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Acc 200, Exam 2 Study Guide

by: Brynna Williams

Acc 200, Exam 2 Study Guide ACC 200

Brynna Williams
GPA 4.0

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This study guide covers everything that will be on our 2nd exam
Foundations of Accounting
Ellen Anderson
Study Guide
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This 13 page Study Guide was uploaded by Brynna Williams on Monday March 28, 2016. The Study Guide belongs to ACC 200 at University of Tennessee - Knoxville taught by Ellen Anderson in Spring 2016. Since its upload, it has received 106 views. For similar materials see Foundations of Accounting in Accounting at University of Tennessee - Knoxville.


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Date Created: 03/28/16
ACCOUNTING 200 EXAM 2 STUDY GUIDE Receivables  Accounts receivable o Goods are sold on account o Business takes risk that they will never be paid back o 2 ways to reduce risk  Refuse to sell on account  This deters customers  Transfer collection risk to credit card company or factors  Business sells receivables to credit card company o Must pay for card readers, monthly fees, and transaction fees  Business sells receivables to factor (company that does nothing but buy receivables) o Factor takes a percentage of each dollar repaid o Many businesses don’t do these things  Instead report at EOP how much of owed receivables they probably will not receive  Done by examining receivables by age o The longer the receivable has gone without being paid, the less likely you are to receive it o Calculated by taking total amount of accounts receivable for each block of time that it is overdue (e.g. not yet overdue, 1-30 days overdue, 31-60 days overdue, etc.) and multiplying by the base rate of estimated uncollectible accounts for that block  Rate based off historical uncollectible rates & varies by company o Do this calculation for each block of time & add up all values  Total is the estimated amount we will not be able to collect  Known as allowance for doubtful accounts  EOP adjustment  Up uncollectible accounts expense  Up allowance for doubtful accounts o Contra asset  Deferred expense  Net realizable value  Amount we will probably actually get  Total receivables – allowance for doubtful accounts  Notes receivable o Legal contract generated when business converts account receivable into formal note o Lends money to another business  We are the lender  Payable when we are the borrower o Converting an open account to a formal notes (also called receipt of note)  Open  We’re just taking their word that they will pay us  When we’re tired of waiting, we convert it to formal debt o Recorded as down accounts receivable, up notes receivable  Formal notes charge interest o Accrued interest is recorded as up interest revenue, up interest receivable  Accrued revenue o Interest calculated as principal x rate x time  Principal  Initial amount owed  Interest always computed from principal  Rate  ALWAYS an annual rate  Maturity Date  Date note is due  Time  Every day that we have not been paid divided by 360 o Banks use a 360-day year for interest calculations  Interest receivable and note receivable are 2 separate accounts  Note receivable is only for principal  Accounts receivable turnover ratio o Measures how quickly a company collects its receivables  Measure of liquidity o Formula:  Net credit sales divided by average net accounts receivable  Net credit sales o Sales on account  Average net accounts receivable o (Net realizable value at the beginning of the period + net realizable value at the end of the period)/2 o Interpreted as how many times in the year the company collected receivables  Higher number is better Inventory  Goods and merchandise held for sale to customers o Merchandisers purchase finished goods o Manufacturers purchase stuff to make goods  Cash is unavailable until inventory is sold o 2 costs associated with inventory  Cost of inventory  Current asset on balance sheet until goods are sold o Current because business wants to sell it fast  Cost of goods sold  Expense on income statement when goods are sold o 2 important numbers  Cost of ending inventory  Cost of unsold units at EOP  Cost of goods we sold this period  Every unit is either sold (gone) or unsold (still here)  Unsold units are physically counted o How to calculate the values  Specifically identify which units were sold  Easy  Most businesses can’t do this though  3 other methods for figuring it out  Average cost method o Used when units were all purchased at the same cost & sold in no particular order  Not always true o Average cost calculated by taking total cost of all goods available and dividing by number of goods available for sale  Weighted average  Individual price counted for amount of inventory purchased at that price  Apply this cost to number of goods sold for cost of goods sold & number unsold for cost of ending inventory  FIFO o First in, first out o First units bought were the first ones sold  Most businesses actually operate this way o Oldest inventories will be in sold column, and newest inventories will remain in ending inventory o Produces smallest expense, therefore best net income and best current assets  LIFO o Last in, first out o Opposite of FIFO  Last units we ought were the first ones we sold o Newest units are in sold column, oldest units are in ending inventory  Doesn’t make any sense, but many businesses use it for tax purposes  Produces lowest net income and therefore lower taxes  Inventory ratio analysis o Turnover ratio  How fast inventory is being bought and sold  Higher number is better  Calculated as cost of goods sold expense divided by average inventory  Average inventory = (beginning inventory + ending inventory)/2 Long-Term Assets  All business expenditures classified as 1 of 2 things o Asset on balance sheet o Expense on income statement  How to know which  Asset if item will be used in future to generate revenue  Expense if it is used in current period to generate revenue  Asset expenditures will either be current or long-term  Current assets will be used within  If asset is long-term, you must decide if it is fixed, investment, or intangible  How to determine which it is o Does it have physical substance?  If no, it is intangible  Patent  Trademark  Copyright  Goodwill o Name recognition o Is it held for resale?  If yes, it is an investment o Is it used for productive purposes/generation of revenue?  If no, it is an investment o A fixed asset has physical substance, is not held for resale, and is used for productive purposes/to generate revenue  PPE  Accounting for fixed assets o 6 questions to answer  1 at date of acquisition  Can be acquired by purchase, trade, construction, or donation  What is the cost?  4 over useful life  How do we classify subsequent expenditures? o Costs incurred after acquisition  What is the annual depreciation expense?  What is the accumulated depreciation at any point?  What is the book value at any point?  1 at end of asset’s useful life  What is gain or loss when we dispose of it? o Can be disposed of by selling it, trading it, destroying it, giving it away, or as a casualty  Casualty = theft, fire, etc. o Capitalized asset cost  All expenditures necessary to acquire asset and put it to its intended use  Anything but the cost of repairing damage o Damage is never necessary  Cost of asset + total capitalized asset cost is recorded as the total for the asset on the balance sheet  Purchase price is only beginning of cost  Costs include these:  Delinquent taxes o Guy who owned the property before you skipped out on taxes and now you have to pay them  Land improvement costs o Something sitting on the land  Parking lot, shrubbery  Proceeds/refunds o Negative numbers affecting other costs  Salvaged parts from destroyed building o Expenditures made after acquisition  All classified as either asset on balance sheet or expense on income statement  Capital expenditure  Asset on balance sheet  Improves or extends life of asset o Something new is added  Revenue expenditure  Expense on income statement  Maintenance or repair o Depreciation  Expense of cost reflecting use of asset  Does NOT reflect market value  Land is not depreciable  Does not use cash o Ups a contra asset, which downs a regular asset  Deferred expense o 2 types of depreciation  Physical  Wear and tear  Functional  Obsolescence  Important terms  Cost o All expenditures necessary to acquire asset and put it to its intended use  Useful life o Estimated number of years business will use it o Estimate is based off actual times  Residual value o Amount expected to be received at end of asset’s useful life when it is disposed of  Depreciable cost o Total we can expense over useful life of asset o Cost – residual value  Depreciation expense o Annual amount used  Accumulated depreciation o Contra asset o Total amount of asset used to date  Book value o What’s left to be used of asset o Cost – accumulated depreciation  2 ways to calculate depreciation  Straight-line depreciation o Depreciation is spread evenly over asset’s entire useful life o Annual depreciation = (depreciable cost)/useful life o Depreciation expense will be the same amount every year (except for partial years) o At end of useful life  Accumulated depreciation = depreciable cost  Book value = residual value  Double declining balance depreciation o Accelerated method o Expense all depreciable cost over whole useful life, but more of it is expense in the early years and less in the later years  Frontloading  Benefit is having smaller expenses in later years when revenue is less o Annual depreciation = 2 x (book value)/useful life  In first year, book value will be actual cost of asset o Before halfway point, expense will be more than straight-line o After halfway point, expense will be less than straight-line o Last year will always be weird  In last year, accumulated depreciation MUST equal depreciable cost, no matter what the calculated depreciation expense is o Each year is a separate calculation  Annual depreciation expense accounts for 12 months of depreciation o If you didn’t own it for a whole year (e.g. if you bought it in July and the year ends in December), adjust it for the number of months you owned it o If a whole year isn’t expense in the first year, the remaining depreciable cost of the asset must be expensed in a final mop-up year  EOP adjustment o Recorded as up depreciation expense, up accumulated depreciation o Deferred expense o What happens when you get rid of a fixed asset?  Record either gain or loss  Gain = other income  Loss = other expenditure o “Other” because they do not occur regularly  Steps in recording fixed asset disposal  Catch up on depreciation from the end of the previous period (partial year)  Record disposal o Increase in cash or other asset receipt  Increase what you got  Decrease what you gave  Both asset and accumulated depreciation are decreased o Increase gain or loss  Compare what you got with what you had  If what you got is more than what you had, it’s a gain, which is revenue  If what you got is less than what you had, it’s a loss, which is an expense Liabilities & Stockholders’ Equity  Debt financing o Liabilities o Borrowing from creditors and lenders o Most expensive way to do anything  Creates liability (principal) plus additional cost of interest  Equity financing o Equities o Selling pieces of ownership to owners and investors o 2 pieces  Stock issued  Dilute control of business by creating new owners o New owners expect return on investment  Capital appreciation o Increase in market price per share of stock  Dividends o Returns on investment paid to owners  Retained earnings  No new liabilities or owners  No additional costs  Business keeps own earnings and self-finances assets o Least expensive way to acquire assets  Leverage o Good leverage  Borrow at low rates and use funds to earn at high rates o Bad leverage  Borrow at relatively high rates and use funds to earn at low rates  Notes payable o Amounts owed by business under contract  Exactly like notes payable, but is a liability instead of an asset  We’re borrowing this time  Current liability if due within one year of issue  if note is issued/given/signed, we are the BORROWER  EOP adjustment for interest  Up interest payable, up interest expense o Accrued expense  Once you pay the note  Down cash, down note payable, down interest payable  Contingent Liabilities o Amounts the business MAY owe in the future  Could happen, but not 100% guaranteed  ONLY record if future event is PROBABLE and amount is ESTIMABLE o Example  Warranty  Promise to repair something  Goods are issued with warranties o It is PROBABLE some of them will need repair o Businesses CAN estimate cost of repairs  Amount is calculated on sales of item with warranty o Recorded as up warranty payable, up warranty expense  Cost of selling goods with warranty  if you don’t sell goods with warranties, you don’t need to record this  Bonds Payable o Long-term liabilities  Always long term because amounts are usually very large  Principal, term, and maturity date have the same definitions  Par o Another word for the face value of the bond  Interest o Calculated in the same way, but interest on bonds is paid every 6 months  If we issued the bond, we are the borrower  On date of issue o Recorded as up cash, up bonds payable  180 days (6 months) later o Interest is paid o Recorded as down cash, up interest expense  You actually pay it, so it doesn’t go into a payable  When the year ends before the next 180 days have passed o Recorded as up interest expense, up interest payable  Accrued expense  Next payment after the year end o Down cash, down interest payable, up interest expense  What happens at the end of the term o Last bit of interest is paid  Down cash, up interest expense  Down cash, down bonds payable  Equity o Retained earnings is the only way to get assets without any added responsibility o Creating owners  Stock is ownership of company  Owners/stockholders/investors obtain rights in company o Right to vote at annual meeting  The more shares you own, the more votes you have o Right to receive dividends o Right to payment in case of liquidation  2 types of stock o Preferred and common  Preferred get dividends first, common get leftovers  In case of liquidation  All debt is first paid off, then preferred stockholders get excess, and if there is anything left after that, it goes to common stockholders  After stock is bought from corporation, stockholders can buy and sell their shares any time they want o Stock market  Terms  Par value o Legal value of a share of stock o Amount set when business decides to start selling stock but before they have sold any o Number is made up and means nothing  Market price o Actual price at which share of stock is purchased o Changes over time and reflects investors’ feelings  Not set rationally  If opinion of company goes down, market price goes down  E.g. if a company’s CEO’s is discovered to be a murderer, stock prices will go down  Authorized o Shares available for sale o What has been offered  Issued o Shares sold  Outstanding o Shares issued and still in the hands of stockholders  Treasury o Shares issued and repurchased by corporation o Issued = treasury + outstanding  Paid-in-capital in excess of par o The amount above par that we received for a share of stock  Total paid-in-capital in excess of par = (number of shares issued) x (amount above par received) o GAAP requires excess line for the difference  There is no difference between issuing common stock and preferred stock  Only difference is dividends and liquidation  Corporations will also take assets other than cash in exchange for stock o Treasury stock  Shares of stock that are bought back by the company  Recorded at market value  Par value does not matter when repurchasing stock, only when selling  Contra equity  Reduces overall equity (subtract it)  3 reasons companies repurchase stock  Concentrate voting control o Issuing stock dilutes voting control  Make shares available for employee stock programs  Attempt to affect stock price o Law of supply and demand  When supply shrinks, price should increase  Dividends o Share of corporate profits distributed to stockholders o 3 important dates  Date of declaration  Corporation says that they will pay dividends and incurs liability for them  Journal entry is up dividends, up dividends payable  Date of record  About 1 month later  Cutoff date o Everyone who wants dividends needs to own stock by this date  No journal entry because all that happens is the names of people receiving dividends are put in a list  Date of distribution  About 1 month after date of record  Dividends are actually paid o Journal entry is down dividends payable, down cash o Preferred stockholders have a guaranteed rate they will receive  Can be listed as dollar amount or percentage of par  Common stockholders get excess  This is the maximum amount preferred stockholders will receive  If total amount of dividends paid is not enough to satisfy this amount, the total will be divided evenly among all preferred stockholders and common stockholders will get nothing o Divide dollar amount by number of shares to get dividends per share o 3 important ratios  Earnings per share  Maximum amount common stockholders COULD receive in dividends if business retained none of its earnings o They will not receive this amount, nor do they want to  Calculation o (net income – preferred dividends)/outstanding common shares  Dividend yield  Rate of return on investment  Calculation o (dividends per share of common stock)/ (market price per share of common stock)  Represents rate of return investors will earn from owning a share of a corporation’s common stock o Investors want to know this before they invest  Price-earnings ratio  Most-used ratio  What people are willing to pay for $1 of a company’s earnings  Calculation o (market price per share of common stock)/ (earnings per share on common stock)  Shows how much people believe in company o Represents number of years company is expected to continue earning at the current level


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