ACC 201 Exam Review: Financial Statements, Transaction Analysis, Accruals, Inventory and Assets

Terms in this set (30)

1. The basic accounting equationAssets = Liabilities + Stockholders' Equity. Every transaction keeps this equation in balance.
2. Four main financial statementsIncome statement (revenues and expenses over a period), statement of stockholders' equity (or retained earnings), balance sheet (assets, liabilities and equity at a point in time) and statement of cash flows.
3. Normal balances: which accounts increase with a debit?Assets, expenses and dividends increase with debits. Liabilities, stockholders' equity (including common stock and retained earnings) and revenues increase with credits.
4. Journal entry: company borrows 10,000 cash from a bankDebit Cash 10,000; credit Notes Payable 10,000. Assets and liabilities both rise.
5. Journal entry: company provides services on account for 2,000Debit Accounts Receivable 2,000; credit Service Revenue 2,000. Revenue is recognized when earned, not when cash is received.
6. Revenue recognition principleRevenue is recognized when the company satisfies its performance obligation by transferring goods or services to the customer, regardless of when cash is collected.
7. Expense recognition (matching) principleExpenses are recorded in the same period as the revenues they help generate.
8. Accrual vs cash basis accountingAccrual basis records revenues when earned and expenses when incurred; cash basis records them only when cash changes hands. GAAP requires the accrual basis.
9. Four types of adjusting entriesDeferred (prepaid) expenses, deferred (unearned) revenues, accrued expenses and accrued revenues.
10. Adjusting entry: 300 of prepaid insurance has expiredDebit Insurance Expense 300; credit Prepaid Insurance 300.
11. Adjusting entry: 500 of wages earned but unpaid at period endDebit Wages Expense 500; credit Wages Payable 500.
12. Unearned revenue: what kind of account is it?A liability. The company has received cash but still owes goods or services; it becomes revenue as the obligation is fulfilled.
13. Purpose of closing entriesTo reset temporary accounts (revenues, expenses, dividends) to zero and transfer their net balance to Retained Earnings at period end.
14. Retained earnings roll-forwardEnding retained earnings = beginning retained earnings + net income - dividends.
15. Current vs noncurrent assetsCurrent assets are expected to be converted to cash or used up within one year or the operating cycle (cash, receivables, inventory); noncurrent assets last longer (equipment, intangibles).
16. Allowance method for bad debtsEstimated uncollectible accounts are recorded as Bad Debt Expense with a credit to Allowance for Doubtful Accounts, a contra-asset that reduces receivables to net realizable value.
17. Writing off a specific uncollectible account under the allowance methodDebit Allowance for Doubtful Accounts; credit Accounts Receivable. This entry does not affect net income or net receivables.
18. Cost of goods sold formulaCOGS = beginning inventory + purchases - ending inventory.
19. FIFO vs LIFO when prices are risingFIFO assigns the oldest (cheaper) costs to COGS, so it gives lower COGS, higher net income and higher ending inventory. LIFO gives higher COGS and lower net income. LIFO is not allowed under IFRS.
20. Gross profit formulaGross profit = net sales - cost of goods sold.
21. Straight-line depreciation formulaAnnual depreciation = (cost - residual value) / useful life in years.
22. Mini-problem: equipment costs 50,000, residual value 5,000, useful life 5 years. Straight-line depreciation per year?(50,000 - 5,000) / 5 = 9,000 per year.
23. Book value (carrying value) of a long-lived assetCost minus accumulated depreciation. Accumulated depreciation is a contra-asset account.
24. Capital expenditure vs revenue expenditureCapital expenditures add to an asset's useful life or capacity and are capitalized; ordinary repairs and maintenance are expensed as incurred.
25. Three sections of the statement of cash flowsOperating activities (core business), investing activities (buying or selling long-term assets and investments) and financing activities (debt, issuing stock, paying dividends).
26. Where are dividends paid and interest paid classified under US GAAP?Dividends paid are financing activities; interest paid is an operating activity.
27. Current ratio formula and meaningCurrent ratio = current assets / current liabilities. It measures short-term liquidity; higher means more ability to pay short-term obligations.
28. Debt to assets ratioTotal liabilities / total assets. It measures the share of assets financed with debt, an indicator of solvency risk.
29. Historical cost principleAssets are generally recorded at their original cost when acquired, not at their later market value.
30. GAAP vs IFRS: who sets each?In the US, GAAP is set by the Financial Accounting Standards Board (FASB). IFRS is set by the International Accounting Standards Board (IASB) and is used in many other countries.