ACCT 311 Final Exam Comprehensive Review Guide

Exam Logistics and Submission Deadlines

• Examination Schedule:     * Date: Friday, May 8.     * Time: 3:15 PM – 5:15 PM.     * Location: LH 014.
• Technical Requirements: The exam is conducted on laptops using the Respondus LockDown Browser.
• Required Materials:     * Binghamton Student ID: Mandatory. Students without an ID will receive a zero.     * Writing Utensil: Pen or pencil for scratch work.     * Calculators: Financial calculators are permitted. Graphing calculators or calculators with pre-programmable text capabilities are strictly prohibited.     * Provided Materials: Time Value of Money (TVM) tables and scratch paper will be provided.
• Exam Composition (30 Multiple Choice Questions):     * Chapters 3 & 4: 12 questions.     * Chapters 2, 5, 6, & 7: 9 questions.     * Chapters 8, 9, 10, & 11: 9 questions.
• Academic Integrity: No outside materials or notes are allowed.
• Submission Deadlines: The final deadline for all homework assignments and the LinkedIn + Fun Fact extra credit assignment is Thursday, May 7 at 11:59 PM.

Fundamental Accounting Concepts: Cash vs. Accrual

• Accrual Accounting:     * Definition: Measures revenues when they are earned and expenses as they are incurred (the matching principle).     * Economic Reality: Matches the timing of expenses and revenues more accurately to economic reality.     * Regulatory Status: Required by Generally Accepted Accounting Principles (GAAP) for all public companies.     * Disadvantages: Requires estimates, which makes it less verifiable than cash flows and can potentially enable earnings management.
• Cash Accounting:     * Definition: Measures cash receipts and cash payments only when they are physically made.

The Accounting Equation and Financial Cycles

• Basic Accounting Equation:     * $\text{Assets} = \text{Liabilities} + \text{Shareholders' Equity}$
• Expanded Accounting Equation:     * $\text{Assets} = \text{Liabilities} + \text{Paid-In Capital} + \text{Retained Earnings} + \text{Revenues} - \text{Expenses} - \text{Dividends} + \text{Gains} - \text{Losses}$
• The 10-Step Accounting Cycle:     1. Obtain Information: Gather data about external transactions from source documents.     2. Analyze: Determine the impact of the transaction on the accounts.     3. Journalize: Record transactions in a journal.     4. Post: Transfer entries from the journal to the general ledger.     5. Unadjusted Trial Balance: Prepare a listing of account balances before adjustments.     6. Adjusting Entries: Record and post entries to update accrual records at period end.     7. Adjusted Trial Balance: Prepare a trial balance after adjusting entries.     8. Financial Statements: Prepare the Balance Sheet, Income Statement, etc.     9. Closing Entries: Zero out temporary accounts to Retained Earnings.     10. Post-Closing Trial Balance: Verify the ledger balances after closing.

Adjusting and Closing Entries

• Adjusting Entries: Performed at the end of every accounting period to update records for performance that has occurred but hasn't been recognized.     * Deferred Expenses: Cash was paid ahead of time, but the expense is incurred during the period (e.g., Prepaid Rent).     * Deferred Revenue: Cash was received ahead of time, but revenue is earned during the period (e.g., Gift Cards/Unearned Revenue).     * Accrued Expenses: Expense incurred during the period but cash has not yet been paid (e.g., Salaries Expense).     * Accrued Revenues: Revenue earned during the period but cash has not yet been received (e.g., Interest Revenue).     * Management Estimates: Expenses incurred without a clear cash flow (e.g., Depreciation or Bad Debt Expense).
• Temporary vs. Permanent Accounts:     * Temporary Accounts: Reset each year; reported on the Income Statement. Includes Revenues, Expenses, Gains, Losses, and Dividends.     * Permanent Accounts: Roll over year to year; recorded on the Balance Sheet. Includes Assets, Liabilities, and Stockholders' Equity.
• Closing Entry Mechanics:     * For Revenues and Gains: Debit Revenues/Gains and Credit Retained Earnings.     * For Expenses, Losses, and Dividends: Credit Expenses/Losses/Dividends and Debit Retained Earnings.

Annual Reports and Disclosures

• Filing Requirements: Public companies must provide shareholders with an annual report 60–90 days after the end of each fiscal year.
• Contents of the Annual Report:     * Financial Statements: Balance sheet, income statement, statement of cash flows.     * Disclosure Notes: Explain data within the statements or provide extra information not tied to a specific line item.     * Management’s Discussion & Analysis (MD&A): Management’s analysis of past performance and future expectations (noted as potentially biased).     * Additional Items: Business conditions, risk factors, legal proceedings, stock performance, and internal control procedures.
• Audit Opinions: Public reports must be audited. Potential opinions include:     * Unqualified.     * Qualified.     * Adverse.     * Disclaimer of Opinion.
• Responsibility: Management is ultimately responsible for the accuracy of the annual report.

The Balance Sheet and Operating Cycle

• Balance Sheet Fundamentals: Reports the financial position at a specific point in time. Classified into Current Assets, Long-Term Assets, Current Liabilities, Long-Term Liabilities, Paid-In Capital, and Retained Earnings.
• Liquidity vs. Solvency:     * Liquidity: The ability to convert assets to cash to pay short-term obligations.     * Solvency: Riskiness regarding the ability to pay all debts, including long-term ones.
• The Operating Cycle:     1. Use cash to acquire inventory.     2. Prepare inventory for sale.     3. Deliver inventory to customers.     4. Collect cash from customers.
• Operating Cycle Formula: $\text{Operating Cycle} = \text{Days in Inventory} + \text{Days Sales Outstanding}$     * Classification Rule: If the cycle is longer than 1 year (e.g., distilleries), the operating cycle length is used as the cutoff for current vs. long-term classification.

Cash, Cash Equivalents, and Restricted Cash

• Cash: Includes currency, bank balances, and undeposited checks. Companies maintain minimal balances to avoid opportunity costs (lost interest).
• Cash Equivalents: Investments maturing in less than 3 months from the date of purchase.     * If maturity is 3–12 months: Short-term investment.     * If maturity is > 12 months: Long-term investment.
• Restricted Cash: Never a cash equivalent. Can be current (if restricted < 1 year) or non-current (if restricted > 1 year).     * Compensating Balance: A formal requirement by a lender to keep a minimum balance (e.g., 10% of a $\$1,000,000$ loan).     * Specific Purpose: Informal intent by management to use funds for a specific cause.
• Current vs. Long-Term Splitting: Prepayments and loans must be split based on the portion used/due within the next 12 months (e.g., 18 months of rent: 12 months current, 6 months long-term).

Financial Ratios

• Liquidity Ratios:     * $\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$     * $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$     * $\text{Acid-test (Quick) Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}$
• Solvency Ratios:     * $\text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}}$     * $\text{Times Interest Earned Ratio} = \frac{\text{Net Income} + \text{Interest Expense} + \text{Income Taxes}}{\text{Interest Expense}}$
• Profitability Ratios:     * $\text{Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales Revenue}}$     * $\text{Return on Assets (ROA)} = \frac{\text{Net Income}}{\text{Average Total Assets}}$     * $\text{Return on Equity (ROE)} = \frac{\text{Net Income}}{\text{Average Total Equity}}$     * Note on Leverage: Higher leverage increases ROE if the company is profitable, but excess debt interest can negate profits.

Income Statement and Earnings Per Share

• Sections of the Income Statement:     1. Income from Continuing Operations: Includes operating and non-operating income.     2. Income from Discontinued Operations.     3. Earnings Per Share (EPS): Basic and Diluted.
• Basic EPS Formula:     * $\text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Common Shares Outstanding}}$
• Reporting Formats: Typically Multi-step (Gross Profit, Operating Income).     * $\text{Gross Profit} = \text{Revenue} - \text{COGS}$

Accounting Changes and Error Corrections

• Change in Accounting Principle: Requires retrospective approach (adjusting old statements as if the new principle was always in place).
• Change in Accounting Estimate: Requires prospective approach (correct in the current period and moving forward).
• Error Discovery:     * Same year: Correct before issuing annual report.     * After issuance (Immaterial): Prospective approach.     * After issuance (Material): Correct old statements, reissue them, and include a disclosure note in the current year.

Statement of Cash Flows

• Categories:     * Operating Activities: Core business + interest expense/revenue.     * Investing Activities: Buying/selling long-term assets.     * Financing Activities: Issuing/repaying debt, issuing stock, dividends.
• The Indirect Method (Operating Flows):     1. Start with Net Income.     2. Add non-cash expenses (Depreciation/Amortization).     3. Add decreases in current assets and increases in current liabilities.     4. Subtract increases in current assets and decreases in current liabilities.     5. Note: Changes in the cash account itself are not added/subtracted; the total change from year to year reflects the overall cash flow.

Time Value of Money (TVM)

• Principles: Money invested today grows due to interest. It considers nominal amounts, not inflation (purchasing power).     * Simple Interest: Interest on original principal only.     * Compound Interest: Interest on principal plus accumulated interest.
• Annuities:     * Ordinary Annuity: Payments occur at the end of each period.     * Annuity Due: Payments occur at the beginning of each period.
• Applications: Valuation of monetary assets/liabilities with cash flows occurring in 1 year or more; calculating revenue for performance obligations separated by more than 1 year.

Revenue Recognition and Accounts Receivable

• Revenue Recognition Steps:     1. Identify the contract.     2. Identify performance obligation(s).     3. Determine transaction price.     4. Allocate price (based on relative stand-alone selling prices).     5. Recognize revenue when obligations are satisfied (control transfers).
• Control Factors: Customer has legal title, possession, physical consumption, risks/rewards, or has accepted the asset.
• Sales Returns: Estimates recognized in the same period as revenue using an "Allowance for Sales Returns" (Credit AR or Allowance; Debit Sales Returns).
• Bad Debt (Allowance Method): Expense recognized when accounts are estimated to be uncollectible (end of period), not when specific accounts are written off.

Inventory and Cost Flow Systems

• Recording: Recorded as current asset at cost plus acquisition costs (freight-in, insurance).
• Inventory Systems:     * Perpetual: Continuously updates inventory and COGS with every transaction.     * Periodic: Updates only at end of period.     * $\text{COGS} = \text{Beginning Inventory} + \text{Net Purchases} - \text{Ending Inventory}$
• Cost Flow Methods:     * FIFO: Oldest sold first. In rising costs, results in higher ending inventory and lower COGS.     * LIFO: Newest sold first. LIFO Conformity Rule: If used for taxes, must be used for reporting.     * Average Cost: Uses weighted average.
• Subsequent Measurement: Inventory write-downs are required if market value falls below cost due to damage, obsolescence, or price changes.

Long-Term Assets: Capitalization and Allocation

• Capitalize vs. Expense:     * Capitalize: Benefits extend to future periods (Buildings, Patents).     * Expense: Benefits apply only to the current period (Salaries, Utilities).
• Intangibles: Purchased intangibles are capitalized; Developed intangibles (R&D) are generally expensed as incurred.
• Cost Allocation:     * Depreciation: Plant and equipment.     * Depletion: Natural resources.     * Amortization: Intangible assets.
• Journal Entries: Debit Expense; Credit Accumulated Depreciation/Amortization (Contra-asset).
• Formulas:     * $\text{Allocation Base} = \text{Initial Asset Value} - \text{Salvage Value}$     * $\text{Book Value} = \text{Historical Cost} - \text{Accumulated Allocation}$
• Dispositions: Remove book value (Debit Accumulated Depreciation, Credit Asset). Record gain/loss for the difference against cash received.

Topics NOT Covered on Exam

• Chapter 3: Proxy Statements, Segment Reporting.
• Chapter 4: Restructuring Costs, Interim Reporting, Diluted EPS calculation, DuPont Framework.
• Chapter 5: Valuation of Long-Term Bonds, Leases, Pensions.
• Chapter 6: Licenses, Intellectual Property, Franchises, Bill-and-Hold, Consignment, Gift Cards.
• Chapter 7: Internal Controls, Direct Write-Off Method, Financing with Receivables.
• Chapter 8: LIFO Inventory Pools, Dollar-Value LIFO.
• Chapter 9: Gross Profit Method, Retail Methods (LIFO/FIFO/Dollar-Value).
• Chapter 10: Donated Assets, Asset Exchanges, Self-Constructed Assets, Interest Capitalization, Overhead Allocation.
• Chapter 11: Sum of the Years Digits, Assets held for sale, Group/Composite Depreciation, Error Correction (Ch 11 context), Impairment, Subsequent Expenditures, Changes in Estimates/Methods.