Accounting101 final
- 1. Accounting 101 Final 65 mc questions 1. What is the Sarbanes Oxley Act of 2002? What agency did it create? An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as Enron, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards. It created a new, quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, charged with overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. The nonprofit arm of Financial Executives International (FEI), Financial Executives Research Foundation (FERF), completed extensive research studies to help support the foundations of the act. 2. Given account titles and balances, and asked to complete calculations - similar to chapter 2 and 3 quizzes on blackboard 4. Know the GAAP principles - historical cost, going concern, objectivity, monetary unit, etc 1. Going Concern- An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption. 2. Objectivity Principal- Accountants use the objective to describe asset valuations that are fractural and can be verified by independent experts. 3. Historical Cost- The original amount that the business entity paid to acquire the asset. 4. Monetary Unit- When the dollar amount is not always stable. Due to inflation and deflation the value of the the money will purchase less. 5. What are the diff forms of business organizations - know the characteristics of each 1. Sole Proprietorship- An unincorporated business owned by a single individual. 2. Corporation- A business organized as a separate legal entity and chartered by a state, with ownership divided into transferable shares if capital. 3. Partnership- An unincorporated form of business organization in which two or more persons voluntarily associate for purposes of carrying out business activities. 6. Know how to do simple manipulations of the acctg equation Accounting Equation: Assets= Liabilities + Owners Equity 7. What is the basic purpose of audited financial statements? They give assurance to outsiders that the financial statements issued by management provide complete and reliable picture of the company’s financial statements, performed by a firm of certified public accountants. An audit is an investigation of a company’s financial statements, designed to determine the fairness of these statements. 8. What are the basic financial statements? 1. Balance Sheet- Is a position statement that shows where the company stands in financial terms at a specific date. 2. Income Statement- is an activity statement that shows details and results of the company’s profit related activities for a period of time. 3. Statement of Cash Flows- Statement that shows the details of the company’s activities involving cash during a period of time. 9. What does the income summary account tell us?
- 2. The summary account in the ledger to which revenue and expense accounts are closed at the end of the period. The balance (credit balance for a net income, debit balance for a net loss) is transferred to the Retained Earnings account. 10. What kind of account is unearned revenue? What about prepaid expenses? Unearned Revenue- An obligation to deliver goods or render services in the future, stemming from the receipt of advance payment. When a company collects money in advance from its customers, it has an obligation to render services in the future. Therefore, the balance of an unearned revenue account is considered to be a liability; it appears in the liability section of the balance sheet, not in the the income statement. Cash $9,000 Unearned Rent Revenue $9,000 Collected Cash in advance from harbor Cab for rental of storage space for 3 months. Unearned Rent Revenue $3,000 Rent Revenue Earned $3,000 Portion of rent received in advance from Harbor Can that was earned in December. Prepaid Expenses- Assets representing advance payment of the expenses of future accounting periods. As time passes, adjusting entries are made to transfer the related costs from the asset accounts to an expenses account. 11. Know how to do chapter 10 adjustments for interest - you may also refer back to chapter 4 12. Know the normal balances of accounts Normal Account Classification Balance Assets Debit Contra asset Credit Liability Credit Contra liability Debit Owner's Equity Credit Stockholders' Equity Credit Owner's Drawing or Debit Dividends Account Revenues (or Income) Credit Expenses Debit Gains Credit Losses Debit 13. What kind of account is accumulated depreciation and what is it's normal balance? A contra-asset account shown as a deduction from the related assets account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account. It has a credit balance, and offsets the cost of an asset in the balance sheet. 14. Given a trial balance before adjustments - know how to make adjustments based on it 1. Converting assets to expenses- Ex. Debit Unexpired Insurance Credit Cash--> Debit Insurance Expense Credit Unexpired Insurance 2. Converting Liabilities to revenue- Ex. Debit Cash Credit Unearned Revenue-> Debit Unearned Revenue Credit Revenue Earned
- 3. 3. Accruing unpaid expenses- End of month adjustment. Debit Salary Expense and credit Salaries Payable. 4. Accruing uncollected Revenue- End of accounting period adjustment. Debit Acc Rec and credit Service revenue earned. 15. What is proper way to prepare a journal entry? Know 16. What are the steps of the accounting cycle? Know them in the proper order Accounting Cycle- The sequence of accounting procedures used to record, classify, and summarize accounting information. The cycle begins with the initial recording of business transactions and concludes with the preparation of formal financial statements. The Steps are: 1. Journalize- record transactions 2. Post each journal entry to the appropriate ledger account. 3. Prepare a trial balance. 4. Make end of period adjustments 5. Preparing and adjusting a trial balance. 6. Preparing the financial statement. 7. Journalizing and posting closing entries 8. Preparing an after closing trial balance. 17. Know how to do chapter 11 calculations - refer to demo problem at end of chapter and know how to do those calculations Stockholders Equity 8% preferred stock, $100 Par value, 200,000 shares authorized 12,000,000 Common Stock, 5 par, 5,000,000 shares authorized 14,000,000 Additional Paid In Capital Preferred Stock 360,000 Common Stock 30,800,000 31,160,000 Retained Earnings 2,680,000 Total Stockholders Equity 59,840,000 A. How many shares of preferred stocks have been issued? 12,000,000 / 100 par per share = 120,000 Shares B. What is the total amount of dividend to Preferred stocks? 120,000 shares X $8 per share= $960,000 C. How many shares of common stock have been issued? 14,000,000 / $5 par = 2,800,000 shares D. What is the average price received by the Corp for the common Stock? 14,000,000 + 30,800,000= 44,800,000 / 2,800,000 # of shares= $16 E. What is the amount of legal Capital? 120,000,000 + 14,000,000= 26,000,000 F. What is the total paid in capital? 26,000,000 Legal Cap + 31,160,000 ADPIC= 57,160,000 G. What is the book value per share of common stock? Total Stock Holders Equity 59,840,000 Less: Claims of preferred Stock 12,000,000 Equity of common stockholders 47,840,000
- 4. Number of common stock outstanding 2,800,000 Book Value Per Share 17.09 18. What is the name given to those shares of stock that have been sold and are in the hands of stockholders The name of stocks that have been sold and are in the hands of stockholder’s are called Outstanding Stocks. 19. Know how to do chapter 10 calculations for calculating interest - refer to the blackboard exercises Ex: On November 1, Porter Company borrows $10,000 from its bank for a period of 6 months of an annual interest rate of 12%. Six months later on May 1, Porter Company will have to pay the bank principal of $10,000, plus $600 interest ($10,000 X 12% X 6/12). The Journal Entry to record November 1 borrowing is: Cash 10,000 Notes Payable 10,000 Borrowed $10,000 for 6 months at 12% interest per year. At December 31, 2 months interest expense has accrued, and the following year-end adjusting entry is made: Interest expense…. 200 Interest payable 200 To record interest expense incurred through year end on 12%, 6 month note dated Nov.1 ($10,000 X 12% X 2/12=$200) For Simplicity, we will assume that Porter Company makes adjusting entries only at yearend. Thus the entry on May 1 to record payment of his note will be: Notes Payable 10,000 Interest Payable 200 Interest Expense 400 Cash 10,600 To record payment of 12%, 6 month note on maturity date and to recognize interest expense accrued since Jan 1 (10,000 X 12% X 4/12=400) 20. Know what the impact is of omitting adjusting entries on financial statements If you omit adjusting entries on financial statements it can cause overstatements or understatemets on the financial statements. 21. Read chapter 10 as per the syllabus - know what is involved in determining how to record liabilities as long term vs. short term Some long-term debts, such as mortgage loans, are payable in a series of monthly or quarterly installments. In these cases, the principal amount due within one year (or the operating cycle) is regarded as a current liability, and the remainder of the obligation is classified as a long-term liability. As the maturity date of a long-term liability approaches, the obligation eventually becomes due within the current period. Long term liabilities that become payable within a year of the balance sheet date are reclassified in the balance sheet as current liabilities. Changing the classification of a liability does not require a journal entry; the obligation is simply shown in a different section of the balance sheet. 22. When does interest payable on a loan become a liability? After 12 months has finished, a current liability becomes a long term liability. 23. Know how to calculate depreciation under the various methods and how to do it for consecutive years
- 5. Last Question 24. What are examples of accelerated depreciation methods?? (150% DB and 200% DB) - - what do accelerated depreciation methods do? The term accelerated depreciation means that larger amounts of depreciation are recognized in the early years of the assets life, and smaller amounts are recognized in the later years. The method is used primarily in income tax returns, rather than financial statements. 25. What is the most commonly used depreciation method? Many businesses use the straight-line method for their financial statements and accelerated methods in their tax returns. Accelerated Depreciation methods result in higher charges to depreciation expense early in the asset life and therefore, lower reported net income than straight- line depreciation. 26. How do you see the matching principle applied in the process of depreciation? Depreciation, as the term is used in accounting, is the allocation of the cost of a tangible plant asset to expense in the periods in which services are received from the asset. The basic purpose of depreciation is to offset the revenue of an accounting period with the cost of the goods and services being consumed in the effort to generate that revenue. As services are received from the asset, the cost of the asset is gradually removed from the balance sheet and becomes and expense, through the process of depreciation. Accountants recognize that an asset will render useful services only for a limited number of years and that the full cost of the asset should be systematically allocated to expenses during the year 27. Know what the lower of cost or market rule is A method of inventory pricing in which goods are valued at orginal cost or replacement cost (market), whichever is lower. Used when market value is cheaper that originally purchased. 28. When goods are in transit - know when the goods belong to the buyer and when they belong to the seller - when title passes Title passes from the seller to the buyer when the goods are physically delivered to the buyer. 29. Which inventory method is the best one to use for income tax purposes during inflationary periods? By reporting a higher cost of goods sold than results from other inventory valuation methods; the LIFO method usually results in lower taxable income. 30. You will be given cost layers and asked to calculate cost of goods sold under FIFO, LIFO, and Average cost Last Question 31. What is inventory shrinkage and how is it recorded? The loss of merchandise through such causes as shoplifting, breakage, and spoilage. EX: Computer City shows an inventory with the cost of $72,200. A physical inventory however shows a balance of $70,000 on hand. Cost of Goods Sold $2,200 Inventory $2,200 To adjust the perpetual inventory records to reflect the results of the year end physical count. 32. Know how to record purchases and sales under periodic and perpetual methods Perpetual Inventory System: Purchases of Merchandise: Inventory $6,000 Accounts Payable $6,000 Purchased 10 Regents 21 inch computer monitors for $600 each. Sales of Merchandise:
- 6. Accounts Receivable $2,000 Sales $2,000 Sold 2 Regents 21 inch monitors for $1,000 each Cost of Goods Sold $1,200 Inventory $1,200 To transfer the cost of 2 21 inch monitors $600 each from inventory to COGS account. Periodic Inventory System: Purchase of Merchandise: Purchases $2,000 Accounts Payable $2,000 Purchased inventory on account. Sale of Merchandise: Inventory (beginning of the year) $14,000 Add: Purchases $130,000 Cost of Goods available for sale $144,000 Less: Inventory (end of year) $12,000 Cost of goods sold $132,000 33. Know how to prepare a bank reconciliation - how to arrive at the adjusted cash balance and how to update the depositor's records (via journal entries) Ex: The July bank statement sent by the bank to Parkview Company is $5,000.17 on July 31. Parkview’s Ledger shows a bank balance of $4,262.83 1. A deposit of $410.90 made after banking hours on July 31 does not appear in the bank statement. 2. 4 checks issued in July have not yet cleared from the bank. #881 $100, #888- $10.25, #890- $402.50, #891- $205. 3. 2 credit memoranda were included in the bank statement: $500. Proceeds from collection of non-interest bearing not rec from J.David. The bank collection department collected this note for Parkview Company $24.74. Interest earned on average account balance. 4. 3 Debit memoranda accompanied the bank statement. $5 Fee charged for collection on note receivable $50.25 NSF Check $12 Service charge by the bank 5. Check # 893 was issued to the telephone company in the amount of $85 but was erroneously recorded in the cash payment journal as $58. The cash account is overstated by $27 Parkview Company Bank Reconciliation July 31,2009 Balance per bank statement, July 31.2009 $5,000.17 Add: Deposits of July 31 not recorded by Bank $410.90 $5,411.07 Deduct Outstanding Checks:
- 7. No. 881 $100 No. 888 $10.25 No. 890 $402.50 No. 891 4205 ($717.75) Adjusted Cash Balance $4,693.32 Balance per depositor’s record $4,262.83 Add: Notes Rec $500 Interest Earned $24.74 $524.74 $4,787.57 Deduct: Collection Fee $5 NSF Check $50.25 Service charge $12 Error of check Stub $27 ($94.25) Adjusted Cash Balance $4,693.32 Cash 524.74 Notes Rec 500 Interest Revenue 24.74 To record collection of notes rec from J.David collected by the bank and interest earned on bank account Bank Service Charges 17 Acc Rec 50.25 Telephone Expense 27 Cash 94.25 To record bank charges, NSF check, and understatement of cash payment for telephone expense 34. Review chapter 7 - know what a petty cash fund is and what its purpose is Every business finds it convenient to have a small amount of cash of hand with which to make some minor expenditures. Examples of these expenditures include such things as small purchases of office supplies, taxi fares, and doghnuts for an office meeting. As a practical matter, because of the small amount of petty cash expenditures, the entire debit portion of this entry often is charged to the Miscellaneous Expense Account. 35. What are cash equivalents? What are some examples? Very short-term investments that are so liquid that they are considered equivalent to cash. Examples include money market funds, U.S treasury bills, certificates of deposit, and commercial paper. These investments must mature within 90 days of acquisition. 36. What are some examples of reconciling items that a depositor may have to record that they were not aware of until the bank statement arrived? Balance per depositor’s record $4,262.83 Add: Notes Rec $500 Interest Earned $24.74 $524.74 $4,787.57 Deduct: Collection Fee $5
- 8. NSF Check $50.25 Service charge $12 Error of check Stub $27 ($94.25) Adjusted Cash Balance $4,693.32 Cash 524.74 Notes Rec 500 Interest Revenue 24.74 To record collection of notes rec from J.David collected by the bank and interest earned on bank account Bank Service Charges 17 Acc Rec 50.25 Telephone Expense 27 Cash 94.25 To record bank charges, NSF check, and understatement of cash payment for telephone expense 37. What are the entries made to record a sale in the perpetual system? Purchases of Merchandise: Inventory 6,000 Accounts Payable 6,000 Purchased 10 Regents 21 inch computers monitors for 600 each. Sale Of Merchandise: Accounts Rec 2,000 Sales 2,000 Sold 2 Regents 21 inch monitors for 1,000 each; payment due in 30 days Cost Of Goods Sold 1,200 Inventory 1,200 To transfer the cost of 2 Regents 21 inch monitors (600 each) from inventory to the cost of goods sold inventory. Revenue – Expenses = Net Income. 38. Know how to use credit terms in calculations Ex: On November 1, Porter Company borrows $10,000 from its bank for a period of 6 months of an annual interest rate of 12%. Six months later on May 1, Porter Company will have to pay the bank principal of $10,000, plus $600 interest ($10,000 X 12% X 6/12). The Journal Entry to record November 1 borrowing is: Cash 10,000 Notes Payable 10,000 Borrowed $10,000 for 6 months at 12% interest per year. At December 31, 2 months interest expense has accrued, and the following year-end adjusting entry is made: Interest expense…. 200 Interest payable 200 To record interest expense incurred through year end on 12%, 6 month note dated Nov.1 ($10,000 X 12% X 2/12=$200) For Simplicity, we will assume that Porter Company makes adjusting entries only at yearend. Thus
- 9. the entry on May 1 to record payment of his note will be: Notes Payable 10,000 Interest Payable 200 Interest Expense 400 Cash 10,600 To record payment of 12%, 6 month note on maturity date and to recognize interest expense accrued since Jan 1 (10,000 X 12% X 4/12=400) 39. What is gross profit? Net sales revenue minus the cost of goods sold. Gross profit is a useful means of measuring the profitability of sales transactions, but it does not represent the overall profitability of the business. There also are expenses they must pay and they must also pay taxes. 40. What are interim financial statements? An interim financial statement is a summary of your company's financial activities for an accounting period of less than one year. Businesses generally release annual financial statements, but many also opt for reporting financial statements on a more frequent basis. 41. Where does net income from the income statement appear? Net Income appears on the bottom of the income statement. Overnight Auto Service Income Statement Sales Revenue 2,200 Operating Expense: Wages 1,200 Utilities 200 (1,400) Net Income $800 42. Know how to prepare the closing entries - chapter 5 Closing Revenue Repair Service Revenue 100 Income Summary 100 Closing Expense Income Summary 50 Rent Expense 50 Closing Dividends Retained Earning 200 Dividends 200 To Close Income Summary with a Net Income. Income Summary 3,000 Retained Earnings 3,000 43. Know how to do all calculations under FIFO, LIFO, and Average cost under both a perpetual and periodic system Perpetual System: Average Cost- EX: Mead had 5 Elco generators in inventory, which had a tota price of $5,600 (2 units @ 1,000 plus 3 units @ 1,200= 5,600) Therefore the average per units price is (5,600 / 5 units = $1,1,20) Cash 1,800 Sales 1,800
- 10. To record the sale of one Elco Ac-40 generator Cost of Goods Sold 1,120 Inventory 1,120 To record the cost of one Elco Ac 40 generator sold to Boulder Construction Co determined by the average cost method. First in, First Out Method-EX: 2 generators from Jan 5 purchases @ 1,000……. 2,000 2 generators from Feb 5 purchases @ 1,200……. 2,400 Total Cost of 4 Units….. 4,400 Cost of Goods Sold…. 1,000 Inventory 1,000 To record the purchase of one Elco AC 40 generator sold to Boulder Construction determined by the FIFO flow assumption. Last in, First Out.. Cost of Goods Sold 1,200 Inventory 1,200 To record the sale under the LIFO assumption. 3 generators from Feb 5 @ 1,200 3,600 1 Generator from Jan 5 @ 1,000 1,000 Total Cost of goods Sold 4,600 Periodic System: Inventory at the beginging of the year 10,000 Add: Purchase during year 80,000 COG Available for sale during the year 90,000 Less: Inventory at the end of the year 7,000 Cost of Goods Sold 83,000 Average Cost- The average cost is determined by dividing the total cost of goods available for sale during the year by the total number of units available for sale. Thus the average per unit cost is 100 (3,000 / 30 units) Under the average cost method, the ending inventory would be priced at 1,200 (12 units X 100 per unit) and the cost of goods sold would be 1,800 (3,000 COGS available for sale – 1,200 in cost assigned to the ending inventory) FIFO- The Oldest units are assumed to be sold first. The ending inventory is assumed to consist of the most recently acquired goods. The inventory of 12 food processors would be valued at the following cost: The cost of goods sold would be $1,550 (3,000 – 1,450) 5 units from Dec 1 Purchase @ 130 650 5 units from Oct 1 purchase @ 120 600 2 units from the July 1 purchase @ 100 200 Ending inventory 12 Units at FIFO cost 1,450 LIFO- The most recent units purchased are assumed to be sold first. The inventory is assumed to contain the earliest purchases. The Cost of goods sold under the LIFO method is 2,020 (3,000 – 980) 10 units from the beginning inventory @ 80 800 2 units from Mar 1 Purchases at 90 180
- 11. Ending Inventory. 12 units at LIFO cost 980