Accounting 209 Review for Exam 1This 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)AccountingSECFASBGAAPIASBIFRSAnnual report (10-K)Auditor’s reportCost principleRevenue recognition principleMatching principleFull disclosureMaterialityCost – benefitFiscal yearCorporationStockholders/ShareholdersBalance SheetIncome StatementStatement of Retained earnings (or StmtOf Stockholders’ equity)Statement of Cash FlowsAsset Liability Stockholders’ equity (or shareholders’ equity or owners’ equity)DividendsCommon stock (contributed capital)Retained earnings (earned capital)RevenueExpenseAccrual basisTransactionT accountDouble entryGeneral ledgerDebitCreditAdjustment/adjusting entryFinancial Statements- Income statement- Balance sheet- Statement of retained earningsUnderstand relationships among statementsStatements 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 accountsASSETS LIABILITIES Cash Accounts payableMarketable securities Wages payableAccounts receivable Taxes payableInventory Interest payablePrepaid expenses Unearned revenueSupplies Accrued liabilities (or accrued expenses)Land Notes payable Buildings Mortgages payableEquipment Bonds payableMachineryOffice furniture STOCKHOLDERS’ EQUITYIntangible assets Common stock (or Capital stock)Retained earningsTransactions 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 entriesRequired 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 PROBLEMS1. 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 andas accurate as possible.The following problems were all taken from exams given in previous semesters. Solutions follow each problem.Example problem #1Shown below are accounts and balances of the Duval Company as of December 31, 2009. Cash $ 20Fees revenue 400Dividends 90Supplies expense 40Accounts receivable ?Utilities expense 70Accounts payable 30Land 80Rent expense 120 Supplies 10Common stock 35Retained earnings, Jan 1, 2009 15Determine 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?SOLUTIONa. Net income = revenues – expenses = 400 – (40 + 70 + 120) = $170b. First determine REBeginning RE + NI – Dividends = Ending RE15 + 170 – 90 = 95Stockholders’ equity = Common stock + RE = 35 + 95 = $130c. Assets = Liabilities + Stockholders’ equityCash + AR + Land + Supplies = AP + Stock + RE20 + AR + 80 + 10 = 30 + 35 + 95AR = $50Example problem #2The balance sheet for the Snook Company at December 31, 2010 showed total assets of $2,500