JMU ACTG244 Exam 1

Steps in business development:

1. create an idea

2. arrange financing

3. make investments/acquire assets

4. develop operations

Accounting

Measures and communicates information about performance

Examples of Stakeholders

- investors

- creditors

- government

- supplies

- management

- employees

- regulators

Balance Sheet

snapshot of company's assets, liabilities, and stockholders' equity at given point in time

(shows us where we are)

Income Statement

shows a company's results of operations during a specific period of time

Assets

things that you OWN or CONTROL that provide future benefit (things of value)

- can be tangible and intangible

Liabilities

an obligation to provide economic benefits to someone else in the future (anything you owe)

Equity

owner's remaining stake after subtracting debts (what's left over)

Accounting Equation

Assets = Liabilities + Equity

Tangible Goods

cash, equipment, buildings and inventory

Intangible Goods

copyrights, trademarks and patents

Revenues

inflows of assets resulting from operating the business

- increases total equity

- revenue is not always equal to cash received

Expenses

using up of assets increases in liabilities as a result of operating the business

- decreases total equity

- expenses are not always equal to cash paid

Net Income

Revenues - Expenses (when a company earns profit, it increases the net assets of the business and increases the owner's equity in the business)

Dividends

shareholders pulling profits from the company

Financing

any transaction that involves obtaining cash from lenders or business owners and any transaction that involves repaying lenders or distributing earnings to owners

- borrowing cash or paying it back

- withdrawing cash or receiving cash from multiple investors to invest into the business or paying cash back to investors

Investing

any transaction that involves acquiring LONG-TERM assets or investments in other businesses and any transaction that involves the sale of these assets

- purchasing or selling long-term operational assets such as equipment, land, buildings

Operating

any transaction not categorized as financing or investing

- using cash to pay for everyday operations such as salaries, supplies, inventory, paying back vendors

- receiving cash for everyday operations such as revenues, deposits

Financing Activity

The owner of a business withdraws and invests $40,000 of her savings to start a florist shop

Investing Activity

A business purchases a warehouse to store seasonal merchandise

Financing Activity

A business pays off a loan it had taken out at the local bank

Operating Activity

The community free clinic makes its monthly payroll to nurses and other health care employees

Operating Activity

A catering company accepts a deposit for a wedding reception scheduled for next month

Financing Activity

At the end of the year the owner of a consulting business withdraws $20,000 of profits from the business

Investing Activity

A music instructor sells the company van which is no longer needed by the business

Operating Activity

A bed and breakfast pays its real estate taxes for the year

Investing & Financing Activity

A resort acquires a bus by paying a $5,000 down payment and signing a promissory note with GMAC for $70,000

Current Assets

expected to be converted to cash or be consumed within a year... held for short period (1yr or less)

cash, short term investments, account receivables, inventory, prepaid expenses

Long-Term Assets

expected to be converted to cash or consumed in a time period longer than a year (1yr or more)

long term investments, equipment & machinery, land & buildings, intangible assets

Cash

currency in the cash registers or safe, amounts on deposit in checking accounts, and may also include currency or other countries

Short Term Investments

interest earning investments such as government securities, certificates of deposit and money market funds

Accounts Receivable

many businesses permit customers to pay within a period following a sale

AKA I.O.U's

Inventories

Goods that a company intends to sell to its customers (merchandise, food, parts)

Prepaid items

some items that a business needs to operate are paid in advance

- pre paid insurance, pre paid rent, and pre paid advertising

- considered assets because you have the right to receive a service in the future

Long Term Investments

most common is when one company owns another

Accumulated Depreciation

as buildings and equipment wear out or become obsolete, their value depreciates

Contra Asset

when an asset is classified as an asset but carries a negative balance

Intangible Assets

long term rights that DO NOT have physical form

- patents, trademarks and copyrights

- eventually wear out or expire

Operating Activities

the result of normal business practices

Financing Activities

any transaction that involves obtaining cash from lenders or owners and any transaction that involves repaying lenders or distributing earnings to owners

Account Payable

when a supplier gives you a period of time to pay for a purchase (what the buyer records when a seller records an account receivable)

Accrued Liabilities

amounts that will become payable in the future as a result of services you are receiving now

- ex: at the end of the month you used some electricity but have not yet paid

Unearned (deferred) revenue

when someone pays the business in advance for a service it must provide in the future

-ex: a private therapist that asks for payment up front and provides sessions over time would record unearned revenue when the cash is received

Financing Liabilities

long-term liabilities payable over several years

ex: notes payable, bonds payable, lines of credit

Retained Earnings

total of all earnings of the business since it was created minus any amount withdrawn by the owners over that same time

Retained Earnings Formula

Beginning Retained Earnings Balance + Net Income - Withdrawals

Balance Sheet Equation

Assets = Liabilities + Equity

Income Activity Statement

explains how we got here

Sales of Goods

record revenue when the goods are delivered

Sales of Services

record revenue when the service is completed

Cash Sales

sales and cash receipts happen at the same time

ex: a barber providing hair service and accepting cash immediately after

Sales on Account

revenue is recorded before the cash is received

ex: a barber providing hair services and accepting cash a month later

Interest Revenue

interest income earned on investments

Gains from sales of long-term assets

when a business sells a long-term asset for more than they paid

Operating Expenses

outflows or using up of assets or increases in liabilities

Matching Principles

expenses should be matched with the revenues they helped to create

-requires many expenses be recognized regardless of when cash is paid for them

Wages

recorded as expenses when the employee does the work

Merchandise Inventory

becomes an expense when it is sold to a customer

Prepaid Insurance

becomes an expense as it expires

Equipment

becomes an expense when equipment is used

Interest on debt

becomes an expense through the passage of time

Interest Expense

when a company borrows money, they will usually have to pay interest over time

Loss on sale of long-term assets

when a company sells a long term asset for less than they paid

General Ledger

a complete collection of a company's account

General Journal

contains all the record of transactions a business conducts

Journal Entry

Whenever the business makes a transaction with an external party (customer, supplier, creditor, owner/investor) AND tells stories on how a transaction increases or decreases an account balance

Adjusting Journal Entry (AJE)

what occurs when a business records income or expenses that were not recorded during an accounting period

Unearned Revenue

when a business is paid upfront for services to be provided in the future, they record a liability account

ASSETS

Cash, Short Term Investments, Accounts Receivable, Inventories, Prepaid Items, Long Term Investments, Tangible Assets, Accumulated Depreciation, Intangible Assets

LIABILITIES

Operating, Financing, Accrued, Unearned (deferred) Revenue

EQUITY

Capital Paid, Retained Earnings