ACCT-Quiz 1

Accounting

The information system that identifies, records, and communicates business activities. Accounting measures and communicates business activities.

Importance of Accounting

Accounting helps organizations determine what to create, how much to invest, and how to plan operations. It tells the story of whether a business idea is good by measuring what actually happened.

Accounting (Ex.)

 Netflix uses accounting and analytics to decide what shows to create and how much to pour into them. Stranger things 30 million per episode because they knew people would watch it and they’d make the mkoney back

Important of Accounting (ex.)

Stranger Things cost 30 million per episode but analytics showed they would likely make the money back.

External Users

Do not directly run the organization and rely on general purpose financial statements.

Internal Users

Directly manage the organization and receive internal reports tailored to managerial and executive needs.

Data Analytics

The process of analyzing data to identify meaningful relations and trends.

Data Analytics (Example)

Netflix uses analytics to predict which shows will perform well before investing millions like stranger things again.

Types of Analytics

1. Descriptive: summarizes and describes events from the past

2. Diagnostic: reveals causes of events from the past

3. Predictive: predicts likely events for the future

4. Prescriptive: creates action plans to achieve a desired future

5. Cognitive: using AI and machine learning to analyze and understand data in a way that mimics human cognition. A rising fifth type of analytics

Data Visualization

A graphical presentation of data to help people understand its significance.

Dashboard

A visualization containing charts, graphs, and images organized to show important trends and relations.

AI in Accounting

AI will not replace accountants because humans are needed to check its work and train AI systems.

AI in Accounting (Example)

An accountant reviews AI generated reports to ensure accuracy before they are used for decisions.

Areas of Accounting Opportunities

1. Financial

2. Managerial

3. Taxation

4. Accounting‑related

Transaction Analysis

Uses the expanded accounting equation to determine how transactions affect assets, liabilities, and equity.

Financial Statements

part of the conceptual and procedural framework of accounting.

Conceptual Accounting

Relates to the underlying principles and ideas guiding accounting.

Procedural Accounting

Relates to the methods and processes used to record and report accounting information.

Criteria for a Good Business Idea

1. 
   

1. Addresses an ongoing need

2. Is innovative

3. Has growth potential

4. Is difficult to replicate

Business Idea Example: Uber

Uber had $193B in gross bookings but only $52B in revenue showing the difference between platform activity and company revenue. Got the idea waiting for a taxi in paris and started it when he got back but hey have to pay the drivers

Income Statement

Shows performance for the most recent period: revenue − expenses = net income.

Statement of Equity

Shows how equity changed from one period to another.

Balance Sheet

Reports what the company owns (assets) and owes (liabilities + equity).

Why Balance Sheets Look Backward

They show historical cost, not current market value. If you bought something 20 years ago in Seattle it’s definitely more expensive today but you check redfin for that not a balance sheet because that’s historical info not today’s info

Balance Sheet Example: Land Value

Land bought for 50k decades ago may be worth 10× today, but the balance sheet still shows 50k.

Statement of Cash Flows

Shows where cash came from and where it went

Equity Financing

Money from owners; no repayment required.

Debt Financing

Money borrowed from creditors; must be repaid with interest.

Financing Example: Redhawk Coffee

10,000 from owners + 10,000 from bank = 20,000 total cash available.

Non-Current Assets

Used for years but wear out slowly (cart, espresso machine, tablet)

Current Assets

Used up quickly (beans, milk, cups, syrups)

Investing Example: Redhawk Coffee

12,000 cart + machine, 800 tablet + reader, 5,500 inventory, 1,700 cash remaining.

Revenue

Money earned from selling goods or services.

Expenses

Costs incurred to earn revenue.

Net Income formula

Revenue - expenses = net income

Operating Example: Redhawk Coffee

20,000 revenue − 14,600 expenses = 5,400 net income

Dividends

Payments to owners from profits.

Retained Earnings

Profit kept in the business for future use

Allocation Example: Redhawk Coffee

5,400 net income = 2,000 dividends + 3,400 retained earnings.

Accounting Equation (assets)

Assets = Liabilities + Equity.

Why the Equation Matters

Investing must equal financing; every transaction affects the equation

Three Types of Activities

1. Financing

2. Investing

3. Operating

Three Types of Activities Example: Redhawk Coffee

1. Financing: $20k raised

2. Investing: cart, machine, inventory

3. Operating: selling coffee, paying wages

Measure

Determine what happened using assets, liabilities, equity, revenue, expenses.

Communicate

Report results to owners, creditors, and decision‑makers.

What Investors Want to Know

What resources the business has and who has claims on them.

Liabilities and Equity Redhawk Coffee Example

Liabilities: $10k bank loan Equity: $10k contributed capital

When Is a Company Profitable?

When revenues exceed expenses.

Dividends Are Not an Expense

They are paid out of income, not deducted to calculate income

EPS is

Net income per share of common stock.

Why EPS Matters

Tracks performance, compares expectations, influences stock prices.

EPS Example: Redhawk Coffee

$5,400 income / 1,000 shares = $5.40 EPS.

FedEx EPS Example

EPS estimate 4.76 vs actual 3.60 = negative surprise.

Lululemon EPS Example

EPS estimate 2.72 vs actual 2.87 = positive surprise.

Income Depends On

Correct revenue timing + correct expense timing

DreamWorks Case Example

Shrek 2 sold well, but returns caused a 25% earnings shortfall

Revenue Recognition Options

Option 1: Record when shipped

Option 2: Record when return period ends

Relevance vs Faithful Representation

Relevance = timely Faithful representation = precise

Consequences of Misestimation: Dreamworks error

Stock dropped 13.9%, 450M market cap lost, lawsuits filed

Ethics in Accounting

Rules aren’t always black and white, you need judgment

Ethical Line

The point where “making numbers look good” becomes lying.

Income Statement

Describes a company’s revenues and expenses and computes net income or loss over a period of time.

What Income Statements Show

Revenues are listed first, followed by expenses. Net income occurs when revenues exceed expenses, net loss occurs when expenses exceed revenues.

Income Statement Example: FastForward

Consulting revenue $5,800 + rental revenue $300 = $6,100 total revenue; expenses $1,700 —→ net income $4,400.

Revenues

Amounts earned from providing services or selling products.

Expenses

Costs incurred to generate revenue.

Revenues vs Expenses

Expenses are NOT subtracted from revenue until the income statement; dividends and shareholder investments are NOT part of income.

Statement of Retained Earnings

Explains changes in retained earnings from net income (or loss) and dividends over a period of time.

Retained Earnings Formula

Beginning retained earnings + net income − dividends = ending retained earnings

Retained Earnings Example: FastForward

Beginning RE = 0 + net income $4,400 − dividends $200 → ending RE = $4,200

Balance Sheet

Reports a company’s financial position at a point in time: assets, liabilities, and equity.

Balance Sheet Example : FastForward

Assets $40,400 = Liabilities $6,200 + Equity $34,200.

Cash Flow Example: FastForward

Operating CF: +$1,000 Investing CF: −$26,000 Financing CF: +$29,800 Net increase in cash: $4,800

How Statements Interrelate

Net income from the income statement flows into retained earnings; ending retained earnings flows into equity on the balance sheet; cash balance flows from the cash flow statement to the balance sheet.

Net Income

Occurs when revenues exceed expenses

Net Loss

Occurs when expenses exceed revenues

Dividends caps

Distributions of earnings to shareholders; NOT an expense

Retained Earnings

Cumulative net income minus dividends

ESG

Environmental, Social, and Governance: a framework for evaluating responsible business practices.

ESG Categories

1. Environmental: emissions, water usage, energy

2. Social: labor, safety, human rights

3. Governance: transparency, controls, compliance

ESG Example: Apple

Examples include 100% renewable electricity in facilities, 902,000 employee training hours, and strong accounting controls.

SEC ESG Reporting Focus

Companies must disclose:

• Environmental compliance costs

• Legal proceedings related to environmental impact

• ESG‑related risks

• ESG trends, commitments, uncertainties

Order of Preparing Financial Statements

1. 1. Income Statement

2. 2. Statement of Retained Earnings

3. 3. Balance Sheet

4. 4. Statement of Cash Flows

Why Financial Statements Matter

They summarize performance, financial position, and cash flows, essential for decision making.

Assets, Liabilities, Equity

Assets = resources owned Liabilities = obligations owed Equity = owner claims (common stock + retained earnings)

What the Accounting Equation Shows

It describes what the company owns (assets) and who has claims on those assets (liabilities + equity)

Assets

Resources a company owns or controls that are expected to yield future benefits.

Asset Example: Accounts Receivable

Providing services “on credit” creates an account receivable (future inflow)

Liabilities

Creditor claims on assets, obligations to provide assets or services.

Examples of Liabilitie

Accounts payable, wages payable, notes payable, taxes payable

Liability Example: Accounts Payable

Buying supplies “on account” creates a payable (future outflow)

Equity

Owner claims on assets; equal to assets − liabilities

Components of Equity

Common stock + retained earnings − dividends + revenues − expenses.

Expanded Accounting Equation

Assets = Liabilities + Common Stock − Dividends + Revenues − Expenses

Why the Expanded Equation Matters

Shows how each transaction affects equity and keeps the equation balanced

Common Stock

Cash or net assets received from shareholders in exchange for stock

Dividends

Outflows to shareholders, reduce equity

Revenues

Increase equity through net income

Expenses

Decrease equity through net income

How Equity Changes

Equity increases with owner investments and revenues; decreases with dividends and expenses.