ACCT200 Exam 3 review PDF

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Accounting 200 (Exam 3) FALL SEMESTER 2019 INSTRUCTOR: Mrs. Jordan 

Module 7 - Six Key Accounts 1. Cash and Cash Equivalents (safeguard) a. Most liquid asset, most scarce resource, m  ost susceptible to theft b. Current asset usually presented as first asset on balance sheet c. Breakdown in form of footnote  disclosure on company’s Form  10-K d. U.S. GAAP defines Cash  Equivalents as short-term, highly liquid investments that are readily convertible (3 months or less) to known amounts of cash with insignificant risk of change in value b/c of changes in interest rates e. Require additional  internal controls to protect against theft i.

Ex: register tape, monitoring employees who handle cash, separating duties

ii.

Monthly Bank Reconciliation: resolves differences between b  ank’s & company’s versions of cash in/out 1. Can reveal misappropriation (theft) of cash

2. Short-term and Long-term Investments a. Considered an asset   i.

Short-term if liquidating,  converting to cash in less than a year ( 12 months)

b. Puts idle  cash to use at risk  levels determined by management c. Generates a return   i.

Interest Revenue: from loans/bonds

ii.

Dividend Revenue: from corporate stock investments 

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  iii.

Gain on Sale (investing and selling for a higher price)

d. May be used to develop strategic alliances i.

Vertical/Horizontal Integration such as Coca Cola or PepsiCo

ii.

Shared Resources: management, tech, production

3. Accounts Receivable and the Accounting for Bad Debt (owed, must account for uncollectibility) a. Monies owed  by  customers who did NOT pay cash at purchase (extending credit) i.

Paying with credit cards

ii.

Purchasing “on account”

b. Current Asset u  sually due within 30-90 days (company expects cash within 90 days) c. Strategic Decision: cash flow & risk d. Must account for uncollectible  accounts (amounts not collected) i.

Net Realizable Value: balance of accounts receivable company expect to collect 1. Accounts Receivable balance minus estimated uncollectible amounts (Doubtful Accounts)

ii.

Manage uncollectible accounts to ensure not  too old (credit policies) 

4. Inventory Tracking using FIFO/LIFO Approach (Cost Assumptions, Lower of Cost/Market) a. Current Assets/goods held  for resale by company b. Requires controls  to protect from theft, misuse, damage, & spoilage c. Must determine ideal  quantity and reorder  points d. Must determine how to determine C.O.G.S (on Income Statement) e. Cost Assumptions (LIFO and FIFO) i.

Last Inventory on the shelf is the First Out ( LIFO) 1. Take the Ending Inventory and subtract it from the amount purchased from the EARLIEST purchase. Then multiply all the purchases by their costs to find C.O.G.S.

ii.

First Inventory on the shelf is the First Out ( FIFO) 1. Take the Ending Inventory and subtract it from the amount purchased from the LATEST purchase. Then multiply all the purchases by their costs to find C.O.G.S.

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5. Accounting for Property, Plant, and Equipment & Depreciation a. Long-term Assets = usually large $$ investment required b. Includes land, buildings, machinery, office equipment, vehicles, furniture c. ALL except  land has to expense over useful life Depreciation: systematic allocation of the cost of an asset over the periods during

i.

which the company uses the assets (not reflection of market value) 1. Cost: historical cost of the asset (what they paid for it) 2. Useful Life: estimated # of years business will use the fixed asset 3. Residual (Salvage) Value: estimated amount $ expected to receive at the end of its useful life (when disposed of) 4. Depreciable Costs (portion of goods depreciated) = Costs - Residual Value 5. Depreciation Expense: amount of asset cost expensed each year 6. Accumulated Depreciation: total depreciation expense recorded for asset 7. Book Value = Cost (historical cost) - Accumulated Depreciation ii.

Companies use the Straight  Line method to calculate depreciation 1. Depreciation Expense = (Cost - Residual Value) / Useful Life

d. Match expenses to the revenue they create

6. Current and Noncurrent Liabilities a. Liabilities are probable  future sacrifices of economic benefits arising from present obligations to transfer assets to other entities in the future b. A company is considered highly  leveraged if it utilizes significant debt (debt > equity) c. The cost  of debt or borrowed funds is labelled as: i.

Interest Expense (Interest = principal x rate x time) 1. Principal is the amount borrowed 2. Time is 360/360 when finding the expense for one year

d. If a company receives a good  or service in advance of the bill, the amount is an accrued  expense, meaning it is owed but not yet paid e. If a company receives payment for good or service that has NOT yet delivered or performed, the amount received is recorded as u  nearned revenues f.

Classified as CLO i.

Current Liabilities (short-term & due/payable 12 months) 1. Usually offset long-term assets a. Don’t use a credit card to buy a house b. Don’t use a 15-year note to purchase a year of supplies 2. Bonds Payable: loan made by many  investors to a borrower a. Someone can sell $1,000 payables (bonds) to 1,000 people to accumulate $1,000,000 in funding b. Pay interest based on bond  terms to each buyer 3. Notes Payable: money borrowed from a single  creditor (like a bank) to repay at a  greed upon terms a. A company will “issue a note payable” when they are borrowing $$

iii.

Other Liabilities

Module 8 - Financial Statement Analysis a. Financial analysis provides additional info on f inancial condition, risk performance, and sustainability for internal & external stakeholders that support decisions b. Helps to determine: i.

Financial & Other Risks

ii.

Trends in Performance from One Period to Another

iii.

Performance Compared to Other Entities

iv.

Predictions regarding future outcomes

Components of Financial Analysis a. Corporate Financial Reports required by SEC: i.

Form 10-Q: Quarterly Report

ii.

Form 10-K: Annual Report

iii.

Report of the Independent Registered Public Accounting Firm (Auditors Report) 1. Provides reasonable assurance to users (investors, regulators, creditors) a. Financials prepared according to U.S. GAAP b. Contain no material misstatement

b. Consideration of the economic  environment c. Some knowledge of other  industry averages/performance measurements

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Industry Analysis a. Stakeholders should know industry  indicators to know what common characteristics entities have that sell/provide the same goods/services. b. Industries have threats  & opportunities  i.

Real Estate vs. Technology

ii.

Written Publications vs. Online Publications

c. Supply &  D  emand of goods/services, new and emerging tech… Can it provide info on f uture outlook? d. Industry Analysis are accomplished through P  orter’s Competitive Forces Model, PEST Analysis, and SWOT Analysis

Financial Statement Analysis a. Horizontal Analysis: comparing percent  of change in same  item on financial statements of different periods b. Vertical Analysis: comparing elements on one financial statement to a base item on  the same financial statement i.

Base items are: total assets, total revenue, total liabilities & stockholder’s equity

ii.

Example for Income Statement: Cost of Goods Sold   Total Revenue

 Gross Profit . Total Revenue

c. Common-Sized Financial Statements: reports only  percentages, the percentages provided by vertical analysis, help analysts compare companies d. Ratio Analysis: expressing elements on financial statements as a percent  of another element to find their relationship

Accounting Ratios and Terms a. Liquidity: ability to meet short-term  obligations; ability to convert assets  into cash i.

Working Capital = Current Assets -  Current Liabilities

ii.

Current Ratio =  Current Assets .  > 1 Current Liabilities 1. How many times current assets cover current liabilities; needs to be >1

iii.

Accounts Receivable Turnover: how quickly credit sales are converted to cash 1. Accounts Receivable Turnover =  Credit Sales . Avg. Accounts Receivable 2. Avg. Accounts Receivable = (beginning + end) / 2

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Average Days’ Sales in Receivable: number of days to collect 1. Avg. Days’ Sales in Receivable = Avg. Accounts Receivable Avg. Sales per Day 2. Avg. Sales per Day = Sales / 365

v.

Inventory Turnover: how quickly inventory is sold 1. Inventory Turnover = Cost of Goods Sold Avg. Inventory

vi.

Average Days in Inventory: average number of days it takes to sell an item of inventory 1. Avg. Days in Inventory =  365 . Inventory Turnover Ratio

b. Solvency: ability to make periodic  interest & principal  payment; ability to pay long-term  d  ebt i.

Creditors and bondholders are interested in this measure

ii.

Debt Ratio: Total Liabilities < 1 Total Assets

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c. Profitability: company’s potential to generate a r eturn on investment i.

Gross Profit Margin = Revenue -  Cost of Sales

ii.

Gross Profit Percentage =  Gross Profit /  Revenue

iii.

Return on Assets = Net Income /  Total Assets

iv.

Price-Earnings Ratio = Market Price per Share (common stock) / Earnings per Share 1. Earnings per Share = ( Net Income - Preferred Dividend) / # of Outstanding Common Shares

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Module 9 - The Accounting Cycle - p  rocess by which companies create 4 financial statements Accounting & Accounting Cycle a. The Accounting Info System: collects, records, stores, processes financial data to produce info useful for decision makers b. Foundation of Accounting is the accounting equation. (A = L +E) c. The Accounting Cycle begins  with recording transactions i.

Transaction: economic event that affects the financial position of the company 1. Ex: purchasing a building, paid employees, sold inventory

ii.

Transactions are supported  by Source Documents 1. Ex: sales invoices, bank checks, purchase orders, purchase invoices

d. Each transaction affects at least two accounts and  is therefore recorded twice: Double Entry Accounting

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Accounting Info System a. Accounts: summarize the e ffects (+/-) of transactions i.

Ex: Sales, Accounts Receivables (gain an asset on sale, when they pay it is lost), Cash, Salary Expense, Wages Payable

ii.

To increase  or decrease an account, the account process uses a system of Debit & Credits

b. Companies keep a C  hart of Accounts: i.

Index (list) o  f accounts

ii.

Individualized t o a business form & operations

iii.

Some are common to all business

iv.

The accounts r ecord increases & decreases

c. An account has two sides (one increases and one decreases) i.

Debit (left), Credit (right)

ii.

Placing an entry on the left/right is debiting/crediting

d. The General Journal i.

Every day, in a journal, companies record transactions by date

ii.

The transaction’s debited amount MUST EQUAL the credited amount Ledgers

T-Accounts

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  iii.

Debits include increases in A.E.D., but if you decrease on debit (like a decrease in cash) it is a credit.

iv.

Credit include increases in L.R.C., but if you decrease on credit (like a decrease in sales) it is a debit.

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  e. Process of Accounting i.

Use source documents like sales invoices, purchase invoices, and payroll checks to s upport recording transactions

ii.

Record transaction in a journal entry in chronological  order

iii.

Post to General  Ledger (G/L) increases or decreases to same account 1. T-Account is informal representation of general ledger

iv.

List ending balances by preparing a T  rial Balance

v.

Review & adjust some balances via adjusting  entries (prepare Adjusted  Trial Balance)

vi.

Prepare Financial Statements

vii.

Zero out temporary accounts with closing entries (prepare P  ost-Closing Trial Balance)

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