Principles of Accounting 1 Fall 2013Study Guide for Midterm 1Test Format:- Multiple choice questions (50 @ 5.70 points each). Total possible points are 285. - Maximum grade is 275! The extra points are to compensate for any weakness in themain test instrument and misunderstanding in the question wording. - Students need to bring their own scantron. Do not mark your scantron until you have selected your FINAL answer. Eraser marks confuse the scantron grading machine. All adverse consequences of eraser marks and mismarks are the student’s responsibility. Bring extra scantrons. - You are permitted to use a simple four-function calculator (cell phones are NOT simple four-function calculators). Instructors/exam proctors will check each student’s calculator while distributing the exams.- This is a closed book, closed note, and closed neighbor exam. You are NOT permitted to have scratch paper. You are NOT to look around during the exam. Youare to keep your scantron sheet covered to the extent possible. Questions regarding the exam cannot be asked during the exam period.- You must turn in your exam and scantron with your name, your instructor’s name, and the version letter of the exam on both. You will be asked to show a picture id when you turn in your exam and scantron. - You will have 120 minutes to complete the exam. - The exam covers Chapters 1 – 4. Skills needed: Chapter 1:- Identify and understand the characteristics of the basic forms of business organization structures (i.e. sole proprietorship, partnership, and corporation).o Sole proprietorship – one ownero Partnership – two or more ownerso Corporation – many owners through shares and all that good stuff.- Identify and define the basic types of businesses (i.e. merchandising, manufacturing and service).o Merchandising – buy and sell products (wal mart)o Service – provide service (burger king)o Manufacturing – make and sell products (ford)- Understand the following elements of accounting: assets, liabilities, owners’ equity, revenue, and expense.o Asset – right to use resources with future benefito Liability – obligation to transfer resources in the future to suppliers of goodsand serviceso Owner’s equity – net assets belong to owners (after all liabilities are met, everything else belongs to the owners)o Revenue – the amount received from providing services or transferring resources to customerso Expense – the amount incurred from using resources or services in order to generate revenue- Know the accounting equation and definition of accrual basis of accounting. o Liabilities + owner’s equity = assets (I think that is the accounting equation according to the slides)o Accrual basis of accounting – income is the difference between revenue earned and expenses incurred during a period regardless of when cash is paid or received. (chapter 1, day 1, slide 8 and 9) revenue-expenses=income- Calculate accrual basis net income (loss).o Pretty simple, just use the equation above for TOTAL revenues – TOTAL expenses and you will get the net income- Given a scenario, identify the specific accounting concept in use (i.e. business entity, going concern, monetary unit, and periodicity).o Business entity – an accounting system that reflects only info about economic events that pertain to a particular entity (excluding personal records of the business owners)o Going concern – the business will continue into the foreseeable futureo Monetary unit – money is the common measurement unit of economic activityo Periodicity – success or failure of a business is measured in regular intervals- Identify internal and external stakeholders.o Internal – employeeso External – anyone else invested in a business- Identify on which financial statement an item(s) would be found.Sales, income, gross margino Income statement – indicates revenues-expenses=income for a period of time (income tax expenses, sales, net income, operating expenses)o Balance sheet – indicates the ending balances of assets, liabilities, and owner’s equity at a point in time (buildings, common stock, note payables due in 5 years, patents, retained earnings)o Statement of owners’ equity – indicates changes in owners’ equity for a period of timeo Statement of cash flows – indicates cash inflows and outflows from operation, investing, and financing activities for a period of time (cash paid to suppliers, dividends paid during the period, cash received from sale of building)- Identify the purpose and relationship among the four financial statements (Exhibit 1.4).o Exhibit 1.4 shows it pretty well, hard to type here- Understand and be able to calculate the current ratio and the return on sales ratio.o Current ratio – relationships between current assets and current liabilitieso Return on sales ratio – relationship between net income and sales Example – revenue $20 – expenses $15 = net income $5. $5/$20 = 25% return on sales.- Identify the objective of financial reporting and the characteristics that accounting information should possess (Concepts Statements No. 1 and 2).o Financial reporting should provide info that is useful for making investment,credit, and similar decisions. Also should indicate the company’s economic resources and claims to those resourceso The info should be relevant, reliable, and understandableChapter 2:- Identify the three phases of the management cycle.- Identify activities as operating, investing or financing.- Given an example, identify which of the four perspectives of the balanced scorecard the activity would be categorized.- Identify the objectives of an internal control system.- Given a scenario, identify which of the five basic controls would be involved. (i.e. proper authorization, separation of duties, maintaining adequate documentation, physically controlling assets and information, and providing independent checks on performance).- Prepare a bank reconciliation.- Identify controls over cash receipts and cash disbursements.- Calculate inventory turnover.Chapter 3: ----------Identify activities and decisions made in the revenue, expenditure and conversion processes (Exhibit 3.3, 3.5, and 3.7).Revenue process- consists of a series of interrelated activities designed to generate revenue. Involves interaction with business and customers. Goals are: 1. Provide customers with product or service they