Professional Documents
Culture Documents
Study Guide
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Contributed by:
Aggie CHEI
Pauline HO
Sherry LEUNG
Barbara NGAI(Coordinator)
Helen WONG
~ P.1 ~
Financial Accounting
Study Guide
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Table of contents
1. Syllabus
Pages
3 - 4
2. Teaching Plan
5 - 9
10
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60
- 14
- 19
- 24
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Financial Accounting
Study Guide
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1. Syllabus
CC2101
Level
Credits
Nature
Medium of Instruction
Teaching Pattern
Prerequisites
Assessment
Financial Accounting
2
3
Non-Science
English
28 hours of Lecture
14 hours of Tutorial
Nil
40% Coursework
60% Examination
Aims
This subject introduces the basic concepts of financial accounting. It enables students to apply
fundamental financial theories, analyze financial statements and reports, and prepare basic
financial statements.
Learning Outcomes
On successfully completing this subject, students will be able to:
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Indicative Contents
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~ P.3 ~
Financial Accounting
Study Guide
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and correction of errors; Preparation of journal, ledger accounts, trial balance and basic
financial statements.
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Teaching/Learning Approach
Lectures focus on the introduction and explanation of key concepts and applications of the
accounting principles.
Tutorials provide students with the opportunity to deepen their understanding of the concepts
taught in lectures and to apply the theories to the analysis of problem sets and case studies.
Assessment Approach
A variety of assessment tools will be used, including individual assignments, in-class exercises,
tests and an examination designed to develop and assess students analytical and quantitative
skills in solving accounting problems.
Indicative Readings
Recommended Textbook
Libby, Libby and Short. Financial Accounting. McGraw Hill. (latest ed.).
References
Horngren C.T., W.T. Harrison and L.S. Bamber. Accounting. Prentice Hall. (latest ed.).
Meigs, Williams, Haka and Bettner. Financial Accounting. McGraw-Hill. (latest ed.).
Warren C.S., J.M. Reeve and P.E. Fess. Financial Accounting. South-Western. (latest ed.).
Weygandt, J.J., D.E. Kieso and P.D. Kimmel. Financial Accounting. Wiley. (latest ed.).
HKICPA. Hong Kong Financial Reporting Standards.
~ P.4 ~
Financial Accounting
Study Guide
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2. Teaching Plan
Hong Kong Community College
CC2101 Financial Accounting
Tentative Teaching Plan
Semester Two 2009/2010
Subject Leader
Ms Barbara Ngai (Office: S1308, Tel: 3746 0219, email: ccbngai@hkcc-polyu.edu.hk)
Subject Lecturers
Mr Ben C B Wong (Office: S1426, Tel: 3746 0428, email: ccbenw@hkcc-polyu.edu.hk)
Mr Ben K F Wong (Office: S1224f, Tel: 3746 0439, email: ccbwong@hkcc-polyu.edu.hk)
Ms Helen Wong (Office: S1427, Tel: 3746 0228, email: cchelen@hkcc-polyu.edu.hk)
Ms Arison Woo (Office: S1337, Tel: 3746 0618, email: ccarison@hkcc-polyu.edu.hk)
Objectives
This subject introduces the basic concepts of financial accounting. It enables students to apply
fundamental financial theories, analyze financial statements and reports, and prepare basic
financial statements.
Learning Outcomes
On successfully completing this subject, students will be able to:
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!
!
~ P.5 ~
Financial Accounting
Study Guide
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Financial Accounting by Libby, Libby and Short, International Edition (6th Edition),
McGraw Hill
Reference:
Accounting Information Systems by R L Hurt, McGraw Hill (2008)
10
Tutorial
Remarks
No tutorial class.
Chapter 1
Chapter 2
Chapter 3
Adjustments, Financial
Statements and the Quality of
Earnings (Part 1)
Chapter 4
Adjustments, Financial
Statements and the Quality of
Earnings (Part 2)
Chapter 4
Chapter 6
Chapter 6
Chapter 7
Chapter 7
Chapter 8
~ P.6 ~
Financial Accounting
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Intangibles (Part 1)
11
12
Chapter 8
Chapter 9
Chapter 11
13
14
Analyzing Financial Statement
+
Introduction to Computerized
Accounting System
Chapter 14
+
Supplementary
notes
Assessment Weighting
Coursework:
Examination:
40%
60%
100%
50%
20% (Individual)
20% (Individual)
10%
100%
~ P.7 ~
Financial Accounting
Study Guide
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Lectures
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Tutorials
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You are required to work out all questions as listed for the tutorials. Try to answer
the MC and other questions at the end of each chapter as this will help you grasp the
main concepts of each topic.
Bring your textbook or relevant tutorial questions to each tutorial class.
Answers to assigned tutorial questions will be posted on MOODLE at times by
lecturers. Additional assignments and tutorials may be given whenever necessary.
If you wish to obtain answers to other questions that you have done in the textbook,
you are to check against the solutions of each chapter posted on MOODLE.
Tutorial(s) may be used for lecture purpose if necessary.
Assignments
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Financial Accounting
Study Guide
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Mid-term Test
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Financial Accounting
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~ P.10 ~
Ch14
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Financial Accounting
Study Guide
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" Describe the process that businesses use to communicate financial information to
4.1.2
Chapter Highlights
The balance sheet is a statement of financial position that reports dollar amounts
for the assets, liabilities, and stockholders equity at a specific point in time.
The income statement is a statement of operation that reports revenues, expenses,
and net income for a stated period of time.
The statement of retained earnings explains changes to the retained earnings
balance that occurred during the reporting periods.
The statement of cash flows reports inflows and outflows of cash for a specific
period of time.
Liabilities
+
Stockholders Equity
Sources of financing for the economic resources
(Liability: From creditors
Stockholders Equity: From stockholders
~ P.11 ~
Financial Accounting
Study Guide
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4.1.3
True-False Questions
1.
When accounting and reporting for a business entity, the accounting and reporting
for the business must be kept separate from other economic affairs of its owners.
2.
A balance sheet should be dated for a period (such as For the year ended
December 31, 2006), whereas an income statement should be dated at a point in
time (such as December 31, 2006).
3.
Companies prepare financial statements at the end of each year and more often as
needed.
4.
5.
An audit guarantees that the financial statements are free of all misstatements.
2.
~ P.12 ~
Financial Accounting
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3.
Atlantic Corporation reported the following amounts at the end of the first year of
operation, December 31, 2006: contributed capital $100,000; sales revenue
$400,000; total assets $300,000; $20,000 dividends; and total liabilities $160,000.
Retained earnings and total expenses would be
A)
B)
C)
D)
E)
4.
Financial accounting
A) provides information primarily for external decision makers.
B) is required for corporations but probably would not be done by other business
entities.
C) provides information primarily for the use of managers of the company.
D) has been practiced in this country for approximately the past 15 years.
Exercises
Using the income statement model and the balance sheet model, fill in the missing
amounts for each independent case below. Assume the amounts given are at the end of
the company's first year of operation.
Company
Name
Total
Revenue
Total
Assets
Total
Expenses
Total
Liabilities
Net Income
(Loss)
Stockholders
Equity
Randolph
Newman
Wiseman
Martin
VanTassel
$600,000
$125,000
?
$150,000
?
$350,000
?
$160,000
$275,000
?
$450,000
?
$90,000
$125,000
$80,000
$130,000
$90,000
?
$50,000
$55,000
?
$20,000
($20,000)
?
$13,000
?
$55,000
$110,000
?
$73,000
~ P.13 ~
Financial Accounting
Study Guide
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4.1.4
True-False Questions
1.T
2.F (It should be vice versa. The balance sheet should be dated at a point in time and the
income statement should be dated for a period of time.)
3.T
4.F (Different sets of GAAP have been developed within countries. Differences in
political, cultural, and economic histories have produced many cross-national differences
in the world.)
5.F (An audit provides assurance that the statements are free from material misstatement
based on audit tests.)
Multiple Choice Questions
1.C
2.B
3.A
4.B
5.A
Exercises
Company
Name
Randolph
Newman
Wiseman
Martin
VanTassel
Total
Revenue
Total
Assets
Total
Expenses
$145,000
$105,000
$70,000
Total
Liabilities
Net Income
(Loss)
Stockholders
Equity
$150,000
$220,000
$25,000
$225,000
$50,000
$93,000 $128,000
~ P.14 ~
Financial Accounting
Study Guide
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4.2 Chapter 2 - Investing and Financing Decisions and the Balance Sheet
4.2.1
" Define the objective of financial reporting, the elements of the balance sheet, and the
related key accounting assumptions and principles.
" Identify what constitutes a business transaction and recognize common balance sheet
account titles used in business.
" Apply transaction analysis to simple business transactions in terms of the accounting
model: Assets = Liabilities + Stockholders Equity.
" Determine the impact of business transactions on the balance sheet using two basic
tools: Journal entries and T-accounts.
" Prepare a simple classified balance sheet and analyze the company using the financial
leverage ratio.
" Identify investing and financing transactions.
4.2.2
Chapter Highlights
i)
ii)
Assets (A)
Increase
Debit
Decrease
Credit
= Liabilities (L)
Decrease
Increase
Debit
Credit
~ P.15 ~
Financial Accounting
Study Guide
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# T-Account Format
Assets (A)
Beg. Bal.
Increase
Debit
End. Bal.
Decrease
Credit
Liabilities (L)
Beg. Bal.
Decrease
Increase
Debit
Credit
End. Bal
4.2.3
True-False Questions
1.
2.
Under the separate entity assumption, it is assumed that a business will continue
to operate in the foreseeable future.
3.
4.
5.
~ P.16 ~
Financial Accounting
Study Guide
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Hong Kong companies prepare their financial reports in terms of Hong Kong
dollars, whereas Japanese companies report results in yen. This practice is an
example of the:
A)
B)
C)
D)
2.
3.
5.
$28,500.
$19,500.
$24,500.
$31,300.
4.
~ P.17 ~
Financial Accounting
Study Guide
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Exercises
Show how each transaction affects the accounting equation: Assets = Liabilities +
Stockholders Equity.
1. Individuals invest $50,000 to start a business.
2. The company borrows $75,000 and signs a note agreeing to pay back the money.
3. Purchased $15,000 worth of supplies on credit.
4. Land is purchased for $25,000 cash.
4.2.4
True-False Questions
1.T
2.F (Under the continuity assumption, it is assumed that a business will continue to
operate in the foreseeable future. The separate-entity assumption requires business
transactions to be separate from the transactions of its owners.)
3.F (Assets = Liabilities + Stockholders Equity. Therefore, Assets = $100,000 + 70,000.
Assets = $170,000.)
4.T
5.F (Debits are always on the left and credits are always on the right. Debits always
increase asset accounts and credits always decrease assets. The opposite rule is true for
liability and stockholders' equity accounts.)
Multiple Choice Questions
1.D
2.C
3.C
4.D
5.B
~ P.18 ~
Financial Accounting
Study Guide
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Exercises
Assets
Cash
1.50,000
2.75,000
3.
4.-25,000
100,000
140,000
140,000
Liabilities
Notes
Accts
Payable Payable
Supplies Land
Stockholders
+ Equity
Contributed
Capital
50,000
75,000
15,000
15,000
15,000
25,000
25,000 =
=
=
75,000 15,000
90,000
140,000
~ P.19 ~
+ 50,000
+ 50,000
Financial Accounting
Study Guide
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" Describe a typical business operating cycle and explain the necessity for the time
period assumption.
" Explain how business activities affect the elements of the income statement.
" Explain the accrual basis of accounting and apply the revenue and matching
principles to measure income.
" Apply transaction analysis to examine and record the effects of operating activities on
the financial statements.
" Prepare financial statements.
" Compute and interpret the total asset turnover ratio.
4.3.2
Chapter Highlights
# Income Statement
Revenues Expenses = Net Income (Net Loss)
Income statement reports the profitability of a company over a given period.
- Operating Revenues Results from the sale of goods or services.
- Operating Expenses Costs incurred for the normal operations.
- Other Revenues (Gains), Other Expenses (Losses)
- Income Tax Expense The last expense listed on the income statement for
profit-making corporations.
- Earnings per Share Required disclosure on corporate income statements.
# Statement of Retained Earnings
Beginning RE + Net Income (or Net Loss) Dividends Declared = Ending RE
Net income or net loss comes from the income statement, so the income statement must
be prepared first and the statement of Retained Earnings next. The ending retained
earnings will be put on the balance sheet as the value of retained earnings.
# Cash Basis vs. Accrual Accounting:
-
Cash basis accounting: Records revenue when cash is received and expenses
when cash is paid.
Accrual basis accounting: Requires the reporting of revenues when earned
and expenses when incurred, regardless of timing of cash receipts and cash
payments. Is in agreement with GAAP for the preparation of financial
statements.
~ P.20 ~
Financial Accounting
Study Guide
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Liabilities (L)
Decrease
Increase
Debit
Credit
Expenses and Losses
Increase
Decrease
Debit
Credit
4.3.3
True-False Questions
1.
The operating cycle is the time it takes for a company to purchase goods, pay for
the goods, sell them to customers, and collect the cash from the customers.
2.
3.
Accrual basis accounting recognizes revenues when cash is received from the
customer.
4.
Every transaction which affects either revenue or an expense account also affects
retained earnings on the balance sheet.
5.
Revenue accounts normally have debit balances because they represent assets
received while expense accounts normally have credit balances because they
represent assets used.
~ P.21 ~
Financial Accounting
Study Guide
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LUX Company sold hardware for $12,000 cash and $18,000 of hardware to credit
customers. Which of the following is the correct journal entry to record this
transaction?
A) Cash, debit, $12,000; Accounts Receivable, credit, $18,000; Unearned
Revenues, credit, $30,000
B) Cash, debit, $12,000; Accounts Receivable, debit, $18,000, Hardware
Revenues, credit, $30,000
C) Cash, debit, $12,000; Unearned Revenues, debit, $18,000; Hardware
Revenues, $30,000
D) Cash, debit, $30,000; Hardware Revenues, credit, $30,000
2.
Which of the following is the correct order for preparing the financial statements?
A) Statement of retained earnings, balance sheet, income statement,
statement of cash flows.
B) Statement of cash flows, balance sheet, statement of retained earnings,
income statement.
C) Balance sheet, statement of retained earnings, income statement,
statement of cash flows.
D) Income statement, statement of retained earnings, balance sheet,
statement of cash flows.
3.
and
and
and
When delivery of goods and services for $25,000 results in a cash receipt of
$15,000 and the balance of $10,000 on account, the reported revenues for the time
period are
A)
B)
C)
D)
4.
and
$15,000.
$25,000.
$10,000.
$35,000.
~ P.22 ~
Financial Accounting
Study Guide
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5.
Exercises
On December 1, 2009, Lucky SK Company, was started with $100,000 invested by the
owners as contributed capital. On December 31, the accounting records contained the
following amounts:
Accounts payable
Accounts receivable
Cash
Contributed capital
Consulting fees earned
Dividends declared
Office equipment
100
3,900
25,000
50,000
10,500
2,100
24,100
Office supplies
Rent expense
Salaries expense
Supplies expense
Telephone expense
$ 500
1,500
2,000
100
200
Prepare an income statement in good form for December 31, 2009 which is the first
month of operation. Ignore taxes.
~ P.23 ~
Financial Accounting
Study Guide
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4.3.4
True-False Questions
1.T
2.F (The income statement provides investors with information about operating activities.)
3.F (Accrual accounting recognizes revenue earned regardless of whether cash has come
in or not.)
4.T
5.F (Revenue accounts normally have credit balances because they represent earnings
which increase stockholders' equity. Expense accounts usually have debit balances
because they reduce stockholders' equity. Neither revenues nor expenses represent assets.)
Multiple Choice Questions
1.B
2.D
3.B
4.C
5.B
Exercises
Lucky SK Company
Income Statement
For the Month Ended December 31, 2009
(In U.S. dollars)
Revenues:
Consulting fees earned
Expenses:
Rent expense
Salaries expense
Supplies expense
Telephone
Total Expenses
Net income
$10,500
$1,500
2,000
100
200
3,800
$6,700
~ P.24 ~
Financial Accounting
Study Guide
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" Explain the purpose of adjustments and analyze the adjustments necessary at the end
of the period to update balance sheet and income statement accounts.
" Explain the purpose of a trial balance.
" Present an income statement with earnings per share, statement of stockholders
equity and balance sheet.
" Explain the closing process.
4.4.2
Chapter Highlights
# Adjusting Entries
-
Timing differences occur when cash is received before or after revenues are earned
and expenses are incurred.
4.4.3
True-False Questions
1.
2.
The earnings per share ratio are disclosed at the bottom of the statement of cash
flows.
3.
Revenue and expense accounts are often called permanent (real) accounts because
their balances are closed at the end of the accounting year.
4.
~ P.25 ~
Financial Accounting
Study Guide
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5.
Unearned rent revenue is an example of a liability account that will usually not be
satisfied by payment of cash but rather by allowing the tenant to occupy the
premises for which they have prepaid.
2.
If the accountant forgets to adjust the Prepaid Expenses account, there will be:
A)
B)
C)
D)
3.
a receivable.
a payable.
a prepaid revenue.
unearned revenue.
5.
4.
a receivable.
a payable.
a prepaid revenue.
unearned revenue.
Employees are paid $2,400 every Friday for a five-day workweek. The accounting
period ends on Wednesday, December 31. Adjusting the salary and benefit
expense for the last three days of the accounting period would:
A)
B)
C)
D)
~ P.26 ~
Financial Accounting
Study Guide
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Exercises
Center Company is completing the information processing cycle at the end of the annual
accounting period, December 31, 2009. Four adjusting entries must be made on this date
to update the accounts. The following accounts, selected from Center Company's chart of
accounts, are to be used for this purpose. They are coded on the left for easy reference.
A.
B.
C.
D.
E.
F.
G.
H.
A.
B.
C.
4.4.4
Cash
Notes payable
Interest receivable
Equipment
Accumulated depreciation
Notes payable
Interest payable
Wages payable
I.
J.
K.
L.
M.
N.
O.
P.
Transaction
On December 1, 2009, the company
collected $9,000 rent revenue in advance
for some warehouse space temporarily
rented to a customer (credited in full to
unearned rent). The rent was collected for
December, January, and February.
Office supplies purchased during 2009
amounted to $5,000, which was debited in
full to office supplies during the year. The
year-end inventory count of office
supplies showed $600 of supplies on
hand. The beginning inventory of office
supplies was $800.
On November 1, 2009, the company
signed a $50,000 interest-bearing note
payable. It was for one year and specified
12 percent annual interest payable at the
maturity date of the note.
Unearned rent
Rent expense
Wage expense
Depreciation expense
Interest expense
Interest revenue
Rent revenue
Some other account not listed
Debits
Credits
Code Amount Code Amount
True-False Questions
1.T
2.F (Earnings per share (EPS) are reported on the income statement.)
3.F (Revenue and expense accounts are often called temporary (nominal) accounts
because their balances are closed at the end of the accounting year.)
~ P.27 ~
Financial Accounting
Study Guide
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4.T
5.T
Multiple Choice Questions
1.B
2.B
3.A
4.C
5.B
The adjusting entry is:
Salary and Benefit Expense (the
accrued expense)
1,440
1,440
Exercises
Transaction
A.
B.
C.
Debits
Code
Amount
I
$3,000
P
$5,200
M
$1,000
Credits
Code
Amount
O
$3,000
P
$5,200
G
$1,000
~ P.28 ~
Financial Accounting
Study Guide
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" Apply the revenue principle to determine the accepted time to record sales revenue
for typical retailers, wholesalers, manufacturers, and service companies.
" Analyze the impact of credit card sales, sales discounts, and sales returns on the
amounts reported as net sales.
" Analyze and interpret the gross profit percentage.
" Estimate, report, and evaluate the effects of uncollectible accounts receivable (bad
debts) on financial statements.
" Report, control, and safeguard cash.
4.5.2
Chapter Highlights
xxx
xxx
~ P.29 ~
Financial Accounting
Study Guide
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#
-
4.5.3
True-False Questions
1.
2.
Credit terms 2/10, n/30 mean that if payment is made in two days, a 10%
discount will be given; if not paid within two days, the full invoice price will be
due in thirty days.
3.
4.
The allowance for doubtful accounts normally has a debit balance after the yearend adjustment.
5.
A customer used a credit card to pay for $400 of services. The credit card
company charged 2.5% for its services. How much did the company record as a
deposit to its checking account as a result of the sales transaction?
A)
B)
C)
D)
2.
$400.00
$410.00
$390.00
$388.00
The unadjusted credit balance of the Allowance for Doubtful Accounts account is
$650. Uncollectible accounts are estimated to be $15,600, based on an analysis of
a schedule of aging of accounts receivable. After recording the appropriate
journal entry for the bad debts expense, what will be the adjusted balance of the
Allowance for Doubtful Accounts?
A)
B)
C)
D)
$650
$16,250
$14,950
$15,600
~ P.30 ~
Financial Accounting
Study Guide
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3.
The unadjusted debit balance of the Allowance for Doubtful Accounts account is
$350. Uncollectible accounts are estimated to be $15,800, based on an analysis of
a schedule of aging of accounts receivable. After recording the appropriate
journal entry for the bad debts expense, what will be the balance of the Bad Debt
Expense account?
A)
B)
C)
D)
4.
5.
$15,800
$15,450
$16,150
$350
Exercises
Where, if at all, do items A to G (listed below) belong to in the following bank
reconciliation?
1.
2.
(1)
(2)
$XXX
_____
_____
$XXX
(3)
(4)
$XXX
_____
_____
$XXX
~ P.31 ~
Financial Accounting
Study Guide
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Items:
A.
B.
C.
D.
E.
F.
G.
4.5.4
Checks written during June that had not cleared by June 30.
Bank service charges for June which were not known until the June 30 bank
statement arrived.
Deposit made on June 30 that did not reach the bank until July 1.
Upon reviewing the company's cash receipts book after June 30, it was
discovered that the accounting clerk had neglected to post one receipt to the cash
account.
The bank statement reported a NSF check during June.
The bank incorrectly deducted the check of another company to the bank
account during June.
The company was paid interest on its account by the bank.
Solution to Self-test Questions and Exercise
True-False Questions
1.T
2.F ( If payment is made in two days, a 10% discount will be given; if not the full invoice
price will be due in thirty days.)
3.F (The sales returns and allowances account should be reported as a deduction from
sales revenue because it is a contra-revenue account.)
4.F (Should be credit balance)
5.T
Multiple Choice Questions
1.C
2.D
3.C
4.D
5.A
Exercises
(1.) C, F;
(2.) A;
(3.) D, G;
(4.) B, E.
~ P.32 ~
Financial Accounting
Study Guide
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" Apply the cost principle to identify the amounts that should be included in inventory and the
matching principle to determine cost of goods sold.
" Report inventory and cost of goods sold using the four inventory costing methods.
" Recognize the Financial Statement Effects of the inventory costing methods.
" Report inventory at the lower of cost or market (LCM).
" Understand and compare Perpetual and Periodic Inventory Systems.
" Analyze the effects of inventory errors on financial statements.
4.6.2
Chapter Highlights
Specific Identification
When units are sold, the specific cost of the unit sold is added to cost of goods
sold.
~ P.33 ~
Financial Accounting
Study Guide
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~ P.34 ~
Financial Accounting
Study Guide
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4.6.3
True-False Questions
1.
When the weighted average inventory method is used, ending inventory and cost
of goods sold are valued at a different cost per unit.
2.
LIFO can be used for income tax purposes and FIFO can be used for financial
reporting purposes for a company in a given year.
3.
4.
5.
Under the periodic inventory system, the balance in the inventory account
changes each time a purchase or sale of inventory is recorded.
$80,000
$10,000
Purchases
$45,000
$50,000
2.
$10,000
$15,000
$ 5,000
$25,000
The use of FIFO will result in smaller net income than LIFO.
The use of FIFO will result in a larger cost of goods sold than LIFO.
The use of LIFO will result in a smaller cost of goods sold than FIFO.
The use of FIFO will result in a higher net income and higher ending
inventory than LIFO.
~ P.35 ~
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3.
Units on hand
Cost/Unit
Market/Unit
2,000
$5.00
$5.50
3,000
$4.50
$3.00
Use Lower of Cost or Market and determine the amount of the write-down that
the company will record.
A)
B)
C)
D)
4.
Inventory at the end of the current period was understated because one bin of
inventory was not counted or included in the ending inventory totals. Because of
this error,
A)
B)
C)
D)
5.
$3,500
$2,500
$4,500
$2,000
A company recorded net purchases on credit of $15.7 million for 2010. In 2009,
ending accounts payable was $1.4 million and in 2010, it was $1.9 million. How
much cash was paid to suppliers in 2010?
A) $14.8 million
B) $15.0 million
C) $15.2 million
D) $15.7 million
~ P.36 ~
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Exercises
Compute the missing amounts in the income statement under three different inventory
costing methods: (Round your answers to the nearest dollar).
4.6.4
FIFO
$80,000
LIFO
$80,000
Weighted
Average
$80,000
10,000
10,000
10,000
60,000
?
?
60,000
?
?
60,000
?
?
?
?
20,000
?
?
?
20,000
?
?
?
20,000
?
True-False Questions
1.F (Goods available for sale in dollars is divided by goods available for sale in units to
determine the weighted average cost per unit. This unit cost is applied to both ending
inventory and cost of goods sold.)
2.F (If LIFO is used for tax purposes, it must also be used for financial statement
purposes. This requirement is known as the LIFO conformity rule.)
3.F (The ending inventory of one accounting period becomes the beginning inventory
amount of the next accounting period.)
4.F (If ending inventory is understated, cost of goods sold is overstated and gross margin
is understated. Therefore, net income would be understated on the income statement
while current assets would be understated on the balance sheet.)
5.F (Cost of goods sold is computed as goods available for sale minus ending inventory.)
~ P.37 ~
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Exercises
FIFO
$80,000
LIFO
$80,000
Weighted
Average
$80,000
10,000
60,000
70,000
24,000 (A)
46,000
34,000
20,000
14,000
10,000
60,000
70,000
22,000 (B)
48,000
32,000
20,000
12,000
10,000
60,000
70,000
23,333 (C)
46,667
33,333
20,000
13,333
Computations:
A. 2,000 units x $12 = $24,000
B. (1,000 units x $10) + (1,000 units x $12) = $22,000
C. ($70,000 6,000) units x 2,000 units = $23,333
OR $70,000 6,000 units = $11.67 (rounded)
$11.67 x 2,000 units = $23,340
~ P.38 ~
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" Define, classify, and explain the nature of long-lived productive assets.
" Apply the cost principle to measure the acquisition and maintenance of property,
4.7.2
Chapter Highlights
ii)
# Acquisition Costs
Acquisition costs are the net cash equivalent paid or to be paid for long-lived assets.
Examples:
-
Costs to buy the asset include the invoice price (less early payment discounts),
sales taxes, legal fees, and transportation costs.
Setup costs, including special wiring, platforms (such as concrete foundations),
and other installation costs.
Costs to place the asset in service (to be ready it for use) include expenditures for
testing, adjusting, renovating, and complying with safety requirements.
Generally, financing charges associated with the asset are treated as interest
expense (not capitalized). Exception: self-constructed assets.
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# Depreciation Concepts
i)
ii)
xxx
xxx
# Depreciation Methods
i)
Straight-line depreciation
Depreciation expense = (Cost - Residual Value) x
ii)
1
Useful life
Units-of-production depreciation
~ P.40 ~
Financial Accounting
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iii)
Declining-balance depreciation
Annual
Net
Depreciation = Book !
(
expense
Value
2
)
Useful Life in Years
xxx
xxx
xxx
(Loss)xxx (Gain)xxx
True-False Questions
1.
The cash-equivalent cost of an asset received is measured as any cash given plus
the current market value of the non-cash consideration given up. If this value is
not determinable, the current market value of what is received should be used
instead.
2.
3.
4.
The systematic and rational allocation of the acquisition cost of natural resources
to those periods in which the resources contribute to revenue is called depletion.
5.
~ P.41 ~
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A company purchased for a cash machine with a list price of $120,000, upon
which a 25% trade discount was applied. The machine was shipped FOB
shipping point at a cost of $5,000. Installation and test runs of the machine cost
$3,000. The recorded acquisition cost of the machine is:
A)
$98,000
B)
$128,000
C)
$90,000
D)
$93,000
2.
A special repair on a machine will extend the life of the machine an additional
four years beyond the original estimated life of 6 years. The $50,000 cost of this
repair is:
A) a revenue expenditure.
B) a capital expenditure.
C) an ordinary repair and maintenance expenditure.
D) either (A) or (B).
3.
Which of the following is the GAAP that requires the recording of depreciation?
A) materiality constraint
B) matching principle
C) cost principle
D) time period assumption
4.
5.
~ P.42 ~
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Exercises
Hubbard Company purchased a truck on January 1, 2009, at a cost of $34,000. The
company estimated that the truck would have a useful life of 4 years and a residual value
of $4,000.
Required:
Calculate depreciation expense under straight line and double declining balance for 20092012.
4.7.4
True-False Questions
1.T
2.F (Generally renovation and repair costs paid by the purchaser prior to a machine's use
should be included in the cost of the machine. These costs are usually capitalized
unless they are not material accounts.)
3.T
4.T
5.F (Depreciation itself requires no outflow of cash. The cash flow took place when the
asset was paid for. However, depreciation has an indirect effect on cash since it
affects the amount of income taxes to be paid.)
Multiple Choice Questions
1.A
2.B
3.B
4.C
5.D
Exercises
Year
2009
2010
2011
2012
Depreciation
Straight-line method
Depreciation
Declining balance method
200% acceleration rate
$17,000
$ 8,500
$ 4,250
$ 250
$7,500
$7,500
$7,500
$7,500
Computations:
Straight-line: ($34,000 - 4,000)/4 years = $7,500
Declining-balance:
2009 x 200% x $34,000 = $17,000
2010 x 200% x ($34,000 - $17,000) = $8,500
2011 x 200% x ($34,000 - $25,500) = $4,250
2012 Book value $4,250 - $4,000 target book value = $250
~ P.43 ~
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Chapter Highlights
# Current Liabilities
-
Current liabilities are short-term obligations that will be paid within the current
operating cycle or one year, whichever is longer.
Specific operating activities of companies are usually financed, at least in part, by
related current liabilities.
Current liability accounts that appear on most balance sheets:
i)
Accounts Payable (A/P or Trade Payable)
ii)
Accrued Liabilities
iii)
Current Portion of Long-Term Debt
iv)
Deferred Revenue
# Contingent Liabilities
-
They are estimated Liabilities on the balance Sheet. Whether a situation produces
a contingent liability depends on two factors:
i) The liability must be probable, and
ii) The liability must be reasonably estimated.
The conditions that can exist and how they should be handled are:
Condition
Probable
Subject to
estimation
Record as liability
Reasonably
Possible
Disclose in note
Not subject to
estimate
Disclose in note
Disclose in note
Remote
Disclosure not
required
Disclosure not
required
~ P.44 ~
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4.8.3
Self-test Questions
True-False Questions
1.
2.
3.
Current liabilities are short-term and usually will be paid or satisfied within three
months.
4.
5.
A liability, to be reported on the balance sheet, must have a fixed, known amount
to be paid in the future.
2.
Current assets are $400,000 of the total assets of $1,000,000. Current liabilities
are $200,000 of the total liabilities of $700,000. What is the current ratio?
A)
B)
C)
D)
2.00
2.50
1.43
1.75
~ P.45 ~
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3.
Your company borrowed $50,000 on September 30 by issuing a 6-month shortterm note payable that bears simple interest of 12%. On December 31, the end of
the accounting period, the required adjusting entry related to the note will include
a debit to Interest Expense and a credit to Interest Payable for the accrued amount
of:
A)
B)
C)
D)
4.
Deferred revenues of $24,000 were received and properly recorded and entered in
the ledger of the company. At the end of the accounting period, one-fourth of the
deferred revenue had been earned, but unrecorded. The adjusting entry will
require:
A)
B)
C)
D)
5.
$1,500.
$6,000.
$3,000.
$2,000.
4.8.4
True-False Questions
1. T
2. F(A liability is recorded at the principle only and the interest is recognized as it is
incurred with the passage of time.)
3. F(Current liabilities are short-term and usually will be paid or satisfied within one
year or the operating cycle whichever is longer.)
4. T
5. F(Fixed and known amounts to be paid are not required for liabilities to be reported
on the balance sheet. Warranty liabilities, for example, are based on estimates.)
~ P.46 ~
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~ P.47 ~
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common stock.
" Discuss dividends and analyze transactions.
" Describe the characteristics of preferred stock and analyze transactions affecting
preferred stock.
4.9.2
#
Chapter Highlights
Understanding the Business
Authorized number of shares is the maximum number of shares that can be issued
by a corporation as specified in its charter. This should be a larger number than a
corporation plans to issue initially to provide for the option of selling stock in the
future.
Issued number of shares is the total cumulative number of authorized shares that
have been sold to date by the corporation. Unissued number of shares is the
number of authorized shares that have not yet been sold to date.
Outstanding number of shares is the number of shares currently owned by
stockholders ("out" there).
Outstanding shares = Issued shares - Treasury stock shares
~ P.48 ~
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Treasury stock is the number of shares that has been sold to investors and then
reacquired by the corporation. If there is no treasury stock, the number of issued
shares will equal the number of outstanding shares.
Common Stock
i)
ii)
A corporation may issue two types of common shares: par value and no-par
value.
Initial Sale of Stock
-
When a corporation sells stock to the public, the transaction must be recorded
in the accounts of the corporation. When stock sales are made for cash, Cash
is debited and Common Stock is credited for par value.
Cash
xxx
Common Stock
xxx
xxx
Common Stock
Capital in Excess of Par Value
xxx
xxx
In the case of no-par common stock that has no stated value, the total
proceeds received at the issue are debited to Cash and credited to No-Par
Common Stock. The capital in excess of par value account is not used under
these circumstances.
Repurchase of Stock
-
xxx
xxx
~ P.49 ~
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I.
Preferred Stock
-
~ P.50 ~
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4.9.3
True-False Questions
1.
2.
Treasury shares are no longer outstanding but they are still issued.
3.
If a corporation issued 1,000 shares of its $1 par value stock for $50 per share, the
common stock account would increase by $50,000.
4.
One of the common stockholders' rights is to receive a fixed dividend rate when
the board of directors declares a dividend.
5.
A corporation reacquired 1,000 shares of its $0.01 par value common stock
outstanding, paying $14 per share. Three months later, the 500 shares of the
treasury stock was reissued for $16 per share. The journal entry to record the sale
of the treasury stock will include:
A)
B)
C)
D)
2.
On the date of declaration, which account is debited for the amount of the
declared cash dividend?
A)
B)
C)
D)
3.
Retained Earnings.
Cash Dividend Expense.
Common Stock.
Contributed Capital.
It is an asset.
It receives cash dividends.
It retains voting rights.
It is a contra-equity account.
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4.
5.
100,000.
50,000.
51,000.
49,000.
Exercises
1. Yasmeen's Yard Art issued 50,000 shares of $2 par value and common stock for
$10 per share.
Required:
Record the journal entry.
2. Amethyst Inc. has the following account balances:
Common Stock ($1 par, 100,000 shares issued, 96,000 shares
outstanding)
Capital in Excess of Par
Retained Earnings
Treasury Stock (at cost)
Required:
What is the total stockholders equity?
How many shares of treasury stock does Amethyst have?
~ P.52 ~
100,000
400,000
200,000
32,000
Financial Accounting
Study Guide
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4.9.4
True-False Questions
1. T
2. T
3. F (The common stock account would increase by $1,000 or only the par value of the
shares issued.)
4. F (Common stockholders are not guaranteed a fixed dividend rate. Instead dividends
are determined by the level of earnings, sufficiency of cash, and the need to retain
earnings to grow the company.
5. T
Multiple Choice Questions
1.B
2.A
3.D
4.D
5.D
Exercises
1.
Cash
Common Stock
Capital in Excess of Par
500,000
100,000
400,000
~ P.53 ~
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# Profitability Ratios
1. Return on Equity (ROE)
Return on Equity =
Net Income
Average Owners' Equity
~ P.54 ~
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Net Income*
Average Number of Shares Outstanding for the Period
*If there are preferred dividends, the amount is subtracted from net
income.
4. Profit Margin
Profit Margin =
Net Income
Net Sales Revenue
# Liquidity Ratios
1. Cash Ratio
Cash Ratio =
2. Current Ratio
Current Ratio =
Current As sets
Current Liabilitie s
Quick Ratio =
~ P.55 ~
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# Solvency Ratios
1. Times Interest Earned Ratio
Times Interest Earned Ratio =
2. Debt-To-Equity
Debt - to - Equity Ratio =
Total Liabilities
Owners' Equity
2.
The fixed asset turnover ratio measures management's ability to generate sales
with the use of fixed assets. It is especially valuable for capital intensive
companies.
3.
4.
The higher the debt to equity ratio, the higher the financial risk of the company.
5.
A company with a high price earnings ratio presents lower risk to investors.
~ P.56 ~
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2.
Owners' equity
Average total assets
Income
Cash flows from operating activities
$1,850,000
Income
$180,000
Interest expense
$12,000
$30,000
450,000
470,000
$340,000
3.
$45,000
Cash equivalents
$60,000
$970,000
~ P.57 ~
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Current assets
$480,000
Current liabilities
$230,000
$890,000
$62,000
0.46 to 1.
0.19 to 1.
2.08 to 1.
1.73 to 1.
$120,000
$890,000
$1,500,000
$420,000
$1,560,000
0.53.
0.57.
0.46.
0.67.
~ P.58 ~
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Exercises
The records of Washington Company showed the following:
Average total assets
Average total liabilities
Average stockholders
equity*
$230,000
130,000
100,000
Revenues
Expenses**
Interest expense
$100,000
(81,000)
(2,000)
Net income
$ 17,000
~ P.59 ~
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~ P.60 ~