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1 RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit / Credit Effects = Liabilities ADJUSTING ENTRIES (Chapter 3) Expenses Ownership Ownership of goods on Freight Terms public carrier resides with: Who pays freight costs: FOB shipping point Buyer Buyer FOB destination Seller Seller Perpetual vs. Periodic Journal Entries Type Adjusting Entry Event Perpetual Periodic* Deferrals 1. Prepaid expenses Expenses Assets 2. Unearned revenues Liabilities Revenues Accruals 1. Accrued revenues Assets Revenues 2. Accrued expenses Expenses Liabilities Note: Each adjusting entry will affect one or more income statement accounts and one or more balance sheet accounts. Interest Computation Interest = Face value of note Annual interest rate Time in terms of one year CLOSING ENTRIES (Chapter 4) Purchase of goods Purchases (A/P) (A/P) Freight (shipping point) Freight-In Return of goods (or A/P) (or A/P) Purchase Returns and Allowances Sale of goods (or A/R) (or A/R) Cost of Goods Sold No entry End of period No entry Closing or adjusting entry required Purpose: (1) Update the Owner s Capital account in the ledger by transferring net income (loss) and Owner s Drawing to Owner s Capital. (2) Prepare the temporary accounts (revenue, expense, Owner s Drawing) for the next period s postings by reducing their balances to zero. Cost Flow Methods Specific identification First-in, first-out (FIFO) Weighted average Last-in, first-out (LIFO) Process 1. Debit each revenue account for its balance (assuming normal balances), and credit Income Summary for total revenues. 2. Debit Income Summary for total expenses, and credit each expense account for its balance (assuming normal balances). STOP AND CHECK: Does the balance in your Income Summary Account equal the net income (loss) reported in the income statement? 3. Debit (credit) Income Summary, and credit (debit) Owner s Capital for the amount of net income (loss). 4. Debit Owner s Capital for the balance in the Owner s Drawing account and credit Owner s Drawing for the same amount. STOP AND CHECK: Does the balance in your Owner s Capital account equal the ending balance reported in the balance sheet and the owner s equity statement? Are all of your temporary account balances zero? ACCOUNTING CYCLE (Chapter 4) 9 Prepare a post-closing trial balance 1 Analyze business transactions 2 Journalize the transactions FRAUD, INTERNAL CONTROL, AND CASH (Chapter 8) The Fraud Triangle Principles of Internal Control Activities Finanical pressure Opportunity Bank Reconciliation Bank Balance per bank statement Add: Deposit in transit Deduct: Outstanding checks Adjusted cash balance Rationalization Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls Books Balance per books Add: Unrecorded credit memoranda from bank statement Deduct: Unrecorded debit memoranda from bank statement Adjusted cash balance Note: 1. Errors should be offset (added or deducted) on the side that made the error. 2. Adjusting journal entries should only be made on the books. STOP AND CHECK: Does the adjusted cash balance in the account equal the reconciled balance? RECEIVABLES (Chapter 9) Methods to Account for Uncollectible Accounts 8 Journalize and post closing entries 3 Post to ledger accounts Direct write-off method Record bad debts expense when the company determines a particular account to be uncollectible. EP-1 7 Prepare financial statements: Income statement Owner s equity statement Balance sheet 6 Prepare an adjusted trial balance 5 Journalize and post adjusting entries: Deferrals/Accruals Optional steps: If a worksheet is prepared, steps 4, 5, and 6 are incorporated in the worksheet. If reversing entries are prepared, they occur between steps 9 and 1 as discussed below. 4 Prepare a trial balance Allowance methods: Percentage-of-sales Percentage-of-receivables At the end of each period estimate the amount of credit sales uncollectible. Debit Bad Debts Expense and credit Allowance for Doubtful Accounts for this amount. As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable. At the end of each period estimate the amount of uncollectible receivables. Debit Bad Debts Expense and credit Allowance for Doubtful Accounts in an amount that results in a balance in the allowance account equal to the estimate of uncollectibles. As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable.

2 PLANT ASSETS (Chapter 10) Presentation INVESTMENTS (Chapter 16) Comparison of Long-Term Bond Investment and Liability Journal Entries Tangible Assets Property, plant, and equipment Natural resources Computation of Annual Depreciation Expense Intangible Assets Intangible assets (Patents, copyrights, trademarks, franchises, goodwill) Event Investor Investee Purchase / issue of bonds Debt Investments Bonds Payable Interest receipt / payment Interest Expense Interest Revenue Comparison of Cost and Equity Methods of Accounting for Long-Term Stock Investments Straight-line Units-of-activity Declining-balance Cost Salvage value Useful life (in years) Depreciable cost Units of activity during year Useful life (in units) Book value at beginning of year Declining balance rate* *Declining-balance rate 1 Useful life (in years) Event Cost Equity Acquisition Stock Investments Stock Investments Investee reports No entry Stock Investments earnings Investment Revenue Note: If depreciation is calculated for partial periods, the straight-line and decliningbalance methods must be adjusted for the relevant proportion of the year. Multiply the annual depreciation expense by the number of months expired in the year divided by 12 months. SHAREHOLDERS EQUITY (Chapter 13) Comparison of Equity Accounts Proprietorship Partnership Corporation Investee pays dividends Dividend Revenue Stock Investments Trading and Available-for-Sale Securities Trading Available-forsale Report at fair value with changes reported in net income. Report at fair value with changes reported in the stockholders equity section. Owner s equity Partner s equity Stockholders equity Name, Capital Name, Capital Common stock Name, Capital Retained earnings No-Par Value vs. Par Value Stock Journal Entries No-Par Value Common Stock DIVIDENDS (Chapter 14) Comparison of Dividend Effects Par Value Common Stock (par value) Paid-in Capital in Excess of Par Value Common Stock Retained Earnings dividend No effect Stock dividend No effect STATEMENT OF CASH FLOWS (Chapter 17) flows from operating activities (indirect method) Add: Losses on disposals of assets $ Amortization and depreciation Decreases in current assets Increases in current liabilities Deduct: Gains on disposals of assets () Increases in current assets () Decreases in current liabilities () Net cash provided (used) by operating activities flows from operating activities (direct method) receipts (Examples: from sales of goods and services to customers, from receipts of interest and dividends on loans and investments) payments (Examples: to suppliers, for operating expenses, for interest, for taxes) provided (used) by operating activities PRESENTATION OF NON-TYPICAL ITEMS (Chapter 18) $ () $ $ Stock split No effect No effect No effect BONDS (Chapter 15) Premium Market interest rate Contractual interest rate Face Value Market interest rate Contractual interest rate Discount Market interest rate Contractual interest rate Prior period adjustments (Chapter 14) Discontinued operations Extraordinary items Changes in accounting principle Statement of retained earnings (adjustment of beginning retained earnings) Income statement (presented separately after Income from continuing operations ) Income statement (presented separately after Income before extraordinary items ) In most instances, use the new method in current period and restate previous years results using new method. For changes in depreciation and amortization methods, use the new method in the current period, but do not restate previous periods. EP-2

3 MANAGERIAL ACCOUNTING (Chapter 19) Characteristics of Managerial Accounting COST-VOLUME-PROFIT (Chapter 22) Types of Costs Primary Users Reports Purpose Content Internal users Internal reports issued as needed Special purpose for a particular user Pertains to subunits, may be detailed, use of relevant data Variable costs Fixed costs Mixed costs Vary in total directly and proportionately with changes in activity level Remain the same in total regardless of change in activity level Contain both a fixed and a variable element Verification No independent audits CVP Income Statement Format Types of Costs Direct materials Direct labor overhead Raw materials directly associated with finished product Work of employees directly associated with turning raw materials into finished product Costs indirectly associated with manufacture of finished product Total Per Unit $xx $xx Variable costs xx xx Contribution margin xx $xx Fixed costs xx $xx Contribution Margin per Unit JOB ORDER AND PROCESS COSTING (Chapters 20 and 21) Types of Accounting Systems Contribution margin per unit Unit selling price Unit variable costs Job order Costs are assigned to each unit or each batch of goods Breakeven Point Process cost Costs are applied to similar products that are mass-produced in a continuous fashion Breakeven point in units Fixed costs Contribution margin per unit Job Order and Process Cost Flow Job Order Cost Flow Direct Materials Direct Labor Overhead Process Cost Flow Direct Materials Direct Labor Overhead Target Net Income Required sales in units BUDGETS (Chapter 23) Components of the Master (Fixed costs Target net income) Contribution margin per unit Work in Process Job No. 101 Job No. 102 Job No. 103 Work in Process Hayes Co. Production Kitchenmate Finished Goods Finished Goods Direct Materials Direct Labor Overhead Operating s Cost of Goods Sold Cost of Goods Sold Selling and Administrative Expense ed Income Statement Capital Expenditure ed Balance Sheet Financial s EP-3

4 RESPONSIBILITY ACCOUNTING (Chapter 24) Types of Responsibility Centers Cost Profit Investment Expenses only Expenses and Revenues Expenses and Revenues and ROI Return on Investment Return on investment (ROI) STANDARD COSTS (Chapter 25) Standard Cost Variances Investment center controllable margin Average investment center operating assets Total Materials Materials materials price quantity variance variance variance Total Labor Labor labor price quantity variance variance variance Total Overhead Overhead overhead controllable volume variance variance variance Materials price variance AQ AP AQ SP INCREMENTAL ANALYSIS AND CAPITAL BUDGETING (Chapter 26) Incremental Analysis 1. Identify the relevant costs associated with each alternative. Relevant costs are those costs and revenues that differ across alternatives. Choose the alternative that maximizes net income. 2. Opportunity costs are those benefits that are given up when one alternative is chosen instead of another one. Opportunity costs are relevant costs. 3. Sunk costs have already been incurred and will not be changed or avoided by any future decision. Sunk costs are not relevant costs. Annual Rate of Return Payback Annual rate Expected annual Average of return net income investment payback Cost of capital Net annual period investment cash flow Discounted Flow Approaches Net Present Value Compute net present value (a dollar amount). If net present value is zero or positive, accept the proposal. If net present value is negative, reject the proposal. Internal Rate of Return Compute internal rate of return (a percentage). If internal rate of return is equal to or greater than the minimum required rate of return, accept the proposal. If internal rate of return is less than the minimum rate, reject the proposal. Materials quantity variance AQ SP SQ SP Labor price variance AH AR AH SR Labor quantity variance AH SR SH SR Overhead controllable variance Actual overhead Overhead budgeted Overhead volume variance Fixed overhead rate Normal capacity Standard hours allowed EP-4

5 Financial Statements Order of Preparation Statement Type Date 1. Income statement For the period ended 2. Retained earnings statement For the period ended 3. Balance sheet As of the end of the period 4. Statement of cash flows For the period ended Income Statement (perpetual inventory system) Income Statement revenues $ Less: returns and allowances discounts Net sales $ Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other revenues and gains (Examples: interest, gains) Other expenses and losses (Examples: interest, losses) Income before income taxes Income tax expense $ Income Statement (periodic inventory system) Income Statement revenues $ Less: returns and allowances discounts Net sales $ Beginning inventory Purchases $ Less: Purchase returns and allowances Net purchases Add: Freight in Cost of goods purchased Cost of goods available for sale Less: Ending inventory Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other revenues and gains (Examples: interest, gains) Other expenses and losses (Examples: interest, losses) Income before income taxes Income tax expense $ Retained Earnings Statement Retained earnings, beginning of period Add: (or deduct net loss) Deduct: Dividends Retained earnings, end of period Retained Earnings Statement $ $ STOP AND CHECK: (loss) presented on the retained earnings statement must equal the net income (loss) presented on the income statement. Balance Sheet Balance Sheet As of the End of the Period Assets Current assets (Examples: cash, short-term investments, accounts receivable, merchandise inventory, prepaids) $ Long-term investments (Examples: investments in bonds, investments in stocks) Property, plant, and equipment Land $ Buildings and equipment $ Less: Accumulated depreciation Intangible assets Total assets $ Liabilities and Stockholders Equity Liabilities Current liabilities (Examples: notes payable, accounts payable, accruals, unearned revenues, current portion of notes payable) Long-term liabilities (Examples: notes payable, bonds payable) Total liabilities Stockholders equity Common stock Retained earnings Total liabilities and stockholders equity $ $ STOP AND CHECK: Total assets on the balance sheet must equal total liabilities and stockholders equity; and, ending retained earnings on the balance sheet must equal ending retained earnings on the retained earnings statement. Statement of Flows Statement of Flows flows from operating activities Note: May be prepared using the direct or indirect method provided (used) by operating activities flows from investing activities (Examples: purchase / sale of long-term assets) provided (used) by investing activities flows from financing activities (Examples: issue / repayment of long-term liabilities, issue of stock, payment of dividends) Net cash provided (used) by financing activities Net increase (decrease) in cash, beginning of the period, end of the period $ $ STOP AND CHECK:, end of the period, on the statement of cash flows must equal cash presented on the balance sheet. EP-5

6 Using the Information in the Financial Statements Ratio Formula Purpose or Use Liquidity Ratios 1. Current ratio Current assets Current liabilities Measures short-term debt-paying ability. 2. Acid-test (quick) ratio Short-term investments Receivables (net) Measures immediate short-term liquidity. Current liabilities 3. Receivables turnover Net credit sales Average net receivables Measures liquidity of receivables. 4. turnover Average inventory Measures liquidity of inventory. Profitability Ratios 5. Profit margin N et income Net sales 6. Asset turnover Net sales Av erage assets Measures net income generated by each dollar of sales. Measures how efficiently assets are used to generate sales. 7. Return on assets Measures overall profitability of assets. Average assets 8. Return on common stockholders equity Preferred dividends Average common stockholders equity Measures profitability of owners investment. 9. Earnings per share (EPS) Preferred dividends Measures net income earned on each Weighted average common shares outstanding share of common stock. 10. Price-earnings (P-E) ratio Market price per share of stock Measures ratio of the market price per Earnings per share share to earnings per share. 11. Payout ratio dividends Measures percentage of earnings distributed in the form of cash dividends. Solvency Ratios 12. Debt to total assets ratio Total debt Measures percentage of total assets provided Total assets by creditors. 13. Times interest earned Income before income taxes and interest expense Measures ability to meet interest payments Interest expense as they come due. 14. Free cash flow provided by operating activities Measures the amount of cash generated Capital expenditures dividends during the current year that is available for the payment of additional dividends or for expansion. EP-6

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