RAPID REVIEW

Chapter Content
ACCOUNTING CONCEPTS (Chapters 2–4)
Fundamental Enhancing
Qualities Qualities Assumptions Principles Constraint

Relevance Comparability Monetary unit Historical cost Materiality

Faithful Consistency Economic entity Fair value
representation Verifiability Periodicity Full disclosure
Timeliness Going concern Revenue recognition
Understandability Accrual basis Expense recognition

BASIC ACCOUNTING EQUATION (Chapter 3) INVENTORY (Chapters 5 and 6)

Ownership
Basic Assets = Liabilities + Stockholders’ Equity
Equation Ownership of goods on public
Freight Terms carrier resides with:
Expanded Common Retained
Assets = Liabilities + Stock + Earnings + Revenues – Expenses – Dividends FOB Shipping point Buyer
Basic Equation
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. FOB Destination Seller
Debit / Credit + – – + – + – + – + + – + –
Rules

ADJUSTING ENTRIES (Chapter 4) Perpetual vs. Periodic Journal Entries

Type Adjusting Entry

Event Perpetual Periodic
Deferrals 1. Prepaid expenses Dr. Expenses Cr. Assets
2. Unearned revenues Dr. Liabilities Cr. Revenues Purchase of goods Inventory Purchases
Cash (A/P) Cash (A/P)
Accruals 1. Accrued revenues Dr. Assets Cr. Revenues
2. Accrued expenses Dr. Expenses Cr. Liabilities Freight (shipping point) Inventory Freight-In
Cash Cash
Note: Each adjusting entry will affect one or more income statement accounts and one or
more balance sheet accounts. Return of purchased Cash (or A/P) Cash (or A/P)
goods Inventory Purchase Returns and
Interest Computation Allowances

Sale of goods Cash (or A/R) Cash (or A/R)

Interest = Face value of note × Annual interest rate × Time in terms of one year
Sales Revenue Sales Revenue
Cost of Goods Sold No entry
CLOSING ENTRIES (Chapter 4)
Inventory
Purpose
Return of sold goods Sales Returns and Allowances Sales Returns and Allowances
1. Update the Retained Earnings account in the ledger by transferring net income Accounts Receivable Accounts Receivable
(loss) and dividends to retained earnings. Inventory No entry
2. Prepare the temporary accounts (revenue, expense, dividends) for the next Cost of Goods Sold
period’s postings by reducing their balances to zero.
End of period No entry Closing or adjusting entry
required
ACCOUNTING CYCLE (Chapter 4)

1
FRAUD, INTERNAL CONTROL, AND CASH (Chapter 7)
Analyze business Principles of Internal Control The Fraud Triangle
transactions

9 2 Establishment of responsibility Opportunity

Segregation of duties
Prepare a post-closing Journalize the Documentation procedures
trial balance transactions
Physical controls Financial Rational-
pressure ization
Independent internal verification
Human resource controls
8 3
Journalize and post Post to Bank Reconciliation
closing entries ledger accounts

Bank Books

7 4 Balance per bank statement Balance per books

Add: Deposits in transit Add: Unrecorded credit memoranda from bank
Prepare financial Prepare a statement
statements: trial balance
Income statement
Deduct: Outstanding checks Deduct: Unrecorded debit memoranda from
Retained earnings statement bank statement
Balance sheet Adjusted cash balance Adjusted cash balance
5
Note: 1. Errors should be offset (added or deducted) on the side that made the error.
Journalize and post 2. Adjusting journal entries should only be made for items affecting books.
6 adjusting entries:
Deferrals/Accruals
Prepare an adjusted
STOP AND CHECK: Does the adjusted cash balance in the Cash account equal the
trial balance
reconciled balance?
 RAPID REVIEW
Chapter Content
RECEIVABLES (Chapter 8) STATEMENT OF CASH FLOWS (Chapter 12)
Two Methods to Account for Uncollectible Accounts Cash flows from operating activities (indirect method)
Net income
Add: Amortization and depreciation $X
Direct write-off Record bad debt expense when the company determines a Losses on disposals of assets X
method particular account to be uncollectible. Decreases in current assets X
Increases in current liabilities X
Allowance method At the end of each period, estimate the amount of
Deduct: Increases in current assets (X)
uncollectible receivables. Debit Bad Debt Expense and
Decreases in current liabilities (X)
credit Allowance for Doubtful Accounts in an amount that
Gains on disposals of assets (X)
results in a balance in the allowance account equal to the
Net cash provided (used) by operating activities $X
estimate of uncollectibles. As specific accounts become
uncollectible, debit Allowance for Doubtful Accounts and
Cash flows from operating activities (direct method)
credit Accounts Receivable.
Cash receipts
(Examples: from sales of goods and services to customers, from receipts
Steps to Manage Accounts Receivable
of interest and dividends) $X
Cash payments
1. Determine to whom to extend credit.
(Examples: to suppliers, for operating expenses, for interest, for taxes) (X)
2. Establish a payment period.
Net cash provided (used) by operating activities $X
3. Monitor collections.
4. Evaluate the receivables balance.
5. Accelerate cash receipts from receivables when necessary.
FINANCIAL STATEMENT ANALYSIS (Chapter 13)

PLANT ASSETS (Chapter 9)

Discontinued operations Income statement (presented separately after
Computation of Annual Depreciation Expense “Income from continuing operations”)
Changes in accounting principle In most instances, use the new method in
Cost − Salvage value current period and restate previous years’ results
Straight-line Useful life (in years) using new method. For changes in depreciation
and amortization methods, use the new method
*Declining-balance Book value at beginning of year × Declining balance rate*
in the current period, but do not restate previous
*Declining-balance rate = 1 ÷ Useful life (in years)
periods.
Cost − Salvage value
*Units-of-activity × Units of activity during year Income Statement and Comprehensive Income
Useful life (in units)
Sales $ XX
Note: If depreciation is calculated for partial periods, the straight-line and declining- Cost of goods sold XX
balance methods must be adjusted for the relevant proportion of the year. Gross profit XX
Multiply the annual depreciation expense by the number of months expired in Operating expenses XX
the year divided by 12 months. Income from operations XX
Other revenues (expenses) and gains (losses) XX
BONDS (Chapter 10) Income before income taxes XX
Income tax expense XX
Premium Market interest rate < Contractual interest rate
Income before irregular items XX
Face Value Market interest rate = Contractual interest rate Irregular items (net of tax) XX
Net income XX
Discount Market interest rate > Contractual interest rate Other comprehensive income items (net of tax) XX
Comprehensive income $ XX
Computation of Annual Bond Interest Expense

Interest expense = Interest paid (payable) + Amortization of discount MANAGERIAL ACCOUNTING (Chapter 14)
(OR − Amortization of premium)
Characteristics of Managerial Accounting
*Straight-line amortization Bond discount (premium)
Number of interest periods Primary users Internal users

*Effective-interest Bond interest expense Bond interest paid Reports Internal reports issued as needed
amortization
(preferred Carrying value of bonds Face amount of bonds × Purpose Special purpose for a particular user
method) at beginning of period × Contractual interest rate
Effective-interest rate Content Pertains to subunits, may be detailed, use of relevant data

Verification No independent audits

STOCKHOLDERS’ EQUITY (Chapter 11)
No-Par Value vs. Par Value Stock Journal Entries Types of Manufacturing Costs

Direct materials Raw materials directly associated with finished product

No-Par Value Par Value
Direct labor Work of employees directly associated with turning
Cash Cash raw materials into finished product
Common Stock Common Stock (par value)
Paid-in Capital in Excess of Par Value Manufacturing Costs indirectly associated with manufacture of finished
overhead product
Comparison of Dividend Effects

Cash Common Stock Retained Earnings

Cash dividend ↓ No effect ↓

Stock dividend No effect ↑ ↓

Stock split No effect No effect No effect

*Items with asterisk are covered in appendix.

 RAPID REVIEW
Chapter Content

JOB ORDER AND PROCESS COSTING (Chapters 15 and 16)

Unit contribution Unit selling Unit variable
Types of Accounting Systems = −
margin price costs

Job order Costs are assigned to each unit or each batch of goods
Break-even Fixed Unit contribution
= ÷
Process cost Costs are applied to similar products that are point in units costs margin*
mass-produced in a continuous fashion

Break-even Fixed Contribution

Job Order and Process Cost Flow = ÷
point in dollars costs margin ratio*

Job Order Cost Flow Process Cost Flow Required sales in units Unit contribution
= (Fixed costs + Target net income) ÷
for target net income margin
Direct Materials Direct Materials
Direct Labor Direct Labor
Manufacturing Manufacturing
Degree of operating Contribution Net
Overhead Overhead = ÷
leverage margin income

*For multiple products, use weighted-average.

Work in Process
Inventory Work in
Job No. 101 INCREMENTAL ANALYSIS (Chapter 20)
Process
Job No. 102 1. Identify the relevant costs associated with each alternative. Relevant costs are those
Job No. 103 costs and revenues that differ across alternatives. Choose the alternative that maximizes
net income.
2. Opportunity costs are those benefits that are given up when one alternative is chosen
Finished Goods Finished Goods instead of another one. Opportunity costs are relevant costs.
Inventory Inventory 3. Sunk costs have already been incurred and will not be changed or avoided by any
future decision. Sunk costs are not relevant costs.

Cost of Goods Cost of Goods

BUDGETS (Chapter 21)
Sold Sold
Components of the Master Budget

ACTIVITY-BASED COSTING (Chapter 17)

Sales Budget
Hayes Co.
Budget

1. Identify and classify the activities involved in the manufacture of specific

products and assign overhead to cost pools.
Production Rightride
Budget

2. Identify the cost driver that has a strong correlation to the costs
accumulated in each cost pool. Direct Direct Manufacturing
Operating
Materials Labor Overhead
Budgets
Budget Budget Budget

3. Compute the activity-based overhead rate for each cost pool.

Selling and
Administrative
Expense Budget

4. Allocate overhead costs to products using the overhead rates

determined for each cost pool. Budgeted
Income
Statement

COST-VOLUME-PROFIT (Chapters 18 and 19)

Capital Budgeted
Financial
Expenditure Cash Budget Balance
Types of Costs Budgets
Budget Sheet

Variable costs Vary in total directly and proportionately with changes in

activity level
RESPONSIBILITY ACCOUNTING (Chapter 22)
Fixed costs Remain the same in total regardless of change in activity level
Types of Responsibility Centers
Mixed costs Contain both a fixed and a variable element

Cost Profit Investment

CVP Income Statement Format
Expenses only Expenses and Revenues Expenses and Revenues and ROI
Total Per Unit
Sales $xx $xx
Return on Investment
Variable costs xx xx
Contribution margin xx $xx Return on Average
Fixed costs xx Investment center
investment = ÷ investment center
controllable margin
Net income $xx (ROI) operating assets
 ACCOUNT CLASSIFICATION AND PRESENTATION
Normal
Account Title Classification Financial Statement Balance
A
Accounts Payable Current Liability Balance Sheet Credit
Accounts Receivable Current Asset Balance Sheet Debit
Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit
Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit
Administrative Expenses Operating Expense Income Statement Debit
Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit
Amortization Expense Operating Expense Income Statement Debit
B
Bad Debt Expense Operating Expense Income Statement Debit
Bonds Payable Long-Term Liability Balance Sheet Credit
Buildings Plant Asset Balance Sheet Debit
C
Cash Current Asset Balance Sheet Debit
Common Stock Stockholders’ Equity Balance Sheet Credit
Copyrights Intangible Asset Balance Sheet Debit
Cost of Goods Sold Cost of Goods Sold Income Statement Debit
D
Debt Investments Current Asset/ Balance Sheet Debit
Long-Term Investment
Depreciation Expense Operating Expense Income Statement Debit
Discount on Bonds Payable Long-Term Liability—Contra Balance Sheet Debit
Dividend Revenue Other Income Income Statement Credit
Dividends Temporary account closed Retained Earnings Debit
to Retained Earnings Statement
Dividends Payable Current Liability Balance Sheet Credit
E
Equipment Plant Asset Balance Sheet Debit
F
Freight-Out Operating Expense Income Statement Debit
G
Gain on Disposal of Plant Assets Other Income Income Statement Credit
Goodwill Intangible Asset Balance Sheet Debit
I
Income Summary Temporary account closed Not Applicable (1)
to Retained Earnings
Income Tax Expense Income Tax Expense Income Statement Debit
Income Taxes Payable Current Liability Balance Sheet Credit
Insurance Expense Operating Expense Income Statement Debit
Interest Expense Other Expense Income Statement Debit
Interest Payable Current Liability Balance Sheet Credit
Interest Receivable Current Asset Balance Sheet Debit
Interest Revenue Other Income Income Statement Credit
Inventory Current Asset Balance Sheet (2) Debit
 Normal
Account Title Classification Financial Statement Balance
L
Land Plant Asset Balance Sheet Debit
Loss on Disposal of Plant Assets Other Expense Income Statement Debit
M
Maintenance and Repairs Expense Operating Expense Income Statement Debit
Mortgage Payable Long-Term Liability Balance Sheet Credit
N
Notes Payable Current Liability/ Balance Sheet Credit
Long-Term Liability
P
Patents Intangible Asset Balance Sheet Debit
Paid-in Capital in Excess of Par Stockholders’ Equity Balance Sheet Credit
Value—Common Stock
Paid-in Capital in Excess of Par Stockholders’ Equity Balance Sheet Credit
Value—Preferred Stock
Preferred Stock Stockholders’ Equity Balance Sheet Credit
Premium on Bonds Payable Long-Term Liability—Contra Balance Sheet Credit
Prepaid Insurance Current Asset Balance Sheet Debit
Prepaid Rent Current Asset Balance Sheet Debit
R
Rent Expense Operating Expense Income Statement Debit
Retained Earnings Stockholders’ Equity Balance Sheet and Retained Credit
Earnings Statement
S
Salaries and Wages Expense Operating Expense Income Statement Debit
Salaries and Wages Payable Current Liability Balance Sheet Credit
Sales Discounts Revenue—Contra Income Statement Debit
Sales Returns and Allowances Revenue—Contra Income Statement Debit
Sales Revenue Revenue Income Statement Credit
Selling Expenses Operating Expense Income Statement Debit
Service Revenue Revenue Income Statement Credit
Current Asset/Long-Term
Stock Investments Balance Sheet Debit
Investment
Supplies Current Asset Balance Sheet Debit
Supplies Expense Operating Expense Income Statement Debit
T
Treasury Stock Stockholders’ Equity Balance Sheet Debit
U
Unearned Service Revenue Current Liability Balance Sheet Credit
Utilities Expense Operating Expense Income Statement Debit

(1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss. The Income
Summary account does not appear on any financial statement.
(2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold.
The following is a sample chart of accounts. It does not represent a comprehensive chart of all the accounts used in
this textbook but rather those accounts that are commonly used. This sample chart of accounts is for a company
that generates both service revenue as well as sales revenue. It uses the perpetual approach to inventory. If a periodic
system was used, the following temporary accounts would be needed to record inventory purchases: Purchases,
Freight-In, Purchase Returns and Allowances, and Purchase Discounts.

CHART OF ACCOUNTS
Stockholders’
Assets Liabilities Equity Revenues Expenses
Cash Notes Payable Common Stock Service Revenue Administrative
Expenses
Accounts Accounts Payable Paid-in Capital in Sales Revenue
Receivable Excess of Par Amortization
Unearned Service Value—Common Sales Discounts Expense
Allowance for Revenue Stock
Doubtful Sales Returns and Bad Debt Expense
Accounts Salaries and Preferred Stock Allowances
Wages Payable Cost of Goods Sold
Interest Paid-in Capital in Interest Revenue
Receivable Interest Payable Excess of Par Depreciation
Value—Preferred Gain on Disposal Expense
Inventory Dividends Payable Stock of Plant Assets
Freight-Out
Supplies Income Taxes Treasury Stock
Payable Income Tax
Prepaid Insurance Retained Earnings Expense
Bonds Payable
Prepaid Rent Dividends Insurance Expense
Discount on Bonds
Land Payable Income Summary Interest Expense

Equipment Premium on Bonds Loss on Disposal of

Payable Plant Assets
Accumulated
Depreciation— Mortgage Payable Maintenance and
Equipment Repairs Expense

Buildings Rent Expense

Accumulated Salaries and Wages

Depreciation— Expense
Buildings
Selling Expenses
Copyrights
Supplies Expense
Goodwill
Utilities Expense
Patents