Accounting 201 Final Study Guide - Google Docs PDF

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Study Guide for Final Exam in Professor Glassman's online ACCT 201. Really detailed notes containing every topic featured on the exam ...

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Accounting 201 Test #4 Study Guide

Chapter 10 ●

Advantages/disadvantages of corporations

Advantages: -Limited Liability: Stockholders can lose no more money than the amount that they invested. -Ability to raise capital and transfer ownership Disadvantages: -Additional Taxes (Double Taxation: corporate taxation and individual taxation) -More Paperwork ●

Authorized vs. issued vs. outstanding shares

Authorized Stock: Total number of shares available to sell. Stated in Articles of Incorporation. Issued Stock: The number of shares that have been sold to investors. Outstanding Stock: The number of issue shares held by investors. Only these shares receive dividends. Treasury Stock: The number of shares repurchased by the company.

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Advantages of preferred stock Preferred stockholders are preferred for two reasons: 1.

Preferred stockholders generally have first rights to specific amounts of dividends.

2. They receive preference over common stockholders in the distribution of assets in the event that the company is dissolved. Features of Preferred Stock: -

Convertible (can be converted to common stock)

-

Redeemable (can be returned at a fixed price)

-

Cumulative (shares receive priority for future dividends) 

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Cumulative dividends: If dividends are not declared in a given year, they become dividends in arrears, and they accumulate until the company does declare dividends.

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Components of stockholders’ equity section of balance sheet

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What type of account is treasury stock?

Contra Stockholders Account??? Usually SH equity is credited, but treasury stock is debited so it is a contra account. ●

What does retained earnings represent?

All net income since the company began - all dividends since the company began ●

Regarding dividends, what is recorded on declaration date, record date and payment date?

Declaration Date: The date the board of director announces the next dividends will be paid.

Record Date: The date in which the company looks at its records to determine who the stockholders of the company are. Payment Date: The actual date in which the dividends are paid. ●

Stock dividends/stock splits – eect on stockholders’ equity

Stock Dividends: Additional shares of a company’s own stock given to stockholders. -

Total asses, liabilities, par value, and stockholders equity do not change as a result of stock dividend.

-

Stock Dividend increases liabilities

-

Decreased retained earnings

Stock Split: A large stock dividend that includes a reduction in the par or stated value of a share. -

Total stockholders equity, common stock, and retained earnings do not change as a result of a stock split.

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Par value per share decreases as a result of stock split

Components of statement of stockholders’ equity Balance ( January 1) Issue Common Stock Issue Preferred Stock Dividends Purchase Treasury Stock Resell Treasury Stock Net Income Balance (December 31)

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Return on equity

Net Income / Average Stockholders’ Equity ●

Earnings per share

(Net Income - Dividends on Preferred Stock) / Average Shares of Common Stock Outstanding ●

P/E ratio

Stock Price/ Earnings per Share ●

Record issuance of common stock and preferred stock; record purchase of and reissuance of treasury stock ○

Preferred stock: Cash––––––Debit Preferred Stock------Credit Additional Paid-in Capital---Credit

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Common Stock: Cash-------Debit ●

Common Stock-----credit

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Additional paid-in Cap---credit

• Treasury Stock: Treasury stock-----debit Cash-------------------credit  

Chapter 11 ●

Operating vs. investing vs. financing activities

Operating: Cash receipts and cash payments for transactions involving revenue and expense activities during the period. Operating activities include the collection of cash from customers, or the payment of cash for inventory, salaries, and rent.

Investing: Transactions involving the purchase and sale of long term assets and current investments. A company also might invest cash in other assets such as stocks or bonds  of other companies. Financing: Transactions with lenders, such as borrowing money and repaying debt, and with stockholders, like issuing stock, paying dividends, and purchasing treasury stock. ●

Noncash activities

Significant investing and financing activities that do not aect cash. 1.

Purchase of long-term assets by issuing debt 

2. Purchase of long-term assets by issuing stock 3. Conversion of bonds payable into common stock 4. Exchange of long-term assets ●

Prepare statement of cash flows (Indirect method) in proper form ○

Begin with net income and the list adjustments to net income, in order to arrive at operating cash flows. (Need to remove from net income) ●

Non-cash items (depreciation expense), Nonoperating(Loss or gain on sale of land), Changes in current assets and liabilities

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Add back losses and depreciation to remove the loss/depreciation

Comprehensive Material ●

Expanded accounting equation

Assets = Liabilities + Stockholders’ Equity l Common Stock + Retained Earnings l Revenues - Expenses - Dividends

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GAAP

Generally Accepted Accounting Principles ●

Purpose of trial balance

A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equals total credits. It also assists us in preparing adjusting entries. ●

Cash vs. accrual basis accounting

Cash Basis: -

We record revenues at the time we receive cash

-

We record expenses at the time we pay cash

Accrual Basis: -

We record revenues in the period that goods and services are provided

-

We record expenses in the period that costs are incurred to provide said goods and services

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Revenue recognition/Expense recognition/Matching principles

Revenue Recognition: Record revenue in the period in which we provide goods and services to customers. Expense Recognition: Any costs used to generate revenue are recorded as expenses in the same period as those revenues. Matching Principles: The matching principle directs a company to report an expense in the period in which the related revenues are earned. Further, it results in a liability to appear on the balance sheet for the end of the accounting period. The matching principle is associated with the accrual basis of accounting and adjusting entries. If an expense is not directly tied to revenues, the expense should be reported in the

accounting period in which it expires or is used up. If the future benefit of a cost cannot be determined, it should be charged to expense immediately. ●

Deferrals vs. accruals ○

Prepaid Expense: Arise when a company pays cash to acquire an asset  that is not used until a later period (think prepaid rent)

○

Deferred Revenue: A future obligation is a liability or debt created by receiving cash before the service is performed.

○

Accrued Revenue: Occurs when a company provides a service but hasn’t received payment yet (think babysitting, babysit now/paid later, but bc you provide service record payment as if you were paid.)

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Accrued Expense: When a company has used costs in the current period but hasn’t yet paid cash for costs. (creates timing dierence)

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Temporary vs. permanent accounts

○ Temporary: Revenues, expenses, and dividends; at the end of the year transfer each balance to one account. Retained earrings: Zero out temporary

○ Permanent: All accounts that appear in the balance sheet, including retained  earnings (Cash, Accounts payable...etc) will have same balance from one year to the next if unchanged. ●

Calculate COGS under a periodic inventory system

○ The company reports the cost of inventory it sold as cost of goods sold, an expense, in the income statement. ●

FOB Shipping Point vs. FOB Destination:

○ FOB Shipping: When title passes from the seller to buyer when it is SHIPPED ○ FOB Destination: When title passes from seller to buyer upon arrival to buyer destination. ●

Calculate net book value of a long-term asset:

○ Record at its costs plus ALL expenditures necessary to get the asset ready for use. (NBV: Original cost-accumulated depreciation) ●

Calculate depreciation expense, using straight-line method:

○ Straight line: (asset costs–residual value)[aka depreciable cost] / service life ●

Employer payroll taxes vs. employee payroll taxes

○ Employer: FICA tax (7.65%), Unemployment taxes (6.2%), Fringe benefits, ○ EMPLOYEE: Federal and State income taxes, FICA Tax (social security)(7.65) ●

Debt vs. equity financing

○ Debt: Refers to borrowing money from creditors ○ Equity: refers to obtaining investment from stockholders. ●

Bond stated rate vs. market rate

○ Bond stated rate: Referred to as principal or face amount, at a specified maturity date.

○ Market rate: Is an implied rate based on the price investors pay to purchase a bond in return for the right to received lent money and interest. ●

When is a bond issued at face value/discount/premium?

○ Face value: If the stated rate and market rate are equal ○ Discount: If the stated rate is lower than market rate ○ Premium: if the stated is more than the market rate ●

Liquidity vs. solvency

○ Liquidity: Refers to having sucient cash or other assets to pay its current liabilities

○ Solvency: Refers to a company’s ability to pay all its liabilities which includes long-term liabilities as well. ●

Behavior of principal/interest portion of installment note payments over time

○ Behavior: each payment includes both an amount that represents interest and an amount that represents a reduction of the outstanding loan balance

○ (Carrying value X Interest rate)-decrease in carrying value ○

Then carrying value – +decrease or increase in carrying value

○ And so on. ○  ●

Prepare multiple-step income statement, statement of stockholders’ equity and classified balance sheet (use Chapter 10’s format for stockholders’ equity section) in proper form

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