Accouting Exam Prep Notes

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Working Capital:

Current Assets - Current Liabilities

Good Position if:

The number is positive.

Indicates if there is cash to pay short term debts.

Current Ratio:

Current Assets

Current Liabilities

Good position if:

2:1 if it is too high, then money is tied up in inventory/ A.R

Assesses if a company can pay it's debts when they are due.

Merchandise Inventory Turnover:

Cost of Goods Sold

Average Inventory

Good Position:

a turnover rate of between 5-10 is ideal. Otherwise you buy too much inventory or too little inventory.

indicates the # of times inventory is sold out during an accounting period

Quick Ratio:

Cash + A/R + Bonds + Stocks

Current Liabilities

Good Position if:

Should be at least 1:1

This is how much money you would be able to generate if you had an emergency

Average Collection Ratio:

Avg. Accounts Receivable

Sales on Credit X365

Good Position:

It is dependant on the collection period. if the average is higher than the period allowed, it in a bad position.

Equity Ratio:

Owner's Equity

Total Assets x100

Good Position if:

% is higher than 50%, when the owner owns more than half of their company.

Higher is better, if low pay off any debts as soon as possible.

Return of Net Income:

Net Income

Net Sales on Credit x100

Good Position:

Depends on industry and time.

Need more information to comment, but higher return is ideal

Return on Owner's Equity:

Net Income

Owners Equity x100

Good Position:

Need to know what could be made on other investments to comment

Higher % is better

Debt Ratio

Total Liabilities

Total Assets X100

Good Position if:

the % is less than 50 Therefore creditors own less than have of your business

lower is better, but if you owe very little you should take out a loan to invest in your business.

Petty Cash: a small amount of money kept on hand to make small payments. (asset account)

A cheque is written to the petty cashier. When a payment is made out of petty cash, a petty cash voucher is created and signed by the cashier and the person receiving the cash. The voucher is kept in the petty cash box. To "prove" the petty cash box, the cash must be added to the vouchers and equal the original amount in the petty cash box.

To replenish the petty cash fund, the cashier presents the vouchers to the accountant who then writes a cheque equal to the cash in the petty cash box. Vouchers are then used to make journal entries.

Journal entries are only made when the fund is established or when the size of the fund changes. The petty cash fund is replenished when the petty cash box is low and at the end of the fiscal period.

Analyzing Borrowing Capacity

Analyzing Profitability

Analyzing Liquidity:

Periodic Audit: An audit team (employed by the company or by an outside accounting firm) goes through the company's records to make sure there are no errors in the financial records.

Bank Reconciliation:

At any given time, a company's cash ledger may not equal the amount in the company's bank account. This is caused by timing, interest charges, outstanding cheques, interest earned, and service charges.

To fix this you prepare a bank reconciliation statement.

The top half is the bank statement and the bottom is your personal records.

If the cheques were not recorded add them to the bank statement section.

If a deposit was not found on the bank statement, add to the bank statement section.

Bank Service charges and debit memos (NSF charges & interest charges) are subtracted from the bank statement.

Only your personal corrections need to be journalized.

Definitions:

Bank debit memo: shows a decrease in the company's bank account due to a interest/service charge.

Bank Credit memo: shows an increase in the company's account. (Interest earned)

Outstanding Cheques: cheques that have been issued but not processed yet.

Cancelled Cheques: cashed cheques

Not Sufficient Funds (NSF) : a cheque that cannot be cashed by the bank because there are not sufficient funds in the customers account.

Cash Payments Journal: a special journal used to record all payments made. Later posted to "cash" account on general ledger.

Cash Receipts Journal: a special journal used to record all money received. This journal is later posted to the company's general ledger cash account.

Insurance Broker:

What is a underwriter?

An underwriter decides the insurance rates for clients.

What is a broker?

A broker is hired to find the best insurance package for you. They are a "personal shopper" for insurance.

What is a claim's adjuster?

A Claim's adjuster reviews claims and decides if your insurance package covers the damages you obtained.

CA:

What do you need to do to become a CA?

4 years of university. 3 years of Co-Op, then pass 4 exams

Advantages:

Increased salary

more opportunities

increased employment rate

sector diversity

Disadvantages:

Salary starts average

overqualified for certain jobs

hours of work could be crazy

you pay your dues as a junior accountant.

repetitive, stressful

CA Firm:

Soft skills for a CA?

Communication, teamwork, presentation skills, leadership skills, analytical skills.

CMA:

What do you need to become a CMA?

4 years of university, pass an entrance exam, and complete a CO-OP

Ratio Analysis

Bank Reconciliation

Internal Control & Petty Cash

Careers