HMD 221: Hospitality Financial Accounting Exam #2 Study Guide. Prof J.O

Do you close the capital account when closing accounts?

No.

What is accrual basis accounting?

Recognizes expenses when in. inccured and revenues when earned. this accurately matches expenses and revenues.

What are the 2 things common in an Adjusting entry?

1. Each entry has a balance sheet account and an income statement account. 2.No adjusting entry involves cash

Can you use any account for adjusting entries?

No, just one acct from the balance sheet and one acct from income statement

In a deferrals is cash received first?

Yes

Adjusting entries consists of two major classifications: deferrals and accruals. True or False.

True

What is a deferral?

Adjusted amounts previously recorded in accounts. I.e: previously recorded assets become expenses and previously recorded liabilities became revenue

What is accrual?

Adjustments for which no data has been previously recorded in the accounts. I.E: Assets and revenues not provided and liabilities and expenses not previously recorded.

Does prepaid insurance turn into an insurance expense?

True

What are the 3 elements to depreciating assets?

Cost of the asset, estimated useful life, and estimated salvage value,

What are depreciable assets?

Property,equipment,vehicles, and equipments

What does the journal look like for depreciation expense of a building? What account does it go to?

Debit depreciation expense, credit accumulated depreciation of building. It goes to the income statement.

How do you get the net book value?

Cost of asset- accumulated depreciation= Net book value.d

What are deferral adjustments

prepaid insurance/insurance expense

what is an unearned revenue

a liability that turns into a revenue when paid for its future services.

What happens when there is revenue of 20k and there is no wages expense?

The account is overstated due to no transaction contradicting it.

How do you make an adjusting entry on insurance?

Debit insurance expense and credit prepaid insurance(anything prepaid is an asset and then becomes an expense)

Is income summary a clearing account?

Yes

How would you record unearned revenue?

Under advanced deposits t-account:

Debit stayed revenue , credit remaining advanced deposit (remember advanced deposits are liabilities). Then credit the earned revenu on room revenues.

What is an accrual adjustment?

adjustments that are made for the business data that have not yet been recorded on the firm's accounting records. The 2 types of adjustments are liabilities/expense and asset/revenue.

What are some examples of Accrual adjustments?

Accrued wages payable, ,accrued utilities, accrued assets.

If there are workers that get paid biweekly and they worked 7 days of the last month, how would your journalize the adjustment entry to include those seven days into their paycheck of the new month?

First find out total employees wages, investigate when they get paid (every 14 days) and find out what that total is. Debit wages expense and credit accrued wages payable.

How do you find out the billing from utilities? Example Electricity?

Find out how much the company charges for killowat hours and multiply useage. Debit electricity expense and then credit accrued expenses payable.

What is the accounting cycle?

consists of many steps the accounting staff follows, Beginning with analyzing transactions and ending with a preparing a post-closing trial balance.

What are accrued assets?

Assets that exist at the end of the accounting period but have not been recognized

What is the interest equation for accrued assets?

Interest= P(principle)xR(Annual interest Rate)xT(portion of the year covered by time of investment..

How would you journalize accrued interest?

Debit:Accrued interest recievable Credit: Interest income

What happens when there is a failure to prepare adjustments

The adjustments entries will affect both the balance sheet and income statement

How many steps to the accounting cycle?

1. Analyzing transactions- Examining source documents such as invoices

2. Journalizing transactions- recording transactions in journal

3. Posting- Transferring the debits and credits from journals to the ledger accounts

4.. Preparing a trial balance-Summarizing the ledger accounts to prove the equality of debits and credits

5. preparing adjusting entries-Determining the adjustments and recording them in the general ledger

6. posting adjusting entries- Transferring the adjusting entries from the journal to the ledger accounts

7. preparing an adjusted trial balance-Summarizing the ledger accounts to prove the equality of debits and credits after the posting of the adjusting entries

8. Preparing the financial statements-rearranging the adjusted trial balance into an income statement and a balance sheet

9. Recording and posting closing entries- Journalizing and posting entries that close the revenue and expense accounts for the period to the capital account

10. Preparing a post-closing trial balance- Summarizing the asset, liability, and owners' equity accounts to prove the equality of debits and credits.

What is the length of the accounting cycle? When does it start?

Most businesses prepare monthly financial statements, smaller businesses prepare it yearly. It starts when the accountant analyzes source documents to determine how to record the business transaction.

What documents are used during the accounting cycle

The basic input is 3 documents that are sales invoices, purchase invoices, and time cards for hourly employees. The output is the financial statements which are income, balance, and SHE. Also accountants need to put notes to accompany financial statements.

What is cash basis accounting?

Cash in, cash out

What is statement of owners equity

financial statement that summarizes transactions affecting the owners capital account

Do you add net income and subtract net loss in the statment of owners equity?`

Yes

Do you subtract owners withdrawls in the statement of owners equity?

Yes

What is an adjusted trial balance?

A trial balance that has adjustments. Adjustments are added to the general ledger at the end of the month and so the adjusted trial balance is made so that debits equal credits.

Revenue and expense accounts are closed to the capital account through a clearing account called the income summary. True or false.

True.

What are the 3 steps of the closing process.

1. Close the revenue and the expense accounts to the income summary account

2. Close the income summary account to the Ownsers' equity acct

3. Close the Owners equity acct to the owners equity acct.

If there is a credit balance from revenues, how will you close the revenue and expense accounts?

Using the revenue number to cancel each accounts.

What happens to the remaining revnue from the income summary account when it is closed?

It goes into the share holders equity.

How do you close the drawing account?

Debiting and crediting the money taken.

What is the purpose of a worksheet?

is a columnar sheet of paper on which accountants list the general ledger accounts before making adjustments and preparing the income statement and balance sheet. Reduces the ammount of errors. It's an accountants tool.

What are reversing entries?

Entries made on the first day of an accounting period to reverse the effects of adjusting entries made on the last day of the previous accounting period.

Only adjusting entries that are accruals of assets and liabilites are reversed. True or false

True

Accrual of interest income, recieveable, payable, and expense cannot be reversed. True or False?

False.

prepaid insurance to recognize insurance expense, may be reversed. True or False?

False.

Do reversing entries have an affect the the accounting period?

No, it is up to the accountant to use the method.

What is the statement of cash flows?

the effects on cash of a business's operating, investing, and financial activities. It will reflect the decrease in the sum of cash from the firm's various activities.

What is Cash Equivalents?

short term, high liquidiiy investments sucha as U..S Treasury bills and money market accounts. Firms use thm for investing funds that are not needed for operating purposes. They are made for 90 days or less.

Are cash and cash equivalents considered cash reciepts or cash disbursments for the SCF?

No, they are not.

What are the four reasons for statement of cash flows?

1. To generate positve future net cash flows.( must rely on historical financial information to assess an operations future abilities)

2. Assess the firms ability to meet its obligations

3. Assess the difference between the enterprise's net income and cash reciepts and disbursments

4. Assess the effect of both cash and noncash investing and financing during the accounting period.

What are investing activities?

Acquisition or disposition of noncurrent assets such as property and equipment

What are financial activities?

Borrowing, payment of long-term debt. Sale and purchase of capital stock.e

What are Noncash activities?

Transactions as the acquisition of a hotel in exchange for stock or long term debt

Who are the 3 major groups that view SCF?

Managers(internal), Investors, creditors(external)

Why would management use SCF for?

1. Access to firms liquidity 2. Access Financial Flexibility 3. Determine its dividend policy 4. Plan investing and Financing needs.

Why do investors and creditors need to see SCF for ?

1. Ability to pay bills as they come due 2. ability to pay dividends 3. need for additional financing such as borrowing debt or selling capital stock.

What is the relationship between other financial statements and the SCF?

The statement of operations and retained earnings It reflects the results of operations and dividends declared. Net income from the income statement is transferred to the retained earnings account when the temporary accounts are closed at the end of the accounting period.

Short answer: Income statement and the Statement of retained earnings.

What are cash in and cash-out operating activities?

Revenues(cash inflows) which are sales of food, beverages, other goods and services to lodging guests, as well as interest and dividend income. Expense(cash outflows) aka salaries, wages,taxes, supplies, and interest expense.

What are cash in and cash out investing activities?

acquisition and disposal of all noncurrent assets including property,equipment, and investments. Cash flows are purchase and disposal of short term investments(marketable securities)

What are Cash flows and outflows of Financing Activites?

flows from issuance and retirement of debt and the issuance of repurchase stock.

Cash in: Recieved from stock, short-long term borrowing.

Cash out: Repayments of loans, payments to owners for divdens and any repurchase of stocks.

What flow and activity is this? Cash from receipt of interest and dividends

Inflow, operating

What flow and activity is this? Cash to governmental agencies for taxes

outflow, operating activities

What flow and activity is this? cash to lenders for interest

out, operation

What flow and activity is this?Cash to others for expenses

out, operating

What flow and activity is this? Cash from sales of marketable securities and investments

in, investing

What flow and activity is this? Cash from collection of loans

in, investing

What flow and activity is this? cash to make loans

out, investing

What flow and activity is this? Cash of issuance of debt

out, finance

What flow and activity is this? cash to reaquire capital stock

out, finance

What flow and activity is this? Cash to repay debt

out, finance

What flow and activity is this? Cash to pay divedends

out, finance

What flow and activity is this? Cash from sale of capital stock

in, finance

What flow and activity is this? Cash from issuance of debt

in, finance

If a noncash investing activity happens, can it be journalized?

Yes, into a schedule for a noncash activity

What is an accrual basis?

The income statement prepares this so revenues are recorde when they are earned, not when cash is recived from guests and expenses are recorded when incurrened, not when cash is disbursed.

What is the direct method of cash flows?

Shows cash receipts from sales and cash disbursements for expenses. Requires each item on the income statement be converted from an accural basis to a cash basis.

What is the indirect method of cash flows?

Starts with net income, net come is adjusted for non cash items, Most common non cash expense is depreciation, amortization expense, gains, losses, noncurrent assets and marketable securities.

What is needed to prepare the Statement of Cash Flows?

Income statement, statement of retained earnings, and two successive balance sheets from the beginning to the end of the accounting period.

What are the 4 steps of preparing the statement of cash flows?

1. Determine the net cash flows from operating activities

2.Determine the net cash flows from investing activities

3.Determine the net cash flows from financing activites

4. Present the cash flows by activity on the SCF.

What is cash?

currency and coins as wells time deposits, demand deposits, money orders, certificates of deposit, credit card slips signed by the firm's customers. If it is used for a long term purpose such as equipment replacement and a noncurrent asset

Why is cash the most vulnerable?

Because of its portability.

What are the 9 steps to adequately control cash?

1. Cash handling duties segregated

2. Bookkeeping and cash-handling duties seperated

3. All expenditures should be paid by check

4. Mechanical devices should be used to help safeguard cash 5. Servers and Cashiers should use prenumbered sales tickets 6.Cash should be deposited daily.

7. Employees should be bonded

8. Internal and External audits should be preformed periodiically

9. A voucher system should be implemented.

What is a voucher?

It is a business's written authorization to make a cash payment

When is a voucher prepared?

When an accounting department employee receives an invoice from a supplier of goods and services. Then sends the invoice and voucher to an employee who verifies prices and quantities.

What happens during the verification process when there is a debit or a credit?

Debit: It will become an expense account or will be asset or a liability account

Credit: will be a short term liability account called "voucher payable"

The balance sheet will normally list vouchers payable as accounts payable.

What happens when a bill is due to be paid?

The accounting employee removes the voucher form the file and prepares a check for the treasurer(financial department) to sign. The treasurer puts a stamp on it that says paid and is mailed to the billing firm by the treasurer.

What is petty cash?

Small miscellaneous expenditures such as postage stamps and postage stamps that are paid out of a small cash fund.

Petty cash isn't included in the cash account, true or false?

False.

Disbursements from petty cash funds should be supported by receipts such as cash register tapes, invoices, or other documents. true or false?

True

What are the 3 steps to reimburse?

1. Debit the expense accounts relating to the recipets in the fund

2. Subtract the amount of the remaining cash from the amount of the fund, and credit cash for the amount

3. If the credit entry does not equal the debit entries, use the cash short and over account to balance the entry.

A debit account means expense, a credit means revenue.

What is bank reconciliation?

is a monthly procedure that provides additional control over cash. Explains any differences between the banks cash balance and the companies books.

What are the difference between the bank and book balances?

1. Deposit in transit

2. Outstanding checks

3. NSF Checks

4. Banks Service Charges

5. Credits of interest earned or receivables collected

What is the preperation of the bank of reconciliation?

1. Compare the deposits on the book statement

2. Put the canceled checks in numerical order

3. Add any credit memoranda listed on the bank statement to the balance per books

4. Deduct from the balance per books any debit memoranda on the bank statement, such as bank service charges, credit card fees, or nsf checks

5. Make any necessary corrections resulting from errors made by either the bank or the company

6. After making all necessary adjustments to both the bank and book balances, verify that the adjusted balances are equal

7. Make any necessary adjusting entries to the books. note that items requiring adjusting entries will appear in the portion of the bank reconciliation dealing with the adjusted book balances.

What is the gross recording method?

An additional control procedure over cash disbursements involves accounting for pruchase of inventory on account. Ex: 2/10 is 2 percent discount if the invoice is paid in 10 days and n/30 is if the discounted invoice is not paid in 30 days i means that entire amount is due within the days of the invoice date.

Add Info: It does not reveal discounts that are lost

What is the net method of recording process?

Usees the invoice amount minus any potential cash discount. The discount is anticipated

is the discounted lost account listed separately on the income statement as an additional operating expense?

Yes

When there is a credit card purchase, how long does the firm usually keep it for?

90 Days. and then the electronic bank account funds in a day or two to cash flow.

What is the journal entry for the deposit of credit recorded?

debit cash, credit sale

How much and when does a bank charge hospitality firm for bankcard drafts?

Once a month and 1.5-5 percent. It appears in the firms bank statement as a service charge and it is deducted from the cash's balance.