Test Review Exam 1- accoutning PDF

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ACCT 2101 Exam 1 – Test Review I try to include everything I can think of in your test review but please understand that anything I have touched on is fair game for the test. You will never be tested on something that is not in your lecture notes or that I have not talked about in one of my lectures. I don’t test a lot with definitions – my tests are more practice based. If you can do a journal entry then I know that you understand the normal balance of accounts and what each account is used for. Every now and then you may have a definition based multiple choice or true/false question. Your exam is 32 multiple choice, 3 true/false and 2 matching problems. You will have 90 minutes to complete. For the matching problems: Matching Problem #1: I will give you a list of accounts and you will need to identify the type of account it is (asset, liability, Equity, revenue or expense). Matching Problem #2: I will give you a list of items and you will need to identify whether that item is found on the income statement or the balance sheet. Chapter 1  Difference between managerial and financial accounting. -financial accounting: Area of accounting that serves external users o EXTERNAL USERS: Users that do not directly run the business.  Investors (shareholders/owners)  Creditors (entities the business owes money to)  Boards of Directors  Government regulators (IRS, NC Dept of Revenue)  Customers  Suppliers  Non-executive employees  Accounting information is communicated through: general purpose financial statements subject to rules and concepts called generally accepted accounting principles (GAAP). - managerial accounting: Area of accounting that serves internal users

o Users that directly manage and operate the organization.  Executives (CEO/CFO/Controllers)  Managers (purchasing managers/human resource managers/distribution managers/marketing managers/etc.)  Accounting information is communicated through: internal reports not subject to GAAP and designed to help managers make decisions.  There is one basic question from the different type of entities we discussed in class. Know advantages and disadvantages of each entity type Sole Proprietorship

Partnership

C Corporation

S Corporation

Formation

One owner; easy to form

Two or more owners (called partners); easy to form

Separate legal entity; one or more owners (called stockholders)

Separate legal entity; one or more owners (called stockholders)

Advantages

No double taxation - income taxed at owner’s personal tax rate

No double taxation – the partner’s share of profits is taxed at his personal tax rate

Limited liability – owners are not personally liable for the debt of the business

Limited liability AND no double taxation; the stockholder’s share of profits is taxed at his personal tax rate

Disadvantages

Unlimited liability – owner is personally responsible for all debts of the business

Unlimited liability

Double taxation – income is taxed at corporate rates; then any income distributed to owners is taxed at owner’s personal tax rate

Limited Liability Company (LLC) Separate legal entity; one or more owners (called members) Limited liability AND no double taxation; the member’s share of profits is taxed at his personal tax rate

 Know your accounting equation and how to manipulate it (if I give you assets and equity, what is the amount of the liabilities?).

THE ACCOUNTING EQUATION is used to record transactions. (Hint: This in in all caps and big letters for a reason!) o What it owns = what it owes o Assets = creditor claims (nonowner) and equity (owner) claims o ASSETS = LIABILITIES + OWNER’S EQUITY o This equation must always stay balanced. Left side of the equation must always equal the right side of the equation. So you can never have a one sided entry.  Expanded Accounting Equation: OWNER’S EQUITY ASSET = LIABILITIE + OWNER - OWNER, + REVENUE - EXPENSE S S , WITHDRAWALS S S CAPITAL  Who has claims over assets? Refer to the accounting equation information in chapter 1 notes.  - Liabilities o Represents the creditors’ interest in the business (creditors’ claims on assets.  As indicated earlier, know the type of accounts that are assets, liabilities, and equity (any account we used in chapters 1 – 4 is fair game). o Assests: A resource that a business owns or controls and can be used to operate the business; things of value; resources that yield future benefits.  Ex: McDonald’s purchased the land and constructed the building used for its restaurant operations on Charles Street. Both the land and building are assets to McDonald’s. o Liabilities: Represents the creditors’ interest in the business (creditors’ claims on assets. The business owes somebody “something”.  Ex: McDonald’s borrowed $500,000 from Select Bank to construct their new building. McDonald’s has a liability to

Select Bank for $500,000. The liability is called Notes Payable: a written promise to pay a specified amount in the future. Select Bank expects to be paid back the $500,000 plus interest. o Owners equity: Represents the owners’ interest in the business (owner’s claim on assets).  Can be expressed as: assets minus liabilities which is also called net assets or residual equity. Owner, Capital  Inflows of cash or other assets that an owner puts into the company (owner investments).  Owner, Withdrawals  Outflows of cash or other assets that an owner takes from the company for personal use.  Revenues  Sales of products or services to customers. Increases equity

 Go through the transactions we did in this Chapter and make sure you know how to record each using the accounting equation. Know what causes each account to go up or down. What causes owner’s equity to increase/decrease? What causes equity to increase?  Owner investments  Revenue o What causes equity to decrease?  Owner withdrawls  Expenses  Know the 4 financial statements, what goes on them, what the 3 line heading is that is required for each statement, and the order those statements need to be prepared (i.e., income statement prepared first because you need the net income (loss) to prepare the statement of owner’s equity. You then need the ending Owner, Capital balance from the statement of owner’s equity to prepare the balance sheet).

 There are 4 basic statements prepared and they must be prepared in the following order: 1. Income Statement a. Reports the results of operations over a period of time (one month, one quarter, one year). b. Formula: Revenue (by type of revenue) Minus Expenses (by type of expense) Equals Net Income (Loss) c. REMEMBER: Withdrawals are not expenses and are NOT reported on this statement. 2. Statement of Owner’s Equity a. Reports the change in equity over a period of time from owner investments, net income (or loss) and owner withdrawals. b. Formula: Beginning Owner, Capital Plus: Investments by owner Plus: Net Income (Loss) Minus: Withdrawals Equals Ending Owner, Capital c. Net income/loss used in this statement = the net income/loss reported on the income statement (Statement #1). 3. Balance Sheet a. Reports the financial position of the company at a point in time (last day of the accounting period). b. Reports the assets, liabilities, and equity BY ACCOUNT TYPE. c. Owner, capital balance reported on this statement = the ending owner, capital balance reported on the statement of owner’s equity (Statement #2). 4. Statement of Cash Flows a. Reports cash inflows (receipts) and cash outflows (payments) over a period of time. b. Cash at the end of the period reported on this statement = Cash reported on the balance sheet (Statement #3).

 Every financial statement has a 3 line heading listed in the following order: o Who: Name of the business o What: Name of the financial statement (i.e., income statement, balance sheet, etc). o When: Time period covered by the statement:  Balance sheet reports a day in time (i.e. , June 30, 2018; December 31, 2018)  All other statements report over a period of time (i.e., For Month Ended June 30, 2018; For Quarter Ended March 31, 2018; For Year Ended December 31, 2018)

 Know how to calculate net income (loss): Revenue (by type of revenue) – Expenses = net income loss  Know how to calculate the ending balance in the Owner, Capital account. Chapter 2  Know how to prepare journal entries using whatever method you need to!  Prepare journal entry making sure debits equal credits! o Rule: Normal balance is a debit and  Account balance is increasing, debit the account, or if  Account balance is decreasing, credit the account. o Rule: Normal balance is a credit and  Account balance is increasing, credit the account, or if  Account balance is decreasing, debit the account.  Know the normal balance of all the accounts we have discussed in the first 4 chapters.  What does normal balance mean? The side used to record increases in the account.  Know how to calculate balances using t-accounts. Again, in order to do so you need to understand the normal balances of accounts. Account Title   Debit = left side Credit = right side Abbreviation: Dr. Abbreviation: Cr.

 Ending Balance** Accounts that increase on the left (with debits) have a NORMAL debit balance; accounts that increase on the right (with credits) have a NORMAL credit balance.

 Understand what double-entry accounting means. The requirement that every transaction impact at least 2 accounts. Every transaction must have equal debits and equal credits. o Example: If one account is debited for $1,000; then another account must be credited for $1,000.  What does debit/credit mean in accounting? DEBITS are always entered on the left side of the account and CREDITS on the right side . For every transaction, there must be at least one debit and at least one credit. 3. The TOTAL AMOUNT of the DEBITS must equal the TOTAL AMOUNT of the CREDITS for each transaction. 4. Expenses and Withdrawals will almost always be DEBITED.  It will be very unusual to CREDIT these accounts for normal routine transactions. 5. Revenues and Capital will almost always be CREDITED.  It will be very unusual to DEBIT these accounts for normal routine transactions. 6. Assets and Liabilities will be DEBITED and CREDITED frequently for normal routine transactions.

 Any transaction we journalized in Chapter 2 is fair game (look at the Chapter 2 practice handouts) – any of these can be asked in the form of a multiple choice or true-false question – you must know how to record each of these transactions using debits and credits! Chapter 3  Know what accrual accounting means. An accounting method that recognizes revenue when earned and expenses when incurred regardless of when cash is exchanged  Understand the revenue recognition and matching principles.  Revenue Recognition Principle

o Revenues are recognized (recorded) when earned regardless of when cash is received o “Earned” means we’ve provided a service or sold a product  AJ’s Landscaping mowed a lawn in May and sent its customer a bill for $100; the customer didn’t pay the bill until June. When does AJ’s record revenue?  In May, the month the revenue was earned (the month the service was provided)  McAlister’s Deli delivered food in March to a campus club and left a bill for $300; the club didn’t pay the bill until April. When does McAlister’s record revenue?  In March, the month the revenue was earned (the month the food was sold)  Matching Principle (or Expense Recognition Principle) o Expenses should be matched with the revenue they help generate o Expenses are recorded when they are incurred regardless of when they are paid for o An expense is incurred when a cost is used up in the earnings process (salaries; utilities; telephone; repairs; interest).  AJ’s son, Junior, spent 20 hours mowing lawns in May; he is paid $10 an hour and is paid in the month following the month he works (so he will be paid $200 in June). When does AJ’s Landscaping record the expense?  In May, when Junior did the work  McAlister’s uses utilities every month. In April, McAlister’s received a bill from Greenville Utilities for $3,000 of electricity used in March. When is the expense recorded?  In March, the month the utilities are used  Why are adjusting entries needed and when are they prepared? Prepared at the end of an accounting period to: o Update account balances before financial statements are prepared. o Ensure that net income or net loss is reported accurately on the income statement (in accordance with the 2 principles discussed above). o Ensure that the asset and liability accounts are reported accurately on the balance sheet.

 What type of accounts do adjusting entries affect? These entries DO NOT affect cash. They do ALWAYS affect one income statement account (revenue or expense) AND one balance sheet account (asset or liability).  Know ALL entries related to accruals and deferrals! Study all of the entries in the Chapter 3 practice handouts!  For accrued revenue – you will ALWAYS debit (increase) a receivable and credit revenue. You will eventually collect that receivable which will result in a debit to cash and credit (decrease) to receivable.  For accrued expenses – you will ALWAYS debit an expense and credit a liability (increase). You will eventually pay the liability which will result in a debit to the payable (decrease) and a credit to cash.  For deferred revenue – you receive cash before earning the revenue. You will ALWAYS debit cash and then credit (increase) the liability account called unearned revenue. You will then have to adjust this unearned revenue account to its proper balance at the end of the accounting period. When the unearned revenue account is debited (decreased) then the revenue account must increase (with a credit) because the revenue has now been earned.  For deferred expenses – you purchase a cost that still has value (not yet used in the operations of the business) – supplies, prepaid insurance, prepaid rent, long-term assets. You will ALWAYS debit (increase) an asset and then credit cash or accounts payable. As the asset is used you will then (through an adjusting entry), debit an expense and credit the asset (or contra-asset in the case of long-term assets).  Again, ANY of the above transactions are fair game for multiple choice or true-false questions. Now Later Cash is paid Expense is incurred and Deferred (Prepaid) recognized (recorded) Expense Deferred (Unearned) Cash is received Revenue is earned and Revenue recognized Accrued Expenses Expense is incurred and Cash is paid recognized (recorded) Accrued Revenue Revenue is earned and Cash is received

recognized STUDY THE HANDOUT Chapter 4  Know the 4 closing entries that are required at the end of every accounting period.  Steps to close the books: **Warning: We are about to depart from our general rule of crediting revenues and debiting expenses** 1. Close the revenue accounts to income summary Debit revenue accounts for their total balance (zero them out). Credit Income Summary Example: Service Revenue (the only revenue account for Dee’s Accounting) has a credit balance of $800,000 for the year. Service Revenue $800,000 Income Summary $800,000 2. Close the expense accounts to income summary Credit expense accounts for their total balance (zero them out). Debit income summary Example: Dee’s Accounting has the following balances in its expense accounts at the end of the year: Utilities Expense, $13,200; Interest Expense $2,000; Salaries Expense $600,000; Insurance Expense $2,700; Depreciation Expense $300; Supplies Expense $900 Income Summary $619,100 Utilities Expense $ 13,200 Interest Expense $ 2,000 Salaries Expense $600,000 Insurance Expense $ 2,700 Depreciation Expense $ 300 Supplies Expense $ 900

3. Close the Income Summary account to Owner’s Capital account.

After applying steps 1 and 2, the balance in the Income Summary account will equal the net income or loss for the period. From the above, the income summary account has a credit balance of $180,900 which equals the net income for the year. Close the income summary account to the capital account: Income Summary $180,900 P. Dee, Capital $180,900 **NOTE: If a net loss for the period, then the Income Summary account has a debit balance and the above entry is reversed. 4. Close Withdrawals Account to Owner’s Capital Credit the withdrawals account for its total balance (zero it out). Debit owner’s capital Example: P. Dee withdrew $10,000 from the business for personal use during the year. (i.e., the balance in the withdrawals account is $10,000). P. Dee, Capital $10,000 P. Dee, Withdrawals $10,000  Closing entries are then posted to ledger (t-accounts) to complete the closing process. After closing: o The P. Dee, Capital account now has an ending balance of $190,900 (assuming a beginning capital balance of $5,000 and an investment by P.Dee during the year of $15,000): P. Dee, Capital, Beginning Add: Investment by P.Dee Net income

Less: Withdrawals P. Dee, Capital, Ending

$ 5,000 15,000 180,900

195,900 200,900 10,000 $190,900

o Revenue, Expenses, and Withdrawals now have a ZERO balance, and the Owner, Capital Account is up to date.

 Know the purpose of closing entries. Preparation of the financial statements (step 6) signifies the end of an accounting period. Steps 7 and 8 of the accounting cycle are performed after the financial statements are prepared to get a business ready for a NEW accounting period.  Know what account types are found on a post-closing trial balance (what account balances roll forward and become the beginning balances of the next accounting period (the permanent accounts) and which account types begin the next accounting period with a zero balance (the temporary accounts)).  A list of permanent accounts and their balances after all closing entries have been posted.  ONLY assets, liabilities, and equity (owners, capital) appear on this postclosing trial balance.  NO temporary accounts because they have been closed (have zero balances!).  Ready to start the new accounting period!  The ending balances on the post-closing trial balance become the beginning balances in the new accounting period.

You need to practice, practice, practice to be ready to take this exam. You are not going to have time to sit and think for 5 minutes on one question. You will have 90 minutes to complete your exam from start to finish. Watch the clock!...