Accounting CLEP Exam

What are Generally Accepted Accounting Principles (GAAP)

Set of rules and principles vital for accounting. You might see their stamp of approval on balance sheets.

GAAP was created by whom

Financial Accounting Standards Board (FASB). Private third party organization.

GAAP contains specific facts that MUST be adhered too. What are they

1: Transactions are recorded twice. (Checks and Balances)

2: Financial statements report on the business entity only. Not the owner, and not the investors.

3: Debts are too be paid within one year, or business cycle, whichever is longer. Business cycles do NOT always last 1 year

What are some GAAP principles

1: Conservative Principle: Resolving financial statement uncertainty in the least favorable way.

2: Going Concern Principle: Assume the business will last infinitely.

3: Historical Cost Principle: Deals with assets. Assets are reported.

4: Objectivity Principle: Transactions are recorded using the best objective evidence.

5: Stable Monetary Unit Principle: Money stays the same each

Double Entry Accounting

Requires Transactions to be recorded twice. Equal debits and credits are made in accounts for all transactions

In double entry accounting, what factors need to be monitored

1: Where the money comes from, what account

2: Where is the money going

3: Why is it going there

Therefore, total credits equals total debits.

Rules of a transaction analysis examines what

Where transactions are identified, recorded, and summarized.

For any business, an analysis of transactions must display two things. What are they

1: Increases and

2: Decreases within the financial statement. These are debits and credits

Any increases and decreases from business transactions should display what

Where the assets, liabilities and owners equity are balanced.

Assets

Used to make money. Can be cash.

Liabilities

Debts that normally must be paid within a year.

Owners Equity

A persons claim to there total number of assets.

What is the accounting equation

Assets = Liabilities + Owners equity.

Accounting Cycle

Process of recording and processing the accounting events of a business. Begins when a transaction occurs, like selling a product or an investment

How are transactions recorded

Using entries, based on receipts in recognition of a sale

What's closed at the end of an accounting period

Revenues and Expenses.

Ethics

Standards considered to be the legality of any action performed

Internal controls

Checks and balances of human actions

How do internal controls allow for an increase in profit

If you abide by the law, I.E. do everything right, you will profit.

Sarbanes-Oxley Act (SOX)

A system that allows auditors to test procedures in the workplace.

Code of ethics

Usually issued by a third party called the American Institute of Certified public Accountants. Demonstrates honestly and fairness

Full disclosure

Document all information. Including assets, Liabilities, and equity.

Purpose of financial statements

To provide information on the overall performance of a business (1.5.1)

Income statement

Show the results of Business operations over a period of time, usually 1 year (1.5.1)

Statement of owners equity

Calculates an end of period balance of the owners equity account. Equity is the total claim of 1 or more persons they have on the business. (1.5.1)

Conflict of interest

Accountants objective fairness could be compromised.

What are financial statement rules when creating them

1. All financial statements must have a 3 line heading

• First line is the business name

• Second line is type of report (balance sheet for example)

• Third is the date and period of time

2. Financial statements start all computations by placing numbers in the column farthest to the right

3. To make a sub calculation, move one column to the left.

What are financial statement rules when creating them (Part 2)

4. Draw a single line under the last number in a calculation.

5. Put a double underline under the final numbers calculated.

Accountants place the results of a business calculation in one of 3 different places on the financial statement. What are they?

1. Actual

2. Budget estimate

3. Future estimate (1.5.2)

Cost of goods sold is based on what

Product only (1.5.3)

Sole Proprietor form of business

Based on 1 person. Literally 1. No partners. Completely unincorporated.

Partnership form of business

An arrangement between 2 or more people. Every partner agrees to do business for mutual interests.

Corporation form of business

“Artificial person”. Artificial person creates laws. These laws govern all business. Very regulated and structured. More internal controls, stricter guidelines, and issuance of stock. (1.6)

Go to 1.5.1 on modern states