ACCT 2101 1nd Edition Exam 1 Study Guide Chapters 1 3 Chapter 1 August 21 Review definitions may be in multiple choice form Financial Accounting recording business transactions in an Accounting system so that financial information can be summarized for the preparation of financial statements Business Transaction transfer of value between the business and another entity Liability creditor s interest future obligations of a business Owes venders employers banks customers Stockholder Equity owner s interest in the business Common Stock certificates issued to investors as evidence of ownership Retained Earnings the earnings activity of a business that is kept in the company from daytime Revenues Selling products or services to customers in the course of operating a business Expenses costs incurred in the process of evening revenue Dividens are not expenses transfer of wealth from the business to its stockholders Know the accounting equation and how to manipulate it i e if I give you assets common stock and retained earnings you know how to find liabilities Assets Liabilities Stockholder s Equity Assets Liabilities Common Stock Retained Earnings Know how to classify accounts between assets liabilities and stockholders equity Know where dividends are reported and what the 4 financial statements are for reporting financial information Account Classifications Assets cash land prepaid rent accounts receivable inventory Liabilities notes payable salaries payable accounts payable prepaid insurance salaries payable unearned revenue Stockholder s Equity common stock and retained earnings Dividens DO NOT go on the balance sheet but are recorded on Statement of change in Stockholders Equity 4 Financial Statements Header 1 Name of company 2 Name of statement 3 Year Ended 1 Income Statement reports on the profitability of a business over one Accounting period Ex VSC one year Income Statement Revenues Expenses For the year ended Dec 31 2012 Service Revenue Expense Operating expense 25 000 10 000 Net income loss 2 Statement of change in Stockholders Equity reports on the change in common stock the change in retained earnings for one accounting period 3 Balance Sheet reports on the financial condition of a company on one particular day the last day of the accounting period Dec 31 Ex VSC Balance Sheet December 31 2012 Assets Cash 260 000 Total Assets 260 000 Liabilities 100 000 Notes Payable 100 000 Stockholder s Equity Common Stock 150 000 Retained Earnings 10 000 Total Stockholder Equity 160 000 Total Liabilities SE 260 000 4 Statement of cash flow reports on the change in cash for one accounting period Know how to record events on the accounting equation any event in any of the exercises has potential for showing up in either multiple choice form or problem form Chapter 2 September 3 Know what is meant by accrual accounting and how to identify an accrual and a deferral Accrual Accounting record revenue when earned expenses when incurred regardless of when cash changes hands trigger for revenue recognition when services are provided or products are sold trigger for expense recognition when the cost is incurred used up to record in the Accounting equation 2 Types of transactions 1 Accruals recognize revenue or expense before cash changes hands 2 Deferrals recognize revenue or expense after cash changes hands Deferrals cash is received revenue recorded later when it s earned cash is paid and expense is recorded later when it s incurred Ex Prepaid Rent Prepaid Insurance Unearned Revenue Know how to prepare an income statement and balance sheet in good form I will give you a list of accounts in random order and you need to figure out on which financials statement the accounts go on and in what order Know how to adjust accounts at the end of an accounting period for accruals deferrals i e unearned revenue prepaid rent prepaid insurance salaries payable supplies inventory Salaries payable represents cash owed to employees for work already performed Accounts payable represents account of cash the company owes it vendors Adjusting Entry prepared at the end of an accounting period to get account balances accurate before preparing financial statement Chapter 3 September 9 Know what types of costs are added to inventory for merchandising companies What costs are added to the Inventory 1 Purchase price of the product includes sales tax 2 Shipping cost to get the product to your business 3 Insurance while goods are transit Any cost to get the product to your place of business ready for sale is an inventory cost Know and understand the terms FOB shipping point FOB destination and how to record these transactions FOB shipping point you are the buyer Free on Board to the shipping point Buyer is responsible for shipping the freight is transportation in and is added to the inventory account as a product cost Expense as a part of COGS when inventory is sold Cash and Inventory FOB destination you are the seller Free on Board to the final destination Seller is responsible for the shipping costs Freight cost is transportation out and expensed as an operating expense when it is incurred it s a selling expense Inventory Retained Earnings Know how you arrive at gross profit and net income for a merchandising company i e know how the income statement looks for a merchandising company as opposed to a service company Ex Merchandising Income Statement Sales Revenue 6 000 Cost of Goods Sold 3 500 Gross Profit Margin 2 500 Expense Operating 2 000 Net Income 500 Know how to record all inventory related transactions we did in class purchasing inventory receiving cash discounts paying shipping costs recording inventory returns and finally recording the sale of inventory Purchase Inventory Inventory Accounts Payable or Cash Sell Inventory must record 2 transactions A Record the revenue earned Cash or Accounts Receivable RE for Sales Revenue B Record the cost of the inventory sold Inventory RE for COGS Costs that are not product costs are called period cost Period cost operating expense general selling and Administrative expense Period Cost are expensed in the period incurred Examples Sales commission advertising rent expense salaries expense and insurance expense building Inventory Returns Inventory Accounts Payable Cash Discounts Payment term 2 10 net 30 means 2 discount of the list price Buyer must pay in 10 days of the invoice if not they pay for full amount Always increase inventory at the discounted price Inventory Accounts