ACG 2021 Block 2 Accounting Theory & Practice Flashcards

Chapter 3: Adjusting and Closing Journal Entries

  • Adjusting Journal Entries: Demonstrate the recording and posting of adjusting entries for the following scenarios:

    • Prepaid Expenses: Including specifically Prepaid Rent and Supplies.

    • Depreciation Expense: Recording the periodic allocation of a tangible asset's cost.

    • Deferred (Unearned) Revenue: Adjusting for revenue that was collected in advance but earned over time.

    • Accrued Expenses: Including specifically Salaries Payable and Interest Payable.

  • Closing Journal Entries: Demonstrate the ability to record entries that transfer temporary account balances to Retained Earnings at the end of the period.

Chapter 4: Internal Controls

  • Definition: Internal controls represent a company's plan to safeguard assets and improve the accuracy and reliability of accounting information.

  • Control Activities: Provide examples for both Preventative and Detective control activities.

  • Separation of Duties: A core principle where authorizing transactions, recording transactions, and maintaining control of related assets are separated among different employees to prevent fraud and error.

Chapter 5: Net Sales and Accounts Receivable

  • Net Sales Management:

    • Journal Entries: Demonstrate recording, posting, and financial statement presentation for Sales Discounts and Sales Returns (both are contra revenue accounts).

    • Net Sales Formula: Net Revenues=Total Revenues−(Discounts+Returns+Allowances)\text{Net Revenues} = \text{Total Revenues} - (\text{Discounts} + \text{Returns} + \text{Allowances})

  • Uncollectible Accounts (Accounts Receivable):

    • Estimation: Use the percent-of-receivables aging method to record estimated uncollectibles.

    • Recording Process: Demonstrate the initial journal entry to record Bad Debt Expense and the Allowance for Uncollectible Accounts.

    • Write-off Entry: Demonstrate the journal entry to write off a specific actual A/R amount that becomes uncollectible months after the initial sale.

    • Financial Statement Presentation: Show how these accounts appear on the General Ledger and financial reports.

    • Net Realizable Value (Net A/R) Formula: Net Accounts Receivable=Accounts Receivable Control Account Balance−Allowance for Uncollectible Accounts\text{Net Accounts Receivable} = \text{Accounts Receivable Control Account Balance} - \text{Allowance for Uncollectible Accounts}

Chapter 6: Inventory and Cost of Goods Sold

  • Inventory Purchases: Demonstrate journal entries, posting, and financial statement disclosure for:

    • Inventory purchases at cost.

    • Purchase returns.

    • Purchase discounts.

  • Inventory Sales: Demonstrate the recording of the sale of inventory using the two-step method (recording the revenue/receivable and the cost of goods sold/inventory reduction).

  • Inventory Costing Methods: Calculate and compare Cost of Goods Sold (COGS), Gross Profit, and Ending Inventory under the following methods in both increasing and decreasing price environments:

    • FIFO (First-In, First-Out): Assumes the first units purchased are the first ones sold.

    • LIFO (Last-In, First-Out): Assumes the last units purchased are the first ones sold.

    • Weighted Average.

  • Multi-Step Income Statement Calculations:

    • Gross Profit Formula: Gross Profit=Sales Revenue−Cost of Goods Sold\text{Gross Profit} = \text{Sales Revenue} - \text{Cost of Goods Sold}

    • Be prepared to produce a complete multi-step income statement from provided data.

Chapter 7: Long-Term Tangible and Intangible Assets

  • Tangible Asset Purchases: Demonstrate recording and reporting for Land, Land Improvements, and Equipment.

  • Basket Purchases: Calculate the allocation of costs for lump-sum purchases of multiple assets (Basket) and demonstrate the specific journal entry for the acquisition.

  • Depreciation Methods:

    • Straight-line: Based on time. Allocated an equal amount of depreciation to each year of the asset’s service life.

    • Activity-based: Based on actual use.

    • Double-declining balance (DDB): An accelerated method that allocates higher depreciation in early years and lower in later years. The exam requires calculation for the first two years only. Benefits include reduced net income early on, lower tax payments, and increased cash flow.

  • Intangible Assets: Demonstrate journal entries for Amortization Expense related to Patents or Copyrights.

    • Definition: Long-term assets lacking physical substance, whose existence is often based on legal contracts.

  • Book Value Formula: Book Value=Original Cost of Long-Term Asset−Accumulated Depreciation\text{Book Value} = \text{Original Cost of Long-Term Asset} - \text{Accumulated Depreciation}

  • Residual (Salvage) Value: The amount the company expects to receive from selling the asset at the end of its service life.

Comprehensive Account Guide: Definitions and Classifications

Account Name

Major Category

Normal Balance

Financial Statement

Type

Allowance for Uncollectible Accounts

Contra Asset

Credit

Balance Sheet

Permanent

Sales Allowance

Contra Revenue

Debit

Income Statement

Temporary

Sales Discount

Contra Revenue

Debit

Income Statement

Temporary

Sales Return

Contra Revenue

Debit

Income Statement

Temporary

Bad Debt Expense

Expense

Debit

Income Statement

Temporary

Cost of Goods Sold

Expense

Debit

Income Statement

Temporary

Amortization Expense

Expense

Debit

Income Statement

Temporary

  • Contra Revenue Account: An account with a balance opposite to its related revenue account.

  • Allowance for Uncollectible Accounts: Represents the amount of accounts receivable not expected to be collected.

  • Bad Debt Expense: The cost of estimated future bad debts charged to the current period adjustment.

  • Amortization Expense: The allocation of the cost of an intangible asset over its service life.