(Abridged) FIN 305 Accounting Chapter 1

What is the accounting equation?

Assets = Liabilities + Stockholders' Equity

What makes up Stockholders' Equity?

Common Stock + Retained Earnings

What is the formula for Net Income?

Net Income = Revenues − Expenses

What is the formula for Ending Retained Earnings?

Beginning Retained Earnings + Net Income − Dividends

What are assets?

Resources owned by a business that provide future benefits.

What are liabilities?

Obligations the business owes to creditors.

What is stockholders' equity?

The owners' claim on the company's assets.

What is common stock?

Owners' investments in the business.

What are retained earnings?

Profits kept in the business after dividends.

What is revenue?

Money earned from providing goods or services.

What is an expense?

A cost incurred to generate revenue.

What is a dividend?

A distribution of profits to owners (NOT an expense).

What are the three sources of assets?

Owners (Common Stock), Creditors (Liabilities), Operations (Revenue)

What is an asset source transaction?

Increases assets and increases claims (owners or creditors). Examples are issue stock, borrow money, and earn revenue

What is an asset exchange transaction?

One asset decreases while another increases. Total assets do NOT change. Example is buy land with cash

What is an asset use transaction?

Decreases assets and decreases claims. Examples are pay expenses, pay dividends, and repay debt

Revenue affects which account?

Increases Retained Earnings.

Expenses affect which account?

Decrease Retained Earnings.

Dividends affect which account?

Decrease Retained Earnings.

Are dividends reported on the income statement?

No.

What is double-entry accounting?

Every transaction affects at least two accounts, keeping the accounting equation balanced.

What is the historical cost concept?

Assets are recorded at the price paid, not current market value.

What does the income statement report?

Revenues, expenses, and net income for a period of time.

What does the Statement of Changes in Stockholders’ Equity report?

Changes in common stock and retained earnings during the period.

What does the balance sheet report?

Assets, liabilities, and stockholders' equity at a specific date.

How are assets listed on the balance sheet?

By liquidity (most liquid first).

What does the Statement of Cash Flows report?

Cash inflows and outflows during the accounting period.

What are the three sections of the statement of cash flows?

Operating Activities, Investing Activities, Financing Activities

What are temporary accounts?

Revenue, Expense, and Dividends (reset to zero each period).

What are permanent accounts?

Balance sheet accounts that carry forward each accounting period.

What is closing?

Transferring Revenue, Expense, and Dividend balances into Retained Earnings.

What is GAAP?

Generally Accepted Accounting Principles (U.S. accounting rules).

Who establishes GAAP?

Financial Accounting Standards Board (FASB).

What is IFRS?

International Financial Reporting Standards used in many countries outside the U.S.

What is the correct order of the financial statements?

1. Income Statement

2. Statement of Changes in Stockholders’ Equity

3. Balance Sheet

4. Statement of Cash Flows

Which transaction does NOT change total assets?

Asset exchange transactions.

Which transaction increases both assets and claims?

Asset source transactions.

Which transaction decreases both assets and claims?

Asset use transactions.

What is liquidity?

The ability to quickly convert an asset into cash.

What is the matching concept?

Expenses are recorded in the same period as the revenues they help generate.