ACCT 2001 Exam 1 (Fall 2026 - Kimberly Peters)

Sole Proprietorship

simple to establish, owner controlled, tax advantages

Partnership

simple to establish, shared control, broader shills and resources, tax advantages

Corporation

easier to transfer ownership, easier to raise funds, no personal liability

LLCs and S Corporations

examples of hybrid forms of business that combine the tax advantages of a partnership with the limited liability of corporations

to provide inputs for decision making

purpose of financial information

Accounting

the information system that identifies, records, and communicates the economic events of and organization to interested users

Internal Users

answer questions relevant to their jobs; ex: managers, directors, supervisors

External Users

make investing decisions, evaluate risks of lending, ensure compliance to regulations; ex: investors, creditors, government authorities

Data Analytics

involves analyzing data using both software and statistics to draw inferences

descriptive, diagnostic, predictive, prescriptive

four types of data analytics

Sarbanes-Oxley Act (SOX)

top management must certify financial statements, increased penalties for fraudulent activity, increased independence of outside auditors

ethical behavior

Effective financial reporting depends on sound _____.

Financing

raising money from outside sources; ex: 2 primary sources of outside funds are borrowing money & issuing stock

Investing

purchasing the resources (assets) needed to operate; ex: buying assets like land and equipment

Operating

conducting day to day operations to produces and sell a products or provide a service; ex: selling a product or providing a service & incurring a cost like salaries, utilities, or rent

Assets

resources owned by a business

Liabilities

amounts owed to creditors in the form of debts and other obligations

Stockholders’ Equity

the owners’ claim to assets

Common Stock

the total amount paid in by stockholders for the shares they purchase

Revenues

an increase in assets or decrease in liabilities resulting from the sale of good or the performance of services in the normal course of business

Expenses

the cost of assets consumed or services used in the process of generating revenues

Dividends

payment of cash from a corporation to its stockholders

Retained Earnings

the amount of net income retained in the corporation

Net Income

the amount by which revenues exceed expenses

Net Loss

the amount by which expenses exceed revenues

Income Statement

shows how successful your business performed and reports revenues, expenses, and net income (or net loss); includes revenues, expenses, and net income/net loss; for a period of time (for the month or year ended…)

Statement of Retained Earnings

indicates how much of previous income was distributed to owners and how retained in the business for future growth; includes beginning earnings, net income, dividends, and ending earnings; for a period of time (for the month or year ended…)

Balance Sheet

gives a picture at a point in time of what your business owns and what it owes; includes assets, liabilities, and stockholders’ equity; at a specific point in time

Statement of Cash Flows

reports about cash receipts and cash payments; includes operating activities, investing activities, and financing activities; for a period of time (for the month or year ended…)

Assets = Liabilities + stockholders’ Equity

basic accounting equation

Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows

list the 4 financial statements that should be in an annual report

Auditor’s Report

report prepared by independent outside auditors as to the fairness of the presentation of the financial statements

Classified Balance Sheet

groups together similar assets and similar liabilities, using standard classifications and sections; ex: current vs. long-term, PPE

Current Assets

assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer

Operating Cycle

the average time it take to go from cash to cash; the time to purchase inventory, sell it on account and then collect cash from costumers

Cash, Investment (short term), Receivables, Inventories, Prepaid Expenses

5 common current assets in order of liquidity

Long-Term Investments

investments in stocks and bonds of other companies that are held for more than one year, investments in long-term assets not currently being used in operating activities, long-term notes receivable

Property, Plant, and Equipment

assets with long useful lives that are currently used in operating the business

Depreciation

used to allocate the cost of PPE to number of years

Accumulated Depreciation

shows the total depreciation that a company has taken so far on its assets

Intangibles

assets that do not have a physical substance yet are often valuable; ex: goodwill, copyrights, patents, franchises, trademarks

Current Liabilities

obligations that the company is to pay withing the coming year or operating cycle, whichever is longer

Long-Term Liabilities

obligations that a company expects to pay after one year

Stockholders’ Equity

consists of common stock and retained earnings

Common Stock

investments of assets into the business by stockholders

Retained Earnings

income retained for use in the business

Ratio Analysis

expresses the relationship among selected items of financial statement data

Ratio

expresses the mathematical relationship between one quantity and another

Profitability

measuring the income or operating success of the company for a given period of time

Liquidity

measuring the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash

Solvency

measuring the ability of the company to survive over a long period of time

Earnings Per Share (EPS)

measures the income earned on each share of common stock; (net income - preferred dividends)/weighted average common shares outstanding

Working Capital

the difference between current assets and current liabilities; indicates greater likelihood of paying obligation coming due in the current year; CA - CL

Current Ratio

indicates more current assets than current liabilities; good indicator of liquidity; CA/CL

Debt to Assets Ratio

a measure of solvency; TL/TA

Debt Financing because debt must be paid back at a specific point in time regardless of how the company is doing

Is debt financing or stock financing more risky? Why?

Generally Accepted Accounting Principles (GAAP)

a set of rules and practices, having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposes

Securities and Exchange Commission (SEC)

an agency of the federal government that oversees the US financial markets and accounting standard setting bodies

Financial Accounting Standards Board (FASB)

the primary accounting standard setting body in the US; a private organization

Public Company Accounting Oversight Board (PCAOB)

determines the US auditing standards and reviews the performance of auditing firms

International Accounting Standards Boards (IASB)

issues standards called IFRS which have been adopted by countries overseas

to provide financial information that is useful to investors and creditors for making decisions about providing capital

What is the primary objective of financial accounting?

Relevance and Faithful Representaion

two fundamental qualities of useful financial information

Verifiability

information that can be proved that it is free from error

Timeliness

information that is available to decision makers before it loses capacity to influence decision makers

Comparability

results when different companies use the same accounting principles

Consistency

results when a company uses the same principles and methods from year to year

Understandability

information has this quality if it is presented in a clear and concise fashion

Monetary Unit Assumption

requires that only things that can be expressed in money are included in the accounting records

Economic Entity Assumption

states that every economic entity can be separately identified and accounted for

Periodicity Assumption

states that the life of a business can be divided into time periods

Going Concern Assumption

states that the business will remain in operation for the foreseeable future

Cost Principle

dictates companies record assets at their cost

Fair Value Principle

indicates that assets and liabilities should be recorded at fair value

Cost Constraint

relates to the fact that providing information is costly; the cost of accounting standards and the benefit should outweigh the cost

The Accounting Cycle

Transactions

economic events that require recoding in the financial statements

Account

a record of debits and credits in a specific asset, liability, equity, revenue, or expense item

Normal Debit Balance

debits are more the than credits; assets, expenses, and dividends increase

Normal Credit Balance

credits are more then debits; liabilities, common stock, retained earnings, and revenues increase

Assets and Liabilities and Equity

What is included on the balance sheet?

Revenues and Expenses

What is included on the income statement?

Dividends

What is included on the retained earnings statement?

increase

Revenues _____ stockholders’ equity.

decrease

Expenses and dividends _____ stockholders’ equity.

Source Documents

documents that provide evidence of the transaction; ex: a sales slip, a check, or a cash register tape

Journal

where transactions are recorded in chronological order before they are transferred to an account

Ledger

provides the balances of the accounts as well as keeps track of changes in these balances

Posting

the process of transferring amounts from the journal to the ledger accounts

Trial Balance

a list of accounts and their balances at a given time; usually prepared at the end of an accounting period; proves that debits equal credits

Assets, Liabilities, Equity, Revenues, Expenses

order of a trial balance

Revenue Recognition Principle

companies recognize revenue in the accounting period in which the performance obligation is satisfied

Expense Recognition Principle

expenses are matched with revenues in the period when efforts are expended to generate revenues

Accrual-Basis Accounting

transactions recorded in the periods in which the events occur; revenues are recognized when the performance obligation is satisfied, even if cash was not received; expenses are recognized when incurred, even if cash was not paid

Cash-Basis Accounting

revenues are recognized only when cash is received; expenses are recognized only when cash is paid; not allowed under generally accepted accounting principles

Prepaid Expenses

expenses paid in cash before they are used or consumed

Unearned Revenues

cash received before services are performed

Accrued Revenues

revenues for services performed but not yet received in cash or recorded

Accrued Expenses

expenses incurred but not yet paid in cash or recorded

Deferrals

revenues or expenses that are recognized at a date later than the point when cash was originally exchanged