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Exam 1 Review Exam 1 Review http:// http:// fates.cns.muskingum.edu/ fates.cns.muskingum.edu/ ~plaube/acct301/ ~plaube/acct301/ default.htm default.htm

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Page 1: Exam 1 Review p laube/acct301/default.htm

Exam 1 ReviewExam 1 Review

http://fates.cns.muskingum.edu/http://fates.cns.muskingum.edu/~plaube/acct301/default.htm~plaube/acct301/default.htm

Page 2: Exam 1 Review p laube/acct301/default.htm

FormatFormat

27 questions27 questions Multiple choiceMultiple choice True/FalseTrue/False ProblemProblem

Bring your own calculator!Bring your own calculator!

Page 3: Exam 1 Review p laube/acct301/default.htm

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.

Page 4: Exam 1 Review p laube/acct301/default.htm

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.

Page 5: Exam 1 Review p laube/acct301/default.htm

Relevance Reliability

PredictiveValue

FeedbackValue

Timeliness NeutralityVerifiabilityRepresentational

Faithfulness

Comparability Consistency

Qualitative Characteristics - Qualitative Characteristics - UnderstandabilityUnderstandability

Decision Usefulness

Page 6: Exam 1 Review p laube/acct301/default.htm

Practical Constraints to Achieving Practical Constraints to Achieving Desired Qualitative CharacteristicsDesired Qualitative Characteristics

CostEffectiveness

CostEffectiveness MaterialityMateriality

ConservatismConservatism

Page 7: Exam 1 Review p laube/acct301/default.htm

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.

Page 8: Exam 1 Review p laube/acct301/default.htm

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.

Page 9: Exam 1 Review p laube/acct301/default.htm

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.

Page 10: Exam 1 Review p laube/acct301/default.htm

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)

Page 11: Exam 1 Review p laube/acct301/default.htm

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

Page 12: Exam 1 Review p laube/acct301/default.htm

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.

Page 13: Exam 1 Review p laube/acct301/default.htm

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.

Page 14: Exam 1 Review p laube/acct301/default.htm

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

Page 15: Exam 1 Review p laube/acct301/default.htm

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.

Page 16: Exam 1 Review p laube/acct301/default.htm

Balance Sheet formsBalance Sheet forms

ClassifiedClassified Separates current and non-current Separates current and non-current

assets and liabilitiesassets and liabilities Non-classifiedNon-classified

Page 17: Exam 1 Review p laube/acct301/default.htm

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

Page 18: Exam 1 Review p laube/acct301/default.htm

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

Page 19: Exam 1 Review p laube/acct301/default.htm

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

Page 20: Exam 1 Review p laube/acct301/default.htm

Now, let’s look at some ratios!

Page 21: Exam 1 Review p laube/acct301/default.htm

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

Page 22: Exam 1 Review p laube/acct301/default.htm

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