Rutgers Intro to Financial Accounting Final – Flashcards
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What is the Accounting Equation? Also what are the respective normal balances?
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Assets = Liabilities + Owner's Equity debit credit credit
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Under assets what 3 types are there?
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Current Assets, Investments, Property Plant and Equipment
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Under liabilities what 2 types are there?
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Current and Long-Term liabilities
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Under Owner's equity what 3 sections are there?
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Common Stock, Preferred Stock, Retained Earnings
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What is included in the Income Statement? Also what is the normal balance? What is the product of those two items?And where does that amount go?
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Revenues and expenses credit debit revenues- expenses = Net income/loss which is added to retained earnings
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What is a worksheet and is it required? What are the steps in preparation?
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Optional multiple column tool to help in making financial Statements 1) Prepare a trial balance on the worksheet 2) Enter adjusting entries (keying) 3) Adjust balances and extend correct amount to place in income statement column or balance sheet column 4) Total columns and calculate net income/loss 5) Close the books, close temporary accounts and keep permanent accounts. 6) Post closing trial balance shows about after
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What are the closing entries to close the books?
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a)Debit revenue accounts and credit income summary b)credit expense accounts and debit income summary c)debit/credit (whichever is more) income summary and do the opposite to retained earnings d)credit dividends and debit retained earnings
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What are correcting entries?
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Not adjusting entries, but fixing entries whenever an issue is found
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What is the formula for COGS?
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Beginning Inventory + Purchases - ending inventory extra: Sales revenue - COGS = Gross profit - Operating Expenses = Net Income beginning inventory + COGS = Goods available for sale
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True or false, Service Companies have longer operating cycles.
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False
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What are the 2 types of inventory systems?
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Periodic and Perpetual
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Characteristics of a periodic system:
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Per period inventory count Uses purchases account and discount account
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Characteristics of a perpetual system
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every change in inventory is recorded Uses inventory and cash and COGS Stuff is often purchased and sold on account
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What is the journalizing for the following: XYZ company purchases 1000 dollars worth of goods XYZ sells half the goods at 50 percent marked up price
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Purchases 1000 cash 1000 Cash 750 sales revenue 750
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What is the journalizing for the following: XYZ company increases inventory 1000 dollars XYZ company sells half the merchandise at 50 percent mark up price
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Inventory 1000 cash 1000 Cash 750 sales revenue 750 COGS 500 Inventory 500
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What is FOB destination and FOB shipping point and how does it affect shipping.freight costs
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Freight on board destination - at the destination title(ownership) of the goods changes hands. Meaning the seller pays the freight cost FOB shipping point - as soon as it gets on the vehicle it changes hands, meaning the buyer pays the freight cost
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Under periodic systems what are the ways to calculate the amount of goods? what are their advantages
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FIFO - the general natural way stuff goes out, also generally reduces the impact of inflation LIFO - lower income taxes because you report lower incomes Weighted average Special Identification wi
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How is FIFO done here are your amounts, calculate COGS and ending inventory Units cost 13 units 10 2 12 3 15 2.5
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24 units left over 13 units used 29 dollars used 64.5 dollars left
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How is LIFO done here are your amounts, calculate COGS and ending inventory Units cost 13 units 10 2 12 3 15 2.5
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24 units left over 13 units used 61 dollars left 32.5 dollars used
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How is Weighted Average done here are your amounts, calculate COGS and ending inventory Units cost 13 units 10 2 12 3 15 2.5
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average unit cost is 2.53 24 units left over 13 units used 32.89 dollars used 60.72 dollars left over
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With bank statements, who needs to make the correction on records: Service charge from the bank Your check is in transit and needs to be deposited Borrowed note has an interest payment mistake in customer records Borrowed notes has a borrowing fee mistake in bank records
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Me Bank Me Me Me Me Me Bank
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What are the 3 special purchase accounts and what do they do?
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Purchase Return - purchaser returns goods Purchase Allowance - seller grants a discount from purchase price instead of doing a full return Purchase discount - purchaser makes money by paying in a shorter time i.e. 2/10 n/30
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True or false, A multi-step income statement differentiates between operating and non operating activities
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True
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General Steps in a multi step income statement
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Sales Revenue -COGS = Gross profit Gross profit - operating expenses = Net sales
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Gross Profit Rate
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gross profit/net sales
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What are steps and journalizing in the indirect or allowance method
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1) expense it Bad debts expense Allowance for debt account 2) write off, when you're sure you cannot collect it Allowance for debt account Accounts Receivable
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What are the two ways to calculate the allowance
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Percentage of Sales Percentage of A/R
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How do you compute allowance through percentage of sales Revenues 200,000 A/R 100,000 Allowance for doubtful Accounts 1000 Using 2% of revenues
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Simply find 2% of the revenues amount which is 4000 bad debts expense 4000 Allowance for debt account 4000
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How do you compute allowance through percentage of A/R Revenues 200,000 A/R 100,000 Allowance for doubtful Accounts 1000 2% A/R
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2% of A/R is 2000, but the ALDA balance is 2000 plus existing 1000 so answer is 3000 A/R 100,000 (contra asset account) ALDA 2000 Net Receivables 98,000
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What is used to measure the effectiveness of a business through inventory
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Inventory Turnover rate - measures liquidity COGS/Average inventory of period Days in inventory - average days inventory held 365/inventory turnover ratio
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Fraud is:
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dishonest act by an employee that is a benefit to the employee but a cost to the employer
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Sarbanes-Oxley Act
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an act to maintain a system of adequate internal control within companies
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Segregation of duties
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People who handle money and make deposits needs to be seperate
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Difference between receivables, which are
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Accounts Receivable - 30 -60 days Notes Receivable - 60 - 90 days Other stuff - have their own terms
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Direct write off method is a legitimate way to journalize issues
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NOPE
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Credit Card Sales has 3 parties what are they
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Credit card issuer Visa Retailer Walmart Customer Me
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PPP includes what
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The land or building including the additional costs of acquiring land, insurance, freight, commission
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Can Land and buildings depreciate
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Land NOPE Buildings YEP
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What is the depreciable cost
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Cost of asset minus salvage value
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What are the 2 ways to calculate depreciation
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Straight line method and Double Declining Balance
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Straight Line Method
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Total cost of equipment - salvage value = Depreciable amount Depreciable amount / years of life = the amount it decreases each year
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Double Declining Balance
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This is double the normal rate. so if the normal rate is 20 percent per year, the DDB is 40 percent Year 1 - 105000*.4 = 42000 105000 - 42000 = 63,000 Year 2 - 63000*.4 = 25200 67200 63000 - 25200 = 37800 Year 3 - 37800*.4 = 15120 82320 37800 - 15120 = 22680 Year 4 - 22680*.4 = 9072 91392 22680 - 9072 = 13608 Year 5 - 13608*.4 = 5443 96835 Total depreciation = 96835 100,000 - 96,835 = 3165
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How do you account for intangible assets?
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Using amortization for example buying a patent costs 60,000 estimated useful life is 8 years 60,000 / 8 = 7500 so the yearly amortization expense is 7500 Amortization expense 7500 Patent 7500
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What does Asset turnover ratio provide as information?
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It analyzes the productivity of a company's assets It is how many dollars of sales a company produces for each dollar invested in assets Net sales / average total assets
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Record the Issue of a bond selling at 102, 8%, payments semiannually, for 10 years
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Cash 102,000 Bonds Payable 100,000 Premium on Bonds Payable 2000
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Record the first payment of a bond selling at 102, 8%, payments semiannually, for 10 years
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Interest payment 3900 premium 100 cash 4000
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What are the upsides of issuing bonds? and downsides
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Dont affect stockholder control Tax savings Return on Stockholders equity can be higher (Premiums) downsides: interest on a periodic basis and must pay principal at due date
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What are the 4 types of bonds and what do they do?
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Secured - collateral pledged with issuance (Mortgage bond) Unsecured(debenture) - issued against general credit of borrower (you trust them) Convertible - Bonds that can be converted into stock Callable - Bonds that can be bought back at specific amount prior to maturity
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How to journalize sales tax in a transaction?
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Cash XXX Sales Revenue XXXX Sales Tax payable XXX
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What taxes do employers pay? What more do corporations pay?
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Employer's share of social security (FICA) taxes, State and Federal unemployment taxes Corporations pay separate state and federal income taxes
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What are unearned revenues, and how are they journalized?
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When a company receives advance payment but cannot recognize it as a revenue until the work is done cash XXX unearned revenue XXX when recognized unearned revenue XXX Service revenue XXXX
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What are 5 parts of a bond?
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Face Value - original amount due at maturity date Maturity Date - date of final payment Contractual Interest (stated) rate - annual interest rate paid semianually Bond Indenture - shows the terms and summarizes the rights Bond Certificate - Provides name of issuer, face value, interest rate, maturity date
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What are the 3 important dates for a cash dividend? What is the journalizing included? What accounts does it affect?
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Declaration date - Announcement of the dividend cash dividend dividends payable Record Date - company determines ownership of stock to split dividends no entry Payment Date - the company makes the cas dividend to stock holders dividends payable cash Payment of dividends affects assets and liabilities but not OE
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What happens if I own 20% and 20,000 shares and there's a 2 to 1 stock split
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I will still own 20% of the business but now I will 40,000 shares and half price for each one
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Current Ratio Accounts Receivable turnover ratio Inventory turnover ratio Length of Operating Cycle
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Current ratio = current assets / current liabilities, if greater than 1 company can pay off debt well and has higher liquidity A/R turnover ratio = Net Annual Credit sales/((Beginning A/R + Ending A/R)/2) Inventory turnover Ratio - COGS/Average inventory of period Days in inventory - average days inventory held 365/inventory turnover ratio
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What are the steps in the Acounting process
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journal, journal entry, general ledger, trial balance, adjusting entry, adjusted trial balance, XXXXXXXXX
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Why do companies purchase stock or debt securities?
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1) Excess cash, to invest in highly liquid securities 2) Generate earnings from investment income 3) Strategic reasons like controlling competitiors
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Debt Investment versus stock investments
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Debt investments - these are investments in government and corporation bonds they are recorded at cost, cost plus acquisition costs debt investments cash Stock investments - investments in capital(preferred or common) stock of a corporation
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What are the 3 different sorts of control you can have over a company?
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Less than 20% -> Insignificant Influence -> Cost method (record ivestment at cost and record revenue when cash dividends are received. i.e. If cash dividend is 100,000, you have 15% ownership, then you have revenue of 15,000) 20-50% -> Significant Influence -> Equity Method (investor records its share of net income i.e. if net income is 100,000 and cash dividend in 10,000, and you own 25% you get (100,000*.25) - (10,000*.25) = revenue of 22500 50%+ -> controlling influence -> use consolidated financial statement, its a parent company and this has some involvement in all assets and liabilities
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What is Fair value of a security?
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The amount for which the security would sell on the market.
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Categories of securities include?
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Trading - debt and stock meant to make money on short term differences in price Available for sale - debt and stock with intent to sell in future, more long term Held to maturity - debt only securities help till maturity
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Journalizing Fair Value adjustments
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Fair value adjustment - trading to record the difference between total cost and the total fair value Fair value is the amount the regular market is willing to pay for that security Investments Cost Fair Value unrealized Stock X 50,000 58,000 gain of 8,000 Journalizing Fair value adjustment - Trading 8000 Unrealized (gain/loss) gain - Income 8000 Trading Securities - unrealized gain/loss on income, positive if fair value is higher, negative if fair value is lower Available for sale - unrealized gain/loss on equity, positive if fair value is higher, negative if fair value is lower Unrealized gain/loss shown as a deviation from stockholder's equity, it does not affect the net income calculation
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What does the statement of cash flows report on?
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cash receipts, cash payments, net change in cash resulting from operating, investing, and financing activities during a period
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Identify what 3 main sections exist in a cash flow statement?
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Operating Financing Investing
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What is included under Operating cash flow in and out?
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cash effects of transactions that create revenues and expenses Changes in accounts receivable (do opposite) Changes in inventory (do opposite) Changes in prepaid expenses (do opposite) Changes in Accounts Payable (do same) Changes in income Tax Payable (do same)
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What is included under Financing cash flow in and out?
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acquiring and disposing of investments and property, plant, and equipment, and lending money and collecting the loans Change in building (do opposite) Change in equipment (do opposite)
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What is included under Investing cash flow in and out?
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include obtaining cash from issuing debt and repaying amounts borrowed, and obtaining cash from stockholders, repurchasing shares, and paying dividends Issuance of common stock (positive) Payment of cash dividends (negative)
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For operating cash flow in and out what is the direct method
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Looks at income statement and comparative balance sheets to determine amounts, then splits up into operating, investing, and financing expenses and subtracts from respective cash flows to calculate net increases/decreases in cash
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Free Cash flow
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Net cash from operating activities - Capital Expenditures - Cash Dividends
