Suggestions for the Final
- I have composed a list of suggestions for Exam II based on my attendance in class and
key points that Dr. Mazzitelli talks about. None of these are certain topics/questions on
the exam and are based on my experience of accounting exams.
Chapter 1
1. Make sure you know the equations for the balance sheet, Net Income, Retained
Earnings and cash flows statements.
2. Under the cash flow statement, any operating activities are on the income
statement, assets are under investing activities, and liabilities and contributed
capital come under financing activities.
3. Management is responsible for the information in the financial statements
4. Know the difference between sole proprietorships and partnerships.
5. Know advantages and disadvantages of corporations
Chapter 2 & 3
1. Know the relationships between the 3 basic equations (NI, End RE and Balance
sheet)
2. Read over the accounting assumptions
3. Know the difference between the cash and accrual basis of accounting
Chapter 4
1. If cash precedes the recognition of revenue or expense, have a deferral
2. If cash is after the recognition of revenue or expense, have an accrual
3. Make sure you know a few examples of each to aid in your understanding of the
two
4. Adjustments NEVER involve cash, and affect both the I/S and the B/S
5. Depreciation and amortization are non-cash transactions
Chapter 5
1. Two accounting constraints
a. Materiality – is it large enough to influence decisions?
b. Conservatism – always understate assets and income
2. Par value
a. The amount to credit to common stock is calculated by multiplying the
number of shares X PAR VALUE
b. Any amount in excess of PAR VALUE is credited to Paid-In-Capital
3. Three unique income items
a. Discontinued operations, extraordinary items and the cumulative effect of
change in accounting principle
b. Present ALL NET OF TAX
c. Extraordinary items are unusual in nature AND infrequent in occurrence
4. Profitability ratio
a. Return on Equity (ROE)
Chapter 6
1. Credit card sales
a. Treat credit card sales as CASH sales
b. Always debit credit card discount if there is a credit card fee
2. Credit Sales
a. Calculate sales discount based on the credit terms
b. Ex. 2/10, n/30. A 2% discount if paid within 10 days, and nothing after
3. Net sales
a. Net sales is derived by deducting the contra-revenue accounts from gross
sales (sales returns, credit card and sales discounts)
4. Bad debt expense
a. First increase bad debt expense and the allowance for doubtful accounts
(by the amount calculated/estimated) (dr. Bad debt exp; cr. Allowance)
b. When writing off a bad debt, dr. ALLOWANCE; cr. The specific A/R
c. Income is ONLY reduced when the allowance is created. There is NO
impact on income, assets, liabilities, or equities from an actual WRITEOFF***
5. Receivables turnover ratio (RTO)
a. A measure of liquidity
b. With sales discounts, RTO should be higher
6. End A/R = Beg a/r + credit sales – cash received from customers – write-off
7. End Allowance for D/A = beg. Bal + bad debt exp – write-offs
8. Internal controls
a. Separate duties of handling and recording cash
9. Bank reconciliation: Look at SI handout
Chapter 7
1. Periodic vs. Perpetual inventory
a. Periodic debits a purchases account
b. Perpetual debits an inventory account
2. LIFO (Last-in, First-out) (fashion, automobiles)
a. Is more conservative
b. LIFO conformity: Must use LIFO for BOTH tax and accounting purposes
c. Does a better job of matching the cost of replacement
d. In a period of rising prices LIFO results in a higher COGS, lower ending
inventory, lower NI
3. FIFO (First-in, Last-out) (grocery stores)
a. Learn how to compute FIFO ending inventory and COGS
4. Lower of Cost or Market (LCM)
a. Use LCM when LIFO or FIFO isn’t specified, and different costs are
given to you (market cost, purchase cost etc)
b. ALWAYS use the LOWER of cost or market
c. May be applied to the entire inventory or to each item separately
d. However, when applied to each item separately, will get the lowest cost
(more conservative)
5. Inventory Turnover Ratio (ITO)
a. COGS/Avg. Inventory
Chapter 8
1. Acquisition cost includes:
a. Purchase price
b. Taxes paid at time of purchase
c. Transportation charges
d. Installation costs
e. Setup costs to prepare for use
f. NOT INSURANCE
2. Capital & Revenue expenditures
a. Capital expenditure: an asset
i. Extraordinary repair: increase usefulness or extend life of the asset
b. Revenue expenditure: an expense (benefits current accounting period)
i. Ordinary maintenance (painting)
3. Know the differences between depreciation, depletion and amortization
4. Book value = Acquisition cost – accumulated depreciation
a. Know how to find the book value at the end of a stated year
5. Disposal of Assets
a. Gain/Loss = Sale price – BV at date of sale
b. If sold for more than the BV, we credit the gain on sale
c. If sold for less than the BV, we debit the loss on sale
d. ALWAYS depreciate the asset up to the date of sale
e. I’m pretty sure that there will be a problem where the asset is sold right in
the middle of the year!
6. Straight line depreciation
a. S/L = (Cost – Salvage/Residual value)/estimated useful life (# of years)
7. Double declining balance
a. DDB = First find the S/L per year
b. Then find the S/L rate (S/L amount per year/cost-salvage/residual)
c. If the question asks for double the S/L rate, then multiply the S/L rate by 2
d. Use this new rate X the cost for the DDB amount for year 1
e. For year 2, use the same rate found in 3 X (cost – accum. depreciation)
8. Units of Production
a. Units of prod. = (cost – salvage/residual value)/estimated life (# of units)
Chapter 9
1. Current Assets: less than 1 year
2. Current Liabilities: less than 1 year
3. Current ratio: most important measure of liquidity
a. CR of at least 2 is preferred
4. Time value of Money
a. Two things to ask:
i. Are you looking for a PV or a FV?
ii. Is it a single payment or a series of payments?
b. If it is a sum you are looking to invest TODAY, it is a PV
c. If it is a sum you are hoping to get in the future, use FV
d. If you have bought equipment for $100,000 on account. Find the amount
to assign in your books for that equipment today.
i. Use the PV table
Chapter 10
1. Make sure you know the difference between bonds sold at a discount and bonds
sold at a premium
2. If a $1,000 bond is sold at 96, it means that the $1,000 bond was sold for 96% of
$1,000 or .96 X $1,000 = sold for $960, which means that the bond was sold at a
discount of $40
3. If a $1,000 bond is sold at 104, it means that the $1,000 bond was sold for 104%
or 1.04 X $1,000 = $1,040, which means that the bond was sold at a premium of
$40
4. Know the differences between callable bonds and debentures
5. Know the reasons why corporations issue bonds
6. If the bond was sold @ premium, the interest expense < cash paid
7. If the bond was sold @ discount, the interest expense > cash paid
8. If the market rate is greater than the bond interest rate, the bond will be sold at a
discount and vice-versa
9. When calculating the selling price of a bond:
a. Use the bond interest rate to calculate the amount of interest payment
every year.
b. NEVER USE THE BOND INTEREST RATE AGAIN
c. Then use the PV of annuity factor at the market rate and multiply times
the interest payments calculated in step a
d. Use the PV of $1 factor at the market rate and multiply this number by
the face value of the bond
e. Add both the amounts calculated in step c, and d
10. When using a discount amortization schedule, the carrying value of the bond will
increase as the years go by (finally equaling the face value of the bond)
11. When using a premium amortization schedule, the carrying value of the bond will
decrease as the years go by (finally decreasing to the face value)
Chapter 11
1. Know the rights of common stock holders
2. Make sure you know what dividends in arrears are, and that before paying
common stock holders, the preferred stock holders must be paid for all the years
the dividends were not paid (only for dividends in arrears)
3. Know the difference between stock dividends and stock splits
a. Stock dividends do NOT include cash, only the issuance of new stock
b. A stock split helps to get the market price of shares back into a reasonable
range
4. Know the difference between a large and small stock dividend
a. Small stock (5-10%) debit RE for market value
b. Large stock (50-100%) debit RE for par value
c. Dividends are not paid on treasury stock