New User Special Price Expires in

Let's log you in.

Sign in with Facebook


Don't have a StudySoup account? Create one here!


Create a StudySoup account

Be part of our community, it's free to join!

Sign up with Facebook


Create your account
By creating an account you agree to StudySoup's terms and conditions and privacy policy

Already have a StudySoup account? Login here

Final exam review

by: Evelin Notetaker

Final exam review ACCT 2331

Evelin Notetaker
GPA 2.5

Preview These Notes for FREE

Get a free preview of these Notes, just enter your email below.

Unlock Preview
Unlock Preview

Preview these materials now for free

Why put in your email? Get access to more of this material and other relevant free materials for your school

View Preview

About this Document

This is the final study guide for accounting.
Acct Principles I
Kiran M Parthasarathy
Study Guide
final review accounting
50 ?




Popular in Acct Principles I

Popular in Accounting

This 48 page Study Guide was uploaded by Evelin Notetaker on Saturday December 5, 2015. The Study Guide belongs to ACCT 2331 at University of Houston taught by Kiran M Parthasarathy in Summer 2015. Since its upload, it has received 118 views. For similar materials see Acct Principles I in Accounting at University of Houston.


Reviews for Final exam review


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: 12/05/15
Acct 2331 Final Exam Chapters 1-3 Proprietorship-single owner -cannot have investor -personally liable for debts Partnership two more people owners -unlimited liability Corporation under state law -money can be given from public (stockholders) can help expand -disadvantage double taxation corporate and income Accountants measure financing, investing, operating Financing- owners stockholders equity and lenders Investing- assets, purchase sale Operating- revenues and expenses Accounting Equation - ???????????????????????? = ???????????????????????????????????????????? + ????????????????????ℎ???????????????????????? ????????????????????????   -Stockholders’ Equity= Common Stock + Retained Earnings -Retained Earnings= Beginning RE +Net Income –Dividends -Liquid Asset-cash -Fixed assets- land equipment -Liability amount owed to lenders -Stockholders’ equity- common stock and retained earnings -Retained earnings (Opening balance retained earnings+Revenues –Expenses – Dividends) Profit= revenues- expenses Four Financial Statements -income statement reports revenues and expenses shows profit -States of Stockholders’ Equity commons stock and retained earnings -Balance Sheet shows position of company • Based on accounting equation (Assets, liabilities, Stockholders’ Equity) -Statement Cash Flows based on operating, investing and financing cash flow Financial Accounting Information - Generally Accepted Accounting Principals known as GAAP rules and processes that accountants follow - All companies need to follow same rules in order to be compared to each other - Financial Accounting Standards Boards known as FASB writes GAAP - FASB is an independent private sector - Securities Exchange Commission (SEC) enforces GAAP - Auditors independent party that verifies that GAAP is being followed Accounting Assumptions - A company is an entity that the assets of the owner is separate from the company - Going concern that a company will be running indefinitely unless other information proving it won’t - Periodicity cycle that accounting provided is 12 month period -There is some leniency and company can choose cycle best for them - Monetary Unit there has to be one monetary unit that can be compared across to know the worth of the assets -The unit is that as stable and does not account for inflation - Historical Cost is the original cost or value of the company -This is not the market price since the market price is volatile Transactions - External transactions are conducted with separate economic entity -Selling, purchasing, borrowing and paying salaries - Internal transactions are events that affect financial position of company -Do not include exchange with separate entity - There are six types of accounts: Assets, Liabilities, Stockholders’ Equity, Dividends, Revenues and Expenses - Dividends are distribution to stockholders - Expenses are costs of selling products or services § rent expense, salaries expense, utilities expense - Assets are resources owned § land, supplies, cash, equipment, building, prepaid rent, accounts receivable - Liabilities are amounts owed § accounts payable, notes payable, salaries payable - Stockholders’ equity are owners’ claims to resources - Revenues are amounts earned from sales of products or services § interest revenue, service revenue Debit vs. Credit - Left side of accounts is debit - Right side of accounts is credit - Not like debit and credit card it is a different concept - Sides need to balance one side reflects the other Accounting equation questions make sure to only see what is relevant there maybe extra DEALOR memorize for exam - Debits DEA - Credits LOR - D-Dividends increase debit decrease credit - E-Expenses increase debit decrease credit - A-Assets increase debit decrease credit - L-Liabilities increase credit decrease debit - O-Owners’ (Stockholders’) equity increase credit decrease debit - R-Revenues increase credit decrease debit Recording Transactions - Transactions must be recorded - Accountant analyzes transaction see if it is revenues or expenses - Journal Entry contains description date of account and credit or debit - Journal Entry format Debit name Debit Amount Credit name Credit Amount -Debit is always before credit - Double entry equation balanced and there is a credit and debit that occurs - Examples of transactions pages 59-67 make sure to go over these for the exam -There are examples that assets exchange for one another example cash for land -There are examples where there is no journal entry required since there is no transaction (no service/expense) -Issue common stock necessary to issue stock certificates T-account ledger - Post transactions for account - Debit left, credit right - Take difference to balance - Keep cash separate Example steps accounting equation Accounts Balances Land $12000 Equipment 15000 Salaries Payable 5000 Notes Payable 10000 Supplies 3700 Cash 8700 Stockholders’ Equity X Accounts Payable 2100 Prepaid Rent 3600 What is the total of assets? Land, equipment, supplies, cash, prepaid rent: 12000+15000+3700+8700+3600=43,000 What is the total of liabilities? Salaries payable, notes payable, accounts payable: 5000+10000+2100=17100 What is the total of Stockholders’ Equity? Assets= Liabilities + Stockholders’ Equity 43000= 17100 +X X=25900 Example of trial balance Cash $5000 Dividends $800 Salaries Payable 900 Rent Expense 2,050 Prepaid Rent 600 Accounts Receivable 4,500 Accounts Payable 2000 Common Stock 4,700 Retained Earnings 4,450 Service Revenue 4,900 Salaries Expense 1,800 Advertising Expense 2,200 Trial Balance Accounts Debit Credit Cash $5,000 Salaries payable 900 Prepaid rent 600 Accounts payable 2,000 Retained earnings 4,450 Salaries expense 1,800 Dividends 800 Rent expense 2,050 Accounts receivable 4,500 Common stock 4,700 Service revenue 4,900 Advertising expense 2,200 Totals $16,950 $14,500 Example business transactions and corresponding journal entries November 2 Pay $700 for radio advertising for February. November 7 Purchase beauty supplies of $2,200 on account. November 14 Provide beauty services of $3,400 to customers and receive cash. November 15 Pay employee salaries for the current month of $600. November 25 Provide beauty services of $500 to customers on account. November 28 Pay utility bill for the current month of $100. Date General Journal Debit Credit 1) November 2 Advertising expense 700 Cash 700 2) November 7 Supplies 2200 Accounts payable 2200 3) November 14 Cash 3400 Service revenue 3400 4) November 15 Salaries expense 600 Cash 600 5) November 25 Accounts receivable 500 Service revenue 500 6) November 28 Utilities expense 100 Cash 100 Place ledger into T-accounts some example of previous ledger Advertising expense 1) 700 Bal. 700 Cash 3) 3400 700 1) 600 4) 100 6) Bal. 2000 It is important that for the balance it is of difference of debits and credits Cash Basis Accounting - Record revenues when you receive cash - Record expenses when you spend cash - This basis is not accepted by major companies and GAAP Accrual Basis Accounting - Basis required by GAAP - Record in period when revenues earned - Company records revenue when it sells product and provides service - Known as revenue recognition principal - Record expenses with related revenues - Record period with revenue you try to generate - Implied cause and effect - Expenses for supplies is when they are used - Known as expense recognition or matching principal Revenue Recognition examples - June 17 customer orders service - June 29 company performs service on account - July 7 customer pays cash owed for service - Entry date is June 29 since according to revenue recognition principal - Accounts receivable (asset) debit - Service Expense (expense) credit Expense Recognition Examples - April 10 company orders office supplies - April 25 company receives and uses office supplies - May 7 company pays for supplies purchased - Entry date is April 25 according to matching principal when used - Supplies expenses (expense) debit - Accounts payable (liability) credit Accrual versus cash basis - Accrual foretells future payments that will be paid - Also indicates future cash flows Adjusting entries is an internal transaction - No money going out - Accounts for events not yet recorded Three types of adjusting entries - Deferrals receive gain first and gain benefit first • Prepaid expenses is an asset as the expense is paid off before incurred • Unearned revenues cash entering is a liability since service needs to occur - Accruals benefit occurs after and gain occurs after • Accrued expenses accounts payable • Accrued revenues account receivable - Depreciation is a long term deferral • Accounts for obsolesce • Format is depreciation expense debit accumulation depreciation credit Trial balance • Main function is to check that debits and credits balance • This doe not mean that its correct • It is possible to miss an entry completely • Also accounts can be switched to credit instead of debit and vice versa • Assets do not equal liabilities plus stockholders’ equity § Stockholders’ equity has not been updated Income statement: includes revenues and expenses - Revenues: service revenue - Expenses: salaries, supplies, and utilities - Net income is the bottom line this show how the company is doing - A negative number shows a net loss - Single-step income statement is just revenues – expenses • List all revenues together • List all expenses together - Multi-step income statement explains in detail expenses and revenues Statement of Stockholders’ Equity - Has two main components common stock and retained earnings - Common stock is external transactions - Retained earnings are internal transactions Balance Sheet - Has three components assets, liabilities and retained earnings - It is basically the accounting equation Classified Balance Sheet - Assets and liabilities are classified as short vs long term - Current assets can be converted to money better known as liquid cash, accounts receivable - Long term assets are fixed and not expected to change soon like equipment, land - Intangible assets are copyrights, patents, trademark - Current liabilities are anything with the word payable and unearned revenue - Long term debts will not be paid off quickly Closing step is the process of “zero out” for revenues, expenses and dividends Temporary versus Permanent Account - Temporary is based only on a certain period of time not life - Temporary accounts are closed and transferred to retained earnings - Examples of closing out - Service revenue of $8000 Retained earnings $8000 Service revenue $8000 Notice that revenue is credited and retained earnings is debited - Salaries expense $12000 Salaries expense $12000 Retained earnings $12000 Notice that expense is debited and retained earnings is credited - Dividends $ 19000 Dividends $ 19000 Retained earnings $19000 Notice that dividends is debited and retained earnings is credited - Balances of revenues, expenses and dividends after closing become zero - Revenues and expenses together are net income and if positive increase retained earnings if negative it decreases retained earnings - Dividends decrease overall retained earnings Post- closing trial balances is after the temporary accounts have been closed Financial ratios allow you to read into the company - Networking ratio allows you to check liquidity of the company • Current assets – current liabilities • You want this number to be higher - Current ratio shows whether a company can easily pay off their debts • Current assets/ current liabilities • Higher ratio means that a company is a lower risk • Less than one is a bad sign - Debt ratio show debt resources • Total liabilities/ total assets • Higher ratio means a higher risk • Way to check overall debt - Compare similar industries • Check ones with healthier ratios Accounting cycle Transaction takes place Analyze the transaction and identify the effect on the accounting equation Record journal entries Post entries to T-accounts and ledgers Prepare trial balance Record adjusting entries Prepare adjusted trial balance Prepare financial statements Record closing entries Prepare post-closing trial balance Adjusting entries examples Suppose a customer rents a vehicle for six months from Andres Rental on August 1, paying $6,000. Date Journal Entry Debit Credit August 1 Cash 6000 Unearned revenue 6000 December 31 Unearned revenue 5000 Service revenue 5000 Adjusting entry for interest example On August 31, 2015, Shocker borrows $50,000 from a local bank. A note is signed with princirestand 7% inte to be paid on August 31, 2016. Date Journal Entry Debit Credit December 31 Interest expense 3500 Unearned revenue 3500 Although the note isn’t due until the next years the interest is an expense that needs to be accounted for. This is an example of closing accounts for adjusted trial balance Accounts Debit Credit Retained Earnings $17,000 Dividends $2,300 Service Revenue 35,000 Interest Revenue 1,300 Salaries Expense 7,300 Rent Expense 5,300 Advertising Expense 6,300 Depreciation Expense 8,300 Interest Expense 4,300 Date Journal Entry Debit Credit December 31 Retained earnings 36,300 Service revenue 35,000 Interest revenue 1,300 December 31 Salaries expense 7,300 Rent expense 5,300 Advertising expense 6,300 Depreciation expense 8,300 Interest expense 4,300 Retained earnings 31,500 December 31 Dividends 2,300 Retained earnings 2,300 What is the total of retained earnings? Beginning retained earnings +revenue –expenses – dividend = retained earnings 17000 + 36300 – 31500 – 2300= 19500 Chapter 4 Fraud intentionally deceives Accidental errors are not fraud Three elements to fraud: - Motive- feel need to commit fraud - Rationalization- justification of actions - Opportunity- situation allows fraud Internal controls prevent fraud Biggest accounting scandal - 2001 when Enron found to ‘cook the books’ - Interacted with auditors bribing them overlook problems - Abused revenue recognition Sarbanes-Oxley Act passed in 2002 correct issues - Managers/corporate held responsible for internal controls not just auditors - Consultants cannot be internal auditors - Need to document internal control and procedures Framework Internal Control - Safeguard company’s assets - Improve accuracy/ reliability accounting info - Control environment (ethical tone) - Risk assessment- risk factor analyzed - Control activities- directives carried out - Monitoring- reporting deficiencies Internal control susceptible: - Collusion- 2 or more people circumvent internal controls - Top-level people who override control Cash highly susceptible Two forms of internal cash controls - Bank reconciliation - Petty cash fund Bank reconciliation recognizes that bank and company book are not the same and there might be some timing differences Bank side reconciliation - Deposits outstanding- money company has received need to be added - Checks outstanding- money company has used needs to subtracted - Bank errors depending on error needs to be added or subtracted Company book side of reconciliation - NSF(non sufficient funds) check bounced needs to subtracted - Interest revenue earned needs to be added - Service charge needs to subtracted - Bank collections needs to be added ( notes received) - EFT(electronic funds transfer) receipts need to be added payments subtracted - Book errors need to be added or subtracted Example unadjusted bank balance 7250. Note received 1200, interest 65, NSF 250, Service Fee 45 General ledger 7250 Note collected 1200 Interest earned 65 NSF check (250) Service fees (45) Company balance reconciliation 8220 Journal entries Cash 1265 Note receivable 1200 Interest revenue 65 Service fee expense 45 Account recv 250 Cash 295 Petty Cash Fund - Simple cash the company uses for minor purchases - First need to establish amount - Any charges need to recorded - Petty cash fund needs to constantly be replenished - Example cash fund 300 dollars. Charges of the month supplies 50, entertainment 25, delivery 65 Supplies expense 50 Entertainment expense 25 Delivery expense 65 Petty cash fund 140 Petty cash 140 Cash 140 Chapter 5 - Assets side of the balance sheet • Cash, short-term investments, accounts receivables - Account receivables is the amount owed to a company - Record account receivables on balance sheet at net realizable value - Short-term investments • Expected to mature within a year • Value at market value • Risk capital loss • Three categories: trading, available for sale, held to maturity - Journal entry for market value increase Investment stock (debit) Unrealized gain investment (credit) - Credit sales are sold today and expect payment later • Services on account • Typically supported by invoice • Due to pay by 30-60 days - Company holds legal right to receive cash as represents asset to company - Net revenues = total sales – (returns + allowances + discounts) Example Total sales= 750000 Sales discounts= 20000 Sales returns= 35000 Allowances= 25000 750000 – (20000+35000+25000) = 670000 - Trade discounts are reductions listed price • Can help disguise price from competitors Entry Accounts receivable 320 Service revenue 320 (Make credit sales 400 with 20% discount) - Sales return- returning product - Sales allowance is a partial refund Sales allowance 50 Accounts receivable 50 This is a contra revenue since it does the opposite of revenue to the assets - Sales discount is a reduction in the amount paid • Example 2/10n/30 • 2% if paid in 10 days if not pay in full 30 days • This is a contra revenue - Net realizable value is the amount a firm expects to be paid - Uncollectible accounts also know as bad debts • Amount no longer collectible • Need to report this so that investor sees the real amount - Allowance method accounts for uncollectible • It is an estimate but has not occurred yet • Contra assets reduces accounts receivable indirectly - Percentage of receivable method • Based on previous year • For new companies they need to see competitors • Balance sheet method • Adjusts for the next year • Reflects impact on financial position Example Accounts receivable $22500 company estimates 12% will not be collected. 22500 X 0.12=2700 Bad debt expense 2700 Allowance for uncollectible assets 2700 - Aging method basically old versus new • Older accounts less likely to collect • Apply percentage based on time overdue • More accurate than percentage method since based individual accounts Example Accounts Receivable 60000 Allowance for Uncollectible Accounts 1200 (credit) aging following Not yet due 40000 10% 0-30 days past due 10000 15% 31-90 days past 7000 45% More than 90 3000 85% Estimate not yet= 40000 X 0.10= 4000 Estimate 0-30= 10000 X .15= 1500 Estimate 31-90= 7000 X .45= 3150 Estimate past 90= 3000 X .85= 2550 Total= 10900 Bad debt expense= New- Old 10900-1200=9700 Bad debt expense 9700 Allowance for uncollectible accounts 9700 Allowance for uncollectible= 10900 ????????????  ???????????????????????????????????????? = ????????????????????????????????  ???????????????????????????????????????? − ???????????????????????????????????? - Writing off accounts receivable • When you know that no payment will be made • No effect on balance or income statements • Already accounted for bad debts with allowance Write off Allowance uncollectible 4000 Accounts receivable 4000 (Write off customer’s account) - There is a possibility to collect from a written off account • This has no effects on assets or income Accounts receivable 100 Allowance uncollectible 100 Cash 100 Account receivable 100 - Estimating uncollectible for following year • Credit new balance before adjustment when previous year amount is too high • Debit new balance before adjustment when previous year amount it too low Example before adjustment Accounts receivable 45000 Allowance for Uncollectible Account 1100(credit). Uncollectible accounts estimate 10% 45000 X 0.10= 4500 debit credit 1100 so 4500-1100= 3400 Bad debt expense 3400 Allowance for uncollectible accounts 3400 Income statement bad debt expense 3400 Allowance for uncollectible accounts 4500 Net realizable value= Total accounts receivable – Allowance 40500= 45000-4500 - Note receivable is more formal than accounts receivable • It is an explicit statement that includes interest charge Example receiving payment Cash 10600 Note receivable 1000 Interest revenue 600 ▯▯▯  ▯▯▯▯▯▯  ▯▯▯▯▯ - ????????????????????????????????????????  ????????????????????????????????  ???????????????????? =   ▯▯▯▯▯▯▯  ▯▯▯▯▯▯▯  ▯▯▯▯▯▯▯▯▯▯ ▯▯▯  ▯▯▯▯ - ????????????????????????????  ????????????????????????????????????????  ???????????????????????? = ▯▯▯▯▯▯▯▯▯▯  ▯▯▯▯▯▯▯▯  ▯▯▯▯▯ ▯▯▯▯▯▯▯  ▯▯▯▯▯▯▯▯▯▯▯ - ????  ???????????? ????  ????????????????  ????????  ???????????????????????????????????????????? =   ▯▯▯▯▯  ▯▯▯  ▯▯▯ - ????????????????  ???????????????????? = ▯▯▯▯▯▯▯▯▯▯▯▯  ▯▯▯▯▯▯▯▯▯▯▯ ▯▯▯▯▯  ▯▯▯▯▯▯▯  ▯▯▯▯▯▯▯▯▯▯▯ Chapter 6 - Manufacturing or merchandising companies ear revenue from selling inventory - Inventory falls under current assets on the balance sheet • Not sale price • Cost of inventory - Cost of goods sold (COGS) • Is reported on the income statement totals the cost of inventory sold • Sale of products not services - Merchandising companies are those that purchase finished goods • They resale to customers • Do not manufacture the goods • Can be wholesalers or retailers • Categorize goods as inventory - Manufacturing companies create products • They buy inputs to make products • Three categories: raw materials, work-in-process, and finished goods • Raw materials is what is used to create product • Work-in-process is started but unfinished good • Finished goods are when the manufacturing process is complete • This is shown on the balance sheet Beginning inventory + Purchases= Total inventory Total inventory – Ending Inventory= Cost of Goods Sold (COGS) Total revenues –total expenses= net income Net income= Gross profit – operating expenses Gross profit= Sales revenue – COGS - Single step income statement consists of this equation - Multiple-step income statement • Multiple levels of income • Shows revenues and expenses categorized as activities • Useful in determining source of company’s profitability - Sales revenue is sales inventory • Sales revenue= quantity of goods sold X price - Net sales= total sales revenue – (sales discounts+returns+allowance) - Inventory cost methods • Specific identification • First in, First Out FIFO • Last in, Last out LIFO • Weighted average cost • The last three assume a particular pattern - Specific Identification method • Matched each unit with a price • Used for unique expensive products • For low sales volume - FIFO • First items purchased are the first to be recorded as inventory sold - LIFO • Last units purchased are the first items to be recorded as purchased - Weighted Average Cost • Random mixture of all goods • Cost of goods available for sale/# units available for sale Examples for all 3 purchase 410 unit Number Unit Date Transaction of Units Cost Total Cost Jan. 1 Beginning inventory 44 $ 30 $ 1,320 Apr. 77 Purchase 120 34 4,080 Jul. 15 Purchase 190 38 7,220 Oct. 10 Purchase 100 40 4,000 454 $ 16,620 FIFO Cost of Goods Available for Sale Cost of Goods Sold Ending Inventory # units $/unit $$ # units $/unit $$ # units $/unit $$ Beginning Inventory 44 $30 $1,320 44 $30 $1,320 0 Purchases: Apr. 7 120 $34 4,080 120 $34 4,080 0 Jul.16 190 $38 7,220 190 $38 7,220 0 Oct.6 100 $40 4,000 56 $40 2,240 44 $40 1,760 Total 454 $16,620 410 $14,860 44 $1,760 LIFO Cost of Goods Available for Sale Cost of Goods Sold Ending Inventory # units $/unit $$ # units $/unit $$ # units $/unit $$ Beginning Inventory 44 $30 $1,320 0 $30 $0 44 $30 1320 Purchases: Apr. 7 120 $34 4,080 120 $34 4,080 0 Jul.16 190 $38 7,220 190 $38 7,220 0 Oct.6 100 $40 4,000 100 $40 4,000 0 Total 454 $16,620 410 $15,300 44 $1,320 Weighted average = Cost of goods available for sale/ # units Avg/ unit= 16620/454=36.608 Weighted Cost of Goods Available for Sale Cost of Goods Sold Ending Inventory # units Avg/unit $$ # units Avg/unit $$ # units Avg/unit $$ Beginning Inventory 44 $1,320 Purchases: Apr. 7 120 4,080 Jul.16 190 7,220 Oct.6 100 4,000 Total 454 36.608 $16,620 410 36.608 $15,009.28 44 36.608 $1610.8 - When inventory costs are rising FIFO is the best option because • Higher ending inventory • Lower cost of good sold • Higher reported profit - FIFO is balance sheet focused • Better approximate cost of inventory - LIFO is income sheet focused • COGS matches current costs - Choose LIFO for tax savings • Lowest reported profits • Owe less taxes since less income - Free on board (FOB) • Buyer accepts all responsibility shipping costs - FOB destination • Seller takes care of shipping cost - Inventory systems • Perpetual keeps a running total and facilitated updating • Periodic is no longer used only for inexpensive goods updates once in a while - Gross profit ratio • Gross profit/net sales • Want a higher number - Inventory turn over ratio • COGS/average inventory • Want a higher number - Average days in inventory • 365/Inventory turnover ratio • want a lower number - Lower cost or market value • Report on balance sheet lower of two amounts between the cost or market value Inventory Quantity Cost Market Furniture 265 $ 95 $ 107 Electronics 57 455 328 Furniture choose cost at 95 Electronics choose market at 328 • If the market value is chosen an adjustment has to be made such as if the cost was $29 dollars a unit but the market value is now $20 unit for 15 units the adjustment is Cost of goods sold 135 Inventory 135 ($135= 15 quantity x $9 decline in market below cost) Chapter 7 - Two categories: • Tangible- land, land improvements, equipment, etc. • Intangible- patents, trademarks, copyrights, etc. - Property, plant, equipment • Record cost of the land requires the purchase price of the land plus any expenditures to get the land ready for use • Expenditures include back taxes, attorney fees, demolition, cost assessment, sale salvage parts Purchase land 350000 Pay 3 years back taxes 8000 demolish building 10000 setup fence 2500 Total cost is 368000 including everything needed to use the land but improvements are separate - Allocating costs • Derived benefits incur costs • Similar to matching principal - Depreciation is the cost over lifetime - Land does not depreciate price infinite - Basket purchase of assets • Buying multiple assets at once • Have to record in separate accounts • Based on share values, value each at appraisal estimate • Appraisal/ Total appraisal x negotiated price = allocated price • Debit each and credit cash payment - Depletion of natural resources when you use up resources - Intangible assets have no physical substance two options • Purchase assets, copyrights • Create internally and have protective patent - Report intangible assets • Original cost plus other fees • Expense income statement incurred costs - Patent is right to manufacture or process - Copyright is protection to creator - Trademark are words, slogan, symbol - Goodwill is the value of the whole or worth of company • Based on reputations and expectations of the company • Calculated when acquisition or merger because this is the only time that numbers are accurate • Goodwill debit Asset debit Liabilities credit Cash credit Example Acquired for 40000000 Book Value Fair Value Current assets $ 10,000,000 $ 15,000,000 Property, plant, and equipment 25,500,000 32,500,000 Other assets 2,700,000 3,700,000 Current liabilities 8,000,000 7,100,000 Long-term liabilities 11,000,000 12,000,000 Based on fair value Goodwill 7900000 Current assets 15000000 Property etc 32500000 Other assets 3700000 Current Liab 7100000 Long term Liab 12000000 Cash 40000000 - Capitalize expenditures when they benefit the future of the company • Extensive repairs, additional components - Categorize expenditure as expense when they benefit current period • Simple repairs for example maintenance - Book value= the original cost – accumulated depreciation - Service life is amount of time asset benefits company - Residual value or the salvage value is the end value - Three depreciation methods: • Straight-line • Declining balance • Activity base - Straight-line • Depreciation expense= (asset’s cost- residual value)/ service life • The depreciation is expected to be the same each year • Company should not depreciate residual value • Estimate changes account past depreciation recalculate depreciation expense - Declining balance • Ending total the same as straight-line • Double declining method • Calculate first depreciable cost (cost- residual value) • (1/service life) x 2 = double declining rate (DDR) • Depreciation changes each year starts off high • Keep track of depreciated amount is not more than depreciable cost • Once the DDR is greater than the depreciable cost just plug in the amount that is left - Activity based method • Depreciable cost/ total units expected Example for 3 methods Purchase minivan 38600 Salvage value 6000 Life expectancy 4 years 150000 miles Year one 44,000 miles Calculate annual depreciation Straight line (38600-6000)/4= 8150 Double declining First calculate depreciable value 38600-6000= 32600 total depreciation cannot be greater than this amount (1/4) X 2=.5 (this is DDR)X 38600= 19300 first year if we calculate year 2 (38600-19300) X.5=9650 For the third year you have to plug-in a rate because (19300-9650)X.5=4825 which exceeds the depreciable value year 3 amount is 3650 Year four is zero Activity based (36800-6000)/150000=.217 depreciation per unit year one 44000 X .217= 9548 - GAAP allows 2 methods of depreciation • One can be used for the financial statements • Another for the tax books • This allows a small tax break when they use the accelerated method - Selling older assets • Record depreciation for year • Write off book value • Record gain or loss • Gain is credit, loss is debit Closing  store  have  two-­‐year-­‐old  equipment  that  sold  at  $670,000  originally  cost   $879,000  estimated  service  life  of  10  years  residual  value  of  $69,000    (straight-­‐line)   (879,000  –  69,000)/10=  81000  X  2=  162000  Accumulated  depreciation   Book  value=  879000-­‐162000=717000   Loss  717000-­‐  670000=  47000   Cash 670000 Accumulate Dep. 162000 Loss 47000 Equipment 879000 - Impairment loss • Less than book value • When asset cash flows less than book value • Calculate loss by book value – fair value • Impairment loss debit Asset credit - Research and development classified as an expense - Return on assets • Net income/ average total assets • Want a higher number - Profit margin • Net income/ net sales - Asset turn over ratio Net sales/ average total sales Chapter 8 - Liabilities have three characteristics: • Probable future sacrifices of economic benefits • Present obligations to other entities • Result from past transactions and events - Most liabilities sacrifice cash - Current liabilities are payable within a year - Long-term liabilities are payable over a year - Current liabilities are also known as short-term - Current liabilities occur within an operating cycle • Some companies have operating cycles that are longer than a year so they can have current liabilities that exceed a year - A company prefers to have long-term liabilities because the company appears less risky • Also enjoys lower interest rates • When the company releases new stocks they have higher prices - Examples of current liabilities are: • Notes payable, payroll liabilities, accounts payable, unearned revenue, sales tax payable, current period of long-term liabilities - Notes payable incur interest expense Example a company that borrows 20000 Cash 20000 Notes payable 20000 - Interest is an annual percentage Face value X Interest rate X Fraction of the year Previous example for 10 percent 20000 X .10 X (6/12) - Adjusting entry to account for interest so far Interest expense debit Interest payable credit - When notes payable is paid off Notes payable 20000 Interest expense 500 Interest payable 500 Cash 21000 • Removes notes payable • Records interest expense • Removes interest payable • Reduces cash - Commercial paper is when one company borrows from another • Usually has a lower interest than a bank loan - Accounts payable is owed to a supplier a purchase on an account - Check withholding (employee side) • Federal and state income taxes • Social Security and Medicare • Health/dental/disability/life insurances • Employee investment and savings • Reduces the gross amount of the check - Costs of an employee to an employer • Federal and state unemployment • Employer portion of Social Security and Medicare • Employer contributions to insurances • Employer contributions of retirement and savings • Increases the cost of each employee - Not all states have a state income tax - Federal Insurance Contribution Act or FICA taxes • Social Security and Medicare - Additional benefits like insurances paid by the employer are known as fringe benefits - Credit unearned revenue when service has not be given but paid for - Sales Tax example Cash debit Sales Revenue credit Sales Tax payable credit Account receivable debit Sales credit Sales tax payable credit - Contingencies are uncertain events - Litigation has three options: • Report liability, provide disclosure, provide no disclosure - Whether or not to report disclosure depends on likelihood of payment and ability to estimate amount - Likelihood of payment: • Probable, reasonably estimable, not reasonably estimable - Ability estimate amount • Known, reasonably estimable, not reasonably estimable - Contingent liability recorded if • Loss probable and reasonably estimable Example of entry Loss debit Contingent liability credit - Disclosure is required of the other cases with the exception of : • Remote case - Warranties meet the requirements and need to be recorded • Probable and reasonably estimable Warranty expense debit Warranty liability credit When a customer claims warranty Warranty liability debit Cash credit This decreases warranty liability - Contingent gains are possibility of winning a litigation • Record only when gain is certain - Working capital= current assets – current liabilities • Want a large positive number - Current ratio= Current assets/ Current liabilities - Acid test= (cash + current investments + accounts receivables)/ current liabilities Chapter 9 Long-term liabilities - Debt financing borrowing money - Equity financing additional investment stockholders - Capital structure mixture liabilities stockholders’ equity - Borrow money related taxes - Interest expense borrow money considered tax deductible - Dividends paid to stockholders are not tax deductible - Three sources of long-term debt • Bonds, Notes payable, Leases - Bonds most common corporate debt - Bonds have interest paid over the life of the bond - Interest traditionally paid semi-annually - Large corporate bonds are sold (underwritten) by investment houses - Bond underwriters: J.P. Morgan Chase, Citigroup, Bank of America • Issuing company pays underwritten fee - Private placement- sell single investor - Bond secured versus unsecured • Secure has pledged collateral • Unsecured not backed by assets - Term bonds full principal • End in loan term - Sinking fund- payments each year • Across outstanding debt • Amount available when due - Serial bonds- require installment payments - Corporate bonds callable • Redeemable repay before maturity - Convertible bonds convert each specified share • Sell higher price lower interest - Market interest rate used by investors - Stated interest rate quoted on contract - Calculate price bond with present value - Example Face amount 100,000 Interest rate for 6 months 7% is 3500 10 years semi-annually are 20 terms Calculate present value face table 2 look at i=3.5% n=20 100,000 * 0.50257(number from table)=50,257 Calculate present value interest payments table 4 i=3.5 n=20 3500*14.21240(number from table)=49,743 Sum issue price bonds 100,000 - Annuity series of equal amounts • Over equal time periods - Default risk- company unable to pay • Face amount/ interest payments due - Higher market interest rate lower bond issue price - Discount bonds issue below face value • Raising interest earned by investors - Premium issue price above face • Lowering interest earned by investors - Bonds issued face amount most common practice - Journal entry Cash 100,000 Bonds payable 100,000 First semi-annual Interest expense 3500 Cash 3500 Discount entry Cash 93205 Bonds payable 93205 Bonds payable carrying value Carrying value will increase - Net method including discount and premium • Part carrying value - Gross method record at face value - Interest expense= principal*market interest - Cash paid interest= Face amount * stated interest - Example face 60,000 for 55,000 stated interest 6%, market interest 7% Interest expense 3850 Cash 3600 Bonds payable 250 - Record interest expense- market interest - Amortization schedule provides summary: • Cash paid, interest expense, change carrying value, carrying value - Carrying value reported on balance sheet • Issue date/ final maturity date - Market interest increases market value decreases - Market interest decreases market value increases - Bonds more than face value is at premium • Interest expense: carrying value * market interest • Carrying value decreases over time • Interest expense decreases - Company buys back bonds • Bonds being retired - Bond retirements at maturity • Carrying value at maturity, equals their face amount - Bond retirements before maturity • Early extinguishment of debt • When paid more at a loss • When paid less at a gain • Gain and losses are non-operating items • Interest rate decreases • Company reissue debt at lower rate - Installment notes over years • Each installment payment includes amount interest/ reduction outstanding • Carrying decreases to 0 • Interest expense decreases over time - Lease arrangement lessor provides lease • Right to use asset in period of time - Operating leases like rentals (short) - Capital leases essentially buy assets - Debt equity ratio • Total liabilities/ stockholders’ equity - Debt ratio • Total liabilities/ total assets Chapter 10 Stockholders’ Equity - Invested capital-money paid company by its owners - Articles of incorporation • Nature firm’s business • Shares stocks to be issued • Initial board of directors - Stockholders control company - First stock sold to raise money - Angel investors are wealthy individuals like Shark Tank - Venture capital firms • Provide additional financing • Percentage ownership in company - Go public after 20 million - First time issue stock public • Initial public offering (IPO) - Future stocks issued • Seasoned equity offerings (SEO) - Privately held corporation • Doesn’t allow investment public • Does not file with SEC - Stockholders’ rights • Right to vote • Right receive dividends • Right share distribution of assets - Limited liability lose only what is invested - S corporation has limited liability only one tax - Authorized stocks number available to sell - Issued stock is amount sold - Outstanding stock amount held by investors - Treasury stock is repurchased stock - Par value- per share original - No-par value stock is not assigned par value - Par value journal entry Cash debit Common stock credit Additional paid in credit - Preferred stock • First rights specified amount dividends • Receive preference assets corporation dissolved • Convertible, redeemable, cumulative Cash debit Preferred stock credit Additional paid in credit - Companies repurchase stock • Boost underpriced stock • Distribute surplus cash without paying dividends • Boost earnings per share • Satisfy employee stock ownership plans Treasury stock debit Cash credit - Retained earnings • Normal credit balance • Losses exceed income – debit balance (accumulated deficit) - Dividends- distributions to stockholders - Declaration date- cash dividends paid • Increase liability account - Non-cash asset property dividend - Instead cash- receive stock • Stock dividends or stock splits • Worth half as much equal same in the end - Return on equity • Net income/ average stockholders’ equity - Earnings per share • (Net income- dividends)/Average shares outstanding - Price earning= Stock price/ earnings per share Chapter 11 Cash flow - Statement cash flows • Summary cash inflows/outflows • Operating, investing, financing - Operating activities- revenues/ expenses • Collection cash, salaries, rent, inventory, interests, dividends received, notes payable - Investing activities- long-term assets, current investments • Stocks, bonds, purchase/sale long-term asset - Financing activities- external financing • Borrowing/repaying debt, issuing/repurchasing stock, paying dividends - Income statement provides information operating through expenses and revenues - Balance sheet: operating changes in current assets/ liabilities, investing changes in long-term assets, financing changes long-term liabilities, common stock, retained earnings - Non-cash activities- no change cash, significant for investing and financing Example purchase long-term asset issuing debt Purchase long-term assets by issuing stock - Two ways report cash operating • Indirect/ direct • Both totals equal - Indirect method begin with net income • First adjustment net income • Easier less costly prepare - Direct method • Adjust terms income statement • Directly show cash inflows/outflows - Steps preparing statement cash flows 1. Calculate net cash flows operating 2. Determine net cash flows investing 3. Determine net cash flows financing 4. Combine operating, investing, financing - Basic format Cash Flow Operating Cash Flow Investing Cash Flow Financing Net increase(decrease) in cash Cash beginning Cash ending - Operating changes • Initially add depreciation expense net income, also add amortization • Add back loss, subtract gain • Subtract increase acct recv, add decrease acct recv • Add decrease inventory, subtract increase inventory • Subtract increase prepaid rent, add decrease prepaid rent • Subtract decrease acct payable, add increase acct payable • Add increase interest payable • Subtract decrease income tax - Investing changes • Subtract purchase investments • Add sale land - Financing changes • Add issuance common stock • Subtract payments cash dividends - Cash return on assets • Operating cash flows/ Average total assets - Cash Flow to sales • Operating cash flows/ Net sales - Asset turnover • Net sales/ Average total sales  


Buy Material

Are you sure you want to buy this material for

50 Karma

Buy Material

BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.


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'

Why people love StudySoup

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."

Janice Dongeun University of Washington

"I used the money I made selling my notes & study guides to pay for spring break in Olympia, Washington...which was Sweet!"

Jim McGreen Ohio University

"Knowing I can count on the Elite Notetaker in my class allows me to focus on what the professor is saying instead of just scribbling notes the whole time and falling behind."


"Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

Become an Elite Notetaker and start selling your notes online!

Refund Policy


All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email


StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here:

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.