ACCT 6400 Fall 2024 Midterm Review PDF

# ACCT 6400 – Accounting for Decision Making Sections 82 ## Review for Midterm Exam will cover Modules 1-11. ### Test Format - Similar to CMA Exam - 20 multiple choice questions (4 points each) – total points 80 - 3 Problems – must complete 2 of 3 (10 points each) – total points 20 ### Topic...

# ACCT 6400 – Accounting for Decision Making Sections 82 ## Review for Midterm Exam will cover Modules 1-11. ### Test Format - Similar to CMA Exam - 20 multiple choice questions (4 points each) – total points 80 - 3 Problems – must complete 2 of 3 (10 points each) – total points 20 ### Topics - **Prepare an Income Statement, Statement of Stockholder's Equity, and Balance Sheet** – (Module 3) - Slides 20-25 – (10 Points) - Similar to statements prepared in class, see example below - **Record 10 Transactions in Financial Statement Effects Template** – (Module 3) - (10 Points) - Prepare transaction entries for 10 transactions. - Similar to transactions from Module 3 – slides 9-20 - **Calculate 10 Financial Ratios** – (Modules 1, 4, 6, & 7 ) – (10 Points): - Cash Conversion Cycle Gross Profit - Current Ratio - Times Interest Earned Ratio - Portion of Assets Financed by Non-owners Return on Equity - Return on Assets - Financial Leverage - Inventory Turnover - Gross Profit Margin - **Key Topics** - Accounting Equation: Assets = Liabilities + Shareholders Equity – Module - Accounting Equation is boiled down to “resources equal financing.” The above equation must always be balanced. - Accounting Adjustments – Module 3 – slides 13-18 - Accounting Adjustment Definition: adjustments made to financial statements to ensure accurate reporting. - Prepaid (Deferred) Expenses Definition: (before) payments made in advance for goods or services they will receive in the future. - Shows on the balance sheet as asset, (ex. Insurance or rent), on the income sheet it will show as an expense when used. - Unearned (Deferred) Revenues Definition: (before) money a business receives in advance for goods/services it hasn't provided yet. - Shows on the balance sheet as a liability (ex. Customer signs up for year-long subscription), once the goods/services are delivered the unearned revenue is recognized as actual revenue on income statement. - Accrued Expenses Definition: (after) cost that a company must pay later after receiving a good/service. - Shows on the balance sheet as liability or accounts payable, on the income statement it shows as an expense reducing net income. - Accrued Revenues Definition: (after) money business has earned by providing goods/services but hasn't received payment yet. Though the customer hasn't paid yet, the business records it as revenue because they have completed the work. - Shows on the balance sheet as asset/accounts receivable, shows on the income sheet as cost of goods and services (COGS) - Depreciation – Module 6 - what is it? - Depreciation Definition: using up an asset over its useful lifetime, a long term asset, allocation of cost of a fixed asset to expense, usually shows on the balance sheet. Shows on balance sheet as “Property, Plant, and Equipment". To calculate depreciation: Accumulated Depreciation=Annual Depreciation X Number of Years - How to calculate book value of an asset: Cost - Accumulated Depreciation=Book Value - Financial Statements - Module 2 - Financial Statements Definition: records financial activities, summarizes financial performance and helps stakeholders make informed decisions. Includes income statements, balance sheets, and cash flow statements. - Balance Sheet – What is Included: at a specific point in time, includes resources owned and how it was financial. Provides snapshot of company assets, liabilities, and equity - Separated by Current Assets and Liabilities: - Current Assets: Cash, Accounts Receivable, Inventory, and (Long Term) Prepaid Expense - Liabilities: Accounts Payable, Wages Payable, Income Tax Payable, Short-Term Debt, Long Term Debt, Bonds (Long Term), Shareholder Equity - Income Statement – What is Included: growth in sales, shows company's revenue, expenses, and profits for a specific period, helps assess profitability. - Includes: Revenue, Cost of Sales, Gross Profit, Selling, General, and Administrative Expenses (SG+A), Operating Income, Interest Expense, Income before Tax, Income Tax Expense, Net Income - How to see Income Sheet and Ensure it balances: Revenue-Cost of Sales&Gross Profit-SG+A&Operating Income-Interest Expense & Income BeforeTax-Income Tax Expensei Net Income - Revenue Recognition Principle – Module 5 - Revenue Recognition Definition: guidance used to recognize revenue. Service/Product delivered is revenue, or service performed. Process of recording revenue when a business has earned it, regardless of when payment is received. - Rules to Revenue Recognition: 1) Contract with the customer to identify relevant parties and the terms of the sale. 2) Identify performance obligations whether it is delivering product or a certain service. 3) Ensure there is a transaction price or estimated selling price. 4) Transaction price should be for each performance obligation. 5) When performance obligation is satisfied within the contract, then companies can recognize revenue. - Inventory – Module 6 - LIFO FIFO: Both are the cost of goods sold, both have to do with changes in prices. - LIFO Definition: most recent inventory purchases (last in) are sold first (first out), cost of the newest inventory items is used to calculate the cost of goods sold, while the older inventory remains on hand. - FIFO Definition: the oldest inventory items (first in) are sold or used first (first out), cost of the earliest purchased goods is used to calculate the cost of goods sold, while newer inventory remains on hand. - Inventory Turnover – how to calculate and interpret - Inventory Turnover Definition: the more times selling inventory the better, if the turnover is higher, it is better, financial ratio that shows how many times a company's inventory is sold and replaced over a period. - Formula: Inventory=Cost of Goods Sold / Average Inventroy - Days Inventory Outstanding – how to calculate and interpret - Days Inventory Outstanding (DIO) Definition: lower the number the better, measures how quickly a company turns its inventory into sales. - Formula: DIO=Average Inventory X 365 / Cost of Goods Sold - Bonds - Module 7 - Bonds Definition: long term debt, liability, loan made by an investor to a company or government, a way organizations raise money that have a set interest rate and maturity date - Sold at Par: Contract Rate = Market Rate - Sold at a Discount: Contract Rate < Market Rate - Sold at a Premium: Contract Rate > Market Rate - Stock - Module 8 - Stock Definition: Owner financing; represents ownership of a company, traded on a stock exchange and value can rise or fall based on the company's performance and market conditions. - Market Value: what does it trade on the market, represents what investors are willing to pay based on supply and demand. - Book Value: value of company's assets, minus its liabilities, represents the net worth of the company. Formula for Book Value: Book Value=Common Stock + Additional Paid∈Capital-Treasury Stock + Retained Earnings - Formula for Book Value: Book Value=Total Assets-Total Liabilities - Book Value per Share=Tota Book Value / Number of Outstanding Shares - Market to Book Ratio: metric that compares the company's market value to its book value, helps investors assess whether a stock is overvalued or undervalued. - Market to Book Ratio Formula: Market & Book Ratio=Market Value Per Share / Book Value Per Share - Treasury Stock: stock that company issued and bought back, on balance sheet, usually negative number; shares that a company has repurchased from its shareholders - Dividends: Retained Earnings, reduction of capital, return of capital back to shareholders. Payments by a company to its shareholders, usually cash or additional shares. - Stock Split: Reduces book value and proportionally increases number of shares. When a company divides its existing shares into multiple new shares to increase the number of shares outstanding. - Cash Flow Statement – Module 11 - Cash Flow Statement Definition: period of time showing how cash moves in and out of a business over time. - Three sections: Operating, Investing, Financing - What is included in each section? - Cash Flow from Operating Activities Includes: Net Income, Adjustments for Non-Cash Items (depreciation and amortization, gain/loss on sale of assets), Changes in working capital (Inc/Dec Accounts Receivable, Inc/Dec Inventory, Inc/Dec Accounts Payable, Changes in other current assets and liabilities) - Cash Flow from Investing Activities Includes: Cash Inflows (PP&E, sale of investments), Cash Outflows (PP&E, Investments, Cash spent on Acquisitions) - Cash Flow from Financing Activities Includes: Cash Inflows (issuing stock [equity financing], issuing debt [Loans, Debts]) Cash Outflows (Dividends, debt [loan principal], company stock [treasury stock]) - How to calculate Change in Cash Link to Balance Sheet - Change∈ Net Cash+Cash at Beginning Period=Cash at at End Period - Change∈ Net Cash=Net Cash & Operating Activities+Net Cash & Investing Activities+ Net Cash & Financing Activites - Contingent Liability – Module 7 - Contingent Liability Definitions: 2 criteria need to be met, deemed to be probable and deemed to be estimated. Potential obligation that can arise in the future based on the outcome of a situation; depends on certain conditions being met. - Financial Statement Linkages – Module 2: - Income Statement to Balance Sheet - Balance Sheet to Cash Flow Statement - Income Statement to Cash Flow Statement - Intercorporate Investment – Module 9 - Intercorporate Investment Definition: how much influence one has on a company. Investments made by a company in stock or assets of another company. - Types of Investment - Passive: <20% invested - Significant Influence: 20% > X < 50% invested - Control: 50% > invested - Income Taxes – Module - Module 10 - Income Taxes Definition: expense for tax to be paid. Payments made by individuals/businesses to the government based on their earnings or profits. Calculated as a percentage of income and are used to fund public services, infrastructure, and government operations. - Calculating Income taxes using Effective Tax rate: Effective Tax Rate=Income Taxes / Income Before Taxes X 100 ## **Review Problems** ### **Review Problem 1** Levart Travel Services assets and liabilities at December 31, 20Y6 and its revenue and expenses for the year follow: | Account | Debit ($) | Account | Credit ($) | |-------------------------------------|-----------|-----------------------------------------------|-----------| | Accounts Payable | 12,200 | Land | 90,000 | | Accounts Receivable | 31,350 | Miscellaneous Expense | 12,950 | | Cash | 53,050 | Office Expense | 63,000 | | Common Stock (January 1, 20Y6) | 100,000 | Supplies | 3,350 | | Fees Earned | 263,200 | Wages Expense | 131,700 | Retained earnings were $30,000 on January 1, 20Y6, the beginning of the year. During the year, no common stock was issued and dividends of $20,000 were paid - **Prepare an Income Statement for the year ended December 31, 20Y6** - **Prepare a Statement of Stockholders Equity for the year ended December 31, 20Y6** - **Prepare a Balance Sheet as of December 31, 20Y6** ## **Review Problem 2** | | Description | Balance Sheet | Income Statement | |------------|------------------------------------------------------------------------------|---------------|-------------------| | **Transaction** | | | | | Sep 25, 2021 | Balance, September 25, 2021 | | | | | Step 1-Analyze Transactions and Prepare Entries | | | | 1 | Purchase $221,912 of inventories on account | | | | 2 | Sell inventory costing $223,526 for $394,328 on credit | | | | 3 | Receive $392,422 cash on account | | | | 4 | Pay $212,560 cash toward accounts payable. | | | | 5 | Pay $26,889 cash for operating expenses | | | | 6 | Pay $10,708 cash for PP&E assets. | | | | 7 | Purchase LT marketable securities $1,159 | | | | 8 | Issue commercial paper (short-term debt) for $3,982 cash | | | | 9 | Issue long-term debt for $5,465 cash | | | | 10 | Pay $14,793 cash dividends to stockholders | | | | 11 | Pay $14,097 of long-term debt and $4,183 of other non-current liabilities. | | | | 12 | Purchase $14,632 of other current assets | | | | 13 | Receive $300 cash from customers for products to be delivered later. | | | | 14 | Pay $334 cash for other nonoperating expense | | | | 15 | Pay $19,300 cash for income taxes. | | | | 16 | Repurchase common stock for $90,186 | | | | 17 | Recognize various stock transactions. | | | | 18 | Purchase noncurrent assets for $8,652. | | | | | Step 2-Prepare Accounting Adjustments | | | | 19 | Accrue operating expenses of $13,352. | | | | 20 | Record depreciation of $8,031 and amortization expense of $3,073. | | | | 21 | Recognize decrease in FV of marketable securities, $3,041 current and $8,231 LT. | | | | 22 | Reclassify $1,515 of LTD as current maturities | | | | Sep 24, 2022 | Balance, September 24, 2022 | | | ## **Review Problem 3** ### **Financial Ratios – how to calculate and interpret:** #### **Cash Conversion Cycle - Module 4** | Ratio | Computation | |----------------------------------|----------------------------------------------------------------------| | Days inventory outstanding (DIO) | Average Inventories / 365 * Cost of goods sold | | Days sales outstanding (DSO) | Average Accounts receivable / 365 * Sales | | Days payables outstanding (DPO) | Average Accounts payable / 365 * Cost of goods sold | | CCC | DIO + DSO - DPO | #### **Current Ratio - Module 7** Current Ratio = Current assets / Current liabilities #### **Times Interest Earned Ratio - Module 7** Times interest earned = Earnings before interest and tax (EBIT) / Interest expense, gross #### **Percentage Financed by Non-owners - Module 1** Liabilities / Total Assets #### **Percentage Financed by Owners - Module 1** Shareholders Equity / Total Assets #### **Return on Equity - Module 4** ROE = Net income / Average stockholders' equity ROE = Net income attributable to company shareholders / Average stockholders' equity attributable to company shareholders = Net income * Average total assets / Average total assets * Average stockholders' equity * NCIR (ROA) (FL) (NCIR) #### **Return on Assets - Module 4** ROA = Net income / Average total assets = Net income * Sales / Sales * Average total assets (PM) * (AT) #### **Financial Leverage - Module 4** Financial Leverage = Average total assets / Average stockholders' equity #### **Inventory Turnover - Module 6** Inventory Turnover = Cost of Goods Sold / Average Inventory #### **Days Inventory Outstanding – Module 6** Days Inventory Outstanding = 365 / Inventory Turnover #### **Gross Profit - Module 4** Gross Profit = Sales - Cost of Goods Sold #### **Gross Profit Margin - Module 4** Gross Profit Margin = Gross profit / Sales