Rutgers Intro to Financial Accounting Final

What is the Accounting Equation? Also what are the respective normal balances?

Assets = Liabilities + Owner's Equity

debit credit credit

Under assets what 3 types are there?

Current Assets, Investments, Property Plant and Equipment

Under liabilities what 2 types are there?

Current and Long-Term liabilities

Under Owner's equity what 3 sections are there?

Common Stock, Preferred Stock, Retained Earnings

What is included in the Income Statement? Also what is the normal balance? What is the product of those two items?And where does that amount go?

Revenues and expenses

credit debit

revenues- expenses = Net income/loss which is added to retained earnings

What is a worksheet and is it required? What are the steps in preparation?

Optional multiple column tool to help in making financial Statements

1) Prepare a trial balance on the worksheet

2) Enter adjusting entries (keying)

3) Adjust balances and extend correct amount to place in income statement column or balance sheet column

4) Total columns and calculate net income/loss

5) Close the books, close temporary accounts and keep permanent accounts.

6) Post closing trial balance shows about after

What are the closing entries to close the books?

a)Debit revenue accounts and credit income summary

b)credit expense accounts and debit income summary

c)debit/credit (whichever is more) income summary and do the opposite to retained earnings

d)credit dividends and debit retained earnings

What are correcting entries?

Not adjusting entries, but fixing entries whenever an issue is found

What is the formula for COGS?

Beginning Inventory + Purchases - ending inventory

extra: Sales revenue - COGS = Gross profit - Operating Expenses = Net Income

beginning inventory + COGS = Goods available for sale

True or false, Service Companies have longer operating cycles.

False

What are the 2 types of inventory systems?

Periodic and Perpetual

Characteristics of a periodic system:

Per period inventory count

Uses purchases account and discount account

Characteristics of a perpetual system

every change in inventory is recorded

Uses inventory and cash and COGS

Stuff is often purchased and sold on account

What is the journalizing for the following:

XYZ company purchases 1000 dollars worth of goods

XYZ sells half the goods at 50 percent marked up price

Purchases 1000

cash 1000

Cash 750

sales revenue 750

What is the journalizing for the following:

XYZ company increases inventory 1000 dollars

XYZ company sells half the merchandise at 50 percent mark up price

Inventory 1000

cash 1000

Cash 750

sales revenue 750

COGS 500

Inventory 500

What is FOB destination and FOB shipping point and how does it affect shipping.freight costs

Freight on board destination - at the destination title(ownership) of the goods changes hands. Meaning the seller pays the freight cost

FOB shipping point - as soon as it gets on the vehicle it changes hands, meaning the buyer pays the freight cost

Under periodic systems what are the ways to calculate the amount of goods? what are their advantages

FIFO - the general natural way stuff goes out, also generally reduces the impact of inflation

LIFO - lower income taxes because you report lower incomes

Weighted average

Special Identification

wi

How is FIFO done

here are your amounts, calculate COGS and ending inventory

Units cost 13 units

10 2

12 3

15 2.5

24 units left over

13 units used

29 dollars used

64.5 dollars left

How is LIFO done

here are your amounts, calculate COGS and ending inventory

Units cost 13 units

10 2

12 3

15 2.5

24 units left over

13 units used

61 dollars left

32.5 dollars used

How is Weighted Average done

here are your amounts, calculate COGS and ending inventory

Units cost 13 units

10 2

12 3

15 2.5

average unit cost is 2.53

24 units left over

13 units used

32.89 dollars used

60.72 dollars left over

With bank statements, who needs to make the correction on records:

Service charge from the bank

Your check is in transit and needs to be deposited

Borrowed note has an interest payment

mistake in customer records

Borrowed notes has a borrowing fee

mistake in bank records

Me

Bank

Me

Me

Me

Me

Me

Bank

What are the 3 special purchase accounts and what do they do?

Purchase Return - purchaser returns goods

Purchase Allowance - seller grants a discount from purchase price instead of doing a full return

Purchase discount - purchaser makes money by paying in a shorter time i.e. 2/10 n/30

True or false, A multi-step income statement differentiates between operating and non operating activities

True

General Steps in a multi step income statement

Sales Revenue

-COGS

= Gross profit

Gross profit

- operating expenses

= Net sales

Gross Profit Rate

gross profit/net sales

What are steps and journalizing in the indirect or allowance method

1) expense it

Bad debts expense

Allowance for debt account

2) write off, when you're sure you cannot collect it

Allowance for debt account

Accounts Receivable

What are the two ways to calculate the allowance

Percentage of Sales

Percentage of A/R

How do you compute allowance through percentage of sales

Revenues 200,000

A/R 100,000

Allowance for doubtful Accounts 1000

Using 2% of revenues

Simply find 2% of the revenues amount which is 4000

bad debts expense 4000

Allowance for debt account 4000

How do you compute allowance through percentage of A/R

Revenues 200,000

A/R 100,000

Allowance for doubtful Accounts 1000

2% A/R

2% of A/R is 2000, but the ALDA balance is 2000 plus existing 1000 so answer is 3000

A/R 100,000

(contra asset account) ALDA 2000

Net Receivables 98,000

What is used to measure the effectiveness of a business through inventory

Inventory Turnover rate - measures liquidity

COGS/Average inventory of period

Days in inventory - average days inventory held

365/inventory turnover ratio

Fraud is:

dishonest act by an employee that is a benefit to the employee but a cost to the employer

Sarbanes-Oxley Act

an act to maintain a system of adequate internal control within companies

Segregation of duties

People who handle money and make deposits needs to be seperate

Difference between receivables, which are

Accounts Receivable - 30 -60 days

Notes Receivable - 60 - 90 days

Other stuff - have their own terms

Direct write off method is a legitimate way to journalize issues

NOPE

Credit Card Sales has 3 parties what are they

Credit card issuer Visa

Retailer Walmart

Customer Me

PPP includes what

The land or building including the additional costs of acquiring land, insurance, freight, commission

Can Land and buildings depreciate

Land NOPE

Buildings YEP

What is the depreciable cost

Cost of asset minus salvage value

What are the 2 ways to calculate depreciation

Straight line method and Double Declining Balance

Straight Line Method

Total cost of equipment - salvage value = Depreciable amount

Depreciable amount / years of life = the amount it decreases each year

Double Declining Balance

This is double the normal rate. so if the normal rate is 20 percent per year, the DDB is 40 percent

Year 1 - 105000*.4 = 42000

105000 - 42000 = 63,000

Year 2 - 63000*.4 = 25200 67200

63000 - 25200 = 37800

Year 3 - 37800*.4 = 15120 82320

37800 - 15120 = 22680

Year 4 - 22680*.4 = 9072 91392

22680 - 9072 = 13608

Year 5 - 13608*.4 = 5443 96835

Total depreciation = 96835

100,000 - 96,835 = 3165

How do you account for intangible assets?

Using amortization

for example buying a patent costs 60,000

estimated useful life is 8 years

60,000 / 8 = 7500

so the yearly amortization expense is 7500

Amortization expense 7500

Patent 7500

What does Asset turnover ratio provide as information?

It analyzes the productivity of a company's assets

It is how many dollars of sales a company produces for each dollar invested in assets

Net sales / average total assets

Record the Issue of a bond selling at 102, 8%, payments semiannually, for 10 years

Cash 102,000

Bonds Payable 100,000

Premium on Bonds Payable 2000

Record the first payment of a bond selling at 102, 8%, payments semiannually, for 10 years

Interest payment 3900

premium 100

cash 4000

What are the upsides of issuing bonds? and downsides

Dont affect stockholder control

Tax savings

Return on Stockholders equity can be higher (Premiums)

downsides: interest on a periodic basis and must pay principal at due date

What are the 4 types of bonds and what do they do?

Secured - collateral pledged with issuance (Mortgage bond)

Unsecured(debenture) - issued against general credit of borrower (you trust them)

Convertible - Bonds that can be converted into stock

Callable - Bonds that can be bought back at specific amount prior to maturity

How to journalize sales tax in a transaction?

Cash XXX

Sales Revenue XXXX

Sales Tax payable XXX

What taxes do employers pay?

What more do corporations pay?

Employer's share of social security (FICA) taxes, State and Federal unemployment taxes

Corporations pay separate state and federal income taxes

What are unearned revenues, and how are they journalized?

When a company receives advance payment but cannot recognize it as a revenue until the work is done

cash XXX

unearned revenue XXX

when recognized

unearned revenue XXX

Service revenue XXXX

What are 5 parts of a bond?

Face Value - original amount due at maturity date

Maturity Date - date of final payment

Contractual Interest (stated) rate - annual interest rate paid semianually

Bond Indenture - shows the terms and summarizes the rights

Bond Certificate - Provides name of issuer, face value, interest rate, maturity date

What are the 3 important dates for a cash dividend? What is the journalizing included? What accounts does it affect?

Declaration date - Announcement of the dividend

cash dividend

dividends payable

Record Date - company determines ownership of stock to split dividends

no entry

Payment Date - the company makes the cas dividend to stock holders

dividends payable

cash

Payment of dividends affects assets and liabilities but not OE

What happens if I own 20% and 20,000 shares and there's a 2 to 1 stock split

I will still own 20% of the business but now I will 40,000 shares and half price for each one

Current Ratio

Accounts Receivable turnover ratio

Inventory turnover ratio

Length of Operating Cycle

Current ratio = current assets / current liabilities, if greater than 1 company can pay off debt well and has higher liquidity

A/R turnover ratio = Net Annual Credit sales/((Beginning A/R + Ending A/R)/2)

Inventory turnover Ratio - COGS/Average inventory of period

Days in inventory - average days inventory held

365/inventory turnover ratio

What are the steps in the Acounting process

journal, journal entry, general ledger, trial balance, adjusting entry, adjusted trial balance, XXXXXXXXX

Why do companies purchase stock or debt securities?

1) Excess cash, to invest in highly liquid securities

2) Generate earnings from investment income

3) Strategic reasons like controlling competitiors

Debt Investment versus stock investments

Debt investments - these are investments in government and corporation bonds

they are recorded at cost, cost plus acquisition costs

debt investments

cash

Stock investments - investments in capital(preferred or common) stock of a corporation

What are the 3 different sorts of control you can have over a company?

Less than 20% -> Insignificant Influence -> Cost method (record ivestment at cost and record revenue when cash dividends are received. i.e. If cash dividend is 100,000, you have 15% ownership, then you have revenue of 15,000)

20-50% -> Significant Influence -> Equity Method (investor records its share of net income i.e. if net income is 100,000 and cash dividend in 10,000, and you own 25% you get (100,000.25) - (10,000.25) = revenue of 22500

50%+ -> controlling influence -> use consolidated financial statement, its a parent company and this has some involvement in all assets and liabilities

What is Fair value of a security?

The amount for which the security would sell on the market.

Categories of securities include?

Trading - debt and stock meant to make money on short term differences in price

Available for sale - debt and stock with intent to sell in future, more long term

Held to maturity - debt only securities help till maturity

Journalizing Fair Value adjustments

Fair value adjustment - trading to record the difference between total cost and the total fair value

Fair value is the amount the regular market is willing to pay for that security

Investments Cost Fair Value unrealized

Stock X 50,000 58,000 gain of 8,000

Journalizing

Fair value adjustment - Trading 8000

Unrealized (gain/loss) gain - Income 8000

Trading Securities - unrealized gain/loss on income, positive if fair value is higher, negative if fair value is lower

Available for sale - unrealized gain/loss on equity, positive if fair value is higher, negative if fair value is lower

Unrealized gain/loss shown as a deviation from stockholder's equity, it does not affect the net income calculation

What does the statement of cash flows report on?

cash receipts, cash payments, net change in cash resulting from operating, investing, and financing activities during a period

Identify what 3 main sections exist in a cash flow statement?

Operating

Financing

Investing

What is included under Operating cash flow in and out?

cash effects of transactions that create revenues and expenses

Changes in accounts receivable (do opposite)

Changes in inventory (do opposite)

Changes in prepaid expenses (do opposite)

Changes in Accounts Payable (do same)

Changes in income Tax Payable (do same)

What is included under Financing cash flow in and out?

acquiring and disposing of investments and property, plant, and equipment, and lending money and collecting the loans

Change in building (do opposite)

Change in equipment (do opposite)

What is included under Investing cash flow in and out?

include obtaining cash from issuing debt and repaying amounts borrowed, and obtaining cash from stockholders, repurchasing shares, and paying dividends

Issuance of common stock (positive)

Payment of cash dividends (negative)

For operating cash flow in and out what is the direct method

Looks at income statement and comparative balance sheets to determine amounts,

then splits up into operating, investing, and financing expenses and subtracts from respective cash flows to calculate net increases/decreases in cash

Free Cash flow

Net cash from operating activities - Capital Expenditures - Cash Dividends