Financial Accounting Final Exam with complete solutions.

GAAP Generally Accepted Accounting Principles: Common set of standards that the accounting proessions has developed and generally accepted and universally praticed. SEC Securities and Exchange Commision: the agency of the U.S. Government that oversees U.S. financial markets and accounting standard-setting bodies 00:12 01:14 FASB Financial Accounting Standards Board: The rimary accounting standard- setting body in the United States. Cost Principle Dictates the companies record asset at their cost. This information can be verified by documentation and is therfore reliable. Monetary Unit An assumption that requires companies to include in the accounting recrds only transaction data that can be epressed in terms of money. This enable accounting to quantify (measure) economic events and is vital to applying the cost principle. Economic Entity Any organization or unit in society. It may be a company, a governmental unit, a municipality, a schoo district or a church. Economic Enity Assumption Requires activites of an entity be kept separate and distinct from the activities of its owner and all other economic entities Assets The resources a business owns. The business uses its assets in carry out such activites as production and sales. Assets typically have capacity to provide future services or benefits which can reslut in cash inflows. Liabilites Claims aganist assets- That is existing debts and obligations. Accounts payable, notes payable, wages payable, wages payable, sales and real estate taxes payable, and unearned revenue are a few examples. Stockholders Equity The ownership clain on total assets. Equal to total assets minus total liabilites. The SHE section of corporations balanace sheet consits o 1) paid-in capital 2)retained earnings Revenues Gross increses in stockholders equity resulting from business activities entered into for the purpose of earning income. Generally, revenue result from selling merchandise, performing services, renting property and lending money. Expenses the cost of assets consumed or services used in the process of earning revenue. They are decreases in stocholders equity that result from operation the business. EX. ingredient exp, telephone exp, utilites, supplies exp, rent exp, intrest exp, property tax...etc Sole Proprietorship A business owned by own person. Usally only a relatively small amount of money is necessary to start in business. The owner receives any profits, suffers any losses, and is personally liable for all debts of the business. Partnerships A business owned by two or more persons associated as partners. Typically a partnership agreement sets forth such terms as inital investment, duties of each partner, divison of net income, and settlement upon death or withdrawl of a partner Corporations A business organized as a separate legal entity under state corporation law and having ownership divided in transferable shares of stock. Stockholders enjoy limited liability, may transfer all or part of their shares to ther investers at any time. A corporation enjoys an unlimited life. Corporation Advantages and Disadvantages Advantage: limited liability, ease of transferring ownership, profession management, unlimited life Disadvantage: government regulations, double taxation Accounting Equation Assets= Liabilites+ Stockholders Equity Investment by stockholder Investment of cash in exchange for common stock. Assets will increase and SHE will Increse. Journal entry: Increase Cash & Incease Common Stock Purchase of Equipment for Cash Changes the composition of Assets Journal entry: Cash decreases and Equipment Increases Purchase of Supplies on credit Supplies account under assets will increase and liabilites (accounts payable) increases Service Provided for cash cash under assets will increase and service revenue account under SHE will increase Purchase of advertising on credit result in a increase in liabilies (accounts payable) and decrease in SHE (retained earnings) The advertising is an expenses for your company (expenses increase, net income decreses retained earnings decreases, and SHE decreases. Service Rendered for Cash and Credit We receive cash and bill the balane (grant the customer credit and permission to pay part of the invoice later). This will increase Assets (cash and accounts receivabe) and SHE (service revenue) Payment of Expenses Results in an equal decrease in Assets (cash) and SHE (expenses are increasing thereore net income, retained earnings and SHE is decreasing) Payment of Accounts payable (payment on account) Results in decrease in Assets (Cash) and Liabilites (accounts payable) oberserve that the payment of a liability related to an expenses that has previously been recorded does not affect SHE Recipt of Cash on Accont (cash from customer who owes us money for services previously provided): Receiving a sum of cash from customers who had previously been billed. Results in a change in composition within Assets. Accounts Receivable Decreases and Cash Increases. Dividends Results in a Decrease in Assets (cash) and SHE (Dividends). DEAD Debit Expense Asset Dividend Recording Sequence 1) Analyze business transactions 2) Journalize the transaction 3) Post to ledger accounts 4) Prepare a trial balance 5) Journalize and post adjusting entries; Prepayments/Accruals 6) Prepare an adjusted trial balance 7) Prepare financial statements: income statement , retained earning statement, balance sheet 8) Journalize and post closing entries 9) Prepare a post-closing trial balance Perpetual An inventory system under which the company keeps detaied records of the cost of each inventory purchase and sales and the records continuously show the inventory that should be on hand. Periodic An inventory system under which the company does not keep detailed inventor records throughout the accounting perods but determines the cost of goods only at the end of an accounting period FIFO Highest ending inventory lowest COGS Highest Net Income Highest Taxes LIFO Lowest ending inventory Highest COGS Lowest net income Lowest Taxes Inventory Turnover COGS/ Avg Inventory (beg + ending)/2 Cost of Goods avaiable for sale Begginning Inventory + Net Purchases + Freight in Cost of Goods Sold Cost of Goods Available for Sale - Ending Inventory You wrote a check for $450. However your bookkeper enterd the payment in the records as $540. What needs to happen? You must increase (debit) cash for the difference You wrote a check for $540. How ever your bookkepper entered the payment in your records as 450. What needs to happen to your cash account in your ledger? Reduce cash (credit) by the difference Establisment of Responsibility Only designated personnel are authorized to handle cash recipts Physical controls Store cash in safes and bank valuts; limit acces to starge areas; uses cash registers Segregation of Duties Different indviduals receive cash, record cash recipts, and hold the cash. Independent internal verification Supervisors count cash recipts daily; treasuer compares total receipts to bank deposits daily Documentation Procedures Use remittance advice (mail recipts), cash register tape, and deposit slips Human Resource Controls Bond personnel who handle cash: require employees to take vacations; conduct background checks Calculating maturity value 100,000 + (100,000 x .12 x 10/12) = intrest (110,000) Revenue Expenditures expenditures that are immediately charges against revenues as an expense. Motor tune ups and oil changes, th