Exam Insights & Key Concepts

Exam Insights & Key Concepts

Transaction Types

• Identifying Transactions: Determine whether each transaction is a claim, exchange, asset exchange, asset source, or asset use.

• Classification Expectation: Be prepared to classify provided examples of transactions.

• Calculations: Pay close attention to calculations; incorrect answers may appear as distractors in multiple-choice questions.

The Fraud Triangle ⚠️

• Understanding the Triangle: Expect questions about the fraud triangle and specifically which elements are NOT part of it.

Market & Consumer Definitions

• Textbook Definitions: Be familiar with definitions for: Market, Consumer, and Transaction.

Impact on Financial Statements 📊

• Analyzing Transactions: Understand how transactions affect financial statements, including changes to expenses, cash, or dividends.

Gross Margin Calculation 🧮

• Definition: Gross Margin = Sales - Cost of Goods Sold

• Example 1: Sales of $10,000 and Cost of Goods Sold of $5,000:

  • Gross Margin = $10,000 - $5,000 = $5,000

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Further Examples of Gross Margin Calculation

• Example 2: Sales of $10,000, Sales Discounts of $5,000, and Cost of Goods Sold of $1,000:

  1. Net Sales = $10,000 - $5,000 = $5,000

  2. Gross Margin = $5,000 - $1,000 = $4,000

• Example 3: Sales of $10,000, Cost of Goods Sold of $5,000, rent expense of $3,000:

  • Gross Margin = $10,000 - $5,000 = $5,000 (expenses ignored)

Common Size Financial Statements 📈

• Purpose: Understand the use and purpose of common size financial statements.

Income Statement vs. Balance Sheet 💰

• Definition Differences:

  • Income Statement: Covers a specific accounting period.

  • Balance Sheet: A snapshot at a point in time.

Statement of Cash Flows 💸

• Types of Activities: Know the three types of activities:

  • Operating

  • Investing

  • Financing

• Cash Activity Note: Cash itself is NOT classified as an activity.

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Depreciation Calculation ⚙️

• Straight-Line Method: Formula = (Cost - Salvage Value) / Useful Life

  • Example: Vehicle costs $100,000, salvage value $25,000, useful life of 5 years:

    • Yearly Depreciation Expense: ($100,000 - $25,000) / 5 = $15,000

    • Accumulated Depreciation through Year 2: $30,000

Income Statement Types

• Single-Step Income Statement: Does not include cost of goods sold.

• Multi-Step Income Statement: Includes cost of goods sold affecting operating income.

Shipping Terms 🚢

• Understand: FOB Shipping Point and FOB Destination, transportation costs.

Accrual and Deferral ⏳

• Definitions: Familiarize yourself with accrual and deferral definitions.

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Interest Calculations 💰

• Accrued Interest:

  • Formula: Accrued Interest = Principal * Interest Rate * (Time Period/Total Time)

  • Example: $10,000 at 5% for 7 months:

    • Annual Interest = $10,000 * 0.05 = $500

    • Monthly Interest = $500/12 = $41.67

    • Accrued Interest = $41.67 * 7 = $291.67

Total Interest on a Note Receivable

• Calculation:

  • Face value = $8,000, term = 90 days, interest-rate = 10%:

    1. Annual Interest: $8,000 * 0.10 = $800

    2. Daily Interest: $800 / 365 = $2.19

    3. Total Interest for 90 Days: $2.19 * 90 = [$197.37]

Accounting Events and Financial Statements 🏦

• Accounting Event: An event that directly impacts an entity’s assets, liabilities, or equity.

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Key Concepts for Exam Preparation

• Financial Statements: Review specific items in each.

• Inventory Methods: Distinguish between perpetual and periodic inventory systems.

• Returns: Understand their impact on financial statements.

Assets and Expenses 💸

• Moving Assets to Expenses:

  • Assets are moved to expenses when used up (via depreciation or supplies).

• Examples:

  • Accounts Receivable: Decrease by $10,000 (payment received), Cash increases by $10,000.

  • Supplies: Initial balance $5,000; Remaining balance $2,000, Supplies used $3,000.

  • Rent: Paid $12,000 for the year, $6,000 expense after six months.

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Inventory Costing Methods 📦

• Methods Include:

  • LIFO (Last-In, First-Out)

  • FIFO (First-In, First-Out)

  • Weighted Average

Cash Flow Statement Activities 📊

• Types of Activities: Operating, Investing, Financing.

Matching Concept

• Definition: Recognizes expenses in the same period as the related revenues.

Gross Margin Percentage Calculation

• Formula: Gross Margin Percentage = (Gross Margin / Sales) * 100

Definitions

• Liabilities: Amounts owed to others.

• Assets: Resources owned by the company.

• Expenses: Costs incurred to generate revenue.

Bank Reconciliation 🏦

• Steps: Understand how to adjust balances during reconciliation.

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Accrued Interest 🏦

• Definition: Interest that accumulates but has not been paid yet.

Period Costs vs. Product Costs 🏭

• Period Costs: Expensed in the period incurred (e.g., utilities).

• Product Costs: Directly tied to production (e.g., raw materials).

• Recognition: Period costs are expensed immediately vs. product costs when the product is sold.

Contra Accounts ⚖️

• Definition: Accounts that reduce the value of related accounts.

• Examples:

  • Accumulated Depreciation: Contra account to equipment.

  • Dividends: Contra account to retained earnings.

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Inventory Turnover 📦

• Importance: Indicates how well inventory is managed; ideally, inventory decreases through sales.

Unearned Revenue vs. Prepaid Expenses 💸

• Unearned Revenue: Liability for payment received before service provided.

• Prepaid Expense: Asset for payment made for future services.

• Example: Jacob pays Carrie $50 in advance; from Jacob’s perspective, it’s a Prepaid Expense, from Carrie’s perspective, it’s Unearned Revenue.

Gross Margin Percentage 📈

• Final Formula: Gross Margin Percentage = Gross Profit/ Sales Revenue.