1. Exam 1 Review http://fates.cns.muskingum.edu/~p laube/acct301/default.htm

2. Format 27 questions 27 questions Multiple choice Multiple choice True/False True/False Problem Problem Bring your own calculator! Bring your own calculator!

3. 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.

4. The Conceptual Framework (The key component) Maintain consistency among standards. Maintain consistency among standards. Resolve new accounting problems. Resolve new accounting problems. Provide user benefits. Provide user benefits.

5. RelevanceReliability Predictive Value Feedback Value TimelinessNeutrality Verifiability Representational Faithfulness ComparabilityConsistency Qualitative Characteristics - Understandability Decision Usefulness

6. Practical Constraints to Achieving Desired Qualitative Characteristics Cost Effectiveness Materiality Conservatism

7. Recognition and Measurement Concepts

8. The Realization Principle Reasonable Assurance of Collection Substantial Completion of Transaction Two conditions must be met if the realization principle is to be satisfied. Two conditions must be met if the realization principle is to be satisfied.

9. Ethics in Accounting To be useful, accounting information must be objective and reliable. 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. Management may be under pressure to report desired results and ignore or bend existing rules.

10. Assets Or…Think of the Balance sheet Remaining is Equity: Remaining is Equity: Paid in Capital (investment) Retained Earnings Revenues – Expenses (left) Gains/losses Dividends Liabilities DEBIT CREDIT (Expenses subtract from Equity, so they are a debit)

11. Or…Think which Statement it’s on Balance Sheet – Snapshot in time Balance Sheet – Snapshot in time Permanent accounts Permanent accounts Assets Assets Liabilities Liabilities Paid in capital Paid in capital Retained Earnings Retained Earnings Income Statement – Score sheet for the period Income Statement – Score sheet for the period Temporary accounts Temporary accounts Revenues Revenues Expenses Expenses Gain/losses Gain/losses Dividends, too Dividends, too

12. Adjusting Entries At the end of the period, some transactions or events remain unrecorded. 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. Because of this, several accounts in the ledger need adjustments before their balances appear in the financial statements.

13. 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.

14. Temporary Accounts Revenues Income Summary Expenses Dividends Permanent Accounts Assets Liabilities Shareholders’ Equity The closing process applies only to temporary accounts. Temporary and Permanent Accounts

15. Balance Sheet Limitations: Assets are recorded at historical cost, NOT at market value. Assets are recorded at historical cost, NOT at market value. Resources such as employee skills and reputation are not recorded on the balance sheet. Resources such as employee skills and reputation are not recorded on the balance sheet.Limitations: Assets are recorded at historical cost, NOT at market value. Assets are recorded at historical cost, NOT at market value. Resources such as employee skills and reputation are not recorded on the balance sheet. Resources such as employee skills and reputation are not recorded on the balance sheet.Usefulness: Provides a description of available productive resources. Provides a description of available productive resources. Liquidity information. Liquidity information. Long-term solvency information. Long-term solvency information.Usefulness: Provides a description of available productive resources. Provides a description of available productive resources. Liquidity information. Liquidity information. Long-term solvency information. Long-term solvency information.

16. Balance Sheet forms Classified Classified Separates current and non-current assets and liabilities Separates current and non-current assets and liabilities Non-classified Non-classified

17. Assets CashReceivablesInventoriesPrepaymentsCashReceivablesInventoriesPrepayments Will be converted to cash or consumed within one year or the operating cycle, whichever is longer. Current Assets

18. Liabilities Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Accounts Payable Notes Payable Accrued Liabilities Current Maturities of Long-Term Debt Obligations expected to be satisfied through current assets or creation of other current liabilities Current Liabilities

19. Shareholders’ Equity Capital Stock Capital Stock Retained Earnings Treasury Stock Other Contributed Capital Accumulated Other Comprehensive Income

20. Now, let’s look at some ratios!

21. Liquidity Ratios = Current ratio Current assets Current liabilities Measures a company’s ability to satisfy its short-term liabilities = Acid-test ratio Quick assets Current liabilities Provides a more stringent indication of a company’s ability to pay its current liabilities

22. Financing Ratios = Debt to equity ratio Total liabilities 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