Accy 200 Exam 1 Book Notes PDF

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Chapter 1 

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Accounting is the process of identifying, measuring, and communicating economic info about an organization for the purpose of making decisions and informed judgements. o Accounting is a service activity that helps many different users of accounting information who use the information in many ways Financial accounting is the process that results in the preparation and reporting of financial statements for an entity (external orientation) o Financial statements present the financial position of an entity at a point in time, the cash flow activities for the same period, and other information about the entity’s financial resources, obligations, owners’/stockholders interest, and operations (quantitative information) o It is directed towards what happened in the past o Bookkeeping procedures are used to accumulate the financial results of many of an entity’s activities, and these procedures are part of the financial accounting process o Controller is used to designate the chief accounting officer of a corporation  They are responsible for both the financial and managerial accounting functions of the organization o Certified Public Accountant (CPA): professional designation by fulfilling certain education and experience requirement and passing a 4-part comprehensive exam Managerial Accounting uses economic and financial information to plan and control many activities of the entity and to suppose the management decision-making process o Cost accounting is a subset that relates to the determination and accumulation of product, process, or service costs. (internal orientation) o Certified Management Accountant (CMA): designation earned by a management accountant or cost accountant by passing a 2-part exam Auditing – Public Accounting: firms and individual CPA’s provide auditing (exam) service. This is the process of having financial statement examined by a 3rd party. o Independent auditors report is the result of an audit  1st paragraph identifies the financial statements that were audited  2nd explains the work involved in performing an audit and standards  3rd is the auditor’s opinion on the cash flow, operations, and financial position of the entity  4th referenced the opinion about the effectiveness of the company’s internal control over financial reporting  Annual report includes the financial statement and the notes to the statements, as well as the management’s discussion and analysis Internal Auditing: performs the functions of an external auditors/public accountant, but to a smaller scale Governmental and Not-for-profit Accounting: accounting performed at governmental units and not-for-profit entities like colleges or hospitals. Income Tax Accounting: accountants that work for corporations and public firms that develop specialties in taxation of partnerships, individuals, corporations, estates… Accrual accounting: accounting for the effect of an economic activity, transaction, on an entity when the activity has occurred (POS), rather than when the payment takes place.

Chapter 2 

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Financial Statements o An entity’s financial statements are the end product of a process that starts with transactions between the entity and other organizations and individuals.  Transactions are economic interchanges between entities o Transactions are summarized in accounts and accounts are summarized in financial statements o Current standards require that the financial statements of an entity show the following for the reporting period:  Financial position at the end of the period  Earnings for that period  Cash flows during the period  Investments by and distributions to owners during the period o The financial statements that satisfy these requirements are:  Balance sheet  Income statement  Statement of cash flows  Statement of changes in stockholders’ equity Balance sheet: a listing of the organization’s assets, liabilities, and stockholders’ equity at a point in time (“statement financial position”) o Balance sheet equation/Accounting equation: Assets = Liabilities + SE  Assets: probable future economic benefits obtained or controlled by a particular entity as a result of past transactions  Current assets: cash and assets that are likely to be converted to cash or used for the benefit of the entity within one year  Liabilities: probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions  Current liabilities: liabilities that are likely to be paid with cash within one year  Stockholders’/owners’ equity: the ownership right of the stockholder of the entity in the assets that remain after deducting the liabilities  Stockholders’ equity = net assets = net worth o Cash: cash on hand and in the bank o Accounts receivable: amounts due from customers who have purchased merchandise on credit and agreed to pay within a specified period o Merchandise inventory: the cost of the merchandise that is acquired but not sold o Accumulated depreciation: the portion of the cost of the equipment that is estimated to have been used in the process of operating the business  Depreciation is the process of spreading the cost of an asset over its life to the entity (not the economic loss of value of the asset) o Accounts payable: the amount owed to suppliers of merchandise inventory that was purchased on credit and will be paid within a specific period of time o Accrued liabilities: the amounts owed to various creditors, including wages owed to employees for services provided

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Income Statement/Statement of earnings/Profit and Loss statement/Statement of operations (net income = revenue – expenses) o Distinguishes if the entity operated at a profit for the period of time under consideration (summarizes the entities income or loss during a time o Gains and losses are reported on this document o Revenues (net sales) – expenses are recorded  Net sales represent the amount of sales merchandise to customers, less the amount of sales originally recorded but canceled because the merchandise was returned by the customers  Sales revenue/revenue results from selling a product or providing a service to a customer o Gross profit: the difference between net sales and cost of goods sold and represents the seller’s maximum amount of “cushion” from which all other expenses of operating the business must be met before it is possible to have net income Statement of changes in stockholders’ equity o Similar to the income statement, it has a period of time orientation o This statement shows the details of stockholders’ equity and explains the changes that occurred in the components of stockholders’ equity during the year o Stockholders’ equity is made up of 2 components  Paid-in capital: the total amount invested in the entity by the owners  Common stock: the # of shares authorized by the business’s charter, the # shares issued to stockholders, and shares held by stockholders  Retained earnings: the cumulative net income of the entity that has been retained for use in the business  Dividends: distributions of earnings that have been made to the stockholders, so they reduce retained earnings  Deficit: if retained earnings have a negative balance (cumulative losses and dividends exceeded cumulative net income) Statement of Cash Flows: used to identify the sources and uses of cash during the year (for a period of time) o Depreciation expense: added back to net income because it did not require the use of cash o Increase in accounts receivable and increase in inventory is deducted from the statement. Increase in current liabilities is added. Accounting Concepts and Principles o Accounting entity refers to the entity for which the financial statements are being prepared

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o Going concern concept: the presumption that the entity will continue to operate in the future (will not be liquidated) o Cost principle: the fact that transactions are recorded at their original cost o Objectivity: the accountant’s desire to have a given transaction recorded the same way in all situations o Matching revenue and expense; necessary if the results of the firm’s operations are to reflect accurately its economic activities during the period o Matching concept: DOES NOT MEAN Revenues = Expenses  Revenues are no earned without effort and expenses are a measure of the economic efforts exerted to generate revenues  Revenue is recognized at the time of sale (when the title to the product being sold passes from seller to buyer) o Consistency: essential for financial reporting and helps do trend comparisons  The principle of consistency suggests that an entity should not change from one generally accepted method of accounting for a particular item to another method for the same item o Full disclosure: the financial statements and notes should include all necessary information to prevent anyone reading them from being misled o Materiality: absolute exactness is not necessary in the amounts shown in the financial statements o Conservatism: making judgements and estimates that result in lower profits and asset valuation estimated rather than high profits and asset valuation estimates Financial statements do not reflect opportunity cost Annual Report for a corporation o Report contains the firm’s financial statements for the fiscal year, the report of the external auditor, a letter from the present, and a historical summary of financial data in the past 5 years

Chapter 4 

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Bookkeeping/Accounting Process o The process is shown on the diagram on the right o Bookkeeping is procedures for sorting, classifying, and presenting The Balance Sheet equation (A = L + SE) o Profit would cause assets to increase, SE to increase and L to decrease o We know that a firm’s net income (profit or loss) is reported on the income statement and the net income from the income statement is reported as a factor causing the change in retained earnings for the statement of changes of SE

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o The other element of SE is the amount of capital invested by the owners/stockholders (paid-in capital)  Assets = Liabilities + Paid-in capital + retained earnings  A = L + Paid-in capital + retained earnings (beginning of period) = revenues (during the period) – expenses (during the period) o Net income on the income statement gets into the balance sheet via the retained earnings section of stockholders’ equity  If any retained earnings are given to stockholders as a dividend, the dividend does not show on the income statement but is a deduction from retained earnings  A dividend is a distribution of earnings to the stockholders of the fir m Bo o kk e e p i n gJ a r g o na n dPr o c e d u r e s o Tr a n s a c t i o n sa r efir s tr e c or d e di naj o ur na l( ad a y t o d a yr e c o r do ft r a n s a c t i o n s ) o Tr a n s a c t i o n sa r et h e np o s t e dt oal e dg e rt h a ti ss e q u e n c e da sa s s e t s ,l i a bi l i t i e s , s t o c kh ol d e r s ’e q u i t y ,r e v e n u e s ,a n de x pe n s e s( i nc a t e g o r i e s ) o Cha r to fa c c o unt ss e r v e sa sa ni n d e xt ot h el e d g e r( e a c ha c c o u n ti sn u mb e r e d ) o Ac c o un tb a l a n c ei st h ed i ffe r e n c eb e t we e nt h ep r i o rb a l a n c ea n dt h ea d d i t i on sa n d s u b t r a c t i o n s o Ta c c o u n ti st h ea c c o u n t i n gf o r ma tt h a th a s d e b i ta n dc r e di t( l e f ta n dr i g h t ) 

I nc r e a s e si na s s e t sa r er e c o r d e da s d e b i te n t r i e sa n dd e c r e a s e sa sc r e d i t

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Op p o s i t ef o rl i a b i l i t i e sa n d s t o c kh ol d e r ’ se q u i t y

 Increase in asset = debit  decrease in asset = credit  Increase in liabilities = credit  decrease in liabilities = debit  Revenues increase = credits (because they increase SE)  Expenses decrease = debits (because they decrease SE) o Journal entry format is a useful and convenient way of describing the effect of a transaction on the accounts involved  Data is recorded to provide a cross-reference to the transaction  Dr. means debit and Cr. means credit  Its possible for a journal entry to have more than one debit account and amount and/or more than one credit account and amount  Only requirement is credit = debit

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Transactions generate source documents, like an invoice from a supplier, a copy of a credit purchase, a check stub… Understanding the effect of transactions on the financial statements o T-accounts and journals are models used by accountants to explain and understand the effects of transactions on the financial statements o An alternative to these two is the horizontal model  image on the right  The key to using this model is keeping the balance sheet in balance  The arrow from net income in the income statement to stockholders’ equity in the balance sheet indicated that net income affects retained earnings (which is a component of SE)  Ex: an expense (negative value) under the income statement reduced net income, which reduces SE. A plus or minus sign is used in the context of the equations (A=L + SE and NI = R-E)  A minus sign for expenses means that net income is reduced (expenses are greater) not that expenses are lower  It is possible that a transaction can affect 2 accounts in a single balance sheet or income statement category  Or a transaction can affect more than 2 accounts o The horizontal model and its 2 financial statement equations can be combined:  Assets = Liabilities + SE + revenues – expenses Adjustments o Bo o kk e e p e r sn o r ma l l yh a v et or e c o r da na d j u s t me ntt oc e r t a i na c c o u n tb a l a n c e st o r e fle c ta c c r u a la c c ou n t i n gi nfina n c i a ls t a t e me n t s o Ad j u s t me n t sr e s u l ti nr e v e n u e sa n de x p e ns e sbe i n gr e p o r t e di nt h ea pp r o p r i a t e fis c a lp e r i o d 

Ex )r e v e n uema yb ee a r ne di n2 01 9b u to n l yp a y e di n2 0 2 0

o T woc a t e g o r i e so fa d j u s t me n t s 

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Ac c r u a l s :t r a n s a c t i on sf orwh i c hc a s hh a sn o ty e tb e e nr e c e i v e do rp a i d ,b u t t h ee ffe c to fwh i c hmus tb er e c o r d e di nt h ea c c o u nt st oa c c o mp l i s ha ma t c h i n go fr e v e nu e sa nde xp e n s e sa n da c c u r a t efina n c i a ls t a t e me n t s 

Ex .I fc a s hi s n ’ tb e i n gp a i du n t i l2 0 2 0b u tr e v e n ueh a sb e e ne a r n e d, a na d j u s t me n th a st ob ema d et or e fle c tn e ti n c o me

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Ac c r u a l sa r en e c e s s i t a t e db yc a s hl a g s

Re c l a s s i fic a t i o n s

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Th ei ni t i a lr e c o r d i n go fat r a n s a c t i o n st h a td o e sn o tr e s u l ti na n a p p r o p r i a t ea s s i g n i n gofr e v e n ue st ot h ep e r i o di nwh i c ht he ywe r e e a r n e d / e x p e n s e si n c u r r e d

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Amo un tmu s tb er e c l a s s i fie df r o mo n ea c c o u n tt oa n o t h e ra tt h ee n d o ft h ea c c o u n t i n gp e r i o d

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Ne c e s s i t a t e db yc a s hl e a d s

o Cl o s i n gt h eb o o k s p r e pa r i n gy e a r e n dfin a nc i a ls t a t e me n t s Cha pt e r5 

Ca s hi n c l u d e smo n e yo nha n di nc h a n g ef un ds , p e t t yc a s hf un d s ,u n d e p o s i t e dr e c e i p t s , a n da n yf u n dsi mme di a t e l ya v a i l a b l et ot h ef r i mi ni t sb a n ka c c o un t s

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Ca s he qui v a l e nt sa r es h o r tt e r mi n v e s t me nt sr e a d i l yc on v e r t i bl ei n t oc a s hwi t hami n i ma l r i s ko fp r i c ec h a n g edu et oi n t e r e s tr a t emo v e me nt s

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Ba nkr e c o nc i l i a t i o n:i n v o l v e sb r i n g i n gi n t oa g r e e me n tt h ea c c o u n tb a l a n c er e p o r t e db y t h eb a n ko nt heb a n ks t a t e me n twi t ht h ea c c o u ntb a l a n c ei nt h el e d g e r

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De po s i t si nt r a ns i t :ha v eb e e nr e c o r d e di nt h ec omp a n y ’ sc a s ha c c ou n tb uth a v en o ty e t be e na dd e dt ot h ec o mp a n y ’ sb a l a n c ei nt h eb a n k ’ sr e c o r d s o De p o s i t si nt r a n s i ta r ea d d e dt ot h eb a n k ’ sb a l a n c e

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Out s t a ndi ngc he c ks :h a v eb e e nr e c o r d e da sc r e d i t s( r e d u c t i o n s )t ot h ec o mp a n y ’ sc a s h ba l a n c e , bu th a v en o ty e tb e e np r e s e n t e dt ot heb a nkf o rp a y me n t o Ou t s t a n d i n gc h e c k sa r es u b t r a c t e df r o mt h eb a n k ’ sb a l a n c e

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Ba nks e r vi c ec ha r g e s :t h e s ec h a r g e sa n dt h ei n t e r e s ti n c o mes h o u l db er e c o g n i z e db yt h e c o mp a n yi nt h ep e r i odi n c u r r e do re a r n e d o Ba n ks e r v i c ec h a r g e sa r es u b t r a c t e df r o mt h ec o mp a n y ’ sb a l a n c e o I n t e r e s ti n c o mei sa dd e dt ot h ec o mp a n y ’ sb a l a n c e

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NSF( no ts uffic i e ntf unds )c he c ks :c h e c k st h a th a v e“ b o u n c e d ”f r o mt h ema k e r ’ sb a n k be c a us et h ea c c o u ntd i dn oth a v ee n o u g hf u n d st oc o v e rt h ec h e c k o NSFc h e c k sa r es u b t r a c t e df r om t h ec o mp a n y ’ sb a l a n c e

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Wh a tdo e si tme a nt or e c o n c i l eab a n ka c c o u n t ? o I tme a nst ha tt h eb a l a n c ei nt h eCa s ha c c o u n ti nt hel e d g e rh a sb e e nb r o u g h ti n t o a gr e e me n twi t ht h eb a l a n c eo nt h eb a n ks t a t e me n tb yr e c o g n i z i n gt i mi n gd i ffe r e n c e s a n de r r o r s

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Sho r t t e r m ma r k e t a b l es e c u r i t i e st h a tf a l li nt h ehe l d t o ma t u r i t yc a t e g o r ya r er e p o r t e do n t h eb a l a nc es he e ta tt h ee n t i t y ’ sc o s t( wh i c hi st h es a mea sma r k e tv a l u e )b e c a us eo ft h e i r hi g hq u a l i t ya n ds h o r tt i meu nt i lma t u r i t y

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I n t e r e s ta c c r u a le n t r y

Dr . I n t e r e s tRe c e i v a b l e

Cr . I n t e r e s tI n c o me

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Ac c o un t sRe c e i v a b l e :a mou n te x p e c t e df r o mc u s t o me r si ns e t t l e me ntf r o mt h e i r ob l i g a t i o n so rp u r c h a s e s o Ba dd e b t se x p e ns e( u n c o l l e c t i b l ea c c o un t se x p e n s e ) :a ne s t i ma t e de x pe n s et h a t r e pr e s e n t sa c c o un t sr e c e i v a b l et h a ta r en o te x p e c t e dt obec o l l e c t e d o Wh e nt h ea mo u n t so fa c c o u n t sr e c e i v a b l ee s t i ma t e dt ob eu n c ol l e c t i bl eha sb e e n d e t e r mi n e d ,av a l u a t i o na d j u s t me n tc a nb er e c o r d e dt or e d u c et hec a r r y i n gv a l ueo f t h ea s s e ta n dr e c o g n i z et h eb a dd e b te x p e ns e 

Thi si sDr . Ba dDe b t sEx p e n s e s Cr . Al l o wa n c ef o rBa dDe bt s

o Al l o wa n c ef o ru n c o l l e c t i b l ea c c o u nt si sc o n s i d e r e dac on t r aa s s e tb e c a u s ei ti s r e p o r t e da sas ub t r a c t i o nf r o ma na s s e ti nt h eb a l a n c es h e e t  

Thi sa c c o u nti sav a l u a t i o na c c o u n ta n di t sc r e d i tb a l a n c ei ss u b t r a c t e df r om t h ede b i tb a l a n c eo fAc c o u n t sr e c e i v a b l e

Ca s hDi s c o u n t s o Cr e di tt e r ms :as e l l e r ’ spo l i c ywi t hr e s p e c tt owh e np a yme n tofa ni n v o i c ei sd uea n d wh a tc a s hd i s c ou n ti sa l l o we d 

The s et e r msa r ea b b r e v i a t e da s2 / 1 0,n 3 0 

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Ex :2 / 1 0,n 3 0c r e d i ts a l e st e r m wi t h$5 0 0 0s a l eo nAp r i l8 

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2 / 1 0i st h ed i s c o u n tt e r msa n dn3 0me a n st h ef u l la mo u nto ft h ei n v o i c e i sd u ewi t h i n30d a y s t h Pa y$ 4 9 00( 5 0 0 0–...