ACCT 200 1st Edition Lecture 9Outline of Last Lecture I. 1-Step Income StatementII. Activity 3 answersIII. Internal ControlsIV. E 4-4V. CashVI. ReconcilingVII. 4-2 AVIII. Petty CashOutline of Current Lecture I. Chapter 1 ReviewII. Chapter 2 ReviewIII. Chapter 3 ReviewIV. Chapter 4 ReviewCurrent LectureChapter 1Investing=buying or selling long term assets such as land, building, equipment, or vehiclesFinancing=borrowing money or issuing stock (external financing)Operating=revenues and expenses related to running the business – day-to-day stufBusiness forms:Look up diference between proprietorship, partnership, or corporationIncome statement:Revenues minus (less) expensesRevenues also called sales, revenues earned, fees earnedStatement of stockholders’ equity:Shows changes in common stock and retained earningsBe prepared to calculate ending retained earnings!!!(Beginning retained earnings=10,000; revenues=100,000; expenses=80,000; dividends=5000 - - ending retained earnings=10,000+20,000 (net income) – 5000=25,000)Balance sheet:Assets: 2 categories – current assets, net long-term assetsTotal assetsLiabilities: current liabilities + total liabilitiesEquity: common stock + end retained earningsRelevance: should be able to confirm the value; a predictive value – read book!!!!Faithful representation: complete, neutral, and free from material errorAssumptions:Economic entity – keep diferent companies or personal and company separate (can’t buy personal items with company money)Monetary unit – can express things in dollarsPeriodicity – can express things based on calendar (regular time frames; usually a month/year)Going concern – staying in business longer than a year; keep going2 ways to test: given example, have to define which rule it breaks OR given name, have to define which definition matchesIn appendixChapter 2:Accounting equation: assets=liabilities + equity; assets=liabilities + common stock + beginning retained earnings + revenue – expenses – dividends Assets increase by 600 and liabilities decrease by 2000; change in equity is 6000 (-2000 + 8000)Debit and credit rules:DEAD – debit – expenses, assets, dividends INCREASENormal balance is what increases the account – cash (asset) should have debit balance; acct payable (liability) should have credit balanceRare to credit an expense (reducing it) – won’t have to for exam 1Rare to debit revenues (reducing it)NEVER debit common stock in this classShould not credit dividendsAnalyzing transactions: Purchase supplies on account: Acct equation: increase asset and increase liabilityJournal entry: dr supplies $33, cr acct payable $33Sale on account:Acct equation: assets increase and equity increasesJournal entry: dr acct receivable, cr revenuePurchased supplies for cash:Acct equation: one asset increases and one asset decreasesWhat is the change in TOTAL ASSETS? No change!Chapter 3Matching principle: record an expense when it happens!!!Employee worked in June, paid in July – expense in JUNERevenue recognition: record revenue when earned (when work is done or completed)Airline: when they provide the flightMagazine: when they mail out the magazineTaxes: when they complete the tax returnAdjusting entries:Prepaid expenses (prepaid rent, insurance, supplies)Original entry: pay for prepaid assetDr supplies 4000, cr cash 4000Later count supplies and only 1000 are still left (used 3000)Adjusting entry:Dr Supplies expense 3000, cr supplies 3000Unearned Revenue:Advance payment from a customer – dr cash, cr unearned revenueWork gets done so now it is revenueAdjusting entry: dr unearned revenue, cr revenueChange liability * change revenueIncome statement changed, statement of stockholders’ equity changed, balance sheet changedDepreciation:Accumulated depreciation is a contra asset (negative asset since it has a credit balance)Journal entry: dr depreciation expense, cr accumulated depreciationEquipment 10,000Vehicles 5000Accum depr -1000Net Long-Term Assets 14,000Accrued expenses: record an expense due but not yet paid (i.e., wages)Dr expense, cr liability Accrued revenues: revenues earned but not yet recorded (sale on account or interest on a note)Dr receivable, cr revenueAll adjusting entries change a balance sheet account and income statement accountAll adjusting entries change net income (income statement), statement of stockholders’ equity, balance sheetClosing process:Temporary accounts (get reset to zero yearly): revenues, expenses, dividendsPermanent accounts (don’t get reset yearly): assets, liabilities, common stock, and retained earningsClose revenues and expenses (net income) to retained earningsClose dividends to retained earnings(Mirroring statement of retained earnings in stockholders’ equity statement)Chapter 4Know what Sarbanes-Oxley is – read in bookInternal controls (basic definition questions or which one a particular case violates):Control environment Risk assessmentControl activitiesSeparation of dutiesPhysical controlsProper authorizationEmployee managementReconciliationsPerformance evaluationsMonitoring Bank reconciliations:Bank side:Start with bank statement balanceAdd deposits in transitSubtract outstanding checks=adjusted bank balanceStart with balance per checking account/checkbookSubtract NSF checks (bounced checks)Subtract service chargesAdd collection of notes receivable, interest+/- check errors=adjusted book balanceAdjusted bank balance=adjusted book balanceIn this class, only companies will make mistakes, not banksJournal entries: NSF check: dr acct receivable, cr cashService charge: dr service fee expense, cr cashNotes receivable: dr cash, cr notes receivableInterest on notes: dr cash, cr interest revenueStudy guide questions after trial balance:Net income=$22,000Ending retained earnings=0 + 22,000 – 4000=$18,000Current assets=55+28+5+2=$90,000Total assets=90,000 + 85,000 + 5000 – 25,000=$155,000Current liabilities=10+5+12=$27,000Total liabilities=27,000 + 60,000=$87,000Equity=common stock (50,000) + ending retained earnings (18,000)=$68,000Total liabilities + equity=87,000 +