ALL EXAM REVIEW

Question 1

Rules of Accounting and who creates them

Answer 1

FASB: Financial Accounting Standards Board

-Privately funded organization that governs accounting standards & issues GAAP

GASB: Governmental Accounting Standards Board

-Issues GAAP

GAAP: Generally Accepted Accounting Principles

SEC: Securities and Exchange Commission

-Responsible for enforcing GAAP

IASB: International Accounting Standards Board

-Private-sector organization that develops and approves IFRS

IFRS: International Financial Reporting Standards

-Accounting rules for public companies’ financial statements that make them consistent and easily comparable around the world

Question 2

Economic Entity Assumption

Answer 2

Requires business owners to keep their transactions separate from the activities of their business

Question 3

Revenue Recognition Principle

Answer 3

States that a company should recognize income when it has delivered a product or performed a service, regardless of when the customer actually pays

Question 4

Expense Recognition Principle

Answer 4

aka Matching Principle

Requires companies to record expenses and revenues in the same accounting period when they are related to each other

Question 5

Cost Principle

Answer 5

States that assets should be recorded and reported at their original purchase price

Question 6

Periodicity Assumption

Answer 6

the accounting concept that a business’s financial activities can be divided into distinct time periods (months, qtrs, years)

Question 7

Fair Value Principle

Answer 7

States assets and liabilities should be reported at their current market value, rather than their original purchase price

Question 8

Monetary Unit Assumption

Answer 8

The idea that businesses record their financial activities using a stable currency (i.e. $)

Question 9

Going Concern Assumption

Answer 9

The idea that a business will continue to operate for the foreseeable future

Question 10

Corporations v Partnerships v Sole Proprietorships

Answer 10

-Corp: A business organized under state law that is a separate legal entity

1 or more owners (called stockholders)

-Part: A business with two or more owners and not organized as a corporation

-Sole: A business with a single owner

Question 11

(LLC) Limited Liability Corp

Answer 11

A company in which each member is only liable for their own actions

One or more owners

Question 12

Assets v Liabilities v Equity v Revenues v Expenses

Answer 12

-Assets:Future economic benefit

Ex. Cash, Land, Equipment, ACCOUNTS RECEIVABLE

-Equity: Something a business owes to its owners, or the value of the investment to the owner; what’s yours after taking out what you still owe

Ex. Revenues, Expenses, Dividends

-Liab: Future economic sacrifice or obligation

Ex. Salaries/Notes/Accounts Payable, Unearned Revenue

-Rev: The income that comes in from customers

-Exp: Money a company spends on things like rent, salaries, materials, and utilities

Question 13

Elements of a Journal Entry

Answer 13

Credit (R), Debit (L), Date

Question 14

Debit v Credit & how are they used

Answer 14

-Deb: Increase asset/expense accounts or Decrease liability/equity accounts

-Credits: Decrease asset/expense accounts or Increase liability/equity accounts

Question 15

Normal Balance

Answer 15

• Asset: Debit
  -Liab: Credit
  -Equity: Credit
  -Rev: Credit
  -Exp: Debit

Question 16

!!!!Identify the purpose of common accounts such as cash, accounts
receivable, accounts payable, equipment

Question 17

Define a trial balance and what is it used for

Answer 17

A list of all accounts with their balances

Assets listed first then liabilities and equity

Used to make sure the companys book keeping is accurate

Question 18

Cash accounting v Accrual accounting

Answer 18

• Cash: Records revenue when money is received and expenses when money is paid out

-Acc: Records revenue when it is earned and expenses when they originally occur

Question 19

Contra-account

Answer 19

An account that reduces the balance of another related account

Ex. Equipment= 10,000 Depreciation= 2,000

Question 20

Book Value

Answer 20

The value of an asset as recorded on a company’s balance sheet

Calculation: Original cost of asset - accumulated depreciation

Question 21

!!!!!!!!Know how, why, and when adjusting entries (deferrals and accruals) and closing
entries are prepared

Question 22

What is a temporary vs permanent account and examples of each

Answer 22

-Temp: An account that is used to accumulate transactions for a specific period and is then closed at the end of that period

Ex. Revenues, Expenses, and Dividends

-Perm: An account that maintains its balance over multiple accounting periods and is not closed at the end of the period

Ex. Assets, Liabilities, and Equity

Question 23

What accounts appear on BS and IS

Answer 23

-Income Statement: Revenues
Expenses
= Net Income

-Balance Sheet: Everything not included on a Statement of Retained Earnings or Income Statement

i.e Beginning Balance
Dividends
Net Income (statement of retained earnings)

Question 24

Accrued Revenue v Deferred Revenue

Answer 24

Accrued Revenue: recognized before cash is received

Deferred Revenue: recognized after cash is received but before the service is provided or product is delivered

Question 25

Merchandise company v Service company

Answer 25

-Difference is inventory (one has tangible goods, one does not) -Merchandise company recognizes revenue when they deliver the product to the customer, while a Service company recognizes revenue as the service is performed

Question 26

Periodic v Perpetual inventory system

Answer 26

-Period: inventory entries are only recorded once a week, month, or year -Perp: anytime a transaction occurs that affects inventory, inventory is directly affected *most used today*

Question 27

How do you interpret and apply credit terms for purchases or sales

Answer 27

1/10 net 30..... Discount of 1% if paid in 10 days otherwise pay within 30 days

Question 28

!!!!How do you interpret and apply shipping terms for purchases or sales

Question 29

Inventory Shrinkage

Answer 29

Difference between the inventory the company expects to have and the inventory they actually have (Expected ending inventory - Actual inventory) Causes could be theft, damage, spoilage, fraud, or error

Question 30

Single step v Multi step income statements

Answer 30

-SIngle: Simple, less detailed, focuses on total revenues and expenses (SERVICE COMPANIES) -Multi-Step: More detailed, provides insights into gross and operating profits, preferred for larger or more complex businesses (MERCH COMPANIES)

Question 31

Unit 2 principles and assumptions

Answer 31

-Consistency Principle: must be consistent with methods used from year to year (i.e. FIFO, LIFO) -Disclosure Principle: requires companies to share all relevant information about their financial statements -Materiality Concept: helps ensure that financial reports present relevant information that can aid stakeholders in making informed decisions -only requires companies to disclose information that is important

Question 32

Identify the characteristics of the specific identification inventory cost system

Answer 32

-Companies use Specific ID when they want to record each cost separately -Tracking each individual item in inventory, allowing for precise cost attribution to each unit sold -Most used for luxury companies

Question 33

Understand and apply the Lower-of-cost-or-market principle (LCM)

Answer 33

requires that merchandise inventory be reported in the financial statements at whichever is lower: the historical cost of the inventory or the market value of the inventory

Question 34

Know the differences between the different inventory methods in periods of rising prices

Answer 34

In periods of rising prices, FIFO presents higher gross profit, inventory, and taxes Weighted Avg always presents a number between FIFO and LIFO

Question 35

Five different components of internal controls

Answer 35

CRIME Control procedures, Risk assessment, Information system, Monitoring of controls, control Environment

Question 36

Understand and apply the internal control procedures

Answer 36

Assignment of Procedures, Segregate Duties, Restrict Access, Documents, Audit/Independently Verify

Question 37

Purpose of the bank reconciliation

Answer 37

to ensure that a company's accounting records match the cash balances in its bank account (bank and book)

Question 38

Internal controls directly associated with the use of a bank account

Answer 38

Human error, fraud, collusion, cost v benefit *most important*

Question 39

What journal entries are typically prepared after the bank reconciliation is complete

Answer 39

Bank Fees, Interest Earned, NSF Checks, and Errors

Question 40

FIFO v LIFO

Answer 40

First in First Out Last in First Out

Question 41

How accounts receivable are created

Answer 41

When something is sold and the customer is extended a credit (says they will pay later)

Question 42

!!!!!How to calculate the estimate using the percentage of sales and aging of accounts receivable methods

Question 43

why you cannot use the direct write-off method

Answer 43

it does not record expenses in the same period as the related revenue, leading to inaccurate financial reporting; aka Matching Principle (requires companies to record expenses in the same period as the revenues they generate)

Question 44

purpose of asset capitalization

Answer 44

to record the cost of acquiring or improving a long-term asset on the balance sheet, spreading its expense over its useful life to match revenue generation and improve financial accuracy

Question 45

how are natural resource costs allocated

Answer 45

Depletion; allocating the cost of a natural resource, such as oil or timber, over the period of time that the resource is exploited or used up

Question 46

Bonds: Def, Characteristics, Components

Answer 46

Written promise to pay Multiple parties to whom you owe money to; Sold to investors -Amount on the bond/Specific Principal Amount= Face Value or Par Value -Rate on the bond/Specific Interest Amount/Rate= Stated Rate

Question 47

Benefits of stock financing compared to bond financing

Answer 47

Stock financing avoids fixed repayment obligations and interest costs, reducing financial strain and risk, while providing access to long-term capital without increasing debt levels

Question 48

How to record sale of par value stock and no par stock

Answer 48

To record the sale of par value stock, credit the common stock account for the par value and credit additional paid-in capital for any amount received above the par value. For no-par stock, credit the common stock account for the total proceeds received since there is no par value to allocate

Question 49

Process of dividend declaration and payment

Answer 49

When declaring a dividend, the board of directors authorizes the payment, creating a liability by debiting retained earnings and crediting dividends payable. When the dividend is paid, the dividends payable account is debited, and cash is credited to record the payment

Question 50

Purpose of cash flow statement

Answer 50

The purpose of the cash flow statement is to provide insights into a company's cash inflows and outflows from operating, investing, and financing activities, helping stakeholders assess liquidity, financial health, and cash management efficiency

Question 51

Indirect v Direct Methods for preparing the cash flow statement

Answer 51

Indirect method starts with net income and adjusts for non-cash items and changes in working capital to calculate cash flows from operating activities Direct method reports actual cash receipts and payments, providing a more detailed view of cash transactions

Question 52

Identify and calculate events reported in each section of cash flow statement

Answer 52

The cash flow statement includes operating activities, calculated by adjusting net income for non-cash expenses and changes in working capital; investing activities, calculated from cash inflows and outflows related to asset purchases and sales; and financing activities, derived from transactions involving debt, equity, and dividend payments

Question 53

The steps of the indirect method of calculating cash flows from operating activities

Answer 53

Starts with net income Adjusts for non-cash expenses like depreciation and amortization Adds back losses and subtracts gains Accounts for changes in working capital items such as accounts receivable, inventory, and accounts payable

Question 54

Understand the impact of a sale of fixed asset on the investing activities section

Answer 54

The sale of a fixed asset is reported as a cash inflow in the investing activities section, with the proceeds recorded regardless of any gain or loss recognized on the sale

Question 55

Types and purpose of analysis of financial statements and what each indicates

Answer 55

-Horizontal analysis: (examines trends over time to indicate growth or decline) -Vertical analysis (compares components of a financial statement as percentages to indicate proportionality) -Ratio analysis (calculates financial metrics to assess profitability, liquidity, efficiency, and solvency). These analyses help stakeholders evaluate financial performance, trends, and overall health