Accounting Exam 1

Chapter 1

1. What are Generally Accepted Accounting Principles?

• Definition: The concepts and rules that govern financial accounting practice

  • They require faithful representation and relevance

2. What is the accounting equation?

• Assets = Liabilities + Owners Equity (Total Equity)

  • Assets = Liabilities + Common Stock - Dividends + Revenues - Expenses

3. If you change one part of the accounting equation, what must happen to keep the accounting equation in balance?

• You must change the other side in order for Assets to equal Liabilities + Equity → The equation must always be equal

4. What are the two primary pieces of owner’s equity?

• Contributed Capital - By the owners, Common Stock

• Profits - Retained Earnings (prior year profits)

5. How does a corporation calculate retained earnings?

• Beginning Retained Earnings + Profits - Dividends = Ending Retained Earnings

6. What are the four financial statements?

• Income statement, Balance sheet, Retained earning statement, Cash flow statement

7. What are the differences and similarities between sole proprietorships, partnerships (and LLCs), and Corporations?

• Differences

  • Sole proprietorship = One owner

  • Partnership/LLC = One or more owner

  • C Corporation = No restrictions on ownership type

• Similarities

  • Sole Proprietorship and Partnership formation is usually easy and tax-free

8. How do you calculate the return on assets ratio?

• Net Income (for the year) / Average Total Assets

9. How do you interpret the return on assets ratio?

• The ratio is a way to judge the health/longevity of a company as well as a prediction on how people will interact with the company from a stakeholder perspective

• A higher return on assets ratio mean the better a company is

Chapter 2

1. What are the common accounts you will find in assets, liabilities, and equity?

• Assets: Accounts receivable, cash, buildings, and inventory

• Liabilities: Accounts payable, loans, mortgages payable, deferred revenue

• Equity: Common stock, dividends

2. What’s a debit and what’s a credit?

• Debits often record incoming money vehicle credits record outgoing money

• What do they do on T accounts?

3. How is a journal entry written?

• Include the date of the transaction, amount, affected accounts with account number, and description

4. Can you make journal entries from common transactions (like we did with Consulto, Inc. and many of the homework problems)?

5. Can you create the income statement, the statement of changes in equity, and the balance sheet if you have the year-end balances in the T-accounts?

6. What is the debt to assets ratio?

• Total Liabilities / Total Assets

7. How do you interpret the debt to assets ratio?

• Tells us how much of the assets belong to the lenders vs teh owners

• If the number is large then the company is more likely to fall into debt

Chapter 3

1. What is the difference between the cash method of accounting and the accrual method of accounting?

• The Cash Method: Records revenues when they are collected, records expenses when they are paid    (Not GAAP Approved)

• The Accrual Method: Records revenues when they are earned (whether collected or not), records expenses when they are used (whether paid or not)    (GAAP Approved)

2. Can you calculate net income on the cash method and on the accrual method?

• Cash Method asks “Is money going in and out the door?”

• Sheepdip Company Example (Using Cash Basis Accounting) - Money going in and out the door

  • Is it revenue?

    • Sales of $4,500 on credit - NO (money owed but not paid)

    • Collected $2,000 for serviced to be performed in 2018 - YES (money collected)

    • Paid $625 cash in salaries for work done in 2017 - YES (money spent)

    • Purchases airlines tickets for $250 in December for a trip to take place in 2018 - YES (money spent)

  • What is 2017 net income using cash basis accounting? → $1,125

• The Accrual Method asks “When was it earned? When will it be used?”

  • Sheepdip Company Example (Using Accrual Accounting)

    • Is it Revenue?

      • Sales of $4,500 on credit - YES

      • Collected $2,000 for serviced to be performed in 2018 - NO (hasn't been earned, will be earned in 2018)

      • Paid $625 cash in salaries for work done in 2017 - YES (employees have been “used”)

      • Purchases airlines tickets for $250 in December for a trip to take place in 2018 - NO (will be an expense when used in 2018)

    • What is 2017 net income using accrual accounting? → $3,875

3. Can you calculate and write adjusting journal entries?

• Examples of adjusting journal entries:

  • Prepaid rental revenue

  • Accrued rental expense

  • Unearned revenue that has been collected

  • Depreciation expense

  • Supplies expense at the end of the year

  • Adjusting prepaid expenses such as prepaid insurance.

4. What is the current ratio?

• Current Assets / Current Liabilities

5. How do you interpret the current ratio?

• A “current” asset is something that is anticipated to be used in the current year

• A “current” liability is something that will be paid back in the next year

• A large ration can mean that the company isn't properly using their money because they could be using it to grow instead of letting it sit

6. What is the net profit ratio (also called the profit margin ratio)?

• Net Profit / Sales

7. How do you interpret the net profit ratio?

• This ratio expresses how much profit is actually made for every $ of sales

• A higher net profit ratio means that accompany is managing its costs well and also generating good levels of revenue

Other Questions

• What accounts are considered Assets?

  • Cash, Equipment, Land, Buildings, Accounts Receivable, Inventory, Prepaid Expenses, Investments, Vehicles, Goodwill

• What accounts are considered Liabilities?

  • Notes Payable, Accounts Payable, ______ Payable

• What accounts are considered Equity?

  • Common Stock, Retained Earnings

  • Temporary Equity: Revenues (make equality bigger), Expenses (make equity smaller), Dividends