BUS103 Study Guide

Site: Saylor Academy
Course: BUS103: Introduction to Financial Accounting
Book: BUS103 Study Guide
Printed by: Guest user
Date: Sunday, February 28, 2021, 11:40 PM

Unit 1: Accounting Environment, Decision-Making, and Theory

1a. Demonstrate an understanding of the foundational principles and objectives of accounting

Decision-makers rely on financial information that adheres to guidelines set forth by authoritative bodies so that analysis and comparison of company data are reasonable.

  1. What are the main generally accepted accounting principles (U.S. GAAP) that have been developed by FASB, the AICPA, the SEC, and a number of other leading institutions?
  2. Name the modifying constraints that are customary in practice when a deviation from the strict application of the generally accepted accounting principles is necessary.

The concepts of generally accepted accounting principles and modifying constraints play an important role in the life of an accountant. Users of financial information rely on consistency and the application of both. Study the definitions in The Major Principles on pages 259-267 and Modifying Conventions (or Constraints) on pages 267-269.

 

1b. Apply the accounting equation to illustrate the impact of business transactions and to transform business transactions (data) into usable information

The accounting equation illustrates the relationship between a company's assets, liabilities, and owner's equity.

  1. What is the accounting equation? How do business transactions affect the accounting equation? Given two of the three numbers, could you solve for the third?
  2. In what order are the main four financial statements produced?
  3. From a company's chart of accounts, what types of accounts are includes in the income statement and balance sheet? Name some examples of each type of account.

You should be very familiar with the accounting equation and the effects of accounting transactions on the equation. Be sure you are able to identify assets, liability, equity, revenue, and expense accounts as well as their locations in financial statements. More information can be found in Financial Statements of Business Organizations on pages 34-39.

 

1c. Identify the foundational accounting concepts, assumptions, or principles through the analysis of specific business situations

When an accountant decides not to pursue the correction of an accounting error because the time and money involved to fix the error are greater than the error itself, the accountant's decision is supported by one of the modifying constraints of accounting.

The overall mistake must not be considered a material amount if an accountant opts to leave the error in the records. Accounting principles may be ignored when the amount involved is small enough that readers of the financial statements would not be misled. Can you name the modifying constraint upon which the accountant is relying?

Detailed information about the accounting principles and modifying constraints can be found Objectives of Financial Reporting on pages 270-276.

 

Unit 1 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • American Accounting Association (AAA)
  • Assets
  • Balance sheet
  • Business entity concept
  • Comparability
  • Completeness
  • Conservatism
  • Consistency
  • Dividends
  • Earning principle
  • Equity
  • Equity ratio
  • Exchange price principle
  • Expenses
  • Feedback value
  • Financial Accounting Standards Board (FASB)
  • Full disclosure principle
  • Gain and loss recognition principle
  • Generally accepted accounting principles (GAAP)
  • Going-concern assumption
  • Governmental Accounting Standards Board (GASB)
  • Income statement
  • Liabilities
  • Matching principle
  • Materiality
  • Money measurement
  • Net income (loss)
  • Neutrality
  • Notes payable
  • Periodicity
  • Predictive value
  • Realization principle
  • Relevance
  • Reliability
  • Representational faithfulness
  • Retained earnings
  • Revenue recognition principle
  • Securities and Exchange Commission (SEC)
  • Statement of cash flows
  • Statement of retained earnings
  • Timeliness
  • Transaction
  • Verifiability

Unit 2: Recording Business Transactions

2a. Describe the accounting cycle and be able to identify specific debits and credits, journals, t-accounts, a trial balance, and resulting financial statements

T-accounts are useful in keeping track of debits and credits as business transactions take place. The ending balances in T-accounts are generally "normal" balances. Those balances are reported in a trial balance that is adjusted and ultimately used to produce financial statements.

Draw a flow chart of the accounting cycle that begins with business transactions and ends with financial statements. Check to see that your flow chart includes every step in the accounting cycle.

For a thorough review of the accounting cycle, read The Accounting Cycle on pages 86-114.

 

Unit 2 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Accounting cycle
  • Accrual basis of accounting
  • Chart of accounts
  • Credit
  • Credit balance
  • Debit
  • Debit balance
  • Journal
  • Journal entry
  • Ledger
  • Note
  • Permanent accounts
  • T-accounts
  • Temporary accounts
  • Trial balance

Unit 3: Adjustments for Financial Reporting

3a. Identify why adjusting entries are necessary

Failure to record adjusting entries at the end of an accounting period results in inaccurate income statements and balance sheets.

  1. Give examples of accounts that require adjusting
  2. Give examples of the effects of adjustments on financial statements.

Learn about the necessity of adjusting entries in The Need for Adjusting Entries on pages 147-149 and the consequences of failing to record adjusting entries in Effects of Failing to Prepare Adjusting Entries on page 166.

 

3b. Distinguish among various types of adjusting entries

The matching principle is the reason adjusting entries for prepaid assets, accrued expenses, accrued revenues, depreciation, and unearned income are necessary when using accrual basis accounting.

Explain why cash basis accounting does not require adjusting entries for prepaid assets, accrued expenses, accrued revenues, depreciation, or unearned income.

The cash basis of accounting is compared to the accrual basis of accounting in Cash versus Accrual Basis Accounting on pages 145-146. Read more about the various types of adjusting entries in Classes and Types of Adjusting Entries on pages 149-151.


Unit 3 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Accounting period
  • Accrual basis of accounting
  • Accrued assets and liabilities
  • Accumulated depreciation
  • Adjusting entries
  • Book value
  • Cash basis of accounting
  • Contra asset account
  • Depreciable asset
  • Estimated residual value
  • Estimated useful life
  • Fiscal year
  • Matching principle
  • Prepaid expense
  • Unearned revenue

Unit 4: Completing the Accounting Cycle

4a. Discuss and demonstrate the use of the accounting worksheet as a means of preparing the financial statements

The accounting worksheet starts with a column for the trial balance. The second column records debits and credits to the accounts in the trial balance that require adjustments.

Name the accounts that generally require adjustments.

Following the adjusting entries, the column titled Adjusted Trial Balance includes all of the accounts from the Trial Balance column plus any changes or additions in the Adjustment column. The Adjusted Trial Balance column provides the account balances for the final columns which report balances for the financial statements.

Know where to carry each of the balances in the Adjusted Trial Balance when preparing the columns for the financial statements.

The accounting worksheet is explained in greater detail in The Work Sheet on pages 191-198. Specific guidance for preparing financial statements from the worksheet is provided in Preparing Financial Statements from the Worksheet on pages 199-200.

 

4b. Explain and execute the closing process for a specified accounting cycle

 The closing process has four steps.

  1. Debit the revenue accounts and credit Income Summary.
  2. Credit the expense accounts and debit Income Summary.
  3. Close the balance in Income Summary to the capital account.
  4. Credit dividends (or owner's draw) and debit the capital account.

Before you attempt the final exam, practice journalizing the four steps to the closing process when revenues exceed expenses.

The third step of the closing process will debit Income Summary and credit the capital account when a company's revenues exceed expenses. In the event of a net loss, the third step of the closing process will credit Income Summary and debit the capital account. Practice journalizing the four steps to the closing process when expenses exceed revenues. 

Review the closing process in The Closing Process on pages 201-209.

 

Unit 4 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Accounting cycle
  • Bonds payable
  • Closing process
  • Copyright
  • Current assets
  • Current liabilities
  • Current ratio
  • Dividends payable
  • Goodwill
  • Income Summary account
  • Intangible assets
  • Long-term assets
  • Long-term liabilities
  • Merchandise inventory
  • Notes payable
  • Patent
  • Post-closing trial balance
  • Prepaid expenses
  • Property, plant, and equipment
  • Retained earnings
  • Stockholders' equity
  • Unearned revenues
  • Worksheet

Unit 5: Financial Reporting and Financial Statement Analysis

5a. Locate public company financial statements and read and interpret financial statements

Corporations that sell their stock publicly are required to make their financial reports available to the public. Visit the website of the U.S. Securities and Exchange Commission and click on "Company Filings". Enter the name of any publicly-traded company to access the information they filed with the SEC. An annual report is called a 10-K. This is the 10-K for General Motors Company.

Item 8 of an annual report includes a company's financial statements and supplementary data. The data within item 8 provides the information from which you could determine the company's financial strength utilizing ratios. Calculate the equity ratio and the current ratio for General Motors. Then, find the 10-K for another company of your choosing, find Item 8, and calculate both ratios for that company.

Read about the availability of financial statements in Sources of Information on pages 467-469.

 

Unit 5 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Comparative financial statements
  • Horizontal analysis
  • Liquidity
  • Operating assets
  • Trend percentages
  • Vertical analysis
  • Yield

Unit 6: Accounting for Inventory – Measuring and Reporting

6a. Identify and analyze accounting transactions of a merchandising company

Unlike service companies, which do not maintain inventory, merchandising companies will report the cost of goods sold on their income statement and report inventory balances on their balance sheet.

Inventory transactions often include discounts. Know how to calculate and record sales and purchase discounts associated with the sale and purchase of inventory.

Read about sales and purchase discounts in Sales revenues on pages 304-312.

 

6b. Define and solve for specific business situations involving various inventory methods

The four main methods of tracking inventory costs are FIFO (first-in, first-out), LIFO (last-in, first-out), weighted average, and specific identification. Inventory costs include the purchase price of inventory items as well as the costs associated with getting the items prepared to sell.

What are some of the additional costs that are added to the cost of inventory?

Read about inventory costs in Determining Inventory Cost on pages 362-386.

 

Unit 6 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Adjunct account
  • Cash discount
  • Consigned goods
  • Cost of goods available for sale
  • Cost of goods sold
  • Delivery expense
  • FOB destination
  • FOB shipping point
  • Gross margin
  • Merchandise in transit
  • Net cost of purchases
  • Net sales
  • Periodic inventory procedure
  • Perpetual inventory procedure
  • Sales allowance
  • Sales return
  • Trade discount
  • Transportation-In account
  • Wholesalers

Unit 7: Receivables and Payables Identified

7a. Define and apply the accounting elements associated with receivables and payables

Notes receivable and notes payable require calculations of interest charges to record interest revenue and interest expense.

Before you attempt the final exam, practice calculating interest charges with a principal amount, an annual interest rate, and different lengths of time (30 days, 90 days, 180 days, etc.)

For help calculating interest charges, read Notes Receivable and Notes Payable on pages 35-42.

 

Unit 7 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Allowance for Doubtful Accounts
  • Bad debts expense
  • Cash proceeds
  • Contingent liabilities
  • Current liabilities
  • Discount on Notes Payable
  • Interest
  • Long-term liabilities
  • Net realizable value
  • Operating cycle
  • Payable
  • Percentage-of-receivables method
  • Percentage-of-sales method
  • Principal
  • Promissory note
  • Uncollectible accounts expense

Unit 8: Accounting for Property, Plant, and Equipment

8a. Identify, record, and depreciate property, plant, and equipment

The first step in accounting for purchases of property, plant, and equipment is to debit the asset account for the purchase price. Next, allocate a portion of the purchase price to depreciation expense at the end of each accounting period during the asset's useful life. Additional capital expenditures related to the asset are also recorded during the asset's useful life. Finally, a journal entry is required when an asset is sold, retired, or scrapped.

Practice calculating depreciation expense for property, plant, or equipment and the related journal entry.

For help with recording depreciation expense, read Depreciation of Plant Assets on pages 77-89.

Due to the historical cost concept of accounting, assets are recorded at their purchase price and depreciated during their useful lives.

The book value of an asset is calculated as the purchase price minus accumulated depreciation. Accumulated depreciation represents all the depreciation that has been expensed to date. At the end of an asset's useful life, book value will equal its salvage value or zero.

What type of account is accumulated depreciation?

The accounting treatment of property, plant, and equipment is explained in detail in Initial Recording of Plant Assets on pages 71-76.

 

8b. Distinguish between tangible and intangible assets

The accounting treatment for tangible assets is different than the accounting treatment for intangible assets. Tangible assets tend to be depreciated whereas intangible assets are either amortized or checked periodically for impairment.

What is the accounting treatment for leasehold improvements? Are they amortized, capitalized, or expensed?

The accounting treatment of intangible assets is explained in detail in Intangible Assets on pages 138-147.

 

Unit 8 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Acquisition cost
  • Amortization
  • Book value
  • Capital expenditures
  • Capital lease
  • Depreciation
  • Fair market value
  • Intangible assets
  • Operating lease
  • Tangible assets
  • Useful life

Unit 9: Long-term Liabilities and Stockholders' Equity

9a. Describe the difference between bonds and capital stock

A bond is an example of debt security; capital stock is an example of equity security.

Can you describe at least three ways that bonds and stock differ?

Read Comparison with Stock on page 340 for a review of how bonds differ from stock.

 

9b. Describe par value, discount, and premium as they relate to bonds

Bonds often sell with accrued interest included in the purchase. The bond purchaser pays the accrued interest upfront with the expectation of being reimbursed with the receipt of the first bond interest payment.

What is the journal entry when a bond is issued with accrued interest? What is the journal entry when the first bond interest payment is paid?

Read Selling (Issuing) Bonds on pages 340-348 to review the journal entries for bonds issued with accrued interest.

 

9c. Explain how interest rates affect bond prices

A bond is sold at face value, a discount, or a premium. The price at which a bond is sold depends on the market rate of interest and how it compares to the contract rate of interest.

How do you determine the price of a bond using present value calculations?

Read Bond Prices and Interest Rates on pages 348-376 for help calculating the price of a bond with present value calculations.

 

9d. Account for bonds issued at par, a discount, or a premium

The accounts "Discounts on bonds payable" and "Premium on bonds payable" require amortization.

Before attempting the final exam, practice the journal entries to amortize the Discount on bonds payable and Premium on bonds payable accounts.

For help with amortizing Discount on bonds payable and Premium on bonds payable, read Selling (Issuing) Bonds on pages 348-359.

 

9e. Identify different types of capital stock and discuss differences between common stock and preferred stock

Before attempting the final exam, make sure you are comfortable using the formula for calculating the book value per share of common stock outstanding, which divides total common stockholder equity by the total number of common shares outstanding.

Corporations purchase their own stock for a variety of reasons. The purchased stock is called treasury stock and is considered issued but not counted as outstanding.

What are the reasons a corporation may choose to purchase treasury stock? How is treasury stock reported on the balance sheet?

Read Balance Sheet Presentation of Paid-in Capital in Excess of Par (or Stated) Value – Common or Preferred on pages 198-201 for information on calculating the book value per share. Information on treasury stock can be found on pages 248-253.

 

9f. Prepare a statement of shareholders' equity

A statement of stockholders' equity is presented with the income statement, the balance sheet, and the statement of cash flows. If a company has changes in their stock or paid-in capital, they show them in the columns of the statement of shareholder's equity. Each column reports changes to each of the accounts within the stockholders' equity section. It would be reasonable to expect columns for preferred stock, common stock, additional paid-in capital, retained earnings, and treasury stock.

Each column reports a beginning balance and then reports transactions that affect the beginning balance. Finally, the ending balances are totaled to arrive at a total amount of stockholders' equity.

Read Statement of Stockholders' Equity on pages 247-248 for additional information about the statement of stockholders' equity.

 

9g. Account for paid-in capital, cash dividends, stock dividends, stock splits, and retained earnings appropriations

Paid-in capital is simply the money contributed by stockholders and reported under the balance sheet's Stockholders' Equity section. It includes all classes of stock recorded at par value plus the amount received in excess of par.

Retained earnings are also listed under the Stockholders' Equity section of the balance sheet and represent all the earnings accumulated in the business to date. When retained earnings and cash are sufficient, and the retained earnings have not been appropriated (set aside) for another use, a corporation's board of directors may decide to share the retained earnings with shareholders in the form of a dividend payment.

A cash dividend is the most common form of dividend payment and is paid out of retained earnings, which decreases a corporation's cash. Rather than declare a cash dividend, a corporation may elect to declare a stock dividend which distributes additional shares of stock to common stockholders. A stock dividend also decreases retained earnings but does not decrease cash.

A corporation's board of directors may also vote to declare a stock split, which decreases the par value of stock and increases the number of common shares. A stock split will divide each share of stock into 2 or more shares. For instance, a 4:1 (4 for 1) stock split will turn one share of stock into four shares and simultaneously divide the par value by four. To further illustrate, one share of stock with a par value of $40 that is split 4:1 will now equal four shares of stock with a par value of $10 each.

A corporation's board of directors declares dividends after reviewing the retained earnings and cash of the corporation and a vote.

As practice, name the three significant dates associated with payment of dividends. Know the journal entries associated with each of the significant dates.

Read Paid-in Capital and Retained Earnings on the Balance Sheet on pages 234-344 to review the process of declaring cash and stock dividends.

 

Unit 9 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Bond indenture
  • Callable bond
  • Capital stock
  • Carrying value of bonds
  • Cash dividends
  • Common stock
  • Corporation
  • Cumulative preferred stock
  • Discount on bonds
  • Dividend
  • Dividends in arrears
  • Earnings per share
  • Face value
  • Market value
  • Paid-in capital
  • Par value
  • Preferred stock
  • Premium on bonds
  • Present value
  • Retained earnings
  • Stock dividends
  • Stock split
  • Trustee
  • Underwriter

Unit 10: Statement of Cash Flows

10a. Describe the types of business transactions that are included in operating, investing, and financing activities

Inflows and outflows of cash are reported in three different sections of the statement of cash flows.

List the cash inflows and cash outflows for each of the following sections of the statement of cash flows: operating activities, investing activities, financing activities.

 

Cash Inflows

Cash Outflows

Operating Activities

   

Investing Activities

   

Financing Activities

   

You will find examples of the cash inflows and outflows included within each category in Information in the Statement of Cash Flows on pages 398-400.

 

10b. Describe the difference between the indirect and direct methods of preparing the statement of cash flows

There are two methods of preparing a statement of cash flows: direct and indirect. The investing and financing sections are unaffected by the method utilized but the operating activities section will vary depending on which method is used.

  1. How is the operating activities section prepared using the indirect method?
  2. How is the operating activities section prepared using the direct method?

Instructions for preparing the operating activities section of the statement of cash flows is found in Cash Flows from Operating Activities on pages 400-404.

 

Unit 10 Vocabulary

Be sure you understand these terms as you study for the final exam. Try to think of the reason why each term is included.

  • Financing activities
  • Investing activities
  • Operating activities
  • Working capital