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GT ACCT 2101 - Exam 2 Study Guide
School name Georgia Tech
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ACCT 2101 1st EditionExam # 2 Study Guide Lectures: 7-12Lecture 7 (February 3)- Cash: In a business setting, cash includes coins, currency, undeposited negotiable instruments (i.e. checks), amounts in checking and savings accounts, and demand certificates of deposit (CD)- Certificate of deposit: An interest-bearing deposit that can be withdrawn from a bank at will (demand CD) or at a fixed maturity date (time CD)- Cash equivalents: highly liquid short-term investments with maturities of three months or lesso Commercial paper: a short-term unsecured promissory note issued by a company– when they don’t have the money they need but they know they’ll have it very soon in the futureo Treasury bill: a short-dated government security, yielding no interest but issued at a discount on its redemption price – common length = 90 days; constantly issuing these items of debt – you buy it and they pay you back- Compensating balances: required minimum cash balances on deposit when money is borrowed from banks- Deposits in transit: cash receipts recorded on the depositor’s books but not yet recorded by the bank (undeposited negotiable instruments)- Outstanding checks: checks issued by a depositor that have not yet been paid by the bank on which they are drawn- Credit/debit memo: form used by a bank to explain an addition (credit) or deduction (debit) to the depositor’s account- Not sufficient funds (NSF) check: A customer’s check returned to the depositor’s bank because the funds in the customer’s checking account balance were insufficient to cover the check (“a bad check”)- Bank Reconciliation: process that explains the difference between the bank balance shown in an organization's bank statement, as supplied by the bank, and the corresponding amount shown in the organization's own accounting records at a particular point in timeo Start with Cash Balance per (Bank or Books)o Bank Side:  Add deposits in transit Subtract outstanding checkso Book Side:  Add note collected (+ Interest – Service Fee) Subtract bank service chargeo Adjusted Cash BalanceLecture 8 (February 5)- Current assets – expected to be converted to cash or used up within a year- Short-term investments – buy them to hold them and sell them- Marketable securities – liquid assets that hold maturities - Trading assets - A collection of securities held by a firm that are held for the purpose of reselling for a profit- Accounts receivable/payable – paid out in 30-60 days- Too much cash- Current Ratio = Current Assets/Current Liabilities- Quick Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current Liabilities- Liquidity – how fast it can be converted to cash (closeness to cash)- Productive uses of too much cash – pay dividends to stockholders, invest in projects, research & development, capital investments- Cash through Accounts Receivable = “Quick assets”-Revenue is recognized when BOTH of the following conditions are meto Goods or services are delivered to the customer (that is, revenue is earned)o Cash or other asset (Accounts Receivable) is received (that is, revenue is realized)- Merchandising companies: purchase goods in finished form for resale (ex. Macy’s, Home Depot, Michael’s, Lowe’s)- Major revenue account is a Net Sales account- Net sales is defined aso Gross Sales Less: Sales Returns and Allowances & Sales Discounts Equals: Net Sales Reduce net sales by expected returns (from history)- Gross sales: total sales revenue before deducing sales returns and allowances- Sales returns: products returned by the customer- Sales allowances: reductions of the original selling price- Sales (cash) discounts: reductions of invoice prices awarded for prompt payment- Net sales: total sales revenue reduced by sales returns, allowances, and discounts- Trade discounts: reductions to the gross selling prices for a particular class of customers. (These discounts are used to set the invoice prices)Lecture 9 (February 10) - Accounts Receivable: amounts that customers owe a company for goods sold and services rendered on account (aka “on credit”)o Also called trade receivableso Does NOT include other types of receivables (such as interest receivable or rent receivable)- The allowance method for recording uncollectible accounts allows proper matching of expenses with revenues by using an allowance- An allowance is a contra asset account- The allowance reduces the Accounts Receivable balance to its net realizable value (NRV)- Since we sell on account, we might not know for a while if someone will pay us -> need toestimate bad debt -> people who won’t pay us- The allowance method yields an amount called “Uncollectible Accounts Expense” or “Bad Debts Expense” (aka Doubtful Accounts Expense)o To record the uncollectible accounts adjustment- Journal entry:Uncollectible Accounts ExpenseAllowance for Uncollectible Accounts- No matter what they call it, they refer to it as “Bad Debt Expense”- NRV of Accounts Receivable – use of the allowance method produces the net realizable value of accounts receivable- There are two basic methods of estimating uncollectible accountso Percentage of (Credit) Sales method estimates the uncollectible accounts from the credit sales of a given period The entry is computed without regard to the actual allowance balance The percentage used is based on past collection experience Amount of journal entry = Net sales (total or credit) X Percentage estimated as uncollectedo Percentage of Receivables method estimates uncollectible accounts by determining the desired size of the Allowance for Uncollectible Accounts and makes the adjustment accordingly An aging schedule of accounts receivable is often used to determine the balance needed Amount of journal entry = (Accounts Receivable ending balance x percentage estimated as uncollected) – CR balance in Allowance OR + DR balance in Allowanceo Both methods yield an allowance to reduce accounts receivableLecture 10 (February 12) - Accounts Receivable Write-off:o Entry is:Allowance for Uncollected Accounts XXAccounts Receivable (name) XXo There is NO net effect on the NRV of accounts receivableo Before the write-off, the NRV of Accounts Receivable isAccounts ReceivableLess: CR in AllowanceNet Accounts Receivableo If an accounts receivable that had been previously written off is later recovered, it will take TWO entries to record the recovery:(1) to reverse the


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GT ACCT 2101 - Exam 2 Study Guide

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