cash receipts from customers cash payments to suppliers Investing cash receipts from the sale of long term assets cash payments for the purchase of long term assets Financing cash receipts from borrowing funds cash payments to repay borrowed funds cash receipts from issuing common stock cash payments for dividends Operating Investing Financing beg cash balance statement of cash ows at the end of the accounting period the data in the revenue expense and dividend account are transferred to the RE account The revenue expense and dividend accounts are now called and have zero balances at the beginning of the new accounting period The RE account never closes and is therefore a CHAPTER 2 recognizing revenue even though it has not been collected represents the amount of cash the company expects to collect in the future asset source transaction AR Revenue Collecting AR Cash AR expenses that are recognized before cash is paid entry to recognize an accrued expense only to update the accounting records does not affect cash usually made on December 31St represents that amount of cash the company is obligated to pay the instructor in the future increases liability expense Retained earnings Salaries payable 1 recording transactions 2 adjusting accounts 3 preparing financial statements 4 closing temporary accounts deferred expenses prepaid rent and prepaid insurance total assets remain unchanged income statement unaffected Prepaid rent Cash Retained earnings Prepaid rent defer recognizing revenue until someone performs the service liability assets and liability increase no affect on income statement Cash Unearned revenue Unearned revenue Retained earnings Customer Seller Cash early deferral prepaid A unearned revenue L Cash late accrual accounts payable L accounts receivable A Wagessalaries payable L must make adjusting entry for supplies that are used or missing Ex ABC bought 1400 of supplies January 1 On December 31st there were 1200 less than we started with Supplies 1400 Cash 1400 Supplies exp 1200 RE 1200 CHAPTER 3 lists every ledger account and its balance with debits in one column and credits in another the columns are totaled and compared If the debit column and credit column do not equal there must be an error If the columns do equal each other it provides evidence but not proof that the transactions have been recorded correctly re ects the account balances immediately after the closing entries are posted 1 Issue common stock 2 Earn revenue Cash cash Common stock revenue 3 Pay expenses for payroll etc 4 Pay dividends expense dividend cash cash CHAPTER 4 expense account cost of inventory items that have been sold difference between the sales revenue and COGS expenses are subtracted from gross margin to get net income Sales revenue COGS expenses net income Ex purchased 1000 of inventory for cash Inventory 1000 Cash 1000 Sold all inventory for 1500 cash Cash 1500 Revenue 1500 COGS 1000 Inventory 1000 inventory account is adjusted continually throughout the accounting period each time merchandise is purchased or sold the inventory account is increaseddecreased encourages buyers to pay promptly 210 n30 2 cash discount if the purchaser pays Within 10 days purchaser has 30 days to pay ex provided service for 10000 on account for 210 n30 and customer pays in 8 days 02 X 10000 200 discount Accounts payable 9800 Cash 9800 FOB shipping point buyer pays shipping debit inventory FOB destination seller pays shipping debit shipping expense Gain sell an asset for more than it cost Loss sell an asset for less than it cost only make entry When you SELL the asset CHAPTER 5 first in first out cost of the items purchased first be assigned to the COGS sell older products first highest net income and best balance sheet last in first out cost of the items purchased last be charged to the COGS sell newer products first t calculate average cost per unit by dividing total cost of the inventory available divided by total number of units available CHAPTER 6 Bank statement presented form the bank s point of vieW Debit memos describe transactions that reduce the customer s account balance bank s liability requi res a credit entry to the cash account to the depositor s book Credit memos describe activities that increase the customer s account balance bank s liability Bank statements normally report the balance of the account at the beginning of the period additions for customer deposits made during the period other additions described in credit memos subtractions for the payment of check drawn on the account fduring the period other subtractions described in debit memos a running balance of the account and the balance of the account at the end of the period Begins With the cash balance reported by the bank unadjusted bank balance The bank account is reconciled When the true cash balance of the bank balance agrees With the true cash balance of the unadjusted book balance Book balance Bank balance AR the bank collects deposits in transit interest earned outstanding checks service fees true cash balance NSF check error we made true cash balance Accounting entries for bank reconciliation on book balance Cash bank service charge expense Interest revenue cash Accounts receivable cash Cash accounts receivable Accounting entries for bank reconciliation on bank statement t No entry no entry CHAPTER 7 represents a company s estimate of the amount of uncollectible receivables estimate value CONTRA ASSET ACCOUNT credit balance negative asset of accounts receivable represents the amount of receivables a company estimates it will actually receives AR allowance for doubtful accounts net realizable value for AR recognized in yearend adjusting entry reduces the net realizable value of receivables equity and the amount of reported net income Cash ows not affected Uncollectible accounts exp Allowance Ex We provided 111000 of services on account collected 65000 On Dec 31 we set the allowance at 5 of AR AR 46000 x 05 2300 AR 1 1 1000 Revenue 1 1 1000 Cash 65000 AR 65000 1231 Exp 2300 Allowance 2300 During the next 12 months the actual uncollectable accounts were either 2100 or 2350 At the end of 2014 AR 68000 We want the allowance to be 5 of AR 3400 Using the 2100 expense 3200 th 39 2001a f it a 2300 Allowance 3200 ere 18 e over rom as year s allowance must subtract it from 2014 allowance Using the 2350 expense 3450 Allowance 3400 the allowance went over the projected amount Allowance 50 must add the excess to this year s allowance the amount of accrued interest grows each day that it is not paid Principal x Annual interest rate x Time outstanding Interest revenue Ex On January 1 we lent 10000 at 5 interest rate All principal and interest is due in one year 11 NR 10000 Cash 10000 1231 Cash 10500 NR 10000 Interest rev 500 Ex On July 1 we lent 10000 at 5 interest rate All principal and interest is due in one year only 6 months of interest is earned 61 NR 10000 Cash 10000 1231 Int receivable 250 Interest rev 250 the credit card company charges us a fee every time a customer uses a credit card the fee subtracted from net income Ex we sell goods for 6000 credit card company charges us a 3 fee AR cc comp6000 Revenue 6000 CC expense 180 AR cc comp 180 Later Cash 5820 AR 5820 CHAPTER 8 expense for tangible assets property plant equipment the amount of an asset s cost that is allocated to expense during an accounting period temporary account that is closed to RE expected market value of a fully depreciated asset expense for natural resources expense for intangible assets with identifiable useful lives not on balance sheet unless you buy it from another company Patent amortized over 20 years Copyright amortized over long time Franchise depends Goodwill paying more for an asset be of its reputation not amortized Trademark not amortized Determining the cost of long term assets Buildings purchase price sales taxes document costs realtorattorney fees remodeling costs Land purchase price sales taxes document costs realtorattorney fees costs for removing old buildings grading costs Equipment purchase price discounts sales taxes delivery costs installation costs costs to adapt for intended use acquiring a group of assets in a single transaction total price must be allocated among the assets acquired using the Ex We buy land and a building for 240000 and it is appraised to be worth 360000 Building 270000 X 75 180000 Land 90000 X 25 60000 This indicates that the land is worth 25 of the total value and the building is worth 75 Using these percentages the actual purchase price is allocated equal amounts of depreciation expense each year Asset cost Salvage value Useful life Depreciation expense Ex We buy a van for 24000 with a useful life of 4 years with a salvage value of 4000 24000 4000 4 5000 per year contra asset account credit balance permanent account Depreciation expense 5000 Accumulated depreciation 5000 Book value determined by subtracting the credit balance in the accumulated depreciation account from the debit balance in the associated asset account 24000 van 5000 accumulated depreciation 19000 book value produces a large amount of depreciation in the first year of an asset s life and progressively smaller levels of expense in each succeeding year CAN NOT DEPRECIATE BEYOND ITS SALVAGE VALUE depreciates the same amount as straight line method 1 find the straight line rate 1 useful life make it a percentage 2 find DDB rate straight line percentage rate X 2 3 find depreciation expense DDB rate X book value at the beginning of the period Ex We buy a van for 24000 with a useful life of 4 years with a salvage value of 4000 1 straight line rate IA 25 2 25 x 2 50 3 50 X 24000 12000 depreciation expense for the first year 24000 12000 12000 12000 6000 6000 variable bases depreciation expense on actual asset usage uses salvage value must use a measure of the asset s productive capacity ex number of miles Ex We buy a van for 24000 and plan to drive 100000 miles during its 4 year useful life 24000 100000 024 depreciation per mile a useful life can be revised for longer or shorter than originally calculated Ex We buy a machine on 1113 for 5000 with a useful life of 8 years and salvage value of 3000 50000 3000 8 5875 annual depreciation At the beginning of the 5th year when the machine is now worth 26500 the useful life is revised to be 14 total years 26500 3000 10 remaining years 2350 annual depreciation Ex at the beginning of the 5th year when the machine is now worth 26500 the salvage value is revised to be 6000 26500 6000 4 remaining years 5125 annual depreciation APPENDIX E Companies often invest in stocksbonds of other companies Company issues stock E Company issues bond L Company buys stockbond A Stocks E and bonds L have similarities anyone can buy stocks and bonds including other companies Stock prices uctuate daily because there s a change in future expectations about the net income of the company and because there s a change in future expectations about the macroeconomic outlook Bond prices uctuate for the same reasons as stocks AND because when interest rates rise bond prices fall CHAPTER 9 Current Assets Longterm Assets Cash AR Inventory Land Buildings Equipment Supplies Prepaid Intangible assets stockbond investments NR lt 1 year NR gt1 year Current Liabilities Longterm Liabilities AP wages pay taxes pay Bonds payable Interest payable NP gt1 year NP lt1 year retailer collects the tax from its customers and remits the tax to the state at regular intervals retailer has current liability for the amount of sales tax collected but not yet paid Ex We sell merchandise to a customer for 2000 with 6 sales tax Cash 2120 Sales tax payable 120 Sales revenue 2000 Later Sales tax pay 120 Cash 120 potential obligation arising from a past event lawsuit only make an entry if it is PROBABLE 80 likely that we will pay SOME amount of damages Ex we are sued for 5 million there is a 60 chance we pay 5 million and a 40 chance we pay nothing No entry because it is not 80 probable Ex we are sued for 5 million there is a 90 chance we will lose Expense 5 million Liability 5 million warranties are guarantees on a product or service that are extended for a specified period of time Ex We estimate that the warranty costs of goods that we sold will be 100 Warranty expense 100 Warranties payable 100 There is defective merchandise worth 40 that is returned by a customer Warranties payable 40 Cash 40 Salary expense Salary tax payable Cash CHAPTER 10 can be exchanged at the option of the bondholder for common stock or some other specified ownership interest Issuing company benefits because the investors are willing to accept a lower interest rate in exchange for the conversion feature investors benefit because they obtain the option to share in potential rewards of ownership if the stock increase the investor can convert their bonds to stock if stock does not increase the investor is still guaranteed interest payments allow issuing company to pay off the bond debt before the maturity date If interest rates decline the issuing company could borrow additional money at a lower rate and use the money to pay off higher rate bonds Call price normally exceeds face value of the bonds Ex we issue 140000 bond for 10 years callable at 102 Bonds pay 140000 Loss 2800 Cash 142800 investor initially pays less than face value interest expense is more than cash paid each year investors get free money because the interest rate is low and no one wants the bond Discount on bonds payable is a contra liability Ex we buy a bond with a face value of 100000 for 95000 Cash 95000 Discount 5000 Bonds pay 100000 investor pays more than face value interest expense is less than cash paid each year reduce the effective interest rate bc it s too high premium on bonds payable is a liability account Ex we buy a bond with a face value of 100000 for 105000 Cash 105000 Premium 5000 Bonds pay 100000 Amortizing bond discounts CHAPTER 11 only used for corporations distributed corporate profits are taxed twice once when income is reported on the corporation s income tax return and again when distributions are reported on individual owners tax returns Ex pretax income is 100000 with 30 tax bracket Corporation will pay income tax of 30000 The corporation will then distribute the after tax income of 70000 to individual stockholders in 15 tax brackets requiring a tax payment of 10500 for a total income tax of 40500 taxed as proprietorships or partnerships have limited liability like a corporation h taxed as partnerships has benefits of corporate ownership Sole proprietorships and partnerships are taxed ONCE and individually the owners of proprietorships and partnerships are personally liable for actions they take in the name of their companies A corporation is legally separate from its owners and are not personally liable for actions they take in the name of their companies the most that owners of a corporation can lose is the amount they have invested in the company aka the company s stock investor simply buys or sells stock to acquire or give up an ownership interest in a corporation very easy in a corporation Much harder to do in a proprietorship have to literally transfer the entire company to another person common stock of shares Represents maximum liability of the investorsminimum dollar value you are allowed to sell the share for exists to fulfill legal requirements Par value of shares issued minimum amount of assets that must be retained in the company as protections from creditors legal capital EX issue 1000 shares of 2 par value for 6 each Cash 6000 Common stock 2000 APIC 4000 when a corporation buys back some of its issued stock from the public reasons include 1 to have stock available to give employees pursuant to stock option plans 2 to accumulate stock in preparation for a merger or business combination 3 to reduce number of shares outstanding to increase earnings per share 4 to keep price of stock high when it appears to be falling 5 to avoid a hostile takeover when a business buys treasury stock assets and equity decrease income statement not affected contraequity account deducted from other equity accounts in determining total stockholders equity EX a company buys 50 shares of a stock at 20 per share It then reissues 30 shares of treasury stock at 25 per share Cash 750 25 X 30 Treasury stock 600 20 X 30 APIC TS 150 APICTS is NOT reported as a gain or loss the company still has 20 shares left at 20 per share treasury stock account is now 400 reported directly below RE to reduce the RE account highest risk of losing your investment if the corporation is forced to liquidate reap greatest rewards when the corporation prospers Right to buy and sell stock right to share in distribution of profits right to share in distribution of corporate assets in case of liquidation right to vote on significant matters right to participate in election of directors no voting rights amount of their dividends is usually limited must be paid the liquidation value before ant assets are distributed to common stockholders in case of bankruptcy cumulative dividends if corporation is unable to pay the preferred dividend in any year EX Preferred stock 4 10 par 10000 shares 04 X 10 X 10000 4000 cumulative dividends that have not been paid any amount received above the par or stated value Cash dividend total equity is lowered affected by 3 dates 1 recognize liability decrease in retained earnings income statement and cash ow are not affected dividends dividends payable 2 cash dividends are paid to investors who owned the preferred stock does not affect financial statements NO ENTRY 3 actually pay cash dividend assets and liabilities both decrease income statement not affected cash ow is affected dividends payable cash companies distribute additional shares of stock to the stockholders as a dividend instead of cash Income statement and cash ows are not affected total equity unchanged no affect on assets just increases number of shares of stock outstanding EX we issue stock dividend of 1000 shares when the market price is 28 per share Retained earnings 28000 Common stock 28000 replaces existing shares with a greater number of new shares reduces the market price of stock any par or state value of stock is proportionally reduced to re ect the new number of shares outstanding Has no effect on the dollar amounts of assets liabilities and stockholders equity only affects number of shares of stock outstanding and the par value per share NO ENTRY EX A 2for1 split is declared on 165 outstanding shares with 20 par value I there are now 330 shares worth 10 per share PAID IN CAPITAL Preferred stock APIC preferred stock amount beyond par Common stock APIC commons stock amount beyond par APIC treasury stock Average issue price per share of common stock CS TS CS shares issued Dividend per share of preferred stock cumulative X par value Par value CS CS shares issued Shares outstanding CS TS Market price price at which company issues the stock can change over time Average issue price average price per share of the stock
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