Suggestions for Exam II

- 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 5

1.  Two accounting constraints

  1. Materiality – is it large enough to influence decisions?
  2. Conservatism – always understate assets and income

2.  Par value

  1. The amount to credit to common stock is calculated by multiplying the number of shares X PAR VALUE
  2. Any amount in excess of PAR VALUE is credited to Paid-In-Capital

3.  Three unique income items

  1. Discontinued operations, extraordinary items and the cumulative effect of change in accounting principle
  2. Present ALL NET OF TAX
  3. Extraordinary items are unusual in nature AND infrequent in occurrence

4.  Profitability ratio

  1. Return on Equity (ROE)

Chapter 6

1.  Credit card sales

  1. Treat credit card sales as CASH sales
  2. Always debit credit card discount if there is a credit card fee

2.  Credit Sales

  1. Calculate sales discount based on the credit terms
  2. Ex. 2/10, n/30. A 2% discount if paid within 10 days, and nothing after

3.  Net sales

  1. Net sales is derived by deducting the contra-revenue accounts from gross sales (sales returns, credit card and sales discounts)

4.  Bad debt expense

  1. First increase bad debt expense and the allowance for doubtful accounts (by the amount calculated/estimated) (dr. Bad debt exp; cr. Allowance)
  2. When writing off a bad debt, dr. ALLOWANCE; cr. The specific A/R
  3. Income is ONLY reduced when the allowance is created. There is NO impact on income, assets, liabilities, or equities from an actual WRITE-OFF***

5.  Receivables turnover ratio (RTO)

  1. A measure of liquidity
  2. 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

  1. Separate duties of handling and recording cash

9.  Bank reconciliation: Look at SI handout

Chapter 7

1.  Periodic vs. Perpetual inventory

  1. Periodic debits a purchases account
  2. Perpetual debits an inventory account

2.  LIFO (Last-in, First-out) (fashion, automobiles)

  1. Is more conservative
  2. LIFO conformity: Must use LIFO for BOTH tax and accounting purposes
  3. Does a better job of matching the cost of replacement
  4. 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)

  1. Learn how to compute FIFO ending inventory and COGS

4.  Lower of Cost or Market (LCM)

  1. Use LCM when LIFO or FIFO isn’t specified, and different costs are given to you (market cost, purchase cost etc)
  2. ALWAYS use the LOWER of cost or market
  3. May be applied to the entire inventory or to each item separately
  4. However, when applied to each item separately, will get the lowest cost (more conservative)

5.  Inventory Turnover Ratio (ITO)

  1. COGS/Avg. Inventory

Chapter 8

1.  Acquisition cost includes:

  1. Purchase price
  2. Taxes paid at time of purchase
  3. Transportation charges
  4. Installation costs
  5. Setup costs to prepare for use
  6. NOT INSURANCE

2.  Capital & Revenue expenditures

  1. Capital expenditure: an asset
  2. Extraordinary repair: increase usefulness or extend life of the asset
  3. Revenue expenditure: an expense (benefits current accounting period)
  4. Ordinary maintenance (painting)

3.  Know the differences between depreciation, depletion and amortization

4.  Book value = Acquisition cost – accumulated depreciation

  1. Know how to find the book value at the end of a stated year

5.  Disposal of Assets

  1. Gain/Loss = Sale price – BV at date of sale
  2. If sold for more than the BV, we credit the gain on sale
  3. If sold for less than the BV, we debit the loss on sale
  4. ALWAYS depreciate the asset up to the date of sale
  5. 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

  1. S/L = (Cost – Salvage/Residual value)/estimated useful life (# of years)

7.  Double declining balance

  1. DDB = First find the S/L per year
  2. Then find the S/L rate (S/L amount per year/cost-salvage/residual)
  3. If the question asks for double the S/L rate, then multiply the S/L rate by 2
  4. Use this new rate X the cost for the DDB amount for year 1
  5. For year 2, use the same rate found in 3 X (cost – accum. depreciation)

8.  Units of Production

  1. 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
  4. CR of at least 2 is preferred
  5. Time value of Money
  6. Two things to ask:
  7. Are you looking for a PV or a FV?
  8. Is it a single payment or a series of payments?
  9. If it is a sum you are looking to invest TODAY, it is a PV
  10. If it is a sum you are hoping to get in the future, use FV
  11. If you have bought equipment for $100,000 on account. Find the amount to assign in your books for that equipment today.
  12. Use the PV table

Good Luck on your test! PLEASE read the questions carefully, and think before you answer (Land is NEVER depreciated!!) ¡¡¡Suerte!!!