Accounting 209 Review for Exam 1 This review is intended to be a study aid to help you organize course material and provide examples of some types of questions you might see on the exam but is not a comprehensive listing of every possible question concept Terms to know and understand could be used in matching fill in the blank or multiple choice questions Accounting SEC FASB GAAP IASB IFRS Annual report 10 K Auditor s report Cost principle Revenue recognition principle Matching principle Full disclosure Materiality Cost benefit Fiscal year Corporation Stockholders Shareholders Balance Sheet Income Statement Statement of Retained earnings or Stmt Of Stockholders equity Statement of Cash Flows Asset Liability Stockholders equity or shareholders equity or owners equity Dividends Common stock contributed capital Retained earnings earned capital Revenue Expense Accrual basis Transaction T account Double entry General ledger Debit Credit Adjustment adjusting entry Financial Statements Income statement Balance sheet Statement of retained earnings Understand relationships among statements Statements may be presented in any order but must be prepared in a specific order Income Stmt Stmt of RE Bal Sheet why Think of relationships among the statements Net income needed in order to prepare Stmt of RE ending RE needed to prepare Balance Sheet In practice statements are prepared in a specific order In our class problems may offer info from statements that require you to work both backwards and forwards to find missing amounts As an example refer to HW2 questions 7 10 about Basic Corporation Common balance sheet accounts ASSETS Cash Marketable securities Accounts receivable Inventory Prepaid expenses Supplies Land Buildings Equipment Machinery Office furniture Intangible assets LIABILITIES Accounts payable Wages payable Taxes payable Interest payable Unearned revenue Accrued liabilities or accrued expenses Notes payable Mortgages payable Bonds payable STOCKHOLDERS EQUITY Common stock or Capital stock Retained earnings Transactions analysis Double entry accounting requires that Each and every transaction must keep balance sheet equation accounting equation in balance Each and every transaction must affect at least two accounts in order to maintain balance Accountants use a system of journals and ledgers to record transactions In the ledger each account has a debit left side and a credit right side For all asset expense and dividends accounts the account balance is increased on the debit side For all other accounts the balance is increased on the credit side For each transaction the total dollar amount debited must equal the total dollar amount credited This automatically keeps the accounting equation in balance Adjusting entries Required at the end of each accounting period to ensure that all revenues and expenses are reported correctly accrual basis and that all asset and liability accounts are updated MAJOR CONCEPTS AND EXAMPLE PROBLEMS 1 The goal of accounting is to provide information that will be useful in making decisions Financial accounting provides information to external uses that is to people outside the day to day operations of a business Managerial accounting provides information to company management internal users that is useful in making operating decisions 2 Accountants report financial information through financial statements The income statement shows the results of operations profitability for a period of time The statement of owners equity or the statement of RE which is a component of equity shows changes in the equity accounts for a period of time The balance sheet shows financial position at a point in time The balance sheet shows Assets Liabilities Owners equity this is also known as the accounting equation Net income from the income statement is one component of the changes in retained earnings on the equity statement The other item that affects retained earnings is dividends Ending Retained earnings from the equity statement appears on the balance sheet Company management has the primary responsibility for the information in the financial statements 3 Generally accepted accounting principles are guidelines that help accountants in recording and business transactions and reporting financial information 4 The balance sheet equation must always balance after each transaction is recorded Accountants have developed a system of recording transactions known as double entry accounting that ensures that the balance sheet is kept in balance For each transaction debits must equal credits that is the dollar amount debited must equal the dollar amount credited 5 The trial balance lists all accounts in the company s ledger with their balances balances are shown as either debit amounts or credit amounts The total of the debit balances must equal the total of the credit balances 6 Accrual basis accounting requires that revenues be recorded when earned and expenses when incurred Adjusting entries are required at the end of the accounting period to ensure that all revenues and all expenses have been recorded properly and that all asset and liability account balances are up to date and as accurate as possible The following problems were all taken from exams given in previous semesters Solutions follow each problem Example problem 1 Shown below are accounts and balances of the Duval Company as of December 31 2009 Cash Fees revenue Dividends Supplies expense Accounts receivable Utilities expense 20 400 90 40 70 Accounts payable Land Rent expense Supplies Common stock Retained earnings Jan 1 2009 30 80 120 10 35 15 Determine the following a What amount of net income will Duval Company report for 2009 b What amount will Duval Company report as stockholders equity at December 31 2009 c What is the balance of Accounts Receivable as of December 31 2009 SOLUTION a Net income revenues expenses 400 40 70 120 170 b First determine RE Beginning RE NI Dividends Ending RE 15 170 90 95 Stockholders equity Common stock RE 35 95 130 c Assets Liabilities Stockholders equity Cash AR Land Supplies AP Stock RE 20 AR 80 10 30 35 95 AR 50 Example problem 2 The balance sheet for the Snook Company at December 31 2010 showed total assets of 2 500 and total liabilities of 1 280 On December 31 2010 Snook s total assets had increased to 6 900 and liabilities were 3 400 During 2010 Snook issued 1 500 in new common stock and paid 1 000 in dividends What was Snook s net income for 2010 SOLUTION Beginning of year