Financial Accounting 201 Final Exam Review: Comprehensive Study Notes

Chapter 1: Business, Accounting, and You

Types of Business Organizations

Understanding the different forms of business organizations is foundational in accounting. The main types include:

• Sole Proprietorship: Owned by one individual; simple to establish but owner is personally liable for debts.

• Partnership: Owned by two or more individuals; partners share profits, losses, and liability.

• Corporation: Separate legal entity; owners (shareholders) have limited liability.

Principles of Accounting Measurement

• Historical Cost: Assets are recorded at their original purchase price.

• Entity Principle: Business is treated as separate from its owners.

• Revenue Recognition: Revenue is recognized when earned, not necessarily when cash is received.

Financial Statements

Financial statements provide a summary of a company's financial performance and position:

• Income Statement: Reports revenues and expenses to show net income or loss.

• Statement of Retained Earnings: Shows changes in retained earnings over a period.

• Balance Sheet: Presents assets, liabilities, and shareholders' equity at a specific point in time.

Statement of Cash Flows

• Shows the inflows and outflows of cash, categorized into operating, investing, and financing activities.

Impact of Transactions

• Transactions affect the accounting equation: Assets = Liabilities + Equity.

Chapter 2: Analyzing and Recording Business Transactions

Journal Entries

Journal entries are the first step in the accounting cycle, recording all business transactions in chronological order.

• Debits and Credits: Every transaction affects at least two accounts (double-entry system).

• Normal Account Balances: Assets and expenses have debit balances; liabilities, equity, and revenues have credit balances.

Posting to the Ledger

• Transferring journal entries to the general ledger, which organizes transactions by account.

Trial Balance

• Lists all accounts and their balances to check that debits equal credits.

Accounting Cycle

• Sequence of steps: Analyze transactions → Journalize → Post → Prepare trial balance → Adjust → Prepare financial statements → Close.

Chapter 3: Adjusting and Closing Entries

Types of Adjusting Entries

• Accrued Revenues: Revenues earned but not yet received or recorded.

• Accrued Expenses: Expenses incurred but not yet paid or recorded.

• Deferred Revenues: Cash received before revenue is earned.

• Deferred Expenses: Cash paid before expense is incurred.

Accrual vs. Cash Basis Accounting

• Accrual Basis: Revenues and expenses are recognized when earned or incurred, regardless of cash flow.

• Cash Basis: Revenues and expenses are recognized only when cash is received or paid.

Closing Process

• Temporary accounts (revenues, expenses, dividends) are closed to retained earnings at period end.

Permanent vs. Temporary Accounts

• Permanent Accounts: Assets, liabilities, and equity accounts; not closed at period end.

• Temporary Accounts: Revenues, expenses, and dividends; closed each period.

Contra Accounts

• Accounts that offset related accounts, such as Accumulated Depreciation (contra asset) and Allowance for Uncollectible Accounts (contra asset).

Chapter 4: Accounting for a Merchandising Business

Journal Entries for Merchandising

• Sales transactions (sales revenue, sales returns, and allowances)

• Sales discounts

• Purchases of inventory (on account and cash)

• Purchase discounts and allowances

• Freight-in and freight-out

Inventory Systems

• Perpetual System: Inventory records updated continuously.

• Periodic System: Inventory records updated at period end.

FOB Terms

• FOB Shipping Point: Buyer pays shipping; ownership transfers at shipping point.

• FOB Destination: Seller pays shipping; ownership transfers at destination.

Income Statement Formats

• Single-Step: All revenues grouped together, all expenses grouped together.

• Multiple-Step: Separates operating revenues/expenses from non-operating items; shows gross profit, operating income, and net income.

Classified Balance Sheet

• Assets and liabilities are classified as current or long-term.

Chapter 5: Inventory

Inventory Costing Methods

• FIFO (First-In, First-Out): Oldest inventory costs assigned to cost of goods sold first.

• LIFO (Last-In, First-Out): Most recent inventory costs assigned to cost of goods sold first.

• Average Cost: Weighted average cost per unit is used.

• Specific Identification: Actual cost of each specific item is used.

Inventory Calculations

• Calculate Ending Inventory and Cost of Goods Sold (COGS) using the chosen method.

• Lower of Cost or Market (LCM): Inventory is reported at the lower of its cost or market value.

Gross Profit Method

• Estimate ending inventory using the formula:

$\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold}$

Chapter 6: The Challenges of Accounting: Standards, Internal Control, Audits, Fraud, and Ethics

US GAAP vs. IFRS

• Understand key differences between US Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Internal Controls

• Objectives: Safeguard assets, ensure reliable financial reporting, promote compliance.

• Components:

  • Control Environment

  • Risk Assessment

  • Control Activities

  • Information and Communication

  • Monitoring

Fraud and the Fraud Triangle

• Fraud involves intentional misrepresentation for personal gain.

• The Fraud Triangle consists of: Opportunity, Pressure, and Rationalization.

Chapter 7: Cash and Receivables

Bank Reconciliation

• Process of matching the balance per bank statement with the balance per books, adjusting for outstanding checks, deposits in transit, and errors.

Accounting for Bad Debts

• Direct Write-Off Method: Bad debts are written off when deemed uncollectible.

• Allowance Method: Estimate uncollectible accounts at period end; uses Allowance for Uncollectible Accounts.

Notes Receivable

• Formal written promises to pay a certain amount at a future date; interest may be accrued.

• Calculate maturity value: $\text{Maturity Value} = \text{Principal} + (\text{Principal} \times \text{Interest Rate} \times \text{Time})$

Additional info:

• This review outline covers the first seven chapters, which align with standard Financial Accounting curriculum topics.

• Approximately 2/3 of exam questions are theoretical, with the remainder being numerical/calculation-based.