ACG 2021 Exam 1 Study Guide - PDF

ACG 2021 Exam 1 Study Guide (Chapters 1 -2) Table of Contents Study Guide Pages 1- 2 Exam 1 Definitions Pages 3-4 Sample Questions Pages 5-8 The exam consists of 40 questions that are multiple choice, multiple answer, and...

ACG 2021 Exam 1 Study Guide (Chapters 1 -2) Table of Contents Study Guide Pages 1- 2 Exam 1 Definitions Pages 3-4 Sample Questions Pages 5-8 The exam consists of 40 questions that are multiple choice, multiple answer, and fill-in the blank questions focusing on definitions, the accounting process, and preparing the financial statements – see pages 5-8 for the format of the questions you will be asked. Exam Tips  Write down the Accounting Equation on the scrap paper provided in Testing Lab once you open your exam, but before you start taking the exam.  Use T Accounts during the exam to complete problems and start with the original transaction when possible. Recall and explain the definitions for Exam 1 (Chapters 1 -2) 1. New Terms 2. Basic “account” definitions a. You must know all of the following for each of the basic accounts i. Account name ii. Definition iii. Account major category iv. Which financial statement the account appears v. Normal balance of the account (debit or credit) b. For example, Cash (liquid assets owned by the company) is an Asset on the Balance Sheet with a Debit normal balance, permanent account. c. Conceptualize what business transaction will impact each account i. For example, the business transaction that impacts deferred revenue is when a customer pays us cash before we provide a good or service. The Accounting Process overview - Chapter 1 1. Describe the primary functions of accounting – measuring and communicating. 2. Define and use the Accounting Equation (draw it out on your scratch paper in the exam as well) 3. Recall the definitions of the financial statements, the format of the financial statements, and the information from one financial statement to the others. a. Income Statement b. Statement of Stockholders’ Equity c. Balance Sheet Additional study aids Review – self- study questions at the end of the chapter - #’s 3 – 10; 12 1 The Accounting Process during the accounting period activities – Chapter 2 1. Examples of the Typical Business Transactions – conceptualize how these happens and what accounts are impacted: a. Issue Stock b. Obtain a bank loan in exchange for cash c. Purchase equipment or building using either cash or a bank loan d. Purchase inventory on account or pay in cash (and then pay amount owed later if purchased on account) e. Prepay rent f. Purchase supplies for cash or on account g. Receive cash up front for a product/service to be provided at a later date h. Sell products or service on account or in exchange for cash (and then collect cash is sold on account). 2. Illustrate how business transactions are measured using the Accounting Equation. 3. Illustrate how a business transaction impacts the Accounting Equation (i.e. – increase assets and increase liabilities). 4. Show how each account and major category is increased or decreased through debits and credits – based on the Accounting Equation (AE - you need to memorize the AE). 5. “Record” journal entries from business transactions 6. “Post” journal entries to the general ledger T accounts. 7. Prepare an unadjusted trial balance from the general ledger account balances Overall for Exam 1 1. Build financial statements - similar to the active learning lab #1 and the sample questions on pages 5-8 of this study guide. a. Build an Income Statement from an Unadjusted Trial Balance b. Build a Statement of Stockholders Equity from an Unadjusted Trial Balance c. Build a Balance Sheet from an Unadjusted Trial Balance 2. Demonstrate the links between financial statements a. Demonstrate the link from the Income Statement to the Statement of Stockholders’ Equity. b. Demonstrate the link from the Statement of Stockholders’ Equity to the Balance Sheet Additional study aids Review – self- study questions at the end of the chapter – All 2  ACG 2021 Exam 1 Definitions General Definitions Accounting Equation – equation that shows a company’s resources (assets) equal creditors’ and owners’ claims to those resources (liabilities and stockholders’ equity). Accounting Principles Definitions Generally accepted accounting principles (GAAP) - the rules of financial accounting Major Categories Assets – resources owned by a company. Liabilities - amounts owed to creditors. Stockholders’ Equity - owners’ claims to resources. Revenues - the amounts earned from selling products or services to customers. Expenses - the costs of providing products and services. Accounting Process (Cycle) Definitions Business Transaction - An economic event that initiates the accounting process of recording it in the company’s accounting system. Accounting Period - the specific time period (beginning and end) for which the accounts are aggregated, balanced, and the financial statements are prepared. Account - summary of the effects of all transactions related to a particular item over a period of time. Chart of accounts - a list of all account names used to record transactions of a company. Financial Statements – periodic reports published by the company for the purpose of providing information (communicate) to external users. Income statement - financial statement that reports the company’s revenues and expenses over an interval of time. Statement of stockholders’ equity - financial statement that summarizes the changes in stockholders’ equity over an interval of time Balance sheet - financial statement that presents the financial position of the company on a particular date. Statement of cash flows - financial statement that measures activities involving cash receipts and cash payments over an interval of time. General ledger - the general ledger provides, in a single collection, each account with its individual transactions and resulting account balance. Journal – a chronological record of all transactions affecting a firm. Posting – the process of transferring the debit and credit information from the journal to individual accounts in the general ledger. Unadjusted Trial Balance – A list of all accounts and their balances before adjusting entries are completed, showing the total debits and credits. Basic Account Definitions – need to know definition, normal balance (Credit or Debit), major category (asset, liability, etc.) and financial statement associated with the account 3 Balance Sheet o Cash – liquid assets owned by the company. (debit, asset, balance sheet) o Accounts Receivable – amounts the company expects to collect from customers based on the delivery of service or products. (debit, asset, balance sheet) o Prepaid expenses – costs of assets acquired in one period that will be expensed in a future period. (debit, asset, balance sheet) o Inventory – the cost of the merchandise purchased but not yet sold to customers. (debit, asset, balance sheet) o Supplies - the cost of supplies (pens, paper, toner, etc.) used in the operation of a business. (debit, asset, balance sheet) o Accounts Payable – Promise to pay cash in the future to creditors when purchasing supplies or materials. (credit, liability, balance sheet) o Notes payable –Total amounts owed to creditors for loaning money to the company. (credit, liability, balance sheet) o Deferred revenue – cash in advance from a customer for products or services to be provided in the future. (credit, liability, balance sheet) o Common Stock – Amount shareholders have invested in the business. (credit, stockholders’ equity, balance sheet) o Retained earnings - cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. (credit, stockholders’ Equity, balance sheet) Income Statement o Revenues - the amounts earned from selling products or services to customers. (credit, revenue, income statement) o Expenses - the costs of providing products and services. (debit, expense, income statement) o Net Income - the difference between revenues and expenses. (calculation: revenues – expense, income statement) Statement of Stockholders’ Equity o Dividend – cash payments to stockholders (owners). (debit, no major category, stmt. of stockholders’ equity) 4  ACG 2021 Financial Accounting Exam 1 Sample Questions 1. (Definitions/Accounts) The Balance Sheet is defined as the: a. financial statement that reports the company’s revenues and expenses over an interval of time. b. financial statement that summarizes the changes in stockholders’ equity over an interval of time c. financial statement that presents the financial position of the company on a particular date. d. financial statement that measures activities involving cash receipts and cash payments over an interval of time. e. list of all accounts and their balances at a particular date, showing the total debits and credits. 2. (Definitions/Accounts) Which major category is associated with the following account: Inventory a. Assets b. Liabilitities c Stockholders’ Equity d. Revenues e. Expenses 3. (Definitions/Accounts) Consider the following list of accounts: Account Name Supplies Notes Payable Common Stock How many of the above accounts have a normal debit balance? a. 1 b. 2 c. 3 d. none 4. (Analyze using Accounting Equation) Based on the accounting equation, which of the following accounts will increase Liabilities? a. Service Revenue. b. Cash. c. Accounts Payable. d. Equipment. 5. (Journal Entry) If Melanie’s Lemonade Stand paid rent for the month of January on 1/5, what account is debited and what account is credited on 1/5? (Select ALL that apply) a. Debit Rent Expense b. Credit Rent Expense c. Debit Prepaid Rent d. Credit Prepaid Rent e. Debit Accounts Payable f. Credit Accounts Payable g. Debit Cash h. Credit Cash 5 6. (Journal Entry) On 1/1, Ryann’s bicycle shop bought $2,000 of inventory on account. On 2/15, Ryann’s paid the amount owed for the inventory ($2,000). What account is debited and what account is credited in the journal entry required on 2/15? (Select ALL that apply) a. Debit Inventory b. Credit Inventory c. Debit Cash d. Credit Cash e. Debit Service Revenue f. Credit Service Revenue g. Debit Accounts Payable h. Credit Accounts Payable 7. (Prepare the financial statements) Based on the Unadjusted Trial Balance shown below, calculate the total amount of Net Income based on preparing an Income Statement. Unadjusted Trial Balance As of 12/31/20xx Accounts Debit Credit Cash $1,000 Inventory 3,000 Accounts Payable $1,000 Common Stock 1,000 Retained Earnings 1,000 Service Revenue 5,000 Utility Expense 4,000 Totals $8,000 $8,000 8. (New Problem – not related to #7 above) Based on the Trial Balance and Additional Info shown below, prepare a Statement of Stockholders’ Equity. A.) What is the ending balance in the Retained Earnings account as shown on the Statement of Stockholders’ Equity you constructed? B.) What is the Total amount of Stockholders’ Equity as shown on the Statement of Stockholders’ Equity you constructed? Unadjusted Trial Balance As of 12/31/20xx Accounts Debit Credit Cash $5,000 Inventory 3,000 Accounts Payable $1,000 Common Stock 1,000 Retained Earnings 5,000 Service Revenue 6,000 Utility Expense 5,000 Totals $13,000 $13,000 Additional Information: Beginning Balance of Common Stock on 1/1/20xx $1,000 Beginning Balance of Retained Earnings on 1/1/20xx $5,000 No new stock was issued or dividends paid during the accounting period. Net income was $1,000 for the accounting period. 6 9. (New Problem – not related to #7 or #8 above) Based on the Trial Balance and Additional Info shown below, prepare a Balance Sheet. A.) What is the amount of Stockholders’ Equity shown on the Balance Sheet? B.) What is the amount of Total Liabilities and Stockholders’ Equity shown on the Balance Sheet? Unadjusted Trial Balance As of 12/31/20xx Accounts Debit Credit Cash $6,000 Inventory 4,000 Accounts Payable $1,000 Common Stock 1,000 Retained Earnings 6,000 Service Revenue 7,000 Utility Expense 5,000 Totals $15,000 $15,000 Additional Information: Hint: Please remember the formula for retained earnings when preparing this statement. Beginning Balance of Common Stock on 1/1/20xx $1,000 Beginning Balance of Retained Earnings on 1/1/20xx $6,000 No new stock was issued or dividends paid during the accounting period. Net income was $2,000 for the accounting period. 7 Answers: 1. C 2. A 3. A (Supplies) 4. C 5. A, H 6. D, G 7. $1,000 Income Statement For the Period Ending 12/31/20xx Service Revenue 5,000 Less Expenses: Utility Expense 4,000 Net Income 1,000 8. A.) $6,000; B.) $7,000 Statement of Stockholders' Equity For the Period Ending 12/31/20xx Common Retained Stock Earnings Total Beginning Balance 1,000 5,000 6,000 Stock Issuances - - Add: Net Income 1,000 1,000 Less: Dividends - - Ending Balance 1,000 6,000 7,000 9. A.) $9,000 (Retained Earnings = beg. bal. $6,000 + Net Income $2,000); B.) $10,000 Balance Sheet As of 12/31/20xx Assets: Cash 6,000 Inventory 4,000 Total Assets 10,000 Liabilities: Accounts Payable 1,000 Total Liabilities 1,000 Stockholders' Equity Common Stock 1,000 Retained Earnings 8,000 Total Stockholders' Equity 9,000 Total Liabilities and Stockholders' Equity 10,000 8