Accounting Fundamentals and Financial Statements

Flashcards covering key definitions, account classifications, corporate legal structures, cash flow statement activities, and accounting equations from the lecture notes.

What is the process of accounting?

Accounting is the process of identifying, recording, summarizing, analyzing, and communicating the results of the accounting information to the main decision-makers.

Who are the main decision-makers for accounting information?

Investors & Creditors.

What liability do owners of Sole Proprietorship and Partnership firms have?

Owners of Sole Proprietorship and Partnership firms are personally liable to pay the loan or debt of a company.

What is the difference between Public Corporations and Private Corporations?

Public Corporations sell shares or stock to the public, whereas Private Corporations do not sell shares or stock to the public.

What is the definition of Assets and Liabilities?

Assets are resources owned by a business, and Liabilities are the debts or borrowings or obligations or owing of a company.

What formula is used to calculate Net Income?

$$\text{Net Income} = \text{Revenues} - \text{Expenses}$$

What formula is used to calculate Ending Retained Earnings?

$$\text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends}$$

What are Current Assets versus Non-Current or Long-Term Assets?

Current Assets are assets that are used up or converted into cash within the period of one year, while Non-Current or Long-Term Assets are assets that have been used up for more than a year.

When does Accounts Receivable arise and how is it classified?

Accounts Receivable arises when the company provides services or sells goods on credit, and it is classified as a current asset.

When does Accounts Payable arise?

Accounts Payable arises when a company purchases an asset on credit and cash is paid later.

What are the Six Account Classifications?

1. Assets (Resources owned by the company that provide future benefits)
2. Liabilities (Obligations, owings, payables)
3. Stockholder's Equity (Investments received)
4. Revenues (Price of selling goods and providing services)
5. Expenses (Cost of using goods and services)
6. Dividends (Share of profit distributed to the stockholders)

What cash flows are included in Operating Activities on the Cash Flow Statement?

Inflows from Revenues/Customers, Outflows for Expenses and certain Current Assets (Merchandise Inventory).

What activities are included in Investing Activities on the Cash Flow Statement?

Activities involving a company's investments in long-term assets and other company's shares or stocks.

What activities are included in Financing Activities on the Cash Flow Statement?

Activities involving issuance of Common Stock, borrowing loan, and paying dividends.

What is the fundamental Accounting Equation?

$$\text{Assets} = \text{Liabilities} + \text{Stockholder's Equity}$$

How are Stockholder's Equity and Liabilities defined in terms of claims to resources?

Stockholder's Equity represents owners' claims to the resources (Assets), whereas Liabilities represent creditors' claims to the resources (Assets).

What is the formula to calculate the Ending Balance of SHE on the Statement of SHE?

$$\text{Ending Balance of SHE} = \text{Beginning Balance of Common Stock} + \text{Beginning Balance of Retained Earnings} + \text{Issuance of or Addition to Common Stock} + \text{Net Income} - \text{Dividends}$$

What is the formula for Cash at the end of the period on the Cash Flow Statement?

$$\text{Cash at the end of the period} = \text{Beginning Balance of Cash} \pm \text{Net Increase or Decrease in Cash}$$