PART 1
PART 1 UNIT 1
1
1A. External Financial
Reporting Decisions
Module
1 (Optional) Background: Accounting Cycle 3
2 A.1. Financial Statements: Part 1 19
3 A.1. Financial Statements: Part 2 39
4 A.2. Asset Valuation: Receivables 63
5 A.2. Asset Valuation: Inventory 75
6 A.2. Investments and Long-Term Assets 95
7 A.2. Liabilities and Equity 129
8 A.2. Special Valuation Considerations:
Taxes and Leases 145
9 A.2. Revenue Recognition and Income Measurement 167
, NOTES
1–2 © Becker Professional Education Corporation. All rights reserved.
, (Optional)
1
MODULE
PART 1 UNIT 1
Background: Part 1
Accounting Cycle Unit 1
This section is designed to provide an overview of the accounting cycle and provide a refresher
on fundamental concepts. Although specific questions related to the accounting cycle may not
be seen on the exam, the concepts here are foundational to accounting and are assumed to be
known and understood by exam candidates.
1 Accounting Cycle
The primary objective of the accounting cycle is to capture the economic activity of a business.
The accounting cycle can be broken down into the following steps:
1. Journalize transactions.
2. Post transaction to the general ledger.
3. Prepare an unadjusted trial balance.
4. Record adjusting entries.
5. Prepare an adjusted trial balance.
6. Prepare the financial statements.
7. Prepare closing entries.
8. Prepare the post-closing trial balance.
Each economic transaction captured by the accounting system has an effect on the accounting
equation. The accounting equation can be expressed as follows:
Assets = Liabilities + Owners' equity (or Stockholders' equity)
This equation and any transaction captured by the accounting system demonstrates the
equality of total economic resources (assets) and the claims against those resources (liabilities
and ownership).
Properly recorded journal entries maintain equilibrium in the accounting equation.
The equity portion of the accounting equation is further broken down to demonstrate the
relationship of an owner's equity to the income statement. Contributed capital and retained
earnings are the two primary categories of equity. Contributed capital represents investments
made by owners to the business. Retained earnings represent the utilization of assets in the
creation of wealth for owners and the ability to create returns/profits to owners. These retained
earnings may be reinvested back into the company or made available to pay out to shareholders
as a return through dividends.
© Becker Professional Education Corporation. All rights reserved. Module 1 1–3 (Optional) B
, 1 (Optional) Background: Accounting Cycle PART 1 UNIT 1
A = L + OE
+ Paid-in capital + Retained earnings
+ Revenues – Expenses
– Dividends
+ Gains – Losses
Every transaction of a business should be analyzed to determine the effect on the accounting
equation. In any transaction, a minimum of two accounts will be affected. When analyzing the
effects of each transaction, follow the steps indicated below:
1. Identify which accounts are involved in the transaction (remember there will be at least two).
2. Determine if the accounts are increasing or decreasing.
3. Ensure the accounting equation balances after the transaction is analyzed.
Illustration 1 Transaction Effects on Financial Statement Elements
For each of the following transactions, indicate the impact on the financial statements and
ensure the accounting equation balances.
1. February 1: The corporation issued an additional 10,000 shares of capital stock to
Harris Corp. in exchange for $15,000 cash.
2. February 1: Purchased a building from Sweeney Enterprise for $150,000. A cash
payment of $25,000 was made at the time of the purchase, and a note payable was
issued for the remaining balance.
3. February 1: Paid $7,800 for fire insurance on building for next 3 years.
4. February 9: Purchased additional supplies on account for $3,500.
5. February 11: Billed students $35,840 for tutoring services provided during the first half
of February.
6. February 16: Paid $12,300 in salaries earned by employees during the first half of
February.
7. February 18: Received $10,500 cash in advance from students for tutoring services to
be provided in the future.
8. February 22: Collected cash from accounts receivable of $40,000.
9. February 25: Paid $3,330 for utilities during period.
10. February 25: Paid $6,250 cash on accounts payable.
11. February 28: Declared and paid a $2,000 dividend.
(continued)
1–4 Module 1 (Optional)
© Becker Professional Education Background:
Corporation. Accounting
All rights reserved. Cycle
PART 1 UNIT 1
1
1A. External Financial
Reporting Decisions
Module
1 (Optional) Background: Accounting Cycle 3
2 A.1. Financial Statements: Part 1 19
3 A.1. Financial Statements: Part 2 39
4 A.2. Asset Valuation: Receivables 63
5 A.2. Asset Valuation: Inventory 75
6 A.2. Investments and Long-Term Assets 95
7 A.2. Liabilities and Equity 129
8 A.2. Special Valuation Considerations:
Taxes and Leases 145
9 A.2. Revenue Recognition and Income Measurement 167
, NOTES
1–2 © Becker Professional Education Corporation. All rights reserved.
, (Optional)
1
MODULE
PART 1 UNIT 1
Background: Part 1
Accounting Cycle Unit 1
This section is designed to provide an overview of the accounting cycle and provide a refresher
on fundamental concepts. Although specific questions related to the accounting cycle may not
be seen on the exam, the concepts here are foundational to accounting and are assumed to be
known and understood by exam candidates.
1 Accounting Cycle
The primary objective of the accounting cycle is to capture the economic activity of a business.
The accounting cycle can be broken down into the following steps:
1. Journalize transactions.
2. Post transaction to the general ledger.
3. Prepare an unadjusted trial balance.
4. Record adjusting entries.
5. Prepare an adjusted trial balance.
6. Prepare the financial statements.
7. Prepare closing entries.
8. Prepare the post-closing trial balance.
Each economic transaction captured by the accounting system has an effect on the accounting
equation. The accounting equation can be expressed as follows:
Assets = Liabilities + Owners' equity (or Stockholders' equity)
This equation and any transaction captured by the accounting system demonstrates the
equality of total economic resources (assets) and the claims against those resources (liabilities
and ownership).
Properly recorded journal entries maintain equilibrium in the accounting equation.
The equity portion of the accounting equation is further broken down to demonstrate the
relationship of an owner's equity to the income statement. Contributed capital and retained
earnings are the two primary categories of equity. Contributed capital represents investments
made by owners to the business. Retained earnings represent the utilization of assets in the
creation of wealth for owners and the ability to create returns/profits to owners. These retained
earnings may be reinvested back into the company or made available to pay out to shareholders
as a return through dividends.
© Becker Professional Education Corporation. All rights reserved. Module 1 1–3 (Optional) B
, 1 (Optional) Background: Accounting Cycle PART 1 UNIT 1
A = L + OE
+ Paid-in capital + Retained earnings
+ Revenues – Expenses
– Dividends
+ Gains – Losses
Every transaction of a business should be analyzed to determine the effect on the accounting
equation. In any transaction, a minimum of two accounts will be affected. When analyzing the
effects of each transaction, follow the steps indicated below:
1. Identify which accounts are involved in the transaction (remember there will be at least two).
2. Determine if the accounts are increasing or decreasing.
3. Ensure the accounting equation balances after the transaction is analyzed.
Illustration 1 Transaction Effects on Financial Statement Elements
For each of the following transactions, indicate the impact on the financial statements and
ensure the accounting equation balances.
1. February 1: The corporation issued an additional 10,000 shares of capital stock to
Harris Corp. in exchange for $15,000 cash.
2. February 1: Purchased a building from Sweeney Enterprise for $150,000. A cash
payment of $25,000 was made at the time of the purchase, and a note payable was
issued for the remaining balance.
3. February 1: Paid $7,800 for fire insurance on building for next 3 years.
4. February 9: Purchased additional supplies on account for $3,500.
5. February 11: Billed students $35,840 for tutoring services provided during the first half
of February.
6. February 16: Paid $12,300 in salaries earned by employees during the first half of
February.
7. February 18: Received $10,500 cash in advance from students for tutoring services to
be provided in the future.
8. February 22: Collected cash from accounts receivable of $40,000.
9. February 25: Paid $3,330 for utilities during period.
10. February 25: Paid $6,250 cash on accounts payable.
11. February 28: Declared and paid a $2,000 dividend.
(continued)
1–4 Module 1 (Optional)
© Becker Professional Education Background:
Corporation. Accounting
All rights reserved. Cycle
