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MIDTERM REVIEW

Chapters 1-5
approx 60 questions, all multiple choice
definitions as well as journal entries
PRACTICE CHAPTER RATIOS
Chapter 1
Accounting is when you analyze and record transactions of a company and show them to others in
formal financial statements.
Financial accounting – for outsiders looking at our company – external
this is different from tax accounting. You keep different books for financial and tax accounting
Managerial accounting – for internal users in the company – managers, CEOs etc.
Ethics – try to be morally correct and honest

GAAP – Generally Accepted Accounting Principles


general principles set over the years, as well as specific principles
specific principles are set by FASBI. FASBI sets up the GAAP.
SEC – governs publicly owned companies
Cost Principle – your balance sheet and income state numbers are going to be at the cost that you paid
for it.
Objectivity Principle – everything has to be based on fact, not principles
Going Concern – your company is going to stay functioning for a long time
Business Entity – a business is separate from its owner
Monetary Unit – numbers are all in currency
Revenue Recognition – revenue is recorded only when it is earned.
Sole proprietorship – owned by one person
Unlimited liability – owned by two or more people

Assets = Liabilities + Owner's Equity


assets – things you own that will be used to bring in revenue. If you shut down, creditors and owners
can claim these assets.
Liability – anything you owe to someone else
Owner's Equity – Capital, Retained Earnings ( Revenue – Expenses – Dividends)

Four Basic Statements


Balance Sheet – assets, liabilities, owner's equity for a certain point in time
Income Statement – revenue and expenses for a period of time
Statement of cash flow – how cash has changed from beginning to end of period
Statement of Retained Earnings – Beginning RE + Net Income – Dividends = Ending RE

Chapter 2
Prepaid expense account – asset
Unearned revenue – liability
Cash, A/R, N/R, land, building, equipment -assets
Payables – liability
revenue, expense, dividends, stocks – owners equity
double entry accounting – the value of debits and credits must be equal in value.
Posting – when you take your info from your journal to your ledger
Transactions
trial balance – list of accounts and their balances at a point in time.
More info on statements

Chapter 3
period – calendar year (january – december), fiscal year – any 12 month period, natural business year –
when business has calmed down GAAP says you can only use accrual basis for financial statements,
but you can still use cash basis for internal accounting.
Cash basis – record only when cash changes hands
Accrual basis – record expenses over time (such as 10 year insurance policies etc)– more accurate and
better for business decisions.
Adjusting entries – used because of matching principle
Four major types of adjustment. They all affect the income statement and balance sheet but never the
cash account.
Deferred adjustments –
prepaid expenses (supplies, insurance, depreciation etc)
depreciation (building purchases etc) total depreciation is a contra account. To calculate depreciation
you do purchase cost – salvage value divided by years of use
unearned revenue money you have received that you have not done your part for yet
accrued adjustments -
accrued expenses – salary,
accrued revenue – you have earned the revenue but have not received payment

closing process – close temporary accounts – income statement accounts (revenue, dividends) put net
income into retained earnings
after you close you can start accounts for the new year

Chapter 4
Merchandising Activities
Income Statement Formula
Sales – COGS = Gross Profit
Gross Profit – Expenses = Net Income

Ending Inventory Formula


Beginning Inventory + Purchases = GAFS
GAFS – COGS = Ending Inventory

If you understate COGS, Net Income will be overstated.

Perpetual System – you update MI and COGS with every transaction.


Periodic System – use temporary accounts until the end of the year, then adjust MI and COGS.

p.164, p.171-173 for closing entries

Gross Profit Method -


Beginning Inventory + Purchases = GAFS
GAFS – EI (?) = COGS (?)
Sales (100%) – COGS (?) = GP (20%)
If you know the percentages of your sales and gross profit, then you can find out the COGS %, 80% in
this case. Once you find out your COGS, you can find your EI.

Lifo, Fifo, WA
Lifo – reduces taxes
WA – middle ground – smooths out price changes
Fifo – most sales – best looking IS

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