BMGT220 Exam 1 Review

Sarbanes-Oxley Act of 2002 (SOX) – Est. a new oversight body called Public Company
Accounting Oversight Board (PCAOB)

Generally Accepted Accounting Principle (GAAP) – primarily developed by the Financial

Accounting Standards Board (FASB)

SEC – Has authority over the accounting & financial disclosures for companies whose stock
are public

Internat’l Accounting Standards Board – develop generally accepted accounting principles

outside the USA

Proprietorship – business entity owned by 1

Partnership – business entity owned by 2 or more

Corporation – separate entity divided into shares

Limited Liability Company (LLC) – partnership/corp. hybrid

Business Entity Concept – states that a bizz is viewed as separate

Cost Concept – states amounts are recorded at cost or purchase price

Objectivity Concept – states that the amounts recorded be based on objective evidence

Unit of Measure Concept – states that econ. Data be recorded in dollars

Accounting Equation: A=L+E

Stockholder Equity is increased by: Capital stock & revenues

 Decreased by: expenses & dividends

Income Statement – revenues & expenses for a pd. of time

Retained Earnings – change in retained earnings for a pd. of time

Balance Sheet – assets, liabilities, & Stockholder’s equity for a specific date

Statement of Cash Flows – summary of cash receipts & cash payments for a pd of time

Matching Concept – expenses incurred & revenue those expenses generated are matched
Order of Financial Statements – Income statement, Retained Earnings, Balance sheet &
statement of cash flows

Operating Activities – cash flow

Investing Activities – perm assets

Financing Activities – stockholders, borrowings, dividends

Ratio of liabilities to stockholder’s equity: liabilities/ S. Eq (the lower the better)

Posting – the transfer of Dr & Cr from journal entries to the accounts

Transposition – when the order of the digits is copied incorrectly

Slide – entire # is copied incorrectly 1 or more spaces to the right or left

Horizontal Analysis – item on a financial statement is compared w/ the same item on an

earlier statement

Accounting Period Concept – revenues & expenses are reported in the proper pd

Accrual Basis of Accounting – revenues are reported on the income statement in the pd in
which they are earned

Revenue Recognition Concept – revenues are reported when they are earned, when most of
the work has been done

Cash Basis of Accounting – revenues & expenses are reported when cash is received/paid

Prepaid Expenses – advanced payment of future expenses, recorded as assets when cash is
paid

Unearned Revenues – advanced receipt of future revenues, recorded as liabilities when cash
is received

Accrued Revenues – unrecorded revenues that have been earned by cash has not yet been
received

Accrued Expenses - unrecorded expenses that have been incurred but cash has not yet been
paid

Accumulated Depreciation: Contra Asset account

Journal Entry for Depreciation of Office Equipt: Depreciation Expense XXX
Accumulated Depreciation XXX

Book Value – Cost of the asset that has not yet been depreciated

Vertical Analysis – comparing each item in a FS w/a total amount from the same statement

BICE – Adjusting Process – 1 Balance Sheet Account, 1 Income Statement account, never
Cash, End of accounting pd

Deferrals – prepaid expense & unearned revenue  cash later

Accruals – accrued expense & accrued revenue

 Accruals do NOT require: an original entry; just an adjusting entry

Interest per Year: Principle x Rate x Time (1yr=360 days)

Perpetual Inventory System - each purchase & sale of merch is recorded in the inventory
account & related subsidy ledger

Buyers Journal Entry when repaying w/ purchase discount: Accounts Payable XXX
Cash XXX
Merch Inv. XXX

Sales made w/ credit cards are recorded as: Cash sales

Journal entry for processing fees for credit cards: Credit Card Expense XXX
Cash XXX

Seller’s journal entry when receiving payment w/sales discount: Cash XXX
Sales Discounts XXX
Act. Rec. XXX

Sales discounts = Contra Sales account (inc w/debit)

Seller’s Journal Entry for returns: Sales Returns & Allowances XXX
Act. Rec. XXX
Merch. Inv. XXX
Cost of Merch Sold XXX

FOB Shipping Point – buyer pays the freight costs

FOB Destination – seller pays the freight costs

Journal Entry for seller collecting sales tax & paying it off: Act Rec. XXX
Sales XXX
Sales Tax Payable XXX
Sales Tax Payable XXX
Cash XXX

Sales – Sales Returns – Sales Discounts = Net Sales

Net Sales – Cost of Merchandise Sold = Gross Profit

Gross Profit – Operating Expenses = Income from Operations

Income from operations + other revenues – other expenses = Net Income

Closing Entries (4) –

1. Dr each temporary account w/a Cr balance
2. Cr each temporary account w/a Dr balance
3. Dr Income Summary for the amount of its balance & Cr Retained Earnings

Ratio of Net Sales to Assets = Net Sales/Avg Total Assets (higher is better)

Cost of beginning inventory + Net purchases = Cost of Goods Available

Costs of goods available – cost of goods sold = Ending Inventory

W/returns, Seller’s account affected if merch NOT defective is: Dr. Merch Inventory

W/returns, Seller’s account affected if merch defective is: Cr. Costs of Goods Sold

Account type for cost of goods sold = expense