Exam 1 Review
http://fates.cns.muskingum.edu/~p
laube/acct301/default.htm
Format

27 questions
Multiple choice
 True/False
 Problem


Bring your own calculator!
Investment-Credit Decisions
A Cash Flow Perspective
Accounting information should
help investors evaluate the
amount, timing, and uncertainty
of the enterprise’s future cash
flows.
The Conceptual Framework
(The key component)
 Maintain consistency
among standards.
 Resolve new accounting
problems.
 Provide user benefits.
Qualitative Characteristics Understandability
Decision Usefulness
Relevance
Predictive
Value
Feedback
Value
Comparability
Reliability
Timeliness
Verifiability
Neutrality
Consistency
Representational
Faithfulness
Practical Constraints to Achieving
Desired Qualitative Characteristics
Conservatism
Cost
Effectiveness
Materiality
Recognition and Measurement Concepts
Assumptions
Economic entity
Description
All economic events identified with a particular
economic entity.
Going concern
Business entity will continue to operate indefinitely.
Perodicity
Life of company is divided into time periods to provide
timely information.
Monetary unit
Financial statements are measured in U. S. Dollars.
Principles
Historical cost
Measurement based on exchange transaction amounts.
Realization
Revenue recognized when earnings process is complete
and reasonable certainty of collection exists.
Matching
Expenses recognized in same period as related revenue.
Full disclosure
Information that could change user decisions should be
included.
The Realization Principle
Two conditions must be met if the
realization principle is to be satisfied.
Reasonable
Assurance of
Collection
Substantial
Completion of
Transaction
Ethics in Accounting
 To be useful, accounting
information must be objective
and reliable.
 Management may be under
pressure to report desired
results and ignore or bend
existing rules.
Or…Think of the Balance sheet
CREDIT
DEBIT
Liabilities
Assets

Remaining is Equity:

(Expenses subtract from
Equity, so they are a
debit)

Paid in Capital
(investment)
Retained Earnings

Revenues – Expenses
(left)


Gains/losses
Dividends
Or…Think which Statement it’s on

Balance Sheet – Snapshot in time

Permanent accounts





Assets
Liabilities
Paid in capital
Retained Earnings
Income Statement – Score sheet for
the period

Temporary accounts




Revenues
Expenses
Gain/losses
Dividends, too
Adjusting Entries
At the end of the period,
some transactions or
events remain
unrecorded.
Because of this, several
accounts in the ledger
need adjustments
before their balances
appear in the financial
statements.
Adjusting Entries
Prepayments
(Deferrals)
Accruals
Transactions where
cash is paid or received
before a related
expense or revenue is
recognized.
Transactions where
cash is paid or received
after a related expense
or revenue is
recognized.
Estimates
Temporary and Permanent
Accounts
Income
Summary
Liabilities
Permanent
Accounts
Shareholders’
Equity
Temporary
Accounts
Assets
Dividends
Expenses
Revenues
The closing process applies
only to temporary accounts.
Balance Sheet
Limitations:
 Assets are
recorded at
historical cost,
NOT at market
value.
 Resources such
as employee skills
and reputation are
not recorded on
the balance sheet.
Usefulness:
 Provides a
description of
available
productive
resources.
 Liquidity
information.
 Long-term
solvency
information.
Balance Sheet forms

Classified


Separates current and non-current
assets and liabilities
Non-classified
Assets
Current
Assets
Will be converted
to cash or
consumed within
one year or the
operating cycle,
whichever is
longer.
Cash
Receivables
Inventories
Prepayments
Liabilities
Current
Liabilities
Obligations
expected to be
satisfied through
current assets or
creation of other
current liabilities
Accounts Payable
Notes Payable
Accrued Liabilities
Current Maturities
of Long-Term Debt
Shareholders’ Equity
Capital
Stock
Other
Contributed
Capital
Retained
Earnings
Treasury
Stock
Accumulated Other Comprehensive Income
Now, let’s look
at some
ratios!
Liquidity Ratios
Current assets
Current ratio =
Current liabilities
Measures a company’s ability to satisfy its
short-term liabilities
Quick assets
Acid-test ratio =
Current liabilities
Provides a more stringent indication of a
company’s ability to pay its current
liabilities
Financing Ratios
Total liabilities
Debt to equity
=
ratio
Shareholders’ equity
Indicates the extent of reliance on
creditors, rather than owners, in providing
resources
Times interest
=
earned ratio
Net income + Interest
expense + Taxes
Interest expense
Indicates the margin of safety provided to
creditors