Accounting Exam 1 : Anne Clem at Iowa State University

What is accounting

a system of analyzing and recording, and summarizing the results of a business’s activities and then reporting the results to decision-makers

external decision makers

financial accounting

investors

lenders

board of directors, IRS, SEC

intrnal decision makers

managerial accounting

managers

employees

executives

What are the 4 Financial Statements?

Balance Sheet

Income Statement

Statement of Cash flows

Statement of Retained Earnings

What does the Balance Sheet Do?

reports the financial position of an accounting entity at a point in time

Balance sheet equation

Assets = Liabilities + Stockholders Equity

What 2 accounts make up the Stockholders Equity Account?

Retained Earnings

Contributed Capital

Asset Accounts

Cash

Accounts recievable

Inventory

Prepaid Expenses

Investments

PPE

PPE (what does it stand for)

Property, Plant & Equipment

Liability Accounts

— payable

accrued —-

utilities

wages

interests

taxes

What does Statement of Retained Earnings do?

Reports how net income and the distribution of dividends affected the financial position of the company this accounting period

Statement of Retained Earnings Equation

BRE + net income - dividends = ERE

What does the income statement do?

reports revenues less expenses for the accounting period

net income equation

revenues - expenses = net income

Revenue Accounts

things called revenue OTHER than deferred revenue

Expense Accounts

accounts ending in expense

If expenses go up how does that effect dominoes?

net income -

stockholders equity -

retained earnings -

if revenue goes up how does that effect dominoes?

net income +

stockholders equity+

retained earnings +

What does the Statement of Cash Flows Do?

reports inflows and outflows of cash during the accounting period

provides information about cash flows not provided by accrual-based net income

statement of cash flows equation

cash flows from operating + cash flows from investing + cash flows from financing = change in cash

operating activities

core business

financing activiites

debt or our own stock

Investing activities

PPE or investments

SEC

the federal agency with the power to determine the rules

FASB

the private body that actually writes the rules

PCAOB

body that approves the rules (audits)

IFRS

tules of accounting created by IASB for international use

GAAP

generally accepted accounting principles

pros to incorporation

ability to raise capital

ease of owners transfer

limitied liability of stockholder

cons to incorporation

double taxation of dividends

current asset accounts

cash

account receivable

short term investments

inventory

supplies

prepaid expenses

current liabilities

accounts payable

—- payable

accrued—-

current portion of longterm debt

deferred revenue

current ratio equation

current assets / current liabilites

what does the current ratio do

asses whether current assets are sufficient to pay current liabilities

higher ratio means better able to pay

cash basis accounting

revenues are recognized when cash is collected

expenses are recognized when cash is paid

accrual basis accounting

revenues are recognized when earned, regardless of when cash is received

expenses are recognized when incurred, regardless of when cash is paid

Income Statement Principles

revenues are recognized when the seller provides goods or services to customers, in the amount the seller expects to be entitled to receive

expenses are recorded when incurred in earnings revenue

Income statement limiatiations

does not indicate the amount of cash the company is generating

does not directly measure the change in the value of a company

uses estimation to measure income

what does a net profit margin do?

assesses how much profit comes from each dollar or sales higher ratio indicates higher profitabliity

net profit margin equation

net income / revenue

What are the 4 types of adjusting entries

deferred expense

deferred revenue

accrued expense

accrued revenue

what is deferral adjusting entries

when cash happens first

what is accrual adjusting entries

when cash is after the fact

what is a contra account

an account that is an offset to or deduction from the primary account

general rules for adjustments

adjustment never involve cash

adjustments always affect both the balance sheet and income statement

depreciation adjusting entries

a deferred expense

after adjustments have been prepared and recorded we prepare what?

adjusted trial balance

after the financial statments are prepared you do what?

close all revenue and expense accounts, as well as dividends

accounts that NEVER close

balance sheet acounts, (permanent accounts)

accounts that close at year end

income statement accounts, Temporary accounts