Financial Accounting 291 Final Exam Review: Concepts and Terminology

Chapter 1: Introduction to Accounting

Business Organizations and Accounting Principles

This chapter introduces the foundational concepts of accounting, including the types of business organizations and essential accounting principles.

• Types of Business Organizations: Sole proprietorship, partnership, corporation.

• Basic Accounting Principles:

  • Matching Principle: Expenses are matched with revenues in the period in which efforts are made to generate those revenues.

  • Historical Cost Principle: Assets are recorded at their original cost.

  • Entity Principle: The business is treated as a separate entity from its owners.

Financial Statements

• Types of Financial Statements:

  • Balance Sheet

  • Income Statement

  • Statement of Retained Earnings

  • Statement of Cash Flows

• Purpose: To summarize the financial position and performance of a business.

Accounting Equation

• Equation: $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$

• Application: Used to analyze the impact of transactions on the financial position.

Accounting Standards

• GAAP, IASB, FASB, SOX, etc.: Regulatory bodies and standards governing accounting practices.

Chapter 2: Transaction Analysis

Journal Entries and Accounts

This chapter covers the process of recording transactions using journal entries and understanding the structure of accounts.

• Double-Entry System: Every transaction affects at least two accounts.

• Types of Accounts:

  • Assets

  • Liabilities

  • Owner's Equity

  • Revenue

  • Expenses

• Chart of Accounts: A listing of all accounts used by a company.

Sample Journal Entry

• Example: Recording a cash sale:

  • Debit Cash

  • Credit Sales Revenue

Chapter 3: Accrual Accounting Concepts

Adjusting Entries

Accrual accounting requires adjusting entries to ensure revenues and expenses are recognized in the correct period.

• Types of Adjusting Entries:

  • Accrued Revenues

  • Accrued Expenses

  • Deferred Revenues

  • Deferred Expenses

• Purpose: To update account balances before preparing financial statements.

Depreciation and Closing Entries

• Depreciation: Allocation of the cost of fixed assets over their useful lives.

  • Common accounts: Accumulated Depreciation

• Closing Entries: Transfer balances from temporary accounts (revenues, expenses) to permanent accounts (retained earnings).

Cash vs. Accrual Accounting

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

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

Chapter 4: Merchandising Operations

Inventory Systems and Journal Entries

This chapter focuses on accounting for inventory and sales in merchandising businesses.

• Inventory Systems:

  • Perpetual: Continuous tracking of inventory.

  • Periodic: Inventory updated at period end.

• Key Journal Entries:

  • Sales transactions (with two entries: revenue and cost of goods sold)

  • Sales returns and allowances

  • Purchase of inventory

  • Payment for inventory

Income Statement Formats

• Single-Step: All revenues and gains are totaled, all expenses and losses are totaled, and the difference is net income.

• Multiple-Step: Separates operating and non-operating activities for more detail.

Freight Terms

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

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

Classified Balance Sheet

• Classification: Assets and liabilities are grouped by current and non-current status.

Chapter 5: Inventory

Inventory Costing Methods

This chapter explains how inventory is valued and the impact of different costing methods.

• Methods:

  • FIFO (First-In, First-Out)

  • LIFO (Last-In, First-Out)

  • Average Cost

  • Specific Identification

• Calculation:

  • Cost of Goods Sold (COGS) and Ending Inventory using each method.

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

Gross Profit Method

• Purpose: Estimate ending inventory using the gross profit rate.

• Formula:

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

Chapter 6: GAAP vs IFRS and Internal Controls

Accounting Standards

This chapter compares US GAAP and IFRS and introduces internal controls.

• GAAP vs IFRS: Key differences in accounting standards and reporting.

• Audit Opinions: Types of opinions issued by auditors (unqualified, qualified, adverse, disclaimer).

Internal Controls

• Objectives: Safeguard assets, ensure accuracy of records.

• Elements:

  • Control Environment

  • Risk Assessment

  • Control Activities

  • Information and Communication

  • Monitoring

• Fraud Triangle: Explains the factors that lead to fraud: opportunity, pressure, rationalization.

Chapter 7: Receivables and Bank Reconciliation

Bank Reconciliation

This chapter covers the preparation of bank reconciliations and accounting for receivables.

• Bank Reconciliation: Adjusts the cash balance per books and per bank to the correct amount.

• Steps:

  • Compare deposits and checks

  • Adjust for outstanding items

  • Record necessary journal entries

Uncollectible Accounts

• Methods:

  • Direct Write-Off

  • Allowance Method

• Estimating Uncollectibles: Use aging of accounts receivable or percentage of sales.

• Journal Entry Example:

  • Debit Bad Debt Expense

  • Credit Allowance for Uncollectible Accounts

Notes Receivable

• Interest Calculation: $\text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time}$

• Recording Collection: Debit Cash, Credit Notes Receivable and Interest Revenue.

Additional info:

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

• Approximately 70% of exam questions are conceptual, with the remainder being calculations.