exam 1 review p laube/acct301/default.htm
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Exam 1 ReviewExam 1 Review
http://fates.cns.muskingum.edu/http://fates.cns.muskingum.edu/~plaube/acct301/default.htm~plaube/acct301/default.htm
FormatFormat
27 questions27 questions Multiple choiceMultiple choice True/FalseTrue/False ProblemProblem
Bring your own calculator!Bring your own calculator!
Investment-Credit DecisionsInvestment-Credit DecisionsA Cash Flow PerspectiveA Cash Flow Perspective
Accounting information should Accounting information should help investors evaluate thehelp investors evaluate the
amountamount,, timing timing, and , and uncertaintyuncertainty of the enterprise’s future cash of the enterprise’s future cash
flows.flows.
The Conceptual FrameworkThe Conceptual Framework(The key component)(The key component)
Maintain consistency Maintain consistency among standards.among standards.
Resolve new accounting Resolve new accounting problems.problems.
Provide user benefits.Provide user benefits.
Relevance Reliability
PredictiveValue
FeedbackValue
Timeliness NeutralityVerifiabilityRepresentational
Faithfulness
Comparability Consistency
Qualitative Characteristics - Qualitative Characteristics - UnderstandabilityUnderstandability
Decision Usefulness
Practical Constraints to Achieving Practical Constraints to Achieving Desired Qualitative CharacteristicsDesired Qualitative Characteristics
CostEffectiveness
CostEffectiveness MaterialityMateriality
ConservatismConservatism
Recognition and Measurement ConceptsRecognition and Measurement Concepts
Assumptions DescriptionEconomic entity All economic events identified with a particular
economic entity.
Going concern Business entity will continue to operate indefinitely.
Perodicity Life of company is divided into time periods to provide timely information.
Monetary unit Financial statements are measured in U. S. Dollars.
PrinciplesHistorical cost Measurement based on exchange transaction amounts.
Realization Revenue recognized when earnings process is complete and reasonable certainty of collection exists.
Matching Expenses recognized in same period as related revenue.
Full disclosure Information that could change user decisions should be included.
The Realization PrincipleThe Realization Principle
ReasonableAssurance of
Collection
SubstantialCompletion ofTransaction
Two conditions must be met if therealization principle is to be satisfied.
Two conditions must be met if therealization principle is to be satisfied.
Ethics in AccountingEthics in Accounting To be useful, accounting information To be useful, accounting information
must be must be objective objective and and reliablereliable.. Management may be under Management may be under
pressure to report pressure to report desired desired results results and ignore or bend existing rules.and ignore or bend existing rules.
Assets
Or…Think of the Balance sheetOr…Think of the Balance sheet
Remaining is Equity:Remaining is Equity: Paid in Capital (investment)Paid in Capital (investment) Retained EarningsRetained Earnings
Revenues – Expenses Revenues – Expenses (left)(left)
Gains/lossesGains/losses DividendsDividends
Liabilities
DEBITCREDIT
(Expenses subtract from Equity, so they are
a debit)
Or…Think which Statement it’s onOr…Think which Statement it’s on
Balance Sheet – Snapshot in timeBalance Sheet – Snapshot in time Permanent accountsPermanent accounts
AssetsAssets LiabilitiesLiabilities Paid in capitalPaid in capital Retained EarningsRetained Earnings
Income Statement – Score sheet for Income Statement – Score sheet for the periodthe period Temporary accountsTemporary accounts
RevenuesRevenues ExpensesExpenses Gain/lossesGain/losses Dividends, tooDividends, too
Adjusting EntriesAdjusting Entries
At the end of the period, At the end of the period, some transactions or some transactions or
events remain events remain unrecorded.unrecorded.
Because of this, several Because of this, several accounts in the ledger accounts in the ledger
need adjustments need adjustments before their balances before their balances appear in the financial appear in the financial
statements.statements.
Prepaym ents(Deferrals)
Accruals Estim ates
Adjusting Entries
Transactions where cash is paid or received
before a related expense or revenue is
recognized.
Transactions where cash is paid or received after a related expense
or revenue is recognized.
Temporary Accounts
Revenues
Income Summary
Exp
ense
s
Divid
end
s
Permanent Accounts
Assets
Lia
bili
ties
Sh
areho
lders’
Eq
uity
The closing process applies only to temporary accounts.
Temporary and Permanent Temporary and Permanent AccountsAccounts
Balance SheetBalance Sheet
Limitations:Limitations: Assets are Assets are
recorded at recorded at historical cost, historical cost, NOTNOT at market at market value.value.
Resources such Resources such as employee skills as employee skills and reputation are and reputation are not recorded on not recorded on the balance sheet.the balance sheet.
Limitations:Limitations: Assets are Assets are
recorded at recorded at historical cost, historical cost, NOTNOT at market at market value.value.
Resources such Resources such as employee skills as employee skills and reputation are and reputation are not recorded on not recorded on the balance sheet.the balance sheet.
Usefulness:Usefulness: Provides a Provides a
description of description of available available productive productive resources.resources.
Liquidity Liquidity information.information.
Long-term Long-term solvency solvency information.information.
Usefulness:Usefulness: Provides a Provides a
description of description of available available productive productive resources.resources.
Liquidity Liquidity information.information.
Long-term Long-term solvency solvency information.information.
Balance Sheet formsBalance Sheet forms
ClassifiedClassified Separates current and non-current Separates current and non-current
assets and liabilitiesassets and liabilities Non-classifiedNon-classified
AssetsAssets
CashCashReceivablesReceivablesInventoriesInventories
PrepaymentsPrepayments
CashCashReceivablesReceivablesInventoriesInventories
PrepaymentsPrepayments
Will be converted Will be converted to cash or to cash or
consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longer.longer.
Will be converted Will be converted to cash or to cash or
consumed within consumed within one year or the one year or the operating cycle, operating cycle,
whichever is whichever is longer.longer.
Current Current AssetsAssets
Current Current AssetsAssets
LiabilitiesLiabilities
Accounts PayableNotes Payable
Accrued LiabilitiesCurrent Maturities of Long-Term Debt
Accounts PayableNotes Payable
Accrued LiabilitiesCurrent Maturities of Long-Term Debt
Obligations expected to be
satisfied through current assets or creation of other current liabilities
Obligations expected to be
satisfied through current assets or creation of other current liabilities
Current Liabilities
Current Liabilities
Shareholders’ EquityShareholders’ Equity
Capital Stock
Capital Stock
Retained Earnings
Retained Earnings
Treasury Stock
Treasury Stock
Other Contributed
Capital
Other Contributed
Capital
Accumulated Other Comprehensive IncomeAccumulated Other Comprehensive Income
Now, let’s look at some ratios!
Liquidity RatiosLiquidity Ratios
=Current ratioCurrent assets
Current liabilities
Measures a company’s ability to satisfy its short-term liabilities
=Acid-test ratioQuick assets
Current liabilities
Provides a more stringent indication of a company’s ability to pay its current
liabilities
Financing RatiosFinancing Ratios
=Debt to equity ratio
Total liabilities
Shareholders’ equity
Indicates the extent of reliance on creditors, rather than owners, in providing
resources
=Times interest earned ratio
Net income + Interest expense + Taxes
Interest expense
Indicates the margin of safety provided to creditors