Accounting Final Exam Cheat Sheet

ACCT 2301 Cheat Sheet Chapter 1: 1. Four Basic Financial Statements: a. Balance Sheet b. Income Statement c. Statement of Cash Flows d. Statement of Stockholders’ Equity 2. Net Income Equation: a. Revenues minus Expenses 3. Accounting Equation: a. Assets = Liabilities + Stockholders’ Equity 4. Retained Earnings: a. Ending Balance = Beginning Balance + Net Income – Dividends Declared Chapter 2: 1. The Dual-Effects Concept: a. When one records a transaction in the accounting system, at least two effects on the basic accounting equation will result. 2. T-Accounts: a. Increases and decreases to a single account in the accounting system. b. Debits and credits to a single account in the accounting system c. Changes in specific accounting balances over a time. 3. Assets are listed in the order of liquidity: a. From the most liquid to the least liquid 4. Assets: a. One cannot determine the fair market value of a company b. Certain internally generated assets are not reported on a company’s balance sheet c. A balance sheet shows only the ending balances, in a summarized format, in a summarized format. 5. Current Ratio: a. Shows the company’s liquidity measure b. Current assets / Current liabilities Chapter 3: 1. Net Income is not a specific chart of accounts for a company. 2. Revenue Recognition Principle a. Revenues are recorded when the performance obligations are satisfied 3. Expense Recognition Principle a. Expenses are recorded when incurred and generated revenue. 4. Net Profit: a. Net Profit Margin = Net Income / Net Sales (or operating revenues) b. Lower NPM shows bad productivity c. Higher NPM signals more efficient management of sales and expenses 5. Salvage Value: a. Remaining balance after depreciation has occurred Chapter 4: 1. Hints for adjusting entries: a. Cash is never a part of an adjusting entry b. One account will always be from the balance sheet (A,L, and SHE) c. One account will always be from the income statement (Revenues and Expenses) 2. Adjusted Trial Balance: a. Shows the ending balance in the different accounts after the adjusting entries have been done. Shows in the debit and credit format i. Debits = Credits after the adjusting entries Chapter 6: 1. Net Sales a. Sales Revenue – Credit Card Discounts – Sales Returns and allowances – Sales Discounts 2. Perpetual Inventory System: a. Keeps record of the total amount of inventory that a business has in hand at any point in time and a sale of merchandise of COGS. 3. Net Accounts Receivable = Gross A/R – ADA 4. Gross A/R: a. Beginning balance + sales on account + recovery of write off – write off 5. ADA: a. Beginning balance + Estimation of BDE + recovery of write off – write off 6. Ending balance of ADA: a. Ending A/R x % estimated uncollectible 7. Bad Debt Expense: a. Net Credit Sales x % estimated uncollectible Chapter 7: 1. COGS: a. Beginning Inventory + purchases – Ending inventory 2. GAS: a. Beginning Inventory + Purchases 3. Net Income Calculation: a. Net Sales or Net Revenue – COGS = Net Profit b. Gross Profit – Operating Expenses = Income from operations 4. Accounting for Inventories  2 Methods: a. Perpetual Method: i. Inventories are reduced to at the time of each sale and COGS is increasing ii. Purchase transactions are recorded directly in the Inventory account (asset) 1. Record of Sales: a. Cash or A/R (+A) XX i. Revenue (+R) XX 2. Updated Inventory: a. COGS (+E) XX i. Inventory (-A) XX Chapter 8: 1. 4 issues for PPE: a. Measuring and recording the acquisition costs b. Depreciation c. Repair, Maintenance, Improvement d. Disposal of PPE 2. Straight Line Method: a. Depreciation Expense =       3. Double Declining: a. Depreciation Expense = (   )   4. Units of Production: a. Depreciation Expense =          5. Double Declining: a. In the early years: i. Higher depreciation expense ii. Lower Net income 1. Revenues – Expenses a. Expenses increase so lower net income b. In the later years: i. Lower depreciation expense ii. Higher Net Income 1. Revenues – Expenses a. Lower expenses so higher net income 6. Disposal of PPE: a. Selling Price > Book value  gain b. Selling price < Book value  loss 7. Two Journal Entries: a. Record depreciation expense i. Depreciation Expense (+E) XX 1. A/D (+XA) XX b. The sale of the equipment i. Cash (+A) XX 1. Equipment (-A) XX Chapter 9: 1. Maturity = Payment Date a. when the liability is due 2. When the maturity is greater than one year  long term liability 3. When the maturity is less than or equal to one year  current liability. 4. Working Capital Ratio: a. Current Assets – Current Liabilities 5. Notes Payable: a. Monthly Interest expense = Principal amount x annual interest X # of months / 12 b. Annual Interest Expense = Principal amount x annual interest c. *interest expense is never recorded on the day the money is borrowed. It is recorded on the day after the amount is borrowed. 6. 7. Secured Debt: a. When creditors require the borrower to pledge specific assets as security for the LT-L i. Collateral  to show your ability to pay the debt back 8. Unsecured Debt: a. When the lender relies on the borrower’s integrity and general earning power to repay the loan i. In general r% (secured) > r%(unsecured) 9. Issuing Stock = collecting cash 10. Purchasing Stock = you pay or invest in the bond or stock 11. Issuing Stock: a. Cheaper b. Shareholder c. Voting Rights 12. Issuing Bonds: a. More expensive b. Debtholder c. No voting rights 13. Future Value of a single amount a. 𝐹𝑉 = 𝑃𝑉 𝑥(1 + 𝑟) b. 𝐹𝑉 = 𝑃𝑉 𝑥 (𝐹𝑉𝑇 𝑤𝑖𝑡ℎ 𝑖, 𝑛) c. Use table A-1 14. Present Value of an Annuity a. 𝑃𝑉 𝑜𝑓 𝐴𝑛𝑛𝑢𝑖𝑡𝑦 = 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑥 (𝑃𝑉𝐴 𝑖, 𝑛) b. Use table A-4 15. Present Value of a single amount a. 𝑃𝑉 = 𝐹𝑉 𝑥 (𝑃𝑉𝑇 𝑤𝑖𝑡ℎ 𝑖, 𝑛) b. Use table A-3 16. “Non-interest-bearing note” a. No interest payments over the life of the loan. Interest is incorporated into the final payment Chapter 10: 1. 2. 3. 4. 5. Bonds Payable on the balance sheet is always the face value Interest Expense = Carrying value x Market Rate Interest Payments = Face value x Coupon Rate Carrying value (discount) = bonds payable – bond discount Carrying value (premium) = bonds payable + bond premium 6. 7. Advantages and Disadvantages of Issuing Bonds: a. 8. Relationship between coupon rate and market rate: a. 9. Bonds Issued at Par [Coupon Rate = Market Rate] a. The amount of money a company receives when it sells the bond is the present value of the future cash flow associated with the bond i. 𝑃𝑉 𝑜𝑓 𝑡ℎ𝑒 𝑏𝑜𝑛𝑑 = 𝑃𝑉 𝑜𝑓 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑃𝑉 𝑜𝑓 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 ii. 𝑷𝑽 𝒐𝒇 𝒕𝒉𝒆 𝒃𝒐𝒏𝒅 = 𝑷𝑽 𝒙 (𝑷𝑽 𝒕𝒂𝒃𝒍𝒆 𝒇𝒂𝒄𝒕𝒐𝒓 𝒘𝒊𝒕𝒉 𝒊, 𝒏) + 𝒓𝒆𝒑𝒂𝒚𝒎𝒆𝒏𝒕 𝒙 (𝑷𝑽𝑨 𝒘𝒊𝒕𝒉 𝒊, 𝒏) iii. Use Market Rate when finding the PV of the bond. b. Bonds issued at a discount [Coupon rate < Market Rate] i. Price of the Bond < Face Value 1. 𝑃𝑉 𝑜𝑓 𝑡ℎ𝑒 𝐵𝑜𝑛𝑑 = 𝑃𝑉 𝑜𝑓 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 + 𝑃𝑉 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠 2. 𝑷𝑽 𝒐𝒇 𝒕𝒉𝒆 𝑩𝒐𝒏𝒅 = 𝑷𝑽 𝒙 (𝑷𝑽 𝒕𝒂𝒃𝒍𝒆 𝒇𝒂𝒄𝒕𝒐𝒓 𝒘𝒊𝒕𝒉 𝒊, 𝒏) + 𝒓𝒆𝒑𝒂𝒚𝒎𝒆𝒏𝒕 𝒙 (𝑷𝑽𝑨 𝒘𝒊𝒕𝒉 𝒊, 𝒏) ii. Bond Discount is a Contra-Liability account  represents additional interest to be incurred by the company over and above the coupon rate. c. Bonds issued at a premium [Coupon Rate > Market rate] i. Price of the Bond > Face Value 1. 𝑷𝑽 𝒐𝒇 𝒕𝒉𝒆 𝑩𝒐𝒏𝒅 = 𝑷𝑽 𝒙 (𝑷𝑽 𝒕𝒂𝒃𝒍𝒆 𝒇𝒂𝒄𝒕𝒐𝒓 𝒘𝒊𝒕𝒉 𝒊, 𝒏) + 𝒓𝒆𝒑𝒂𝒚𝒎𝒆𝒏𝒕 𝒙 (𝑷𝑽𝑨 𝒘𝒊𝒕𝒉 𝒊, 𝒏) 2. Bond Premium is an adjunct liability account  it adds to the bond payable 10. Reporting interest expense on a bond issued at a discount using effect interest amortization: a. Step One: 𝐵𝑜𝑛𝑑𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑎𝑡𝑒 b. Step Two: 𝐵𝑜𝑛𝑑𝑠 𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑥 𝑐𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 c. Step Three: 𝑆𝑡𝑒𝑝 𝑜𝑛𝑒 − 𝑆𝑡𝑒𝑝 𝑡𝑤𝑜 11. Reporting Interest expense on a bond issued at a premium using effective interest amortization: a. Step One: 𝐵𝑜𝑛𝑑𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝑟𝑎𝑡𝑒 b. Step Two: 𝐵𝑜𝑛𝑑𝑠 𝑓𝑎𝑐𝑒 𝑣𝑎𝑙𝑢𝑒 𝑥 𝑐𝑜𝑢𝑝𝑜𝑛 𝑟𝑎𝑡𝑒 c. Step Three: 𝑆𝑡𝑒𝑝 𝑜𝑛𝑒 − 𝑆𝑡𝑒𝑝 𝑡𝑤𝑜 12. Zero Coupon Bonds: a. Does not make interest payments over the life of the bond i. 𝑃𝑉 𝑜𝑓 𝑧𝑒𝑟𝑜 𝑐𝑜𝑢𝑝𝑜𝑛 𝑏𝑜𝑛𝑑 = 𝑃𝑉 𝑜𝑓 𝑡ℎ𝑒 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 𝑣𝑎𝑙𝑢𝑒 (𝑖𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑡𝑒𝑟𝑚𝑠) Chapter 11: 1. Benefits of Stock Ownership: a. 2. Stock Dividends: a. Why issue a stock dividend? i. We may not have sufficient cash to distribute out ii. Non-taxable income to shareholders b. Impacts of Stock Dividends: i. No change in total SHE ii. Total shares issued increases iii. No change in Assets or Liabilities iv. R/E decrease v. May lower stock prices 1. Increased supply with decreased demand 3. Stock Splits: a. b. Effect of Stock Splits: i. No change in SHE ii. Par per share decreases iii. # of shares outstanding increases iv. No change in assets or liabilities 4. Dividend Yield:    a. 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑌𝑖𝑒𝑙𝑑 = 𝒎𝒂𝒓𝒌𝒆𝒕 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 5. Earnings Per share: a.   𝑾𝒆𝒊𝒈𝒉𝒕𝒆𝒅 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔 𝒐𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈