Acc 200, Exam 2 Study Guide
Acc 200, Exam 2 Study Guide ACC 200
Popular in Foundations of Accounting
verified elite notetaker
Popular in Accounting
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.
Reviews for Acc 200, Exam 2 Study Guide
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
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
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'