Exam 1 Study Guide SWU (1).docx

Problem worth 10 points: Given a set of words and numbers locate and correctly enter into an Income Statement, Statement of Retained Earnings, and Balance Sheet. What is in an Income Statement? Sales or Service Revenue MINUS Expenses such as advertising expense, fuel expense, rent expense, utility...

Problem worth 10 points: Given a set of words and numbers locate and correctly enter into an Income Statement, Statement of Retained Earnings, and Balance Sheet. What is in an Income Statement? Sales or Service Revenue MINUS Expenses such as advertising expense, fuel expense, rent expense, utility expense, salaries and wages expense. What is in the Statement of Retained Earnings? You start with a 1/1 balance if you have one or leave blank if the company just started. Then ADD net income from the Income Statement, SUBTRACT dividends to get your Retained Earnings, December 31, year 1. What is in the Balance Sheet? That is a little longer. Assets = Liabilities + Stockholders Equity You spread it out and total each category. Assets NUBMERS ON THIS SIDE -------------------------------------------- ---------------------- Cash Accounts Receivable Equipment Land Total Assets Liabilities Accounts Payable Notes Payable Total liabilities Stockholders' Equity Common Stock Retained Earnings Total Stockholders' equity Total Liabilities and Stockholders' Equity Chapter 1: Creditors are mainly interested in assessing whether the company is generating enough cash to make payments on its loan and if the company has enough assets to cover its liabilities. The balance sheet reports the amount of assets, liabilities and stockholders\' equity and could be used to evaluate the amount of cash and the amount of liabilities to see whether the company\'s resources are sufficient to pay creditors. The body of an income statement has three major captions---revenues, expenses, and net income---corresponding to the equation for the income statement (Revenues − Expenses = Net Income). Individual types of revenues and expenses are reported under the revenue and expense headings. Net income is reported on both the income statement and the statement of retained earnings. Cash is reported on the balance sheet and statement of cash flows. Revenues and expenses are reported only on the income statement. Expenses are reported on the income statement when incurred (when the related goods or services are used) regardless of when the cash is paid. Although *profit* is used in casual conversation, the preferred term in accounting is *net income*. Net income is calculated as revenues minus expenses. The accounting equation can be treated like an equation. 100,000 = 40,000 +60,000 If you have a change on one side, it will affect the other side. If you have assets increase of 20,000 and liability increase of 10,000 what is the increase in stockholders' equity (it is 10,000). The statement of retained earnings reports the way that net income (profits) and distributions to stockholders (dividends) affect the financial position of the company during the period. Retained earnings are not an estimate of the value of the company\'s assets. The statement of cash flows shows cash inflows and outflows. Revenues and expenses are reported on the income statement. Chapter 2&3: Liabilities are probable debts or obligations of the entity that result from past transactions, which will be fulfilled by providing assets or other liabilities. Not all liabilities have the word \"payable\" in their names. Know journal entries. Buying equipment with cash or notes payable. Reminder that you post the cost of the equipment and not a fair market value (appraised value). If you buy it for \$100,000 that is what you put in the books. Account Debit Credit ----------------------- ----------- ----------- Equipment \$100,000 Cash or Notes Payable \$100,000 This would have an effect on asset account (equipment) and asset account (cash). Paying an expense with cash. Account Debit Credit -------------------------- ----------- ----------- Expense \$100,000 Cash or Accounts Payable \$100,000 The expenses will increase and if it is accounts payable, the accounts payable (liability will increase). Inflow of cash: Account Debit Credit -------------- ----------- ----------- Cash \$100,000 Common Stock \$100,000 Post Revenue when it is earning. Such as providing piano lessons, say the client came in on 1/15/24 and then paid you on 2/15/24. You still post it in Jan: Account Debit Credit --------------------- ----------- ----------- Accounts Receivable \$100,000 Service Revenue \$100,000 Be able to calculate an Income Statement with given account and numbers to be able to calculate Net Profit Margin. Which is Net Income DIVIDED by Sales Revenue. Chapter 4: Adjustments need to be made at the end of an accounting period to ensure assets and liabilities are reported at appropriate amounts. Adjustments also ensure the related revenues and expenses are reported in the proper period, as required by the revenue and expense recognition principles. Without these adjustments, the financial statements present an incomplete and misleading picture of the company\'s financial performance. Proper accounting is critical to income measurement, but estimation also plays a role. An accrual adjustment is needed when a company has generated revenue in the current period but has not yet received the related cash. Cash will not be received until a later period. Adjusting entries always include one balance sheet account and one income statement account. Permanent accounts are accounts that track financial results from year to year by carrying their ending balances into the next year. These accounts are reported on the balance sheet. The closing process transfers the balances in the temporary accounts (revenue, expenses, and the Dividends accounts) to Retained Earnings. The correct sequence of steps in the accounting cycle is to prepare an unadjusted trial balance, prepare adjusting entries, prepare an adjusted trial balance, prepare the financial statements, make closing entries, and prepare a post-closing trial balance. At the end of each year, after all the year\'s transactions and adjustments are recorded, all revenue, expense, and dividends accounts (referred to as the temporary accounts) are closed by moving their balances to their permanent home in Retained Earnings. The revenue and expense accounts are income statement accounts; their balances will be zero after the closing entries are posted. Prepaying Rent Journal Entry: Account Debit Credit ------------- -------- -------- Prepay Rent 12,000 Cash 12,000 Prepaid rent is a liability and paid until the company rents over time, it also affected asset account (cash). Then, as you rent over time, you would then move it from Prepaid Rent (liability) to Rent Expense (increasing your expenses). Account Debit Credit -------------- ------- -------- Rent Expense 1,000 Prepaid Rent 1,000 Know that closing entries are done like this: +-----------------------+-----------------------+-----------------------+ | Account | Debit | Credit | +=======================+=======================+=======================+ | Sales Revenue | 30,000 | | +-----------------------+-----------------------+-----------------------+ | Service Revenue | 40,000 | | +-----------------------+-----------------------+-----------------------+ | Advertising Expense | | 1,000 | +-----------------------+-----------------------+-----------------------+ | Salaries and Wages | | 12,000 | | Expense | | | +-----------------------+-----------------------+-----------------------+ | Utilities Expenses | | 2,000 | +-----------------------+-----------------------+-----------------------+ | Rent Expense | | 1,000 | +-----------------------+-----------------------+-----------------------+ | Retained Earning | | 54,000 | | | | | | (30,000+40,000 -- | | | | 1,000-12,000-2,000 -- | | | | 1,000 = 54.000) | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ We debit revenues, credit expenses and put the difference in Retained Earnings. The first closing entry debits each revenue account for the amount of its credit balance, credits each expense account for the amount of its debit balance, and records the difference in Retained Earnings. The second closing entry credits the Dividends account for the amount of its debit balance and debits Retained Earnings for the same amount. Assets (such as Cash and Accounts Receivable) and liabilities are not closed at the end of the period. If you have a Net Loss, you would see this: +-----------------------+-----------------------+-----------------------+ | Account | Debit | Credit | +=======================+=======================+=======================+ | Service Revenue | 10,000 | | +-----------------------+-----------------------+-----------------------+ | Salaries and Wages | | 5,000 | | Expense | | | +-----------------------+-----------------------+-----------------------+ | Utilities Expense | | 2,000 | +-----------------------+-----------------------+-----------------------+ | Rent Expense | | 1,000 | +-----------------------+-----------------------+-----------------------+ | Repairs Expense | | 5,000 | +-----------------------+-----------------------+-----------------------+ | Retained Earnings | 3,000 | | | | | | | (10,000-5,000-2,000-1 | | | | ,000-5,000 | | | | = -3,000; can't put | | | | negative so must | | | | DEBIT) | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ Then, we close out dividends to Retained Earnings. Account Debit Credit ------------------- ------- -------- Retained Earnings 1,000 Dividends 1,000 When you close out revenue, expenses, and dividends, it zeros out those accounts. Temporary accounts are closed in the closing process which means that they have zero balances and therefore do not appear on the post-closing trial balance. Depreciation Expense is a temporary account and, as such, should have a zero balance on the post-closing trial balance. ALSO study the quiz questions for Chapters 1-4.