Study Guide Final Exam Fall 2017 PDF

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This is a study guide for the final from chapters 1-12. ...

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Principles of Accounting 1 Fall 2017 Study Guide for Final Exam The exam covers Chapters 1 – 12. Approximately 45% of the exam will come from Chapters 1 – 9 and 55% from Chapters 10 – 12. Chapters 1 and 2: 

Calculate components of the income statement, retained earnings statement, and balance sheet

Financial Statements (in order) 1. Income Statement: has revenues & expenses; purpose to find net loss/ net income a. Net loss/income goes to retained earnings statement 2. Retained Earnings Statement: has beginning retained earnings, net loss/ net income, dividends, & ending retained earnings; purpose to find ending retained earnings a. Ending retained earnings goes to balance sheet 3. Balance Sheet: has assets in order of liquidity (cash, acct recev, notes recev, etc.) PPE, liabilities (acct pay, notes pay, etc.), and stock holder’s equity; specific date unlike the other financial statements and purpose is to balance out assets, liabilities, & SE a. Cash goes to statement of cash flows The Different Sections of a Classified Balanced Sheet Classified Balance Sheet: A balance sheet that contains a number of standard classifications and sections.  Assets o Current Assets: Cash and other resources that companies reasonably expect to convert to cash or use up within the operating cycle/year (whichever is longer)  Examples: cash, debt investments, accts receivable, inventory, supplies, prepaid insurance, etc. o Long-term investments: Investments in stocks and bonds of other corporations that companies hold for more than one year.  Examples: stock investments, investment in real estate o Property, Plant, & Equipment: Assets with relatively long useful lives that companies use in operating the business.  Examples: land, delivery vehicles, furniture, equipment, buildings, accumulated depreciation—equipment o Intangible Assets: Assets that do not have physical substance. (i.e. patents, goodwill, trademarks, tradenames)

 Liabilities & Stockholder’s Equity o Current liabilities: Obligations that a company reasonably expects to pay within the next year or operating cycle, whichever is longer.  Example: Notes payable, accts payable, unearned sales revenue, salaries & wages payable, interest payable, income tax payable o Long-term liabilities: Obligations that a company expects to pay after one year.  Examples: Mortgage payable, notes payable o Stockholders’ Equity: the owner's claim to assets. (common stock: investment of assets into bus. by stockholders, retained earnings: income retained for bus. use)  Use the accounting equation to solve for an unknown. Basic Accounting Equation  Assets = Liabilities + Stockholder’s Equity - Remember this equation relates to balance sheet, as liabilities and stockholder’s equity must equal assets to be balanced  Assets: resources owned by a business  Liabilities: amounts owed to creditors  Stockholder’s equity: ownership claim on net assets o Things that affect SE are common stock, retained earnings, dividends, revenues, & expenses Expanded equation Assets = Liabilities + Stockholder’s Equity Common Stock

Retained Earnings Revenue – Expenses – Dividends

Chapter 3: 

Analyze the effect of business transactions on the accounting equation.

The Effects of Business Transactions on the Accounting Equation Business Transactions: are economic events that require recording in the financial statements.  Assets, liabilities, or stockholders’ equity items change as a result of some economic event. 

Apply debit/credit rules.  Dual effect on the accounting equation. (Debit & Credit)  Each transaction must affect two or more accounts to keep the basic accounting equation in balance.  For every debit, there must be a credit. Remember debits are left and credits are right. DEBITS MUST EQUAL CREDITS; equation must be in balance after every transaction.

 D.E.A.D o (D)ebits increase with (E)xpenses, (A)ssets, & (D)ividends Chapter 4: 

Apply the revenue recognition principle. o Revenue Recognition Principle: Companies recognize revenue in the accounting period in which the performance obligation is satisfied.  Customer requests service --> Service performed --> Cash received  Calculate net income from an adjusted trial balance. o https://www.youtube.com/watch?v=S647-zqLfZg  Prepare adjusting journal entries. Adjusting Entries  Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.  Are required every time a company prepares financial statements  Includes one income statement account and one balance sheet account Adjusting Journal Entries  Purpose is to record obligations & recognize expenses; An example of an Adjusting Entries is Trial Balances

Examples Sierra Corporation purchased supplies costing $2,500 on October 5. Sierra recorded the purchase by increasing (debiting) the asset Supplies. This account shows a balance of $2,500 in the October 31 trial balance. An inventory count at the close of business on October 31 reveals that $1,000 of supplies are still on hand.

For Prepaid Expenses Adjusting entry results in an increase (to debit) to an expense account & a decrease (a credit) to an asset account For Unearned Revenues Adjusting entry is made to record the revenue for services performed during the period and to show the liability that remains Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account

Chapter 5: 



Interpret sales discounts and sales returns. o Sales Returns & Allowances: this account increases with debit. This increases inventory if you are the seller because a product is being returned to inventory. If you are the purchaser, then your inventory decreases because you are returning it. o Sales Discounts: this account increases with debit.  Inventory will go up for purchaser & inventory will go down for seller Calculate cost of goods sold under a periodic system. o Cost of Goods Sold = Beginning Inventory + Purchases + Freight-in – Purchase Discounts – Purchase Returns & Allowances - Ending Inventory

Chapter 6:  

Calculate cost of goods sold or ending inventory using FIFO or LIFO. Calculate cost of goods sold and gross profit using average cost.

Chapter 7: 

Prepare a bank reconciliation.



Calculate the amount of cash to borrow based upon a cash budget.

Chapter 8: 

Prepare the adjusting entry to record the estimate of bad debt expense. o Allowance Method: a method of accounting for uncollectible accounts where losses are estimated through better matching, stating receivables at net realizable value. This method is required by GAAP.  New accounts are Bad Debt Expense which increase with debit & Allowance for Doubtful Accounts which increase with credit (contra-asset account  Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable when a specific amount is written off as uncollectible



Calculate the duration of a note receivable given the interest rate and interest revenue. o When counting days, omit the date the note is issued, but include the due date. o Interest = Face Value of Note x Annual Interest Rate x Time in Terms of One Year

Chapter 9: 

Identify items classified as property, plant, and equipment.



Calculate depreciation expense and accumulated depreciation using straightline depreciation.



Determine correct accounting for repairs and maintenance.

Chapter 10: 

Define a current liability. o Current Liability: a debt that a company expects to pay  From existing current assets or through the creation of other current liabilities  And within one year or the operating cycle whichever is longer



Prepare journal entries associated with notes payable.

 

Determine proper classification for a note payable on the balance sheet. o Current Liability Identify the correct journal entries associated with current liabilities.



Calculate the selling price of a bond.



Based on interest rates, determine if a bond would be sold at a premium (above face value) or a discount (below face value).



Prepare journal entries to record bond transactions.

Chapter 11: 



Interpret the corporate characteristic of limited liability. o A corporation has limited liability because a corporation is its own entity; it is its own separate legal existence and acts under its own name rather than in the name of its stockholders Understand the journal entry to record the issuance of common stock and calculate total shares issued. o The issuance of common stock affects only paid-in capital accounts



Calculate preferred stock dividends.



Identify the declaration date, record date, or payment date associated with dividends. Identify the journal entry to record the declaration of a dividend.





Define or calculate various components of stockholders’ equity.

Chapter 12: 

Identify the purpose of the Statement of Cash Flows.



Distinguish among operating, investing, and financing activities. o Investing Activities: buying and selling long-term assets o Financing Activities: raising money for your company or paying it back o Operating Activities: everything except financing and investing activities



Identify the relationship between cash flows and life cycle phases. o As a life cycle of a product progresses, the cash flow increases o Cash flow reaches it maturity when sales exceed expenditure costs o Cash flow declines when profits fall o At the beginning of the life cycle of a product, cash flow is negative because business is spending more money on introducing product than they are actually receiving from sales



Using the indirect method, calculate net cash provided (used) by operating activities. Calculate net cash provided (used) by investing activities. Calculate net cash provided (used) by financing activities.

 



Calculate free cash flow....