RAPID REVIEW

Chapter Content

ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6)

Ownership
Basic Assets = Liabilities + Owner’s Equity
Equation
Ownership of goods on

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Expanded Owner’s Owner’s Freight Terms public carrier resides with: Who pays freight costs:
Assets = Liabilities + Capital – Drawing + Revenues – Expenses
Equation
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. FOB shipping point Buyer Buyer
Debit / Credit + – – + – + + – – + + –
Effects
FOB destination Seller Seller

ADJUSTING ENTRIES (Chapter 3) Perpetual vs. Periodic Journal Entries

Type Adjusting Entry Event Perpetual Periodic*

Deferrals 1. Prepaid expenses Dr. Expenses Cr. Assets Purchase of goods Inventory Purchases
2. Unearned revenues Dr. Liabilities Cr. Revenues Cash (A/P) Cash (A/P)

Accruals 1. Accrued revenues Dr. Assets Cr. Revenues Freight (shipping point) Inventory Freight-In
2. Accrued expenses Dr. Expenses Cr. Liabilities Cash Cash

Note: Each adjusting entry will affect one or more income statement accounts and one or Return of goods Cash (or A/P) Cash (or A/P)
more balance sheet accounts. Inventory Purchase Returns and Allowances

Sale of goods Cash (or A/R) Cash (or A/R)

Interest Computation
Sales Sales
Cost of Goods Sold No entry
Interest = Face value of note ⫻ Annual interest rate ⫻ Time in terms of one year
Inventory

CLOSING ENTRIES (Chapter 4) End of period No entry Closing or adjusting entry required

Purpose: (1) Update the Owner’s Capital account in the ledger by transferring net Cost Flow Methods
income (loss) and Owner’s Drawing to Owner’s Capital. (2) Prepare the temporary
accounts (revenue, expense, Owner’s Drawing) for the next period’s postings by • Specific identification • Weighted average
reducing their balances to zero. • First-in, first-out (FIFO) • Last-in, first-out (LIFO)

Process FRAUD, INTERNAL CONTROL, AND CASH (Chapter 8)

The Fraud Triangle Principles of Internal Control Activities
1. Debit each revenue account for its balance (assuming normal balances), and
credit Income Summary for total revenues. Opportunity • Establishment of responsibility
2. Debit Income Summary for total expenses, and credit each expense account for
• Segregation of duties
its balance (assuming normal balances). Finanical
• Documentation procedures
pressure Rationalization
STOP AND CHECK: Does the balance in your Income Summary Account equal • Physical controls
the net income (loss) reported in the income statement? • Independent internal verification
• Human resource controls
3. Debit (credit) Income Summary, and credit (debit) Owner’s Capital for the Bank Reconciliation
amount of net income (loss).
4. Debit Owner’s Capital for the balance in the Owner’s Drawing account and Bank Books
credit Owner’s Drawing for the same amount.
Balance per bank statement Balance per books
STOP AND CHECK: Does the balance in your Owner’s Capital account equal Add: Deposit in transit Add: Unrecorded credit memoranda from bank
the ending balance reported in the balance sheet and the owner’s equity statement
statement? Are all of your temporary account balances zero? Deduct: Outstanding checks Deduct: Unrecorded debit memoranda from
bank statement
ACCOUNTING CYCLE (Chapter 4) Adjusted cash balance Adjusted cash balance

Note: 1. Errors should be offset (added or deducted) on the side that made the error.
1 2. Adjusting journal entries should only be made on the books.
Analyze business
transactions STOP AND CHECK: Does the adjusted cash balance in the Cash account equal the
reconciled balance?
9 2
Prepare a post-closing Journalize the
RECEIVABLES (Chapter 9)
trial balance transactions
Methods to Account for Uncollectible Accounts

8 3
Direct write-off method Record bad debts expense when the company
Journalize and Post to determines a particular account to be uncollectible.
post closing entries ledger accounts

Allowance methods: At the end of each period estimate the amount of

7 4
Percentage-of-sales credit sales uncollectible. Debit Bad Debts Expense
and credit Allowance for Doubtful Accounts for this
Prepare financial Prepare a
statements: trial balance amount. As specific accounts become uncollectible,
Income statement debit Allowance for Doubtful Accounts and credit
Owner’s equity statement
Balance sheet Accounts Receivable.
5
Journalize and post Percentage-of-receivables At the end of each period estimate the amount of
6 adjusting entries:
Deferrals/Accruals uncollectible receivables. Debit Bad Debts Expense and
Prepare an adjusted
trial balance credit Allowance for Doubtful Accounts in an amount
that results in a balance in the allowance account equal
to the estimate of uncollectibles. As specific accounts
become uncollectible, debit Allowance for Doubtful
Optional steps: If a worksheet is prepared, steps 4, 5, and 6 are incorporated in the worksheet.
If reversing entries are prepared, they occur between steps 9 and 1 as discussed below. Accounts and credit Accounts Receivable.
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Chapter Content

PLANT ASSETS (Chapter 10) INVESTMENTS (Chapter 16)

Presentation Comparison of Long-Term Bond Investment and Liability Journal Entries

Tangible Assets Intangible Assets Event Investor Investee

Property, plant, and equipment Intangible assets (Patents, copyrights, Purchase / issue of bonds Debt Investments Cash
trademarks, franchises, goodwill) Cash Bonds Payable
Natural resources Interest receipt / payment Cash Interest Expense
Interest Revenue Cash

Computation of Annual Depreciation Expense

Comparison of Cost and Equity Methods of Accounting for Long-Term Stock Investments

Cost ⫺ Salvage value

Straight-line ᎏᎏᎏ
Useful life (in years) Event Cost Equity

Depreciable cost Acquisition Stock Investments Stock Investments

Units-of-activity ᎏᎏᎏ ⫻ Units of activity during year
Useful life (in units) Cash Cash

Declining-balance Book value at beginning of year ⫻ Declining balance rate* Investee reports No entry Stock Investments
*Declining-balance rate ⫽ 1 ⫼ Useful life (in years) earnings Investment Revenue

Note: If depreciation is calculated for partial periods, the straight-line and declining- Investee pays Cash Cash
balance methods must be adjusted for the relevant proportion of the year. dividends Dividend Revenue Stock Investments
Multiply the annual depreciation expense by the number of months expired in
the year divided by 12 months.
Trading and Available-for-Sale Securities
SHAREHOLDERS’ EQUITY (Chapter 13)
Trading Report at fair value with changes reported in net income.
Comparison of Equity Accounts
Available-for- Report at fair value with changes reported in the stockholders’
sale equity section.
Proprietorship Partnership Corporation

Owner’s equity Partner’s equity Stockholders’ equity STATEMENT OF CASH FLOWS (Chapter 17)
Name, Capital Name, Capital Common stock
Name, Capital Retained earnings Cash flows from operating activities (indirect method)
Net income
No-Par Value vs. Par Value Stock Journal Entries Add: Losses on disposals of assets $X
Amortization and depreciation X
Decreases in current assets X
No-Par Value Par Value Increases in current liabilities X
Deduct: Gains on disposals of assets (X)
Cash Cash
Increases in current assets (X)
Common Stock Common Stock (par value)
Decreases in current liabilities (X)
Paid-in Capital in Excess of Par Value
Net cash provided (used) by operating activities $X

DIVIDENDS (Chapter 14) Cash flows from operating activities (direct method)
Cash receipts
Comparison of Dividend Effects (Examples: from sales of goods and services to customers, from receipts
of interest and dividends on loans and investments) $X
Cash payments
Cash Common Stock Retained Earnings (Examples: to suppliers, for operating expenses, for interest, for taxes) (X)
Cash dividend ↓ No effect ↓ Cash provided (used) by operating activities $X

Stock dividend No effect ↑ ↓ PRESENTATION OF NON-TYPICAL ITEMS (Chapter 18)

Stock split No effect No effect No effect

Prior period adjustments Statement of retained earnings (adjustment of
(Chapter 14) beginning retained earnings)
BONDS (Chapter 15)
Discontinued operations Income statement (presented separately after
“Income from continuing operations”)
Premium Market interest rate ⬍ Contractual interest rate
Extraordinary items Income statement (presented separately after
Face Value Market interest rate ⫽ Contractual interest rate “Income before extraordinary items”)

Discount Market interest rate ⬎ Contractual interest rate Changes in accounting principle In most instances, use the new method in current
period and restate previous years results using
new method. For changes in depreciation and
amortization methods, use the new method in the
current period, but do not restate previous periods.

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Chapter Content

MANAGERIAL ACCOUNTING (Chapter 19) COST-VOLUME-PROFIT (Chapter 22)

Characteristics of Managerial Accounting Types of Costs

Primary Users Internal users Variable costs Vary in total directly and proportionately with changes in
activity level
Reports Internal reports issued as needed
Fixed costs Remain the same in total regardless of change in activity level
Purpose Special purpose for a particular user
Mixed costs Contain both a fixed and a variable element
Content Pertains to subunits, may be detailed, use of relevant data

Verification No independent audits CVP Income Statement Format

Total Per Unit

Types of Manufacturing Costs
Sales $xx $xx
Variable costs xx xx
Direct materials Raw materials directly associated with finished product
Contribution margin xx $xx
Direct labor Work of employees directly associated with turning Fixed costs xx
raw materials into finished product
Net income $xx
Manufacturing Costs indirectly associated with manufacture of finished
overhead product
Contribution Margin per Unit

Contribution Unit Unit

JOB ORDER AND PROCESS COSTING (Chapters 20 and 21)
margin ⫽ selling ⫺ variable
per unit price costs
Types of Accounting Systems

Job order Costs are assigned to each unit or each batch of goods Breakeven Point

Breakeven Fixed Contribution

Process cost Costs are applied to similar products that are ⫽ ⫼
point in units costs margin per unit
mass-produced in a continuous fashion

Target Net Income

Job Order and Process Cost Flow
Required sales Contribution
⫽ (Fixed costs ⫹ Target net income) ⫼
in units margin per unit
Job Order Cost Flow Process Cost Flow

Direct Materials Direct Materials

BUDGETS (Chapter 23)
Direct Labor Direct Labor
Manufacturing Manufacturing
Overhead Overhead Components of the Master Budget

.
Sales Budget
Work in Process s Co
Haye get
Inventory Bud
Work in
Job No. 101 Process Kitchen-
Job No. 102 Production mate
Job No. 103 Budget

Direct Direct Manufacturing

Materials Labor Overhead Operating Budgets
Finished Goods Finished Goods Budget Budget Budget
Inventory Inventory

Selling and
Administrative
Expense Budget
Cost of Goods Cost of Goods
Sold Sold
Budgeted
Income
Statement

Capital Budgeted
Expenditure Cash Budget Balance Financial Budgets
Budget Sheet

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Chapter Content

RESPONSIBILITY ACCOUNTING (Chapter 24) INCREMENTAL ANALYSIS AND CAPITAL BUDGETING (Chapter 26)

Types of Responsibility Centers Incremental Analysis

1. Identify the relevant costs associated with each alternative. Relevant costs are
Cost Profit Investment those costs and revenues that differ across alternatives. Choose the alternative
that maximizes net income.
Expenses only Expenses and Revenues Expenses and Revenues and ROI 2. Opportunity costs are those benefits that are given up when one alternative is
chosen instead of another one. Opportunity costs are relevant costs.
3. Sunk costs have already been incurred and will not be changed or avoided by
Return on Investment
any future decision. Sunk costs are not relevant costs.
Return on Average Annual Rate of Return
Investment center
investment ⴝ ⫼ investment center
controllable margin
(ROI) operating assets
Annual rate Expected annual Average
ⴝ ⫼
of return net income investment
STANDARD COSTS (Chapter 25)
Cash Payback
Standard Cost Variances

Total Materials Materials Cash payback Cost of capital Net annual

ⴝ ⫼
materials ⴝ price ⫹ quantity period investment cash flow
variance variance variance
Discounted Cash Flow Approaches
Total Labor Labor
labor ⴝ price ⫹ quantity
Net Present Value Internal Rate of Return
variance variance variance
Compute net present value Compute internal rate of return
(a dollar amount). (a percentage).
Total Overhead Overhead
If net present value is zero or positive, If internal rate of return is equal to or
overhead ⴝ controllable ⫹ volume
accept the proposal. If net present greater than the minimum required
variance variance variance
value is negative, reject the proposal. rate of return, accept the proposal. If
internal rate of return is less than the
Materials price variance ⴝ AQ ⫻ AP ⫺ AQ ⫻ SP minimum rate, reject the proposal.

Materials quantity variance ⴝ AQ ⫻ SP ⫺ SQ ⫻ SP

Labor price variance ⴝ AH ⫻ AR ⫺ AH ⫻ SR

Labor quantity variance ⴝ AH ⫻ SR ⫺ SH ⫻ SR

Overhead variance ⴝ Actual overhead ⫺ Overhead applied

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Financial Statements

Order of Preparation Retained Earnings Statement

Statement Type Date Name of Company

Retained Earnings Statement
1. Income statement For the period ended For the Period Ended
2. Retained earnings statement For the period ended Retained earnings, beginning of period $X
Add: Net income (or deduct net loss) X
3. Balance sheet As of the end of the period
X
4. Statement of cash flows For the period ended Deduct: Dividends X
Retained earnings, end of period $X
Income Statement (perpetual inventory system)
STOP AND CHECK: Net income (loss) presented on the retained earnings statement
Name of Company must equal the net income (loss) presented on the income statement.
Income Statement
For the Period Ended Balance Sheet

Sales revenues Name of Company

Sales $X Balance Sheet
Less: Sales returns and allowances X As of the End of the Period
Sales discounts X
Net sales $X Assets
Cost of goods sold X
Current assets
Gross profit X
(Examples: cash, short-term investments, accounts
Operating expenses
receivable, merchandise inventory, prepaids) $X
(Examples: store salaries, advertising, delivery, rent,
Long-term investments
depreciation, utilities, insurance) X
(Examples: investments in bonds, investments in stocks) X
Income from operations X
Property, plant, and equipment
Other revenues and gains
Land $X
(Examples: interest, gains) X
Buildings and equipment $X
Other expenses and losses
Less: Accumulated depreciation X X X
(Examples: interest, losses) X X
Intangible assets X
Income before income taxes X
Total assets $X
Income tax expense X
Net income $X
Liabilities and Stockholders’ Equity
Income Statement (periodic inventory system)
Liabilities
Current liabilities
Name of Company
(Examples: notes payable, accounts payable, accruals,
Income Statement
unearned revenues, current portion of notes payable) $X
For the Period Ended
Long-term liabilities
Sales revenues (Examples: notes payable, bonds payable) X
Sales $X Total liabilities X
Less: Sales returns and allowances X Stockholders’ equity
Sales discounts X Common stock X
Net sales $X Retained earnings X
Cost of goods sold Total liabilities and stockholders’ equity $X
Beginning inventory X
Purchases $X STOP AND CHECK: Total assets on the balance sheet must equal total liabilities and
Less: Purchase returns and allowances X stockholders’ equity; and, ending retained earnings on the balance sheet must equal
Net purchases X ending retained earnings on the retained earnings statement.
Add: Freight in X
Cost of goods purchased X Statement of Cash Flows
Cost of goods available for sale X
Less: Ending inventory X Name of Company
Cost of goods sold X Statement of Cash Flows
Gross profit X For the Period Ended
Operating expenses
(Examples: store salaries, advertising, delivery, rent, Cash flows from operating activities
depreciation, utilities, insurance) X Note: May be prepared using the direct or indirect method
Income from operations X Cash provided (used) by operating activities $X
Other revenues and gains Cash flows from investing activities
(Examples: interest, gains) X (Examples: purchase / sale of long-term assets)
Other expenses and losses Cash provided (used) by investing activities X
(Examples: interest, losses) X X Cash flows from financing activities
Income before income taxes X (Examples: issue / repayment of long-term liabilities,
Income tax expense X issue of stock, payment of dividends)
Net income $X Net cash provided (used) by financing activities X
Net increase (decrease) in cash X
Cash, beginning of the period X
Cash, end of the period $X

STOP AND CHECK: Cash, end of the period, on the statement of cash flows must
equal cash presented on the balance sheet.

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Using the Information in the Financial Statements

Ratio Formula Purpose or Use

Liquidity Ratios

1. Current ratio Current assets Measures short-term debt-paying ability.

ᎏᎏᎏ
Current liabilities

2. Acid-test (quick) ratio Cash ⫹ Short-term investments ⫹ Receivables (net) Measures immediate short-term liquidity.
ᎏᎏᎏᎏᎏᎏ
Current liabilities

3. Receivables turnover Net credit sales Measures liquidity of receivables.

ᎏᎏᎏ
Average net receivables

4. Inventory turnover Cost of goods sold Measures liquidity of inventory.

ᎏᎏᎏ
Average inventory

Profitability Ratios

5. Profit margin Net income Measures net income generated by each

ᎏᎏ
Net sales dollar of sales.

6. Asset turnover Net sales Measures how efficiently assets are used
ᎏ
Averageᎏassets to generate sales.

7. Return on assets Net income Measures overall profitability of assets.

ᎏ ᎏ ᎏ
Average assets

8. Return on common Net income ⫺ Preferred dividends Measures profitability of owners’

ᎏᎏᎏᎏᎏᎏ
stockholders’ equity Average common stockholders’ equity investment.

9. Earnings per share (EPS) Net income ⫺ Preferred dividends Measures net income earned on each
ᎏᎏᎏᎏᎏᎏ
Weighted average common shares outstanding share of common stock.

10. Price-earnings (P-E) ratio Market price per share of stock Measures ratio of the market price per
ᎏᎏᎏᎏ
Earnings per share share to earnings per share.

11. Payout ratio Cash dividends Measures percentage of earnings distributed

ᎏᎏ
Net income in the form of cash dividends.

Solvency Ratios

12. Debt to total assets ratio Total debt Measures percentage of total assets provided
ᎏᎏ
Total assets by creditors.

13. Times interest earned Income before income taxes and interest expense Measures ability to meet interest payments
ᎏᎏᎏᎏᎏᎏ
Interest expense as they come due.

14. Free cash flow Cash provided by operating activities ⫺ Measures the amount of cash generated
Capital expenditures ⫺ Cash dividends during the current year that is available for
the payment of additional dividends or for
expansion.

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