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Exam 1 - Review

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.

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Exam 1 - Review

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  1. Exam 1 - Review Chapter 1-4

  2. 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

  3. Termsto Know • Economic Entity – keep business and personal separate • Historical Cost – record assets at purchase price • Going Concern – business to continue on into future • Time Period Assumption- ability to prepare timely statements • Materiality- dollar threshold to determine if asset or expense • Relevance – does it make a difference to user? • Reliability – neutral, verifiable, representational faithful • Understandability – clear, concise • Comparability – between acct. periods, between companies • Consistency- use same acct. method once established • Conservatism – use least optimistic estimate • Liquidity- ability to pay short term debt • Solvency- ability to pay long term debt • Revenue Recognition – record revenue when earned • Matching Concept – match revenue with expense in same acct. period

  4. Purpose of Accounting • Users of Financial Statement • Internal • External • Four Financial Statements: 1. Classified Balance Sheet: Assets, Liabilities and 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) Total Assets xx Total Liab. xx Common Stock xx Retained Earnings xx Total Liab. + SHE xx • Current Ratio: CA/CL • Working Capital: CA - CL

  5. 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

  6. The Accounting Equation Assets = Liabilities + Stockholder’s Equity Ex 1-4: 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

  7. 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

  8. 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)

  9. 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

  10. Accounting Cycle, cont. • Unadjusted Trial Balance: Purpose: to prove total debits = total credits

  11. 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. • Four types: 1. Deferred Revenue – unearned revenue 2. Deferred Expense – prepaid expense In a deferral the cash comes first. 3. Accrued Asset – creates a receivable 4. Accrued Liability – creates a payable In an accrual the cash comes later.

  12. 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 liab.) Salary Payable $600 • Rent earned but not yet received at year end totaled $800 Rent Receivable $800 (accrued asset) Rent Revenue $800

  13. More Adjusting Entries ABC Co. signs a six month note on Oct. 1, 2007. The note of $4,000 and interest at 8% is due on April 1, 2008. Make the necessary adjusting entry at Dec. 31, 2007. 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

  14. 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

  15. 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.

  16. Accrual Accounting Analyze Acct. Rec to determine revenue recorded (accrual) and cash received. Acct. Rec. Beg. Rev. Cash Rec’d End

  17. Analyze account payable to determine expenses and cash paid. Acct. Pay Beg Cash Paid Expenses End

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