Accounting 5110 Exam 1

Accural Accounting

Measuring revenues and expenses when the activity occurs regardless of when the cash is received or paid. This is what GAAP makes us do.

Historical Cost Principle

Account for things that actually happened, helps us record actual transactions to keep things realistic. Related to fair value

Full Disclosure Principle

Anything that matters needs to be in the financial statement’s footnotes. (ex: pending lawsuits)

Materiality

Something is big enough that it matters

Conservatism

In a situation where something is truly subjective, pick the option that makes the company look worse. It is better to look a little worse than to potentially mislead people.

Going Concern

Always assume a company will be around 12 months after they file. If not, this must be put in the footnotes.

Comparability

You should be able to use your financial statements to be able to compare your businesses to others.

Consistency

You should be able to use your financial statements to be able to compare your business this year to how your business did in previous years.

Fair Value

Base measurements on the price that would have been used to sell assets or paid to transfer liabilities. Market, income (net present value), cost approaches in the cases where historical cost is not the norm.

What body has the authority from congress to make accounting rules?

SEC

What body has been delegated the authority to actually make the rules?

FASB

How do you refer to an old accounting rule?

ASC #

How do you refer to new accounting rules

ASU Year- Update Number

ASU

Accounting standards update

ASC

Accounting standards codification

What makes gains and losses different from revenues and expenses

Gains and losses do not come from normal operations. All of these are equity accounts.

Sarbanes Oaxley act of 2002

Post- Enron and World Com scandal and requires internal process audits alongside financial statements audits.

What is step 1 of the Accounting Cycle

Record transactions in the journal. Writing what happens.

What is step 2 of the Accounting Cycle

Post those transactions to the general ledger- move debits and credits to their own accounts. Moving from journal entries to the accounts.

What is step 3 of the Accounting Cycle

Prepare the unadjusted trail balance (TB 1)- every account, debit/credit, and how much is in each. Making sure your debits=credits

What is step 4 of the Accounting Cycle

Adjusting entries- either because theres a mistake or we need to record some more things that weren’t recorded in our normal process. Interest

What is step 5 of the Accounting Cycle

Prepare adjusted trail balance (TB 2)

What is step 6 of the Accounting Cycle

Prepare financial statements

What is step 7 of the Accounting Cycle

Close temporary accounts 

What is step 8 of the Accounting Cycle

Prepare a post-closing trial balance (TB 3)

What does the cash flow statement say about the accounting equation?

Assets. Focuses on cash which shows changes in the assets

What does the balance sheet show about the accounting equation?

Shows the entire thing. Assets=Liabilities + OE

What does the income statement say about the accounting equation?

Shows OE

Company issues 100 shares of stock for $5,000. Shares have a par value of $1

debit cash for 5000

credit common stock 100

credit additional paid in capital 4900

Company pays $800 in dividends

debit retained earnings

credit cash

Company owes 2800 for a computer. Seller agrees to accept 2000 which the company pays

Debit accounts payable 2800

Credit Cash 2000

Credit Gain for 800

Company sells $250 of inventory for $800 cash

Debit Cash 800

Debit COGS 250

Credit Revenue 800

Credit Inventory 250

Company has used one month of internet services they previously paid 12000 for a full year of coverage.

debit internet expense 1000

credit prepaid internet 1000

Company owes bank 5800 for interest on a loan and nothing has been recorded.

debit interest expense

credit accrued interest

Company owes bank 5800 for interest on a loan. They pay the bank 6000 to cover the interest and the 200 owed for the current month.

debit accrued interest 5800

debit interest expense 200

credit cash 6000

Company starts a consulting project on January 1 that will go for 3 months

Company will charge $3,000 total for the project and customer pays the entire $3,000 on February 1. What is the journal entry on Feb 1

debit cash 3000

credit unearned revenue 2000

credit revenue 1000

How do you start the balance sheet?

Company Name

Balance Sheet

Date

What makes an Asset/liability current?

It will be utilized in a year

Current Assets

Cash, AR, Inventory, Prepaid insurance/anything prepaid that gets used this year.

Non-current Assets

PPE, Prepaid insurance (parts that arent within this year), Restricted Cash

Current Liabilities:

AP, Accured Liabilities, Income tax payable, unearned revenue, note payable (parts that are from this year)

Equity accounts:

Preferred Stock, Common stock, additional paid-in capital, retained earnings

Where do you put dollar signs on the balance sheet?

There should be four. One by the first asset account (usually cash), one by the first liability account (usually AP) and then total assets, total liabilities and equity.

Where do you put single lines on the balance sheet?

Above any totals. Above total current and total overall sections.

Where do you put double lines on the balance sheet?

Below total assets and below total liabilities and equity.

What should total assets and total liabilities and equity look like?

_______________

$ number

===============

What should total current assets and total current liabilities and equity look like?

_______________

Number

How do you format the stocks in the balance sheet

Stock type ($par value per share, # shares authorized, # shares issued and outstanding)

What accounts are retained earnings?

Retained earnings, COGS, depreciation, expenses, income/revenues,

How do you date an income statement

Year ended/six months ended (Date)

What is the language around current vs noncurrent assets

Current portion of (account) and (account), less current portion

How do you format and find PPE

Property, Plant, and Equipment, Net. Take all property balances - depreciation.

What is the gross profit section of the income statement?

Revenues - COGS = Gross Profit. Line above gross profit

Which accounts go in the operating expenses section of the income statement?

Any expense that is not related to producing your product itself. depreciation/PPE, general and admin expense, insurance expense, legal expense, wages expense, sales and marketing expense.

Which accounts go in the other expenses section of the income statement?

Misc income and interest expense

Where does the accumulated depreciation account from the trial balance go on the balance sheet?

Property Plant and Equipment, net.

Where does additional paid in capital go on balance sheet?

In its own line in equity under the stocks but before retained earnings

where does allowance for doubtful accounts on the trial balance go on the balance sheet

AR - allowance for doubtful accounts is what gets put on the balance sheet as accounts receivable

where does property plant and equipment go on the balance sheet

under non current assets BUT it should be the trail balance amount - depreciation.

what is the order of the income statement

gross profit, operating expenses, operating income (other income, interest income, interest expense, loss or gain on sale), income before taxes, income tax expense, net income