Financial Accounting Test

Unit 1

What is Accounting?

• The identification, measurement, and communication of financial information about a business that is useful in making economic decisions.

The two types of Accounting?

Financial: Financial provides information to decision makers OUTSIDE of an organization(ex, investors, creditors).

Managerial: Managerial provides information to people INSIDE the organization. Such as managers, budgets, forecast, projections, etc.

Fundamental Qualitative Characteristics

Relavence: Capable of making a difference in a decision.

a. Predict value

b. Confirmatory value

c. Materiality- relative size and relative importance

Faithful Representation: makes information reliable to users because the numbers and descriptions match what really existed or happened.

a. Completeness- all necessary information is provided

b. Neutrality- the company can’t be biased

c. Free from Error

Enhancing Qualities

1. Comparability- across firms measured in a similar manner

2. Verifiability- two independent measures, using the same methods(Auditors)

3. Timeliness- disclosed before it loses the ability to influence decisions

4. Understandability- lets reasonably informed users see its significance(Quarterly)

Accounting Principle

Historical Cost

• How much something is actually worth, and what it was purchased for.

Accounting Assumptions

Stable Monetary Unit

• Believes that money will keep its value, ignoring inflation/deflation in the economy. Remain stable.

Economic Entity

• Requires that a business’s financial records be kept separate from personal expenses.

Going Concern

• Assumes the firm will continue to operate until the foreseeable future.

Elements definition and identification

Assets

• What we own. Future economic benefit

Liabilities

• What we owe. Probable future sacrifices.

Equity

• Residual Interest in the assets after deducting its liabilities.

Net Assets = Assets - Liabilities

All 3 are one Balance Sheet

Financial Statements

1. Income Statement: To show results of operation for a period of time - Rev./Exp./Gains/Losses - Results in Net Income

2. Statement of Retained Earnings: Explains how “Net Income” and “Dividends” cause the financial position of a company to change for a period of time (Jan 1- Dec 31) - Paid through dividends(sharing of profits with owners) - Net Income flows to SRE less dividends

3. Balance Sheet: To show the financial position of a company at a point in time. (Picture of the firm on one day) - Assets/Liabilities/Equity - Inherits Retained Earnings - A=L+Eq

4. Statements of Cash Flows: No elements - Cash inflows/outflows by operating, investing, financing.

What is a business transaction?

• An event that has a financial impact on the firm and can be measured is US $. Not all events are transactions.

Which accounts increase with a debit and which increase with a credit (DEAD CURLS)

• Debits increase…

  • Expenses

  • Assets

  • Dividends Declared

• Credits Increase…

  • Unearned Revenue

  • Revenue

  • Liabilities

  • Stockholders’ Equity

How transactions impact/affect the accounting equation

• Transactions impact the accounting equation because they must remain balanced.

  • Assets = Liabilities + Equity

• It must also be classified as 1 of the 10 elements.

T-account

• Mathematical short-hand used by accountants to add and subtract numbers for a particular account.

  • One side increases that account

  • The other side decreases that account

• The ending balance is the difference between the subtotals and should be placed on the side of the T-account that has the largest subtotal.

Revenues and Expenses

• Revenue is the money a business earns from its normal operations, like selling goods or providing services. It represents the inflow of resources to the company.

• An expense is the cost a business incurs in order to generate revenue. It represents the outflow of resources or use of assets.

First four steps of accounting cycle

1. Event / Transaction

2. Journalize Events (JE)

3. Post to Ledger

4. Unadjusted TB