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Exam 1 - Review Chapter 1-4
Getting Started in Business • Nature of Business Activities • Financing • Borrow • Note Payable • Account Payable • Bond Payable • Issue Common Stock • Investing • Purchase Assets: inventory, equipment, land, building • Operating • Sell your product • Revenue and expenses
Termsto Know - Separate Entity Assumption – keep business and personal separate • Historical CostPrinciple– record assets at purchase price • Continuity Assumption– business to continue on into future • Time Period Assumption- ability to prepare timely statements • Full Disclosure Principle – provide sufficient information • Liquidity- ability to pay short term debt • Revenue Recognition – record revenue when earned • Matching Concept – match revenue with expense in same acct. period • Unit of Measure Assumption – express transactions in US $ • Comparability – compare 2 companies in same industry • Consistency – allows comparison within a company • Materiality – amounts large enough to influence user • Conservatism – don’t overstate assets/revenues. Don’t understate liabilities/expenses _ Relevance – capacity of information to make a difference _ Reliability – dependable, accurate information
Purpose of Accounting • Users of Financial Statement • Internal: Management, CEO, CFO • External: investors, creditors • Four Financial Statements: 1. Classified Balance Sheet: Assets = Liabilities + Equity Assets: Liabilities: Current xx Current xx xx xx xx xx Total Current xx Total Current xx Investments xx Long-term note xx Fixed Assets xx Bond Payable xx Accum. Depr. (xx) Intangibles xx Total Assets xx Total Liab. xx Common Stock xx Retained Earnings xx Total Liab. + SHE xx • Current Ratio: CA/CL • Working Capital: CA - CL
2.Multi-step Income Statement: Revenues and Expenses • shows Gross Profit and Income from Operations Revenue - COGS Gross Profit - Operating Expenses Income from Operations + Gains and Losses + Interest Rev. or Int. Exp. ______________________ Net Income 3. Statement of Retained Earnings or Statement or Stockholders’ Equity: Shows changes in equity Retained Earnings Statement: Beg. R.E. (Jan. 1) + Net Income - Dividend End. R.E. (Dec. 31) Statement of Stockholders’ Equity: Beg. SHE (Jan 1) + New Common Stock + Net Income - Dividend End. SHE (Dec. 31) 4. Cash Flow Statement: Shows sources and uses of cash
The Accounting Equation Assets = Liabilities + Stockholder’s Equity Ex : Burlin Co. starts the year with $100,000 in assets and $80,000 in liabilities. Net income for the year is $25,000, and no dividends are paid. How much is owners’ equity at the end of the year. Beg. A = L + SHE 100,000 = 80,000 + 20,000 beg. SHE 0 + new stock 25,000 + net income 0 - dividend 45,000 end. SHE
The Accounting Cycle • General Journal Entries: • Rules of Debits and Credits: Use “DEAD”: Debits increase expenses, assets and dividends So then: Credits increase liabilities, equity, and revenue “CLEAR”
Examples of Journal Entries • A bank loans a company $5,000. Cash $5,000 Note Payable $5,000 (assets increase and liabilities Increase) • A company pays wages of $300 Salary expense $300 Cash $300 (expenses increase and assets decrease) • A company received cash from credit customers for collection of accounts for $400. Cash $ 400 Account Rec. $400 (assets increase and assets decrease) • A utility bill is received for $100. It will be paid next month. Utility Expense $100 Account Payable $100 (expenses increase and liabilities increase) • The company earned $6,000. Cash sales were $2,000, the rest were on credit. Cash $2,000 Acct. Rec. $4,000 Revenue $6,000 (assets increase and revenue increases) • The owner invests $700 into the business. Cash $700 Common Stock $700 (assets increase and equity increases)
Accounting Cycle, cont. • Post to Ledger (T-accounts) Remember: A debit in an entry on the left and a credit is an entry on the right. DR CR
Accounting Cycle, cont. • Unadjusted Trial Balance: Purpose: to prove total debits = total credits
Accounting Cycle, cont. • Adjusting Entries • Purpose: to update revenue (if now earned) and expense accounts (if now incurred) • Two rules: (1) never use cash as an account title (2) one account is from the income statement and one account is from the balance sheet. In a deferral the cash comes first. 1. Deferred Revenue – unearned revenue 2. Deferred Expense – prepaid expense In an accrual the cash comes later. 3. Accrued Revenue – creates a receivable 4. Accrued Expense – creates a payable
Examples of Adjusting Entries 1. Supplies were purchased during the year for $500 and debited to the supplies account. At year end, $300 of the supplies had been used. Supplies Expense $300 (deferred exp.) Supplies $300 2. Of the $4,000 unadjusted balance in unearned revenue, one-fourth was still unearned at year-end. Unearned revenue $3,000 (deferred rev.) Revenue $3,000 • Accrued salaries at the end of the year amounted to $600. Salary Expense $600 (accrued exp.) Salary Payable $600 • Rent earned but not yet received at year end totaled $800 Rent Receivable $800 (accrued rev.) Rent Revenue $800
More Adjusting Entries ABC Co. signs a six month note on Oct. 1, 2009. The note of $4,000 and interest at 8% is due on April 1, 2010. Make the necessary adjusting entry at Dec. 31, 2009. Interest Expense $80 (4,000 x .08 x 3/12) Interest Payable $80 Depreciation on office equipment is $2,000 per year. Depr. Exp. $2,000 Accum. Depr. $2,000
Backwards adj. entry • On May 1, a company paid annual rent of $18,000 and debited the amount to rent expense. • 12/31 Adjustment: used 8 months - $18,000/12 = $1500 per month x 8 mos. = $12,000 So this is the amount we want in the rent expense account – back out the excess. • Rent Expense Prepaid Rent 6,000 Rent Expense 6,000 18,000 6000 adj 12,000
Accounting Cycle, cont. • Adjusted Trial Balance • 4 Closing Entries: close all temporary accounts to zero and transfer information to Retained Earnings. • Close Revenue to Income Summary • Close Expenses to Income Summary • Close Income Summary to Retained Earnings • Close Dividend to Retained Earnings.