Chapter 22 Vocab Test Review Test Review Strategy

Chapter 22 Vocab Test Review Test Review Strategy

Chapter 22 Vocab Test Review Test Review Strategy Understanding or Memorization: Promoting Long-Term Retention Why do we remember some lessons and forget others? Is it that some are perceived as more important, exciting, or possibly just easier to comprehend? Perhaps the answer has elements of all of those in its makeup; however, it is through true understandingi.e., understanding rather than memorization. We dont learn through memorization, we learn through understanding. When you go to the store to buy new smart phone, do you sit there in the store to study the instructions and ensure that you have properly memorized the correct way to use your new phone before leaving? Most people have the store associate show them the basics and then go home and use it. Through playing with our phone, we learn how to use it and ultimately understand the phones applications through its practicality. We essentially learn through understanding what we have to do to achieve our desired result. To do well in accounting, you need to work at understanding what you are learning to ensure that the concepts are retained after the course has ended. Make understanding your goal! Summary of article written by Dale Schlundt, Palo Alto History Professor Cengage Century 21 Accounting .-- Edited for Advanced Accounting Lesson 22-1

Unadjusted Trial Balance Preparing an unadjusted trial balance ensures that debits equal credits in the general ledger. The unadjusted trial balance and other financial data are used to plan and record adjusting entries. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 2 Lesson 22-1 Adjusting Entry for Merchandise Inventory Merchandise Inventory Adjustment Current Balance in Merchandise Inventory Account

$331,235.20 Desired Balance in Merchandise Inventory Account = Amount of Adjustment $307,613.20 = $23,622.00 If Merchandise Inventory decreases from the beginning to the end of the fiscal period, the adjusting entry requires a credit to Mdse. Inv. and a debit to Income Summary.

If Merchandise Inventory increased during the fiscal period, the adjusting entry would be just the opposite and would require a debit to Merchandise Inventory to increase the balance. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 3 Lesson 22-1 Adjusting Entries for Uncollectible Accounts Uncollectible Accounts Adjustment Desired Balance in Allowance Account Current Balance in Allowance Account = Amount of Adjustment

$2,099.25 $675.56 = $1,423.69 Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 4 Adjusting Entries for Supplies and Insurance 1 Debit Supplies ExpenseStore 3 Debit Insurance Expense Lesson 22-1 2 Credit SuppliesStore

4 Credit Prepaid Insurance Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 5 Lesson 22-1 Calculating Federal Income Tax Tax Rate Schedule If taxable income (line 30, Form 1120, or line 26, Form 1120-A) is: Of the amount Over But not over Tax is: over $0 50,000 15% -050,000 75,000 $7,500 + 25% $50,000 75,000 100,000

13,750 + 34% 75,000 100,000 335,000 22,250 + 39% 100,000 335,000 10,000,000 113,900 335,000 100,000 335,000 22,250 + 34% 39% 100,000 10,000,000 15,000,000 3,400,000 + 35% 10,000,000 15,000,000 18,333,333 5,150,000 + 38% 15,000,000 18,333,333 35% -0-

Taxable income: $109,595.43 Amount over $100,000: $9,595.43 39% $9,595.43 = $3,742.22 $22,250.00 + $3,742.22 = $25,992.22 Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 6 Lesson 22-1 Federal Income Tax Adjustment Total Federal Income Tax Expense $25,992.22 Estimated Federal Income Tax Already Paid $23,000.00 = = Accrued Federal

Income Tax Expense $2,992.22 Credit Federal Income Tax Payable Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 7 Lesson 22-1 Adjusting Entries Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 8 Lesson 22-1 Adjusted Trial Balance Once the adjusting entries are posted, an adjusted trial balance is prepared. Prove that your debits = your credits.

The adjusted trial balance is used to prepare financial statements. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 9 Lesson 22-2 Income Statement The adjusted trial balance is used to prepare the financial statements. 1 Other Income 2 Other Expenses Section: Interest Expense & Loss on Plant Assets Cengage Century 21 Accounting -- Edited for Advanced Accounting

3 Net Deduction (more other expenses than other revenue) SLIDE 10 Lesson 22-2 Statement of Stockholders Equity Paid-in Capital in Excess of Par Common section 1 Preferred 2 Stock section Paid-in Capital in Excess of ParCommon, appears on the Statement of Stockholders Equity AND Balance Sheet too. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 11

Lesson 22-2 Balance Sheet Current Asset accounts New current liability accounts section 1 Long-term Liabilities section 2 Office Equipment is included in the Plant Assets section.

A corporations total stockholders equity is increased by net income. (Dividends it.) Expanded 3reduce Stockholders Equity section Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 12 Lesson 22-2 Lesson 22-2 Audit Your Understanding 1. Why are other revenue and other expenses reported separately from sales, cost of merchandise sold, and operating expenses on the income statement? ANSWER Sales, cost of merchandise sold, and operating expenses are used

to determine income from operations. Other revenue and other expenses, such as interest income, rent income, interest expense, and gains or losses on plant assets, are not normal business activities. Therefore, they are not included in calculating income from operations and are reported separately. (Note: Sales is a normal business activity and is not included in this section.) Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 13 Lesson 22-3 Analyzing the Payment and Receipt of Corporate Cash Corporations are required to prepare one additional statement which addresses the changes in the businesss cash for the period. The cash receipts and cash payments of a company are called cash flow. A financial statement that summarizes cash receipts and cash payments resulting from business activities during a fiscal period is called a statement of cash flows. A statement of cash flows is prepared using the cash basis of accounting.

Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 14 Lesson 22-3 Cash Flows from Business Activities Cash Flows from Operating Activities The cash receipts and payments necessary to operate a business on a day-today basis are called operating activities. Examples: Paying cash for inventory AND Paying cash for utilities Cash Flows from Investing Activities Cash receipts and cash payments involving the sale or purchase of assets used to earn revenue over a period of time are called investing activities. Purchasing store equipment for cash AND Receiving cash from interest income Receiving cash from the sale of office equipment AND Paying cash for equipment Cash Flows from Financing Activities Cash receipts and payments involving debt or equity transactions are called financing activities. The issuance of bonds payable is an example of a financing activity. Paying the principal on a line of credit is a cash outflow OR Paying cash dividends Cengage Century 21 Accounting -- Edited for Advanced Accounting

SLIDE 15 Lesson 22-3 Cash Flows from Operating, Investing, and Financing Activities Activity Operating Cash Inflows Sale of merchandise Receipt of interest income Receipt of rent income Investing Financing

Sale of office equipment Sale of store equipment Sale of other investments Issuance of stock Issuance of long-term notes payable Issuance of bonds Borrowing cash against line of credit Cash Outflows Payment for daily operations (advertising, insurance, interest, inventory, rent, salaries, taxes, utilities) Purchase of office equipment Purchase of store equipment Purchase of other investments Payment of dividends Payment of principal from longterm notes payable Payment of bond principal Making principal payments Cengage Century 21 Accounting -- Edited for Advanced Accounting

SLIDE 16 Lesson 22-3 Completed Statement of Cash Flows Cash flows from operating activities Cash receipts from: Cash payments for: Calculate and enter net cash provided by operating activities. Net cash provided/(used) by operating activities Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 17 Lesson 22-3

Investing Activities Section of a Statement of Cash Flows 1 Cash flows from investing activities Record source and amount for each type of cash received and paid for investing activities. 2 Calculate and enter net cash used by investing activities. 3 Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 18 Lesson 22-3 Financing Activities Section of the Statement of Cash Flows 1 Cash flows from financing activities Record source and amount for

each type of cash received and paid for financing activities. 2 Calculate and enter net cash used by financing activities. 3 Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 19 Lesson 22-3 Completing the Statement of Cash Flows 1 Calculate net change in cash. 2 Record cash balance on January 1. Record cash balance on December 31. Verify 3 change in cash balance. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 20 Closing Entry for Accounts with Credit

Balances Lesson 22-4 Debit the balance of every income statement account with a credit balance. 1 Enter the total of the debit entries as a credit to Income Summary. 2 Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 21 Closing Entry for Accounts with Debit Balances Lesson 22-4 1 Enter Income Summary. 2 Enter the total of the credit entries as a debit to Income Summary.

3 Note: A Loss on Plant Assets is classified as an expense. Expenses accounts are credited to close them. The closing entry with a Loss on Plant Assets requires a debit to Income Summary. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 22 Lesson 22-4 Closing Entry to Record Net Income If a company has a net income, the entry to close the Income Summary account includes a debit to Income Summary. Net Income increases Retained Earnings If the corporation made money, Retained Earnings needs to be increased with a credit. Retained Earnings represents previous years earnings

that have been retained and not distributed as dividends. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 23 Lesson 22-4 Closing Entry for Dividends Dividends decrease the earnings retained by a corporation. The closing entry requires a credit to Dividends to return the balance to zero. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 24 Lesson 22-4 Reversing Entries A reversing entry

should be made for every adjusting entry that created a balance in an asset or a liability account. Accrued Interest Expense Adjusting Entry: you must reverse the entry that created a balance in Interest Payable. So the reversing entry for Interest Expense requires a debit to Interest Payable. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 25 Lesson 22-4 Reversing Entries You must also reverse the

entry that created a balance in Interest Receivable. A reversing entry for Accrued Interest Income would be a debit to Interest Income and a Credit to Interest Receivable. You also need to reverse the entry that created a balance in Federal Income Tax Payable. Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 26 Lesson 22-4 Accounting Cycle for a Merchandising Business Organized as a Corporation 1 2 13 3

3 4 12 5 9 11 6 7 10 8 1. Source documents are checked for accuracy, and transactions are analyzed into debit and credit parts. 2. Transactions, from information on source documents, are recorded in journals. 3. Journal entries are posted to the accounts payable, accounts receivable, and general ledgers. 4. Schedules of accounts payable and accounts receivable are prepared from the subsidiary ledgers. 5. An unadjusted trial balance is prepared from the

general ledger. 6. Adjusting entries are journalized. 7. Adjusting entries are posted to the general ledger. 8. An adjusted trial balance is prepared from the general ledger. 9. Financial statements are prepared from the adjusted trial balance. 10. Closing entries are journalized. 11. Closing entries are posted to the general ledger. 12. A post-closing trial balance is prepared from the general ledger. 13. Reversing entries are journalized and posted to the general ledger. If a company does not use reversing entries, preparing the post-closing trial balance is the last step in the accounting cycle. (Step #12) Cengage Century 21 Accounting -- Edited for Advanced Accounting SLIDE 27 Test Review Strategy Chapter 22 Vocab Test Review

The End Remember: Work at Understanding Cengage Century 21 Accounting .-- Edited for Advanced Accounting

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