Lecture 04 - Recitation 1

Question 1

What is meant by Double-entry accounting (balance sheet)? (2)

Answer 1

• Increases and decreases are described as debits and credits.
• Double-entry accounting requires that debits equal credits.

Question 2

Expanded equity section (Balance sheet) (2)

Answer 2

The equity section is expanded to reflect:

increases form

• common stock
• revenues,

decreases from

• dividends
• expenses.

Question 3

Prepayments and Accruals

• Examples for Adjusting entries (3)
• Expenses & Revenues (4)

Answer 3

• insurance, depreciation (A)
• unearned revenues (L)
• eg services cash (A)
  not invoiced & vice versa

Question 4

Double-Entry Accounting (“bible of accounting”)

Answer 4

Always: debit - credit

Question 5

Explain T-Accouts! (2)

• increase / decrease
• name couple of accounts

Answer 5

.

Question 6

Main points for creating a Balance Sheet? (3)

Answer 6

• Assets (“what i have”)
  = Liabilities + Equity
• Equity (“what it’s worth”)
  = (Common Stock - Dividends)
  + (Revenues - Expenses)
• Net Income (“what i gain”)
  = Revenues - Expenses

Question 7

Adjusting Entries (3)

Answer 7

• Revenue / Expenses
• Basic Principle: Timing
  Accured / Deferred Payment
  (Angehäuft / aufgeschoben)

Question 8

What are Prepayments /Deferrals? Give two examples for Adjusting Entries! (4)

Answer 8

• Prepaied expense
  (Insurrance, depreciation, ..)
• Unearned revenue
  (service)

Question 9

What are Accruals?

• Definition (2)
• Examples for Adjusting Entries! (2)

Answer 9

• Not previously recorded, in balancesheet account
• “Akkruall (Rückstellung)”: ist eine Möglichkeit, Einnahmen oder Ausgaben anzusammeln oder anzuhäufen, bis sie verbucht werden.

-

Question 10

Definition: Cash flows form operating activities

Answer 10

Cash flows form operating activities (cash flows form operations) refer to cash inflows and outflows directly related to the firm`s primary day-to-day business activities.

Question 11

Cash flows from investing activities (2)

Answer 11

Cash inflows and outflows related to …

• acquiring or selling productive assets
• making investments in securities of other entities.

Question 12

Cash flows from financing activities

Answer 12

Cash inflows and outflows related to …

• external sources of financing from both owners and non-owners

Question 13

Treasury stock

Answer 13

• Shares of a company’s own stock that it has issued and subsequently bought back from the market.

Question 14

Managers can boost decicling sales by …

• lengthening credit periods
• lowering credit standards.

Problems (3)

Answer 14

The resulting increase in accounts receivable …

• can cause net income to outpace operating cash flow.
• Consequently, many view a m large receivalbel increase as a warning sign.

Question 15

Net cash inflow or outflow for the period (2)

Answer 15

The net cash inflow or outflow for the period is the same amount as the increase or decrease in cash equivalents for the period from the balance sheet.

(Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash)

Question 16

How to set up a income statement? (3x2)

Answer 16

Revenue
e.g. sales revenue,
service revenue,
interest income,
or any other sources of income.

Expenses

• Cost of Goods Sold (COGS):
  e.g. direct materials,
  direct labor,
  and manufacturing overhead.
• Gross Profit Calculation:
  Subtract the COGS from the total revenue
• Other Expenses:
  e.g. advertising
  and other general expenses

Net Income Calculation
Add or subtract the income and expenses

Question 17

How to prepare a statement of stockholders’ equity? (2)

Answer 17

Common Stock + Retained Earnings = Total Stockholders’ Equity

• Beginning Balance:
• Stock Issuance:
• Dividends:
• Net Income:
• Ending Balance:

Question 18

Name the two types of Prepayment / Deferrals (2)

Answer 18

Deferred / Unearned Revenue:
Allocate earned portion of unearned revenues to revenue to reflect revenues earned in the period.

• Unearned Revenue (-L)
• (Sales) Revenue (+R, +SE)

Deferred / Prepaid Expenses:
allocate used or expired assets to reflect expenses incurred in the period (-> depreciation, amortization)

• (Insurance) Expense (+E,-SE)
• Prepaid Insurance (-A)

Question 19

Name the two types of Accruals.

Answer 19

Accured Revenues:
record revenues to reflect revenues earned in the period that are not yet received in cash or recorded.

• (Interest) Receivable (+A)
• (Interest) Income (+R,+SE)

Accured Expenses:
record expenses to reflect expenses incurred in the period that are not yet paid in cash or recorded.

• (Wages) Expense (+E,-SE)
• (Wages) Payable

Question 20

Why do I have revenues on the credit side (eg. consulting services) and expense’s on the debit side (eg. rent, wages) in the trial balance? (3)

Answer 20

• Revenues are recorded on the credit side as they increase owner’s equity or company’s net income.
• Expenses are recorded on the debit side as they decrease owner’s equity or company’s net income.
• Trial balance lists all ledger accounts and balances, ensuring total debits equal total credits.