ACC 230 Review for first exam

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ACC 230Review for first exam

• Or
• The minimum you should know!

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Financial Accounting and its environment

• Describe the relationship between
• Management
• FASB
• SEC
• AICPA
• CPAs -Auditors
• Stockholders
• Board of Directors
• GAAP

• Underlying principles and Conventions
• Company Annual Report
• Company Financial Statements
• Investors
• Lenders
• SFASs
• APBs
• Fin. Acctg. Process

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Transaction Analysis and Financial Statements

• What is the basic accounting equation (for the
  balance sheet)
• What does the left side of the balance sheet tell
  us?
• How can the right side be interpreted?
• Define Assets, Liabilities and Owners Equity

4
Transaction Analysis and Financial Statements

• What is the basic equation for the income
  statement?
• Give an example of a transaction for which the
  company would record revenue.
• Give an example of a transaction for which the
  company would record expense.
• What are earnings?

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Transaction Analysis and Financial Statements

• What is the basic equation for the statement of
  owners equity?
• Using the basic accounting equation (for the
  balance sheet) show how the balance sheet, income
  statement, and statement of owners equity are
  tied together.

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Transaction Analysis and Financial Statements

• What is accrual accounting? Give an example of
  its use.
• What is the matching principle. Give an example
  of its application.
• Is the matching principle more closely tied to
  the accrual or cash basis of accounting?
• What is the cost principle? Give an example of
  its application.

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Transaction Analysis and Financial Statements

• What is the accounting entity principle? Give an
  example of its application.
• How do we account for credit sales and their
  subsequent collection? Why do we account for the
  transactions this way?
• How do we account for the purchase and subsequent
  sale of inventory? Why do we account for the
  transactions this way?

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Transaction Analysis and Financial Statements

• Is inventory expensed at the time of purchase?
  Why or why not?
• Is property plant and equipment expensed at the
  time of purchase? Why or why not?
• How do we account for the purchase of plant and
  equipment? Why?

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Transaction Analysis and Financial Statements

• What is the revenue recognition principle? Is it
  consistent with accrual accounting or cash based
  accounting?
• Describe the Net Trade Cycle, also called the
  Business Cycle.
• Why are accounts receivable considered more
  liquid than inventory?

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From this list of accounts, prepare a balance
sheet, income statement and statement of owners
equity.

• Sales Revenue 132,000
• COGS 38,000
• Accounts Rec. 1,500
• Fixtures 15,000
• Deprec. Expense 3000
• Operating Exp. 37,300
• Owners Withdrawal 10,000

• Cash 155,500
• Owners Equity 123,700
• Accounts Payable 47,300
• Rent Expense 20,000
• Inventory 2,000
• Owners investment 100,000
• Accumulated Deprec. 3000

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Transaction Analysis and Financial Statements

• Enter the following transactions on a spread
  sheet.
• Or, given a spread sheet, tell what transaction
  gave rise to each transaction.
• (See the next slide.)

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And owners equity
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The Balance Sheet

• What do we mean by liquidity?
• Name two ratios that measure liquidity.
• What do they tell us about liquidity?
• What is the acid test and why and when is it
  used?

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The Balance Sheet

• If you are given industry averages, you should
  intelligently discuss them.

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How to do Ratio Analysis

• Describe what the ratio is designed to measure
  and how it is expressed (days, times, or s).
  Is a larger or smaller number better?
• Compute the ratio
• Interpret the ratio you computed
• Compare the ratio between years
• Compare the ratio to an industry average.
• Draw a conclusion

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Compute and interpret the following ratios (you
will NOT be given the formulas)

• Debt Ratio
• Debt to Equity Ratio
• Current Ratio
• Quick Ratio
• Average Collection Period
• Days Inventory Held
• Days Payables Outstanding
• Net Trade Cycle

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Income Statement

• Be able to classify income statement items
• Sales Revenue
• Cost of Goods Sold
• Operating Expenses
• Other income and expenses
• Separate line items shown net-of-tax

You are not responsible for this, this semester.
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Income Statement

• Be able to do ratio analysis
• Net profit margin
• Gross profit margin
• Operating profit margin
• Effective tax rate
• Other items on the income statement
• Extraordinary Items
• Discontinued Operations

You are not responsible for this, this semester.
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Profitability Ratios

• Be able to do the 6-step procedure for
• Return on Assets (ROA)
• Return on Equity (ROE)

You are not responsible for this, this semester.