ACCTNG 2400 1st EditionExam # 2 Study Guide Lectures: 9 - 14Based off of most important material on lecture notes, Practice Exam on MyGateway, and the list of what to know for the exam from Professor Van WertI. For exam, know:Chapter 3:a. Income statementi. Revenues, expenses, net incomeb. Cash basis accountingc. Accrual basis accountingi. Required by GAAPd. Revenue principlee. Matching principle (expenses)f. The expanded accounting equationi. Think of revenues and expenses as subcategories of retained earnings g. When the service or product was or will be providedi. To customer ii. By the supplierh. When the cash was/will be exchangedi. Collected from customerii. Paid to supplierChapter 4:a. Why adjustments are neededa. Income statement reports performance for the periodi. Revenues when earned (revenue principle)ii. Expenses when incurred to generate revenue (matching principle)b. Balance sheet reports financial health at period end:a. Assets at amounts representing future economic benefitsb. Liabilities at amounts representing future economic sacrificesc. Some revenues and expenses don’t get recorded as the result of transactions during the perioda. Some occur solely to the passage of time (interest, rent, depreciation)b. Inability or inefficiency of recording at each event (supplies, taxes)d. Adjusting entriesa. Typically performed monthlyb. Never involve cashc. Involve 1 income statement account and 1 balance sheet accounte. Deferral adjustmentsa. Supplies and supplies expenseb. Contra-accountsc. Accumulated depreciationf. Dividendsa. Not an expense!g. Period-end processa. Prepare unadjusted trial balance to verify debits=creditsh. Adjusting journal entriesa. Analyze accounts for adjustments, prepare adjusting journal entriesi. Prepare financial statement in order: income statement, statement of retained earnings, balance sheet, statement of cash flowsMaterial from the practice exam that may be confusing:Material from lecture notes (condensed from previously posted lecture notes. Look at individual lecture notes for more detail/charts/other material covered):Lecture 9 (Feb 24)I. Chapter 3: Reporting Operating Results on the Income StatementRevenues – recorded when an asset is earned by providing a service/product to a consumerExpenses – recorded when a financial sacrifice occurs in the process of earning revenue REVENUES – EXPENSES = NET INCOMEa. Cash Basis vs. Accrual BasisCash Basis – record revenues when cash is received; record expenses when cash is paid.Accrual Basis – record revenues when earned (AKA: once services have been done. Does not necessarily mean they actually received cash); Record expenses when incurred. *Regardless of when cash is exchanged* Required by GAAP.Lecture 10 (Feb 26) I. Debits and Credits as Revenues and Expensesa. Memory aid – DEAD CRLSDebits increase: Credits increase:Expenses RevenuesAssets LiabilitiesDividends Stockholders Equity- Revenues are recorded with credits- Expenses are recorded with debitsRevenue principle – revenues are recognized (recorded on financial statement) when they are earned (the have done what is necessary to obtain the right to receive payment)Matching Principle – record expenses in the same time period as the revenues with which they can be reasonably associated.Lecture 11 (March 3)I. Multi-step income statementsa. Core results- Include revenues and expenses from the company’s main business activitiesb. Peripheral results – include any revenues and expenses from activities other than the company’s main businessII. Expense initial journal entrya. Cash paid when expense is incurredDebit Expense 10,000Credit Cash 10,000b. Cash paid before expense is incurredDebit Prepaid expense 10,000Credit Cash 10,000c. Cash paid after expense is incurredDebit Expense 10,000Credit Accounts Payable 10,000Lecture 12 (March 5)I. Accounting Cycle (FROM BEGINNING TO END – THEN IT STARTS OVER)a. During the periodi. Transaction source documentsii. Transaction analysisiii. Record in journaliv. Post to ledgerb. At period endi. Unadjusted trial balanceii. Record and post adjustment entriesiii. Adjusted trial balanceiv. Financial statementsc. At Year endi. Close temporary accountsii. Post-closing trial balanceII. Closing processa. Temporary Accounts – revenues, expenses and dividends that start counting at the beginning of each periodb. At the end of the period (the closing process)i. Transfer revenues, expenses, and dividends declared into retained earnings (a permanent balance sheet account)ii. Zero-out all of the temporary accountsIII. Why adjustments are neededa. Problem: some revenues earned and expenses incurred are not recorded during normal day-to-day business operationsb. Solution: adjust accounting records at the end of the period to appropriately state revenues, expenses, assets, and liabilitiesIV. Depreciation – a decrease in value of assets over timea. Don’t record the expense of equipment or buildings all at one, you alter the value of the expense account used on that item each monthV. Types of adjustmentsa. Deferral – record revenues and expenses that had earlier been deferred:i. Cash was collected but revenue hadn’t been earned so an unearned revenue liability was recordedii. Cash was paid but expenses hadn’t been incurred so a prepaid expense asset was recordedb. Accrual – record revenues earned and expenses incurred for which cash has not been exchangedi. Revenues are recorded with a receivable assetii. Expenses are recorded with a payable liabilityLecture 13 (March 10)Adjustments for depreciation- Depreciation is the process of allocating the cost of buildings, vehicles and equipment to the accounting periods in which they are used- It is NOT an estimate of the market value of the asset- Represents the allocation of the use of an asset over time- We use the straight-line method, where the same amount is recognized in each period of the asset’s expected useful life (distribute evenly each month)Contra-Accounts- An account that is an offset to, or reduction of, a related account- A contra-account is always paired with a related account, and always has a balance opposite (debit/credit) its paired account- Contra-asset is the most common, but there are contra-liability accounts (like bond discounts) and contra-equity accounts (like treasury stock)Deferral and Accrual adjustments- Deferral adjustments record the use of an asset as an expense- Accrual adjustments increase either an asset