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Final Exam Review

# Final Exam Review - CHAPTER 1 FINANCIAL ACCOUNTING AND...

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CHAPTER 1 – FINANCIAL ACCOUNTING AND ACCOUNTING STANDARDS (INCLUDING SEC) - 4%, 2 theory, 0 calculation CHAPTER 2 – CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL ACCOUNTING - 2%, 1 theory, 0 calculation Problem: 1. Which of the following accounting principles is considered to be one of the most basic of the principles? a. Historical cost b. Matching c. Revenue recognition d. Full disclosure e. Going-concern Answer to problem: 1. e CHAPTER 3 – THE ACCOUNTING INFORMATION SYSTEM - 7%, 1 theory, 3 calculation Adjusting Entries 1. Prepaid Expenses a. Unexpired costs – regular journal entry prepared during the period in which the cash outlay (or promise to pay) is made. b. Example – Company pays \$2,400 insurance premium on April 1, 2008. Insurance coverage is for two years. c. Regular entry on April 1, 2008: Prepaid Insurance 2,400 Cash 2,400 Adjusting entry on December 31, 2008 : Insurance Expense 900 Prepaid Insurance 900 d. Note the form of the adjusting entry – debit the expense, credit the current asset 2. Unearned Revenues a. Cash (or the promise of cash) received in advance of performing services or selling goods b. Example – Company receives \$4,500 on September 1, 2008 for services to

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be performed over the next nine months. c. Regular entry on September 1, 2008 : Cash 4,500 Unearned revenue 4,500 Adjusting entry on December 31, 2008 : Unearned revenue 2,000 Revenue 2,000 d. Note the form of the adjusting entry – debit the liability, credit revenue 3. Accrued Expenses a. Unrecorded expenses – expenses incurred, but cash not yet been paid. b. Example –At December 31, 2008, Company expects to pay employees’ wages and salaries of \$8,400 as a result of work performed since the last pay day (December 15). c. Adjusting entry on December 31, 2007 : Wages and salaries expense 8,400 Wages and salaries payable 8,400 d. Note two things: (1) the form of the adjusting entry – debit expense, credit current liability (2) There is no regular entry as was the case with the prepayment situations above. 4. Accrued Revenues (2) There is no regular entry as was the case with the unearned revenue situation given above. 5. Estimation Adjustments – Depreciation a. Cost allocation of amounts for certain property, plant and equipment assets. b. Example – On January 1, 2008, Company acquired machinery (a depreciable asset) at a total cost of \$152,000. The estimated salvage value of the asset is \$2,000 and its estimated useful life is five years. c. Regular entry on January 1, 2008, assuming the asset was acquired on credit.
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