Pre Assesment Prep Flashcards
Balance sheet
Used to evaluate a company’s financial position by comparing the assets and liabilities
Common assets
Cash, AR, inventory, and infrastructure
Common liabilities
AP, taxes, mortgage, unearned revenue
Sources of owners equity
Capital stock and retained earnings
What types of accounts are included in the balance sheet?
Assets, liabilities, and owners equity accounts
How to calculate net income
Sales revenue - COGS - expenses
Single step income statement
Revenues and expenses are grouped together and net income is the difference between the revenue and expenses. Taxes are shown separately
Multiple step income statement
Emphasizes presentation of gross profit and operating income
What accounts are found in the multiple step income statement?
selling and admin
cost of sales
operating income
Research and development
net income
Gross profit calculation
Sales - COGS
Operating profit calculation
Gross profit - operating expenses
What accounts are used in computing a company’s net income?
Sales
COGS
income tax expense
What is reported in a multiple step income statement that is not reported in the single step?
Gross profit
What cash flow category contains activities whereby cash is obtained from or repaid to creditors and owners?
Financing
What accounts are used in computing a company’s financing cash flow for the year?
Cash paid for dividends, and cash received as investments
What accounts are used in computing a company’s ending cash balance for the year?
Cash balance at beginning of year
and cash flow from operating, investing, and financing activities
How is revenue typically recorded in terms of debits and credits?
As a credit representing an increase of equity
What items are found on the statement of cash flows?
Operating, investing, and financing activities - it is an extension of the income statement
How do the financial statements relate to each other?
- Income statement helps explain
changes in the retained earnings balance in the balance sheet - statement of cash flows explains change in the cash balance in the balance sheet
4 steps in the accounting cycle
- Analyze transactions
- Record the effects of transactions
- Summarize effects of transactions
- Prepare reports
Asset accounts
Cash, inventory, equipment
Liability accounts
AP, Notes payable
Assets (DR/CR)
Increase with debits
Decrease with credits
Liabilities (DR/CR)
Increase with credits
Decrease with debits
Owners Equity (DR/CR)
Increase with credits
Decrease with debits
Do dividends increase or decrease owners equity?
Decrease —> increased by a debit and decreased by a credit
What does a debit entry to a liability account represent?
Decrease
What does a debit entry to an equity account represent?
A decrease
Revenue recognition principle
- Cash has been collected or reasonably assured
- Earnings process is substantially complete
Matching principle
Expenses are recorded in the same period in which corresponding revenue is recorded
What is the proper way to record an increase in an asset account and an increase in an equity account?
Asset: debit
Equity: credit
How are expenses typically recorded with debits and credits?
As a debit, representing a decrease in equity
Why is accrual based accounting preferred over cash basis accounting?
Accrual based accounting provides a more accurate picture of a company’s economic profitability
Accrual based accounting
Process of recording revenues and expenses when earned and incurred regardless of when cash is received
Cash basis accounting
Process where revenues and expenses are recognized only when cash is received or paid
How to calculate interest rates
(Simple interest X 100) / (principle X time)
Special journal vs general journal
General = one journal
Special = multiple journals
When does an accountant perform transaction analysis?
When recording items in the journal
3 steps of a JE
- Identify accounts
- Determine increase / decrease for each
- Determine how much increase / decrease
What kind of accounts are expense accounts?
Equity accounts
What does journalizing mean?
Recording a transaction
Current Asset accounts
Cash
AR
Inventory
notes receivable
supplies
Long term asset accounts
Land, buildings, equipment
Current liability accounts
Notes payable
AP
salaries
interest payable
income taxes
Long term liability accounts
Mortgage payable
What are some of the Expense accounts (equity)
advertising
utilities
travel
office supplies
COGS
admin salaries
rent
payroll taxes
Chart of accounts sequence
- Assets
- Liabilities
- Owners equity accounts
- Revenues
- Expenses
At the end of the year before any closing entries are made, which account has a debit balance?
COGS
What is a nominal account?
Temporary accounts that are closed to a zero balance at the end of each accounting period appearing on the income statement
What is a real account?
Permanent accounts that are not closed to a 0 balance at the end of each accounting period - appear on balance sheet
What accounts are nominal accounts?
Revenues, expenses, dividends, COGS, and capital stock
What accounts are real accounts?
Cash, AR, AP, retained earnings
In preparing bank reconciliation, what is the proper treatment of a deposit in transit?
Add it to the reported cash balance in the bank statement
Why are daily cash deposits important?
They prevent the accumulation of a large amount of cash
Periodic reporting criteria
- Financial position from balance sheet
- Relative success or failure from income statement
- Nature and extent of cash flows form statement of cash flows
How does the time period concept impact the process of financial reporting?
Financial statements are provided on a regular basis at least once a year
What kind of account is a dividend account?
Equity
Where and when should an expense already paid in cash be reported if it cannot be directly matched with an associated revenue?
I’m the income statement as an expense in the accounting period in which it occurred
Unrecorded liabilities JE
DR expense
CR payable
Prepaid balances JE
DR prepaid account
CR cash
Unearned revenue JE
DR cash
CR unearned revenue
2 steps for adjusting JEs
- does not involve cash
- Each entry involves a balance sheet account and an income statement account
What are balance sheet accounts?
Cash
AR/AP
Equity
short term assets
prepaid expenses
intangible assets
What are some income statement accounts?
TRACED
Taxes
Revenue
Amortization
COGS
Expenses
Depreciation
Calculating expense totals
(total / months) x time left in year
Closing retained earnings to dividends JE
DR RE
CR dividends
Are balance sheet accounts closed at the end of the year?
No, only income statement accounts are closed at the end of the year
Which account is shown in a post closing trial balance?
Cash
How is the ending retained earnings balance computed?
Beginning RE + net income - dividends
At the end of the year what account is reflected in the retained earnings balance before the closing entries are made?
Net income
What accounts have debit balances on the trial balance?
Expense accounts
What accounts have credit balances on the trial balance?
Revenue accounts
Adjusted trial balance steps
- Refer to last 5 lines on adjusted trial balance
- Data validation tool - list - highlight ALL account titles - ok
- Add last 5 lines to closing entries
- Add RE as the 6th line
- Calculate RE (revs - exps)
- Indent all credit items
- Skip line under RE and add another RE line and dividends under RE
- BOTH will be the total shown in the dividends column
- Indent dividends and credit balance
- Add balances to RE beginning balance, net income, dividends, and calculate ending RE balance
Post closing trial balance set up
- Data validation tool for all lines
- Select only real trial balance accounts
- Copy all adjusted balances except RE into post closing
- Pull bottom RE balance into RE on post closing
- Use auto-sum to tally debits and credits
What are the real trial balance account titles?
Cash
Inventories
Receivables
PPE
Intangible assets
Other assets
AP
Loans payable
Capital lease liabilities
Deferred income tax
Accrued expenses and other liabilities
Capital stock and other
Accumulated other comprehensive loss
Retained earnings
If an expense is improperly recorded as an asset what impact does this have on the income statement?
Net income is overstated
What is the impact of posting the CORRECT amount to the WRONG expense amount?
Incorrect totals for individual expense accounts
What are the 5 internal controls?
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring
3 functions of segregation of duties
- Authorization
- Record keeping
- Custody of assets
What are control activities?
Policies and procedures that provide reasonable assurance that the company’s established objectives will be met
How to reconcile bank statements
Begin with balance per bank (ending balance)
+ deposits in transit
- outstanding checks
= correct balance
Then take balance per books
+ interest earned
- bank service charges
MAKE SURE THEY MATCH
How to read sales discounts
x/10 is the % discount and n/x are the payment terms
Customer will receive X discount if they pay within N terms
What accounts are contra accounts?
Sales discounts, returns, and allowances
What is a contra account?
An account that is offset or deducted from another account
How to calculate gross sales
Total recorded sales before discounts, returns and allowances
How to calculate net sales
Gross sales - sales discounts, returns and allowances
Direct write off method
Recording of losses from uncollectible accounts as expenses during the period in which they are deemed uncollectible
Allowance method
Recording of estimated losses due to uncollectible accounts as expenses during the period in which the sale occurred
Write off of specifically identified bad accounts JE
DR allowance
CR accounts receivable
Net sales on the income statement computed as
Gross sales - sales discounts - sales returns and allowances
Net AR in the balance sheet is computed as
Gross AR - allowances
FOB destination
Seller owns merchandise from the time it is shipped until it is delivered to buyer
FOB shipping point
buyer owns merchandise at the time merchandise is shipped
Perpetual inventory system
Inventory records are updated whenever a purchase or sale is made - most often used when each item has a relatively high value
Periodic inventory system
Only the dollar amount of the sale is recorded - most often used when inventory comprises a large number of diverse items each with a relatively low value
2 steps of physical counting of inventory
- Quantity count
- Inventory costing
Computing inventory and COGS for periodic system
Beginning inventory
+ net purchases
= COGS available for sales
- ending inventory
Computing inventory and COGS for perpetual system
Beginning inventory
+ net purchases
= COGS available for sale
- prelim COGS
= ending inventory predicted
- ending inventory actual
= Cost of moving inventory
Inventory shrinkage
Inventory lost or stolen during a period
Obsolescence
Notable decrease in the worth or utility of an inventory item
How is inventory shrinkage typically reported in the financial statements?
As part of COGS
FIFO
First in first out - assumes oldest units are sold first and new units remain in inventory
LIFO
Last in first out - assumed newest units are sold first
COGS = new units
Inventory = old units
When to capitalize
When costs are expected to benefit future periods
Salvage value
The amount expected to be received when an asset is sold at the end of its useful life
Straight line depreciation METHOD
assumes an asset will benefit all periods equally and that the cost of the asset should be assigned on a uniform basis for all accounting periods
Annual Straight line depreciation calculation
(Cost - salvage value) / estimated useful life in years
Depreciation expense JE
DR depreciation expense
CR accumulated depreciation
Double Declining - balance depreciation calculation
((100 / years) x 2) x book value
Disposal JE
DR accumulated depreciation
CR (item)
Trademark JE
DR trademark
CR cash
Patent JE
DR patent
CR cash
Franchise JE
DR franchise
CR cash
Amortization
To periodically lower the book value of a loan or an intangible asset over a set period of time.
Amortization JE
DR amortization expense
CR patent/TM etc
What is the difference between depreciation and amortization?
Depreciation is for tangible assets and amortization is for intangible assets
Amortization expense calculation
Cost / useful life
Federal payroll JE
DR federal withholding
CR cash
State payroll JE
DR state withholding and state unemployment
CR cash
Salary JE
DR salaries payable
CR cash
Salary expense vs salary payable
expenses are tax withholding
payable amount paid
Sick day JE
DR salaries expense
CR sick days payable
Which principle required that the expense associated with a compensated absence be accounted for in the period in which it is earned by the employee?
Matching
Property tax JE
DR property tax expense
CR prepaid property taxes
Contingency
An uncertain circumstance involving potential gain or loss that will not be resolved until some future event occurs
Probable contingency
Future event is likely to occur and should be disclosed on the balance sheet
Reasonably possible contingency
Chance of future event is more than remote but less than likely and should be disclosed on the balance sheet
Remote contingency
Chance of future event occurring is slight and does not need to be disclosed on the balance sheet
Discounting
Reducing a future value to its present value
When computing present and future values what does compounding refer to?
Frequency with which interest is added to the principle
Loan payment JE
DR loans payable
CR interest expense
Prospectus
Report provided to investors that represents a company’s financial statements and explains its business plan, sources of financing, and significant risks
Corporate charter
Written doc filed by founders detailing the major components of a company like objectives, structure, and planned operation
Par value
Face value of a single share of stock
Stock issuance JE
DR cash
CR common stock
How does the amount in retained earnings change from one year to another?
Increased by net income
decreased by dividends and net loss
Retained earnings
calculation
Beginning retained earnings
+net income
-dividends
Cash dividends
Cash distribution of earnings to stockholders
3 important dividend dates
- Declaration date
- Date of record
- Payment date
What happens to dividends accounts at the end of the year?
Closed to the retained earnings account
Declared dividends JE
DR dividends
CR dividends payable
COGS JE
DR COGS
CR inventory
Which financial statement provides a detailed explanation of one component in the year-to-year change in the retained earnings balance?
Income statement
What is an expense?
The amount of assets consumed through business operations
What is an example of an investing activity?
Buying buildings
A company issued capital stock to new investors in exchange for $100,000 cash. What is the effect of this transaction on the accounting equation?
Total assets and owners’ equity increase
What does a debit entry to a liability account represent?
A decrease
How are dividends typically recorded with debits and credits?
As a a debit, representing a decrease in equity
When does an accountant perform transaction analysis?
When recording items in the journal
When making a journal entry, why is it important to know whether in account increased or decreased?
To determine whether the account should be debited or credited
Time period concept
Financial statements are provided on a regular basis, at least once a year
In which type of business would accrual basis accounting result in the same income measure as cash basis accounting?
A small business, in which all sales amounts are collected in cash at the time of the sale and all expenses are paid in cash immediately
Wages expense JE
DR wages expense
CR wages payable
Initial Prepaid expenses JE
DR prepaid account
CR cash
Initial Office supplies JE
DR supplies
CR cash
Adjusting office supplies JE
DR supplies expense
CR supplies
Adjutsting prepaid expense JE
DR prepaid account expense (insurance)
CR prepaid account (insurance)
Initial Unearned revenue JE
DR cash
CR unearned revenue
Adjusting unearned revenue JE (after revenue is earned)
DR unearned revenue
CR revenue
Adjusting rent expense JE
DR rent expense
CR prepaid rent
Adjusting interest JE
DR interest receivable
CR interest revenue
What kind of control activity is the policy requiring employees to take mandatory vacations?
Independent check
In a corporation who has the power to properly authorize the payment of dividends?
The board of directors
Why is the separation of duties control so important with cash?
Without separation of duties, an employee who takes cash can cover up the shortage by adjusting the accounting records
What are three specific functions that should be kept separate when setting up more sophisticated internal controls?
approving
recording
physical possession
Who makes up the audit committee in a public company?
Outside directors
What is the impact of posting an expense amount as an asset in the general ledger?
Expenses are too low,
Reported net income is too high
Sales discounts JE
DR cash
DR sales discounts
CR AR
Return of merchandise JE
DR sales returns and allowances
CR cash
CR AR
Bad debt expense JE
DR bad debt expense
CR allowance
Specifically identified uncollectible accounts (allowance) JE
DR allowance
CR AR
What kind of account is sales returns and allowances?
A contra-revenue account
With respect to bad debts what is the direct write off method?
Recognizing bad debt expense after confirming that a specific customer is not going to pay
How to calculate net AR
Sales - allowance
What kind of contra account is sales discounts?
revenue
3 different types of inventory
- Raw materials
- Work in process
- Finished goods
What is the proper accounting for the inbound inventory shipping cost called
“freight in”?
Add to inventory cost
Periodic vs Perpetual systems inventory JE
Periodic:
DR Purchases (freight in)
CR AP
Perpetual:
DR inventory
CR: AP
What is the proper accounting for purchasing discounts?
Subtract from inventory cost
Periodic vs Perpetual system inventory return JE
Periodic:
DR AP
CR purchase returns
Perpetual:
DR AP
CR inventory
Periodic vs. Perpetual inventory shrinkage closing JE
Periodic:
DR COGS
CR inventory
Perpetual:
DR AP
CR inventory
Periodic inventory calculation
Beginning inventory
+ purchases
= GAFS
- ending inventory
=COGS
What caution needs to be exercise when using a declining balance depreciation method to compute depreciation expense during the final years of an assets life?
Cannot reduce book value below salvage value
What accounting action is necessary when an asset becomes worthless and must be scrapped?
must be removed from the books 
What happens to any remaining un-depreciated cost when an asset is scrapped?
It is recorded as a loss
What legal right belongs to the owner of a patent?
Protection from others using or selling the product for a specified number of years
Patent amortization JE
DR amortization expense
CR patent
With respect to a valuable trademark that a company has internally developed, which costs are capitalized?
The legal filing cost associated with registration
What is the proper accounting for most costs associated with developing a patent?
Expense
What is the proper accounting treatment if the market value of a franchise exceeds its cost at the time of acquisition?
Record the franchise asset at cost
What is the relationship between the cash balance in the amount of retained earnings?
There is not direct relationship
Dividend payment JE
DR dividends payable
CR cash
Gross profit percentage calculation
Gross profit / sales
How to calculate EPS (earnings per share)
Net income / # of outstanding shares
2 EPS reported figures
- Basic - # actually outstanding
- Diluted - # that could be if stock was exercised
Operating activities inflows/outflows
Inflow: cash receipts, interest and dividend revenue
Outflow: cash payments, salaries and taxes
Financing activities cash inflows and outflows
Inflow: issuance of notes, bonds, and common stock
Outflow: repayment of loans, repurchase of stock
Articulation
The interrelationships between the financial statements
Are dividends included in net income calculations?
No!
General ledger vs general journal
Ledger: identifies what page the entry appears
Journal: identifies the account
5 categories of control activities
- Segregation of duties
- Proper procedures for authorizations
- Physical control over assets
- Adequate documents
- Independent checks
What control activities are preventative controls?
Segregation of duties
Proper procedures for authorizations
Physical control of assets
What control activities are considered detective controls?
Adequate documents
Independent checks
FIFO/LIFO COGS calculation
Average cost flow assumption
COGS and ending inventory are determined by using an average cost of all merchandise
Average cost flow assumptions calculation
Book value of long term intangible assets calculation
Cost - accumulated depreciation
What does MORE expenses equal?
Less retained earnings
Utilities expense JE
DR utilities expense
CR cash
Adjusting unrecorded receivables JE
DR AR
CR revenue
What accounts are credited when making closing entries?
Revenues
Adjusted unearned service revenue JE
DR unearned service revenue
CR service revenue
Percentage of AR method formula
(Bad debt / AR) x 100
What is one cash management tool?
Minimum amount in non-interest accounts
Maximum amount in higher yielding investments
Cash collection JE
DR cash
CR AR
Credit sale JE
DR AR
CR sales
Adjusting bad debt expense JE
DR bad debt expense
CR allowance
Who retains ownership with respect to goods on consignment?
Supplier maintains ownership until it is sold even though the inventory is at the seller’s location
With FIFO cost flow assumption, which units are assumed to be sold first?
The old units
Does the AP account get closed at the end of the period?
No!
Are revenues debited or credited when closing to retained earnings?
Credited
What is the closing entry for sales revenue?
DR sales revenue
CR retained earnings
What is the closing entry for COGS?
DR retained earnings
CR COGS
Unearned rent revenue JE
DR unearned rent revenue
CR rent revenue
Interest expense JE
DR interest expense
CR interest payable
Initial prepaid rent JE
DR prepaid rent
CR cash
Adjusting prepaid rent JE
DR rent expense
CR prepaid rent
Delivery revenue JE
DR AR
CR delivery revenue
