FINAL

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The Basics
1. Accounting Equation: RETAINED EARNINGS STATEMENT
Assets = Liabilities + Owner’s (Stockholders’) Equity A summary of the changes in the retained earnings of a business
entity that have occurred during a specific period of time, such as a
month or a year.
2. T Account:
Account Title BALANCE SHEET
A list of the assets, liabilities, and stockholders’ equity of a business
Left Side Right Side entity as of a specific date, usually at the close of the last day of a
debit credit month or a year.

STATEMENT OF CASH FLOWS

A summary of the cash receipts and cash payments of a business
3. Rules of Debit and Credit: entity for a specific period of time, such as a month or a year.

Total Debits
Total Credits

6. Accounting Cycle:
Balance Sheet Accounts 1. Transactions are analyzed and recorded in the
journal.
ASSETS LIABILITIES STOCKHOLDERS’ EQUITY
2. Transactions are posted to the ledger.
Asset Accounts
Liability Accounts  Capital Stock  Retained Earnings 3. An unadjusted trial balance is prepared.
Debit for Credit for Debit for Credit for Debit for Credit for Debit for Credit for 4. Adjustment data are assembled and analyzed.
increases() decreases() decreases() increases() decreases() increases() decreases() increases() 5. An optional end-of-period spreadsheet (work
sheet) is prepared.
Income Statement 6. Adjusting entries are journalized and posted to
Accounts the ledger.
7. An adjusted trial balance is prepared.
Revenue Accounts
The side of the account for recording increases and the 8. Financial statements are prepared.
Debit for Credit for 9. Closing entries are journalized and posted to
normal balance is shaded.
decreases() increases()
the ledger.
Less 10. A post-closing trial balance is prepared.
Expense Accounts
Debit for Credit for 7. Types of Adjusting Entries:
increases() decreases()
1. Prepaid expense (deferred expense)
Equals 2. Unearned revenue (deferred revenue)
Net Income 3. Accrued revenue (accrued asset)
Revenues exceed expenses 4. Accrued expense (accrued liability)
Increases stockholders’ equity 5. Depreciation expense
(retained earnings)
or Each entry will always affect both balance sheet and
Net Loss income statement accounts.
Expenses exceed revenues
Decreases stockholders’ equity
(retained earnings) 8. Closing Entries:
Dividends Accounts 1. Transfer revenue account balances to Income
Debit for Credit for Summary.
increases() decreases() 2. Transfer expense account balances to Income
Summary.
3. Transfer Income Summary balance to Retained
Earnings.
4. Analyzing and Recording Transactions: 4. Transfer dividends account balance to Retained
1. Carefully read the description of the transaction to determine Earnings.
whether an asset, liability, capital stock, retained earnings, rev-
enue, expense, or dividends account is affected by the transaction. 9. Special Journals:
2. For each account affected by the transaction, determine whether
the account increases or decreases. Providing services
3. Determine whether each increase or decrease should be recorded on account ⎯⎯⎯⎯⎯→ recorded in ⎯
⎯→ Revenue (sales) journal
as a debit or a credit. Receipt of cash from
4. Record the transaction using a journal entry. any source ⎯⎯⎯⎯⎯→ recorded in ⎯
⎯→ Cash receipts journal
5. Periodically post journal entries to the accounts in the ledger. Purchase of items
6. Prepare an unadjusted trial balance at the end of the period. on account ⎯⎯⎯⎯⎯→ recorded in ⎯
⎯→ Purchases journal
Payments of cash for
5. Financial Statements: any purpose ⎯ ⎯⎯⎯⎯→ recorded in ⎯
⎯→ Cash payments journal

INCOME STATEMENT
A summary of the revenue and expenses of a business entity for a
specific period of time, such as a month or a year.
 FINAL
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10. Shipping Terms: 16. Contribution Margin Ratio = Sales – Variable Costs
FOB Shipping Point FOB Destination Sales
Ownership (title)
passes to buyer when 17. Break-Even Sales (Units) = Fixed Costs
merchandise is.................... delivered to delivered to Unit Contribution Margin
freight carrier buyer
Transportation costs
are paid by .......................... buyer seller 18. Sales (Units) = Fixed Costs + Target Profit
Unit Contribution Margin
11. Format for Bank Reconciliation:
19. Margin of Safety = Sales – Sales at Break-Even Point
Cash balance according to bank statement ...................... $xxx Sales
Add: Additions by company not on bank
statement .......................................................... $xx
Bank errors ............................................................. xx xx 20. Operating Leverage = Contribution Margin
$xxx Income from Operations
Deduct: Deductions by company not on bank
statement .......................................................... $xx 21. Variances
Bank errors ............................................................. xx xx
Adjusted balance.................................................................. $xxx Direct Materials = Actual Price per Unit – × Actual Quantity
Price Variance Standard Price Used
Cash balance according to company’s records ................ $xxx
Add: Additions by bank not recorded by company .. $xx Direct Materials = Actual Quantity Used –
Company errors..................................................... xx xx × Standard Price
Quantity Variance Standard Quantity per Unit
$xxx
Deduct: Deductions by bank not recorded Direct Labor = Actual Rate per Hour –
by company...................................................... $xx × Actual Hours
Rate Variance Standard Rate Worked
Company errors..................................................... xx xx
Adjusted balance.................................................................. $xxx Direct Labor = Actual Hours Worked – × Standard Rate
Time Variance Standard Hours per Hour
12. Inventory Costing Methods:
Variable Factory Actual Budgeted Factory
1. First-in, First-out (FIFO)
Overhead Controllable = Factory – Overhead for
2. Last-in, First-out (LIFO)
Variance Overhead Amount Produced
3. Average Cost
Fixed Factory Budgeted Factory Applied
13. Interest Computations: Overhead Volume = Overhead for – Factory
Interest = Face Amount (or Principal) × Rate × Time Variance Amount Produced Overhead

22. Rate of Return on Income from Operations

14. Methods of Determining Annual Depreciation: =
Investment (ROI) Invested Assets
STRAIGHT-LINE: Cost – Estimated Residual Value Alternative ROI Computation:
Estimated Life Income from Operations Sales
ROI = ×
DOUBLE-DECLINING-BALANCE: Rate* × Book Value at Beginning Sales Invested Assets
of Period
*Rate is commonly twice the straight-line 23. Capital Investment Analysis Methods:
rate (1/Estimated Life). 1. Methods That Ignore Present Values:
A. Average Rate of Return Method
B. Cash Payback Method
15. Adjustments to Net Income (Loss) 2. Methods That Use Present Values:
Using the Indirect Method A. Net Present Value Method
Increase B. Internal Rate of Return Method
(Decrease)
Net income (loss) $ XXX 24. Average Rate Estimated Average Annual Income
=
Adjustments to reconcile net income to of Return Average Investment
net cash flow from operating activities:
Depreciation of fixed assets XXX 25. Present Value Index = Total Present Value of Net Cash Flow
Amortization of intangible assets XXX
Amount to Be Invested
Losses on disposal of assets XXX
Gains on disposal of assets (XXX)
Changes in current operating assets and liabilities: 26. Present Value Factor Amount to Be Invested
=
Increases in noncash current operating assets (XXX) for an Annuity of $1 Equal Annual Net Cash Flows
Decreases in noncash current operating assets XXX
Increases in current operating liabilities XXX
Decreases in current operating liabilities (XXX)
Net cash flow from operating activities $ XXX
or
$(XXX)