Exam 1 Review: Financial Statements, GAAP, and Accounting Principles

A set of flashcards covering key concepts from the lecture notes on financial statements, accounting principles, and adjusting entries.

What are the four main financial statements and what does each show?

Income Statement—revenues and expenses (net income); Statement of Owners' Equity—owners' investments and withdrawals (owner's capital/equity); Balance Sheet—assets, liabilities, and equity; Statement of Cash Flows—operating, investing, and financing activities.

Assets have what normal balance and how do you decrease them?

Normal balance is a debit; to decrease assets you credit.

Liabilities have what normal balance and how do you decrease them?

Normal balance is a credit; to decrease liabilities you debit.

Owner Capital has what normal balance and how do you decrease it?

Normal balance is a credit; to decrease it you debit.

Owner Withdrawals have what normal balance and how do you decrease them?

Normal balance is a debit; to decrease it you credit.

Revenues have what normal balance and how do they affect equity?

Normal balance is a credit; increases equity; to decrease it you debit.

Expenses have what normal balance and how do they affect equity?

Normal balance is a debit; decreases equity; to decrease it you credit.

Normal balance of Prepaid Rent?

Debit.

Normal balance of Note Receivable?

Debit.

Normal balance of Accounts Payable?

Credit.

Normal balance of Accounts Receivable?

Debit.

Normal balance of Equipment?

Debit.

Normal balance of Interest Payable?

Credit.

Normal balance of Unearned Revenue?

Credit.

Normal balance of Land?

Debit.

Normal balance of Prepaid Insurance?

Debit.

Normal balance of Utilities Expense?

Debit.

Equity normal balance and its behavior in relation to revenues and withdrawals

Equity has a credit normal balance; increases with revenues and owner investments; decreases with expenses and owner withdrawals.

GAAP stands for

Generally Accepted Accounting Principles.

Cost Principle

Accounting information is based on actual cost.

Revenue Recognition Principle

Revenue is recognized when goods or services are provided and the amount expected to be received is measurable.

Matching (Expense recognition) Principle

Record expenses in the same period as related revenue.

Going-Concern Assumption

Assumes the business will continue operating.

Monetary Unit Assumption

Transactions are measured in a single currency.

Time Period Assumption

Life of the company is divided into time periods (months/years) for reporting.

Business Entity Assumption

A business is accounted for separately from other entities.

Accounting Equation

Assets = Liabilities + Equity.

Return on Assets (ROA) formula

Net income divided by average total assets.

Debt Ratio formula

Total liabilities divided by total assets.

Profit Margin formula

Net income divided by net sales.

T-Accounts

A ledger account used to show the effects of transactions with debits on the left and credits on the right.

What counts as Revenues?

Income earned by providing goods or services (sale of a product or service performed). Not included: borrowing money, owner investments, or selling assets.

What counts as Expenses?

Costs incurred to earn revenue or to run the business during a period.

Asset accounts on the Balance Sheet

Accounts Receivable, Supplies, Prepaid Insurance, Land, Equipment.

Liability accounts

Accounts Payable, Wages Payable, Notes Payable.

Equity accounts

Owner's Capital, Owner's Withdrawals.

Revenue account example

Service Revenue.

Expense accounts example

Rent Expense, Salaries Expense, Depreciation Expense.

Trial Balance

A list of all ledger accounts and their balances at a point in time; checks that total debits equal total credits.

Steps to prepare a Trial Balance

List each account title and amount (from ledger); compute total debits and credits; verify that debits equal credits.

Accrual Basis accounting

Records revenue when services/products are delivered and expenses when they are matched with revenue.

Cash Basis accounting

Records revenues when cash is received and expenses when cash is paid.

Adjusting Entries

Entries made at period end to allocate revenue and expenses to the correct period; often involve prepaid expenses and accruals.

Adjusting Prepaid Expenses (example)

If a 24-month prepaid expense of $2400 started Dec 1, monthly expense is $100; adjust to expense $100 each month.

Unearned Revenues

Cash received in advance of providing products/services; a liability until performance is completed.

Accrued Expenses

Costs incurred in a period that are unpaid and unrecorded; liabilities recognized at period end.

Accrued Revenues

Revenues earned in a period that are not yet billed or collected.

Depreciation Expense

Non-cash expense allocating the cost of long-term assets (buildings, machines, vehicles) over their useful lives.