ACCT201 FINAL Exam Study Guide

This study guide encompasses various accounting principles, methods, and calculations crucial for understanding fixed assets, liabilities, stockholders' equity, and cash flows, designed to prepare for the ACCT201 final exam.

Exam Structure

  • Total Questions: 75 multiple choice questions

  • Total Points: 150

  • Breakdown: 50% calculation, 50% conceptual

Fixed Assets

  • Definition: Fixed assets are also known as Plant assets or Property, Plant & Equipment (PP&E).

    • Include physical and tangible operational assets.

  • Cost of Fixed Asset: All expenditures necessary to acquire the asset and prepare it for use, encompassing:

    • Purchase price

    • Delivery costs

    • Installation costs

    • Any costs incurred to bring the asset to a usable condition.

  • Non-Depreciated Asset: Land is not depreciated since it has an indefinite life.

  • Book Value of Asset: Calculated using the formula:

    • ext{Book Value} = ext{Cost} - ext{Accumulated Depreciation}

  • Salvage Value: The estimated value of a fixed asset at the end of its useful life.

Depreciation Methods

  • Straight-Line Depreciation: Calculated as follows:

    • ext{Depreciation Expense} = rac{ ext{Cost} - ext{Salvage Value}}{ ext{Useful Life}}

    • Adjustment for Purchases During the Year: The first year's depreciation must be prorated based on the number of months the asset was in use, calculated as:

    • ext{Depreciation for First Year} = ext{Direct Computation} imes rac{ ext{# Months}}{12}

  • Ordinary Repairs: Expenditures for maintenance or repairs are expensed as incurred.

Disposal of Fixed Assets

  • Gain or Loss Recording: To determine gain or loss on disposal:

    • Compare Book Value (BV) and Sale Price (SP):

    • If SP > BV, recognize a GAIN (credit).

    • If SP < BV, recognize a LOSS (debit).

Intangible Assets

  • Definition: Intangible assets lack physical substance and include items such as goodwill and patents.

  • Goodwill: How it is acquired involves purchasing another business for more than the fair value of its net identifiable assets.

  • Research and Development Costs: These costs are expensed as incurred rather than capitalized.

  • Patents: Include fees that confer legal rights and the lifespan of a patent (generally 20 years).

  • Amortization Expense: Similar to depreciation but for intangible assets, calculated using straight-line method.

Asset Turnover Ratio

  • Calculation: To analyze efficiency, calculate:

    • ext{Asset Turnover} = rac{ ext{Net Sales}}{ ext{Average Total Assets}}

    • A higher ratio indicates more efficient asset utilization.

Depreciation Methods: Units of Activity

  • Calculating Units of Activity Depreciation:

    • Formula:

    • ext{Depreciation Expense} = rac{ ext{Cost} - ext{Salvage Value}}{ ext{Total Units of Activity}}

    • Multiply by the actual units used each year.

Accounting for Notes and Interest

  • Issuance of a Note: Record upon issuance.

  • Interest Calculation: Use:

    • ext{Interest} = P imes R imes T

    • Where P = Principal, R = Rate, T = Time (in years).

  • Payment of Notes and Interest: Record the payment of principal and any accrued interest.

Sales and Sales Taxes

  • Recording Sales with Tax: Account for sales tax through Sales Tax Payable account.

  • Calculating Sales Tax: When given total sales amount (including tax), derive sales tax with percentage method.

Liabilities

  • Current vs. Long-term Liabilities:

    • Current liabilities are due within a year, while long-term liabilities are payable beyond a year.

  • Payroll Recording:

    • Record gross pay less deductions (FICA, Income tax, Medical insurance) results in Net Pay.

    • Record payment of payroll.

    • Record employer payroll taxes (FICA, FUTA, SUTA).

Bonds

  • Convertible Bonds: May be converted into common stock by the holder.

  • Callable Bonds: Can be redeemed early by the issuing company.

  • Bonds Issuance Records: Record issuance at par, premium or discount according to their relationship with face value:

    • At par: 100% of face value.

    • At premium: More than 100% of face value.

    • At discount: Less than 100% of face value.

Bonds Payable Amortization

  • Monthly Amortization of Discounts or Premiums: Necessary for adjusting the interest expense reported.

    • Interest Expense must be adjusted downward for premiums or upward for discounts.

  • Carrying Value on Balance Sheet:

    • For premiums: ext{Carrying Value} = ext{Face Value} + ext{Unamortized Premium}

    • For discounts: ext{Carrying Value} = ext{Face Value} - ext{Unamortized Discount}

  • Interest Owed: Calculated as:

    • ext{Interest Owed} = ext{Face Value} imes ext{Rate}

  • Redemption Gain/Loss:

    • Calculate gain or loss by comparing payment made to carrying value:

    • If payment > carrying value, record LOSS (debit).

    • If payment < carrying value, record GAIN (credit).

Shareholders' Equity

  • Bankruptcy Limits of Shareholders: They can only lose their initial investment if the corporation goes bankrupt.

  • What Shareholders Receive Upon Bankruptcy: In accordance with their stake in the corporation.

  • Issuance of Common Stock: Record based on par value with additional capital if received exceeds par value.

  • Share Definitions: Understanding different types of shares:

    • Authorized shares: Maximum number of shares a corporation is allowed to issue.

    • Issued shares: Total shares actually sold to shareholders.

    • Outstanding shares: Issued shares minus treasury shares.

  • Impact of Treasury Stock: It reduces stockholders' equity.

  • Common vs. Preferred Stock: Differences in rights and benefits between both types.

  • Preferred Stock Issuance Recording: Similar to common stock, respecting par value considerations.

Dividends

  • Key Dates: Important dates in dividend declarations:

    • Declaration Date: Date company announces dividend.

    • Record Date: Cut-off date to determine dividend recipients.

    • Payment Date: Date dividends are actually paid.

  • Dividends Recording: Appropriate journal entries for recognizing dividends.

  • Cumulative vs Non-Cumulative Preferred Stock:

    • Determine dividends for both common and preferred stockholders based on cumulative nature.

  • Stock Splits vs. Stock Dividends: Understanding the differences, including their effects:

    • On par value per share, total par value, total retained earnings, and total paid-in capital.

  • Payout Ratio: Ratio reflecting the proportion of earnings paid as dividends to shareholders.

  • Return on Common Stockholder’s Equity: Measure of profitability and financial performance for common stockholders.

  • Recording Common Stock Dividends: Journal entries to capture common stock dividends accordingly.

Statement of Cash Flows

  • Purpose: Assesses a company's capability to pay dividends and meet financial obligations.

  • Calculating Cash Flows from Operations (Indirect Method):

    • Starting with Net Income, adjust for:

    • + Depreciation

    • + Losses

    • - Gains

    • - Increases in non-cash current assets

    • + Decreases in non-cash current assets

    • + Increases in current liabilities

    • - Decreases in current liabilities

  • Cash Flows from Financing Activities: Conceptual focus, generally includes cash transactions with long-term assets.

  • Cash Flows from Investing Activities: Conceptual focus, encompasses cash transactions relating to long-term liabilities and stockholder's equity accounts.

  • Phases of Cash Flows: Understanding cash flow implications during introductory, growth, maturity, and decline phases of a business cycle.