ACC 210 Midterm #1 Chapters 1, 2, 3

UH Manoa Professor Boochun Jung

What is in the balance sheet? (hint: the formula)

Balance sheet: Assets = liabilities + owner’s equity

and “balance as of”

What is the difference between internal users and external users

Internal: managers and employers of a company

External: anyone OUTSIDE the company

If it’s not quantifiable then..

it’s not part of accounting system

Managerial accounting provides information for ___ users

internal users

Financial reporting provides information for ___ users

external users

The objective of financial reporting is to: provide ___ information in making investment and credit decisions to ___ users.

useful information to external users

What are the 4 financial statements?

Income Statement

Balance Sheet

Statement of Retained Earnings

Statement of Cash Flows

Financial statements are prepared..

quarterly (not audited) and annually (audited)

What are the rules of accounting? (hint: it’s a title)

U.S. GAAP (generally accepted accounting principles)

Who makes the rules of accounting?

FASB (Financial Accounting Standards Board)

Who enforces the rules of accounting?

SEC (Securities and Exchange Commission)

Assets are on the ___ side of the equation

left side

T/F: Assets are anything with future economic benefits

True

Examples of Assets?

Tools & Equipment, Cash, Inventory, Buildings, PPE (property, plant, equipment)

Examples of liabilities?

Accounts payable, anything payable, unearned revenue

What is in owner’s equity?

Capital Stock (investment/investor gives u money), Retained Earnings (sales, net income, revenue, dividends)

What are the order of financial statements to complete?

1) Income Statement

2) Statement of Retained Earnings

3) Balance Sheet

4) Statement of Cash Flows

How are income statement and statement of retained earnings related?

by net income

How are the balance sheet and statement of retained earnings related?

because they both have retained earnings

What is in the income statement? (hint: formula)

I/S statement: revenues - expenses = net income

What is in the statement of retained earnings? (hint: formula)

R.E.: Beginning R/E + net income - dividends = ending retained earnings

Ending R.E. - Beginning R.E. = ?

Net income - dividends

Depreciation Expense goes on which financial statement?

Income Statement (an expense, because business didn’t do their service, but was paid)

Sales is on which financial statement?

I/S statement (revenue)

What does statement of cash flows contain?

1. operating activities

2. investing activities

3. financing activities

Examples of cash flows from operating activities? (hint: what are operating activities)

incur employee salaries and wages; sell products and services; make inventory purchases

What are examples of cash flows from investing activities? (hint: what are investing activities)

buying or selling property, plant and equipment, purchases/sell longterm investments

Examples of cash flows from financing activities (hint: what are financing activities)

selling stocks, borrowings, pay cash dividends

What is the order of the accounting cycle?

1) analyzing
2) journaling
3) posting
4) (unadjusted) trial balance
5) adjusting entries

What side is debit on?

Left side (increase)

What side is credit on?

Right side (decrease)

What is D.E.A.D.?

Dividends, Expenses, Assets, Debit (anything else is credit)

Debits are decreased by?

Credit

Credits are decreased by?

Debit

Journal entry is explaining

what happened in the transaction.

Ending amount should be the same/balanced

Debit is shortened as

Dr.)

Credit is shortened as

Cr.)

What is step 3 posting?

Transferring amounts to T accounts

What is a ledger? (don’t think you have to memorize for exam)

file or book containing company’s accounts

Step 4 preparing is ___

all balances taken from ledger

used to prove equality of debit and credit balances

working paper, not a statement

)What are the assumptions and principles u have to memorize?

Economic Entity Concept

Monetary Unit Assumption

Going Concern

Periodicity

(Historical) Cost Principle

Revenue Recognition Principle

Matching Principle

Accrual Basis and Revenue Recognition Principle are ___

the same! because revenues are recognized when they are realized and earned. (usually at the time of sales)

What is the economic entity concept?

basically we assume personal and business assets are kept separate (financial statements, records)

What is the monetary unit assumption?

We assume that money is the common denominator (the default unit for financial statements)

What is going concern?

we assume that a business will continue indefinitely

What is periodicity?

we assume a company can divide their economic activities in time periods

AKA performance can be split monthly, quarterly, or annually

What is the cost principle?

Record assets and liabilities at what u paid to buy them and continue to value them at historical cost until sold.

Example: building bought $20k in 1975 and is now worth $100k

What is the revenue recognition principle?

revenues are recognixed when a good or service is performed

What is the matching principle?

expenses should match with revenue “let the expenses follow the revenue”

Prepaid expenses are ____ until ___

are assets until used and then becomes an expense

Example: your body is an asset and when you die it becomes an expense (planning a funeral etc)

For accrual basis: revenue is recognized when

when earnings process is complete

For accrual basis: an expense is recognized

when incurred to generate revenue AKA when it happens

Do we care about cash basis?

NO!! Free your mind. Erase it

What are the two types of costs?

Unexpired costs and expired costs

Unexpired costs hold:

future economic benefit (an asset)

Expired costs hold:

no additional economic benefit, (an expense)

An asset changes to an expense when ____

when the benefits expire AKA when item is sold

Step 5: Adjusting Entries use what 2 principles?

Revenue recognition principle and Matching principle

Adjusting entries are classified as:

prepaid expenses, unearned revenue, accrued revenues, accrued expenses

accrued = accrual basis

Adjusting entries are made at the _____ of the accounting period

at the end of the accounting period

If your company recieved investment from a company then that is ….

Capital Stock —> Owner’s Equity

If your company made/purchased investment of another company that is ….

An Asset

Depreciation is a debit or credit?

Depreciation is a debit because it is an expense

Accumulated depreciation is a debit or a credit?

Accumulated depreciation is a credit because it reduces the value of an asset over tie

Financial statements are prepared from ___

the adjusted trial balance

What can be used to evaluate profitability

Net income percentage

ROE (return on equity)

ROA (return on assets)

T/F the higher the net income percentage the more profitable the company is

TRUE!

What are current assets

cash or other assets that are expected to be turned into cash, sold, consumed within one year or one operating cycle

Examples of current assets

cash, accounts receivable, inventory, supplies, short term investments

What are long-term/non current assets?

assets that do not meet the definition of current assets (longer than one year or one operating cycle)

Examples of non-current assets

notes receivable, fixed assets (land, machinery, plant assets), intangible assets (patents, copyright, trademark)

What are current liabilities?

Any obligations that will be satisfied within one year or one operating cycle

Examples of current liabilities?

taxes payable, salaries payable, interest payable etc

What are long-term liabilities?

any obligations that do not meet the definition of current liabilities

Examples of long-term liabilities?

notes payable, loans payable

How is a prepaid expense adjusted?

Dr. Expense

Cr. Asset

I/S: expenses overstated. net income overstated

B/S: assets overstated, equity overstated

How are unearned revenues adjusted?

Dr. Liability

Cr. Revenue

I/S revenues understated. net income overstated

B/S liabilities overstated. equity understated

How are accrued expenses adjusted?

Dr. Expense

Cr. Liability

I/S: expenses understated. net income overstated

B/S: liabilities understated. equity overstated

How are accrued revenues adjusted?

Dr. Asset

Cr. Revenue

I/S revenues understated. net income understated

B/S assets understated. equity understated.

Net income percentage formula?

Net income / revenue