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Accounting Exam > Accounting 284 > Flashcards

Accounting 284 Flashcards

1
Q

What is the objective of financial accounting?

A

A system of analyzing, recording, and summarizing the results of a business activities and then reporting the results to decision makers

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2
Q

Purpose of financial statements?

A

Shows a corporations financial insight to its performance, operations, and cash flow.

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3
Q

Content of Balance Sheet?

A

-reports the financial position of an accounting entity at a point of time.
-reports assets, liabilities, and stockholders’ equity. (also owners equity)
-separate entity assumption.

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4
Q

Content of the Statement of Retained Earnings?

A

-reports how net income and the distribution of dividends affected the financial position of the company this accounting period. (Sum of all past earnings, not paid out in dividends)

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5
Q

Content of Income Statement?

A

-Reports revenues less expenses for the accounting period.
-Shows net income (net profit, net earnings, the bottom line)
-Unit of measure assumption

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6
Q

Content of Statement of Cash Flows?

A

-Reports inflows and outflows of cash during the accounting period.
-provides information about cash flows not provided by accrual-based net income.
-Reports cash flows from operating, investing, and financial activities.

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7
Q

FASB

A

The private body that actually writes the rules.

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8
Q

SEC

A

The federal agency with the power to determine the rules. (Never used power)

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9
Q

GAAP

A

Generally Accepted Accounting Principle
The measurement rules use to develop the information in the financial statements in the United States

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10
Q

Balance Sheet Equation

A

Assets = Liabilities + Owners’ Equity

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11
Q

Retained Earnings Equation

A

Beginning RE + Net Income - Dividends = Ending RE

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12
Q

Income Statement Equation

A

Revenues - Expenses = Net Income

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13
Q

Transaction Analysis

A

-Determining the economic effect of a transaction on the accounting equation
Two rules
1-every transaction affects at least 2 accounts.
2-the accounting equation must remain in balance after each transaction.

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14
Q

Steps in Transaction Analysis

A

1-Identify the accounts affected (what did I give/what did I get)
2-Determine the effect on each account (+/- & $)
3-Determine that the accounting equation remains in balance

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15
Q

T-Accounts

A

-Summarize transaction effects for each account
-determine account balance
-draw inferences about a company’s activities
Dr=Debit, left side
Cr=Credit, right side

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16
Q

Journal Entry

A

-An accounting method for expressing the effects of a transaction on accounts in debits equal credits formal
Characteristics-
-Recorded in a journal in chronological order
-Debits are written first
-Credits are indented below debits
-Debits equal credits Dr=Cr

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17
Q

Balance sheet accounts

A

Assets-Resources, cash, A/R, inventory, prepaid expense, PPE, investments.
Liabilities-AP (_payable or accrued), unearned revenue (customer pays in advanced)
Stockholders equity-Contributed Capital, Retained Earnings

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18
Q

Income Statement accounts

A

Revenues-Sales Revenue*, interest revenue, dividend revenue, rent revenue (all earned)
Expenses-COGS, salaries and wages exp., utilities exp, repairs and maintenance exp, insurance exp, advertising exp, transportation exp, tax expense, interest exp, (used up)

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19
Q

Relationship of 3 basic equations

A

(IS) Net Income = Revenues - Expenses
(RE) BRE +Net Income - Dividends = ERE
(BS) Assets = Liabilities + Stockholders Equity (Contributed Capital and Retained Earnings)

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20
Q

Statement of Cash flows equation

A

Cash Flows from Operating activities + cash flows from Investing activities + cash flows from Financing activities=Change in cash

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21
Q

Financing Activities

A

-Borrowing money (loans)
-Issuing stock
Liabilities and Stockholders equity

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22
Q

Investing Activities

A

-Purchasing PP&E
-Purchasing the securities of other company’s (investment)
Assets

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23
Q

Cost Principle

A

-Assets are recorded at their original cost of transaction date (cash equivalent value)
—Exchange value-What is given?What is received
Cost does not represent market or current value

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24
Q

Type of T-Accounts

A

Assets, Expenses, and Dividends all increase on the debit side
Liabilities, Revenue, and Equity all increase on the credit side

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25
Q

Cash Basis

A

Revenues are recognized when cash is collected
Expenses are recognized when cash is paid

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26
Q

Accrual Basis

A

Revenues are recognized when earned, regardless of when cash is received
Expenses are recognized when incurred, regardless of when cash is paid
(Required by GAAP for external reporting)

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27
Q

Element of the Income statement

A

Revenues and expenses result primarily from operating activities
Revenues and expenses only increase

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28
Q

Time period assumption (IS)

A

The long life of a company can be reported in shorter time periods. (Qtr or Yr)

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29
Q

Income Statement Principles (Revenue)

A

Revenues are recognized when (or as) the seller provides goods or services to customers, in the amount the seller expects to be entitled to receive.

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30
Q

Income Statement Principles (Expense)

A

Expenses are recorded when incurred in earnings revenue (When item is used up)

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31
Q

Deferral

A

Cash comes before the recognition of revenue or expense (Revenue Prepaid exp)

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32
Q

Accrual

A

Cash comes after the recognition of revenue or expenses (Receivable Payable)

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33
Q

Deferral Adjusting Entries

A

When the cash happens first
1- Deferred Expense
Expense +
Prepaid Expense (asset) -
2 - Deferred Revenue
Unearned revenue (liability) +
Revenue -

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34
Q

Accrual Adjusting Entries

A

When the cash is after the fact
1-Accrued expenses
Expense +
Payable (liability) +
2-Accrued Revenue
Receivable (asset) +
Revenue +

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35
Q

General Rules for Adjustments

A

-Adjustment never involve cash
-Adjustments always affect both the balance sheet and the income statement

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36
Q

Contra-Account

A

-An account that is an offset to, or deduction from, the primary account
-Book value (net book value, carrying value): the difference between an asset’s acquisition cost and it’s contra-account

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37
Q

Deprecation

A

A deferred Expense
-Capitalize the fixed asset purchased (buildings, equipment, vehicles, computers, and office furniture)
-Apply the matching principled:record a potion of the assets cost as depreciation each accounting period
-New Account: accumulative depreciation (contra-account)

38
Q

Principles of Control Activities

A

-Establish responsibility
-Segregate duties
-Restrict access
-Document procedures
-Independently verify

39
Q

Internal control

A

Actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations.
Control Components:
-Control environment
-Risk Assessment
-Control activities
-Information and communication
-Monitoring activities

40
Q

Internal Control for cash (cash receipts)

A

-Cashers held individually responsible for cash received
-Different individual be assigned to receive, maintain custody, and record cash
-Cash be stored in a locked safe until deposited at bank
-Document cash reveived
-Match register receipts to cash count and deposit slips.

41
Q

Internal Control for cash (Cash payments)

A

-Limit individuals initiating purchases
-different individuals order, receive and pay for purchases
-Access to checks and valuable property restricted
-Purchases requisitions, purchase orders, receiving reports, and pre-numbered checks used to document
-Each step in payment process independently verified

42
Q

Bank Reconciliation

A

Adjustment to books:
- Bank service charges
-NSF checks
+EFT
+Interest
Adjustment to banks:
-Outstanding checks
+Deposits in transit

43
Q

Cost of Goods Sold (COGS)

A

Beginning Inventory + Purchases = Costs of Goods available for sale - Ending inventory = Cost of Goods sold
(COGS is an expense)
(Inventory shrinkage: the cost of inventory lost to theft, fraud, and error damage)

44
Q

Inventory Shrinkage

A

1- Compute what El (solve) should be using the cogs equation
2- Compute inventory shrinkage as: shrinkage = El should be (Step 1) - Actual El (given)

45
Q

Perpetual vs. Periodic Inventory Systems

A

Perpetual Periodic
Buy Inventory. + inventory + purchases
Sell Inventory + Cogs - Inventory. No entry
Count Inventory Adjust bal to count Record inventory close purchases and create cost of goods sold
COGS = BI + P - EL
Calc LY Account closed Count

46
Q

Purchase Adjustment

A

Gross Purchase + transportation in (FOB Shipping/FOB destination) - Purchase returns and allowances - Purchase discount = Net purchase

47
Q

FOB Shipping vs FOB destination

A

Shipping- in transit belongs to the buyer
Destination - in transit belongs to the seller

48
Q

Sales Adjustments

A

Gross sales - Sales returns and allowances (contra-revenue) - Sales discounts (c-r) = Net Sales

49
Q

Multistep Income Statement

A

Net sales - COGS = Gross profit - selling, general and admin expenses = income from operation +/- other revenues (expenses), net = income before taxes - tax expense (t*PTI) = net income (1-t) * PTI
EPS- do not calculate (primary or basic

50
Q

Inventory

A

Goods that are held for sale in the course of normal business or will be used in producing other goods
Retailers-Merchandise Inventory
Manufacturers- raw materials inventory work-in-process inventory finished goods inventory

51
Q

Consignment Inventory

A

Belongs to the owner

52
Q

Inventory Costing FIFO and LIFO

A

1- Calculate number of units sold and number of units in ending inventory #AFS
2-Create “warehouse” containing beginning inventory and purchases only (no dates)
3-Pull sold units from “warehouse”to compute COGS
FIFO : Top down LIFO : Bottom up
4-Remaining units in “warehouse” = ending inventory

53
Q

Inventory Costing Weighted Average

A

1-Calculate number if units sold and number of units in ending inventory #available for sale
2-Create “warehouse” containing beginning inventory and purchase only
3-Compute weighted average cost/unit (WAC) = COGAFS / # units available for sale
4- COGS = WAC * # units in ending inventory
COGS : FIFO < WAC < LIFO
El: FIFO > WAC > LIFO

54
Q

Effect of LIFO vs FIFO - Rising Prices

A

LIFO-
Highest COGS
Lowest net income
Lowest ending inventory cost
FIFO-
Lowest COGS
Highest net income
Highest ending inventory cost

55
Q

LIFO Rule

A

If we use LIFO on our tax return, we must use LIFO on our financial statements
IFRS does not allow LIFO

56
Q

Ending Inventory Overstated

A

This Year Next Year
COGS Understated Overstated
Net Income Overstated Understated

57
Q

Ending Inventory Understated

A

This year Next year
COGS Overstated Understated
Net Income Understated Overstated

58
Q

Bad Debt Expense

A

-If a company extends credit to customers, it is inevitable that some of then will not pay
-The company will not know until often much later who is not going to pay

59
Q

Types of Receivables

A

Accounts receivable
-Arise from sales of goods or service on credit
Notes Receivable
-A formal written contract outlining the terms by which a company will receive the amount owed, including a due date (maturity date)
-Typically includes interest

60
Q

Bad Debt (issue and solution)

A

The accounting issue- how to charge the cost of these bad debts (customers who default on AR), to the same period in which the sales are generated.
The solution- estimate the amount of accounts that will ultimately be uncollectible and match against revenues in the period the sale is made.

61
Q

Credit sales method

A

1-Estimate the amount by multiplying the appropriate rate times net credit sales (given/assume all sales on credit unless said)
2- increase bad debt expense and the allowance for doubtful accounts by the amount calculated
BD exp = % * net credit sales
(income is reduced when bad debt expense is recorded)

62
Q

Writing off a specific bad debt

A

-Reduce the allowance for doubtful accounts
-reduce the account receivable that has been identified to be uncollectible
-No effect on income, assets, liabilities, or equity from the actual write-off

62
Q

Aging Method

A

1- Compute totals for each aging category and estime loss % for each category
2- determine how much should be in the allowance for doubtful accounts
3-determine the current balance in the allowance for doubtful accounts
4-increase the allowance to the desired balance by increasing bad debt expense and the allowance for doubtful accounts by the difference between what it is and what it should be.
(income is reduced when bad debt expense is recorded)

62
Q

What if a customer pays after the account is written off?

A

1-Reverse the write-off entry
2-Record the cash Receipts as usual:
- increase cash
-Decrease A/R

62
Q

Acquisition Cost

A

All reasonable and necessary costs to acquire and prepare and asset for use
(Purchase price, taxes paid at time of purchase, transportation charges, purchase costs/fees, installation costs, setup costs to prepare for us)
Capital expenditures: expenditures that are added to the acquisition cost of an asset (change value)
Revenue Expenditures: expenditures that are expense as incurred (general repairs & maintenance)

63
Q

Interest on Notes receivable

A

Interest = P * IR (Rate) * T (time)

64
Q

Cost of operational assets

A

-Depreciation (fixed asset) (ppe)
-Amortization (intangibles)
(Land is not depreciated)

65
Q

EBITDA

A

Earnings before interest, taxes, depreciation, and amortization

66
Q

Depreciation (3 methods)

A

1- Acquisition cost (c)
2-Estimated useful life
3-Estimated residual value (rv)
C-RV is the total amount of depreciation expense to be recognized over the life of the asset (under all methods)

67
Q

Straight Line Method

A

Evenly over life, same amount each year
Depreciation exp./year = Cost -RV/Life in years

68
Q

Units of production method

A

According to usage
More usage > More Deprecation
less usage > less depreciation
Depreciation expense/units = C-RV/Life in units

69
Q

Disposal of Assets

A

1- record depreciation up to the date of sale
2-Record a gain or loss on disposal

70
Q

Double-Declining balance method

A

More depreciation early in life, less depreciation later in life (accelerated)
Step 1 calclate DDR = 1/life * 2
Step 2 DDR* beginning of year

71
Q

Intangible assets

A

Definite life-Record amortization expense (patent)
Indefinite life-review annually for impairment, but don’t amortize (goodwill)

71
Q

Long term liabilities

A

Notes payable (long term)
Bonds bayable (traded security, bond market, raised capital)

72
Q

Bond returns

A

-interest expense is the balance (CV) times the market rate
-cash is the face amount times the sate rate
-amortization is the difference between the two

73
Q

The sale of bonds

A

Selling Price > Par = Bond Premium
Selling Price < Par = Bond Discount
Selling price = Par = Bond issued at par

74
Q

Shares of Captial Stock

A

Authorized-Approved to be sold by BOD
Issued-Sold
Treasury-Repurchased
Outstanding-Issued and still held in Market = Issued - Treasury

75
Q

What is par value

A

The minimum amount to be contributed by stockholders
-legal requirement (state)
-specified in the charter
-no relationship to market price of stock

76
Q

Treasury Stock

A

Results when a company buys its own stock in the market
The purchase of treasury stock reduce assets and equity
The reissuance increase assets and equity
Note-No gain or loss is recorded when stock is reissued

77
Q

Cash Dividends

A

Declaration date > record date > payment date
(pay dividends on outstanding shares only)
Dividends are not an expense on the income statement. They reduce retained earning and are a distribution on income.

78
Q

Stock Dividends

A

Reduces retained earning and increase stock outstanding with no effect on income assets
Small < 20-25% of outstanding shares recorded at market value
Large >20-25% of outstanding shares recorded at par value

79
Q

Stock Splits

A

No entry is recorded
Therefore nothing is affected expect the par value and number of shares outstanding

80
Q

Stockholders equity

A

Contributed Capital=
Preferred stock
common stock
additional paid in capital
Retained Earnings
Minus:Treasury stock
= Total stockholders equity

81
Q

Operating Section

A

-Adjusts net income to a cash basis
Indirect adjusts net income to ash basis by looking at what affected income that didn’t not affect cash

81
Q

Purpose of statement of cash flows

A

The balance sheet reports-static cash balance, cash at the end of the period
The balance sheet does not report-sources or inflows of cash, uses or outflows of cash
The income statement is accrual based

82
Q

Classifying cash flows

A

Operating adjusts net income to cash from operations (core operations)
Investing shows buying and selling of PPE and intangibles as well as investments
Financing is issuing and repaying debt, issuing and reacquiring stock and paying dividend

83
Q

Investing Section

A

Shows cash flows from buying and selling noncurrent assets including, PPE (capital expenditures), investments
Compare to cash flow from operations to see how much of investment funds are internally generated

84
Q

Financing Section

A

Shows cash flows from: issuing and maintaining debt, issuing and repurchasing stock (our own), paying dividends
Provides the bridge between the amount used in investing activities and the amount generated by operations

85
Q

Horizontal Analysis

A

Also called time series analysis
shows year to year changes as a percentage of the base year
To calculate the % change: Current year - Prior Year / Prior year

86
Q

Verital (Common-size) analysis

A

Express each financial statment amount as a percentage of the base
On the income statment, the base is sales. Express the rest of the income statement as a percentage of sales
On the balance sheet the base is total assets, express the rest of the balance sheet as a percentage of total assets

87
Q

Ratio Analysis for Chapter 13

A

Compares items in the financials (ad certain external items) to each other to look for relationships
Three main categories of ratios
Profitability-measures the overall success of a company
Liquidity-measures the ability to meet currently maturing debts
Solvency-Measures the ability to meet long-term obligations

Accounting Exam (1 decks)

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