Financial Accounting Final Exam

CH 1-12

Assets

Probable furute economic benefits owned by the business as a result of past transactions

Liabilities

Probable debts or obligations of the entity that result from past transactions, which will be fufilled by providing assets or services

Stockholders’ Equity

The financing provided by the owners and the operations of the business

Balance Sheet

Reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time

Separate Entity Assumption

states that business transactions are seperate from and shouylf exclude the personal transactions of the owners

Financial Statement Heading Format

Who: Name of the Business

What: Title of the Statement

When: Accounting Period

Formatting of Journal Entries

Debit first, credit second. Debits and credits must equal each other.

Date Account Titles Debit Credit

Title $

Title $

Expenses

decreases in assets or increases in liabilities arising from providing goods or services during the current period

Expense Recognition Principle

Expenses are recorded when incurred in earning revenue: also called matching

Revenues

Increases in assets or settlements of liabilities arising from providing goods or services

Revenues Journal Entry

Revenue Recognition Principle

revenues are recorded when (or as) the seller provides goods or services to customers, in the amount the seller expects to be entitled to receive

Adjusting Journal Entries

Entries necessary at the end of each accounting period to report revenues and expenses in the propor period and assets and liabilities at appropriate amounts

Adjusting Journal Entries Record

1. Accruals Accrued Revenues (Revenue earned but not yet received)

• Debit: Accounts Receivable

• Credit: Service Revenue

Accrued Expenses (Expense incurred but not yet paid)

• Debit: Expense (e.g., Salaries Expense)

• Credit: Payable (e.g., Salaries Payable)

2. Deferrals Prepaid Expenses (Previously recorded asset now used)

• Debit: Expense (e.g., Rent Expense)

• Credit: Prepaid Asset (e.g., Prepaid Rent)

Unearned Revenues (Previously recorded liability now earned)

• Debit: Unearned Revenue

• Credit: Revenue (e.g., Service Revenue)

3. Depreciation To allocate cost of long-term assets over time

• Debit: Depreciation Expense

• Credit: Accumulated Depreciation

4. Interest Accrued Interest Expense

• Formula:
  Principal × Rate × Time

• Debit: Interest Expense

• Credit: Interest Payable

5. Supplies Used If supplies were purchased earlier and now used up:

• Debit: Supplies Expense

• Credit: Supplies

• Adjusting entries ensure that:

  • Revenues are recorded when earned

  • Expenses are recorded when incurred

Closing Journal Entries

Temporary Accounts to Close:

1. Revenues

2. Expenses

3. Gains & Losses (if any)

4. Dividends (if declared)

1. Close Revenue Accounts to Income Summary

• Debit: Each Revenue account

• Credit: Income Summary

2. Close Expense Accounts to Income Summary

• Debit: Income Summary

• Credit: Each Expense account

3. Close Income Summary to Retained Earnings

• If Net Income:

  • Debit: Income Summary

  • Credit: Retained Earnings

• If Net Loss:

  • Debit: Retained Earnings

  • Credit: Income Summary

4. Close Dividends to Retained Earnings

• Debit: Retained Earnings

• Credit: Dividends

• Order matters: Revenues → Expenses → Income Summary → Dividends

Permanent Accounts

The balance sheet accounts that carry their ending balances into the next accounting period

Temporary Accounts

Income statement accounts that are closed to retained earnings at the end of the accounting period

Reconciling Items on a Bank Reconciliation

Start with Bank Statement Balance:

Add:

• Deposits in Transit (you recorded, bank hasn’t)

Subtract:

• Outstanding Checks (you wrote, bank hasn’t cleared)

Start with Book Balance (Cash account):

Add:

• Interest earned

• EFT collections

• Bank errors (if bank deducted too much)

Subtract:

• NSF (bounced) checks

• Bank service charges

• EFT payments

• Book errors (if you over-recorded deposits)

Internal Controls

control environment, risk assessment, control activities, information and communication, monitoring activities

Common Activities of Merchandising Companies

A company that sells goods that have been obtained from a supplier

Common Activities of Manufacturing Companies

A comapny that makes, not buys the prducts they sell

Common Activities of Service Companies

A company that sells services rather than physical goods

Periodic Method

A system in which ending inventory and cost of goods sold are determined only at the end of the accounting period based on a physical inventory count

Perpetual Method

A system in which a detailed inventory record is maintained by recording each purchase and sale of inventory during the accounting period

Credit Terms

Cost of Goods Sold Formula

Beginning Inventory + Purchases — Ending Inventory

COGS using FIFO

• Identify units sold.

• Assign cost starting from beginning inventory and oldest purchases.

• Remaining units are the ending inventory, valued at the most recent purchase costs.

• Ending Inventory: Composed of the most recent purchases.

• COGS: Sum of the oldest costs for units sold.

COGS using LIFO

• Identify units sold.

• Assign cost starting from the most recent purchases backward.

• Remaining units (oldest) are the ending inventory.

• Ending Inventory: Composed of the oldest inventory.

• COGS: Sum of the most recent purchase costs for units sold.

COGS using Weighted Average Method

• Calculate total cost of goods available for sale (beginning inventory + purchases).

• Calculate total units available for sale.

• Weighted average cost per unit = Total cost / Total units.

• Multiply by units sold for COGS and units remaining for ending inventory.

• Ending Inventory: Units on hand × weighted average cost per unit.

• COGS: Units sold × weighted average cost per unit.

Allowance for Doubtful Accounts

Type:

• Contra-Asset account

• Paired with Accounts Receivable on the balance sheet

Normal Balance:

• Credit

Purpose:

• To estimate and record expected uncollectible receivables

• Matches bad debt expense to the same period as related sales (per Matching Principle)

Write-Offs and recovery of bad debt

1.To Record Bad Debt Expense:

• Debit: Bad Debt Expense 

• Credit: Allowance for Doubtful Accounts 

2. To Write Off an Uncollectible Account:

• Debit: Allowance for Doubtful Accounts 

• Credit: Accounts Receivable 

3. To Record Collection of a Previously Written-Off Account:

• Step 1 Reinstate A/R: Debit: Accounts Receivable Credit: Allowance for Doubtful Accounts 

• Step 2 Record Cash Collection: Debit: Cash Credit: Accounts Receivable

Notes Recievable Journal Entry

a. Issuance of Note (Lend Money)

• Debit: Notes Receivable 

• Credit: Cash 

b. Accrue Interest Receivable:

• Debit: Interest Receivable 

• Credit: Interest Revenue 

c. Receipt of Interest at Maturity: 

• Debit: Cash 

• Credit: Interest Receivable (for accrued interest) 

• Credit: Interest Revenue (for remaining interest) 

d. Repayment of Principal:

• Debit: Cash 

• Credit: Notes Receivable

Interest Expense Calculation

Interest= Principal x Interest rate x Time

Interest expense Journal Entry

When interest is incurred (accrued but not yet paid):

Debit: Interest Expense  
Credit: Interest Payable

When interest is paid in cash:

Debit: Interest Expense  
Debit: Interest Payable (if accrued earlier)  
Credit: Cash

Percentage of Credit Sales Method

• Formula: 

  • Bad Debt Expense = Credit Sales x Estimated % Uncollectible

• Journal Entry: 

  • Debit: Bad Debt Expense 

  • Credit: Allowance for Doubtful Accounts

Depreciation and Accumulated Depreciation

Depreciation and Accumulated Depreciation Classification

Straight-Line method

(Cost - Residual Value) / Useful Life = Depreciation Expense

Double Declining Method

2 / Useful Life = Rate Rate x Beginning Book Value or Cost- accumulated depreciation = Depreciation 

Notes Payable Journal Entry

When you borrow (issue a note):

Debit: Cash  
Credit: Notes Payable

At period-end (to accrue interest):

Debit: Interest Expense  
Credit: Interest Payable

Use formula: Principal × Rate × Time

When you repay the note and interest:

Debit: Notes Payable  
Debit: Interest Payable (if accrued)  
Debit: Interest Expense (if not yet accrued)  
Credit: Cash

Notes payable Interest Calculation

Interest = Principal × Rate × Time

Bonds Payable Journal entry

1. Issuing Bonds at Face Value:

Debit: Cash  
Credit: Bonds Payable

2. Issuing Bonds at a Discount:

(Issued for less than face value)

Debit: Cash  
Debit: Discount on Bonds Payable  
Credit: Bonds Payable

3. Issuing Bonds at a Premium:

(Issued for more than face value)

Debit: Cash  
Credit: Premium on Bonds Payable  
Credit: Bonds Payable

4. Interest Payment (Face Value Example):

Debit: Interest Expense  
Credit: Cash

Discount: Increase interest expense

Premium: Reduce interest expense

Bonds Payable Interest Calculation

Interest = Face Value × Stated Rate × Time

Treasury Stock

Issued shares that have been reacquired by the company

Treasury Stock Repurchase Journal Entry

Debit: Treasury Stock

Credit: Cash

Treasury stock Reissuance Journal Entry

🔹 If Reissued at More Than Cost:

Debit: Cash  
Credit: Treasury Stock  
Credit: Additional Paid-In Capital (APIC) – Treasury Stock

🔹 If Reissued at Less Than Cost:

If there's enough APIC–Treasury Stock:

Debit: Cash  
Debit: APIC – Treasury Stock  
Credit: Treasury Stock

📌 Note:

• Treasury Stock is always removed at original cost

• APIC–Treasury Stock is used only for gains/losses on reissuance

• Never record a gain or loss on treasury stock in net income

Number of Shares Issued Calculation

Shares Issued = Shares Outstanding + Treasury Shares

Outstanding Shares and Treasury Shares

Outstanding Shares

• Shares currently owned by shareholders

• Used to calculate earnings per share (EPS) and dividends

Treasury Shares

• Shares repurchased by the company

• Not considered outstanding

• No voting rights or dividends

Stock Issuance Journal Entry

1. When Stock is Issued at Par Value:

Debit: Cash (Shares issued × Par value)  
Credit: Common Stock (at par value)

2. When Stock is Issued Above Par (with Additional Paid-In Capital):

Debit: Cash (Total amount received)  
Credit: Common Stock (Par value × shares issued)  
Credit: Additional Paid-In Capital (Difference)

Dividend Journal Entry

1. When Dividends Are Declared:

Debit: Retained Earnings  
Credit: Dividends Payable

2. When Dividends Are Paid:

Debit: Dividends Payable  
Credit: Cash

Notes:

• Declaration creates a liability.

• Payment reduces cash and clears the liability.

Par Value Per Share

• The nominal (legal) value assigned to each share of stock in the corporate charter.

• Usually a very small amount (e.g., $0.01 or $1 per share).

• Represents the minimum legal capital that must be retained in the business and cannot be distributed as dividends.

Debit: Cash

Credit: Common Stock (Par Value × Shares Issued)

Credit: Additional Paid-In Capital (any excess over par)

Operating Actiities

Cash inflows and outflows related to the components of net income

EX: Cash received from customers (sales revenue)

• Cash paid to suppliers and employees (inventory, wages)

• Interest paid and received (sometimes classified as operating)

• Income taxes paid

Financing Activities

Cash inflows and outflows realted to financing sources external to the company

EX: Cash received from issuing stock or bonds

• Cash paid to repurchase treasury stock

• Dividends paid to shareholders

• Borrowing money (notes payable, loans)

• Repaying borrowed funds

Investing Activities

Cash inflows and outflows related to the sale or purchase of investments and long-lived assets

EX: Purchase of property, plant, and equipment (PPE)

• Sale of PPE

• Purchase or sale of investments (stocks, bonds, etc.)

• Loans made to others (notes receivable)

• Collection of loan principal

Statement of Cash Flows

Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing

Direct Method

A method of presenting the operating activities section of the statement of cash flows; reports the components of cash flows from operating activities as gross receipts and gross payments

Cash Flows from Operating Activities:

• Cash received from customers: $XX,XXX

• Cash paid to suppliers: (XX,XXX)

• Cash paid to employees: (XX,XXX)

• Cash paid for interest: (X,XXX)

• Cash paid for income taxes: (X,XXX)
  Net cash provided by operating activities: $XX,XXX

Indirect Method

Presntes the operating activities section of the cash flow statement by adjusting net income t ocompute cash flows from operating activities

Cash Flows from Operating Activities:
Net Income: $XX,XXX
Adjustments to reconcile net income to net cash provided by operating activities:

• Depreciation expense: +X,XXX

• Decrease (increase) in accounts receivable: +/−X,XXX

• Increase (decrease) in accounts payable: +/−X,XXX

• Other non-cash expenses or changes: +/−X,XXX
  Net cash provided by operating activities: $XX,XXX