Accounting 2001 LSU Exam 1

Auditor's Opinion

an expression about whether financial statements conform with generally accepted accounting principles

corporation

A business that raises money by issuing shares of stock

Common Stock

the portion of stockholders' equity that results form receiving cash from investors

accounts payable

obligations to suppliers of goods

accounts receivable

amounts due from customers

creditor

a party to whom a business owes money

stockholder

a party that invests in common stock

partnership

a business that is owned jointly by two or more individuals but does not issue stock

operating activities

cash received from customers

Actually selling a product or providing a service.

Use of assets to carry out organization's plans: R&D, Purchasing, Distribution, Marketing.

Means of paying for resources.

financing activities

cash received from issuing new common stock

Means organization sues to pay for resources and carrying out plans.

Acquire capital (money) for the business.

What are 2 main ways that businesses can acquire capital? Borrow or sell stock.

operating activities

cash paid to suppliers

investing activities

cash paid to purchase a new office building

Using proceeds from financing activities to purchase items needed by the business.

asset

cash

stockholders' equity

retained earnings

expense

cost of goods sold

expense

salaries and wages expense

revenue

sales revenue

liability

notes payable

Revenue

Service revenue

financial statements

the total cumulative amount received from stockholders in exchange for common stock

auditor's opinion

an independent assessment concerning whether the financial statements present a fair depiction of the company's results and financial position

notes to the financial statements

the interest rate that the company is being charged on all outstanding debts

financial statements

total revenue from operating activites

management discussion and analysis

managements assessment of the company's results

not disclosed

the names and positions of all employees hired in the last year

sole proprietorship

owned by one person

unlimited liability

Adv. Simple to establish, Owner controlled, Tax advantages

Dis. Owner personally liable for business debt, Financing difficult, Transfer of ownership may be difficult

partnership

two or more owners

each partner has unlimited liability

Adv. Simple to establish, Shared control, Broader skills and resources, Tax advantages

Dis. Partners personally liable for partnership debts, Transfer of ownership may be difficult

corporation

owned by one or many shareholders

separate legal entity (limited liability)

Adv. Easier to transfer ownership, Easier to raise funds (capital), No personal liability

Dis. Unfavorable tax treatment (double taxation)

Information and measurement system

identifies, records, and communicates

provides useful financial information for decision making

economic events

business activites

interested users

decision makers

External interested users

evaluate the company (work outside of the business)

Should I invest in the company or sell my stock? Is company complying with rules (I.e. paying taxes)? Should we loan company money?

internal interested users

run the company

Not subject to same rules as external reporting

Individuals directly involved in managing and operating an organization.

Does company have enough money to expand, launch a new product line? What will my bonus be?

Examples of internal users

Employees, Managers, Supervisors, CEO, CFO, Departments such as R&D, Marketing, Engineering, H/R, Production, etc

examples of external users

Individuals, Investors and Creditors, Government Regulatory Agencies (SEC), Taxing Authorities

Sarbanes-Oxley Act (SOX)

Ethics in financial reporting.. was passed to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

ethical behavior

effective financial reporting depends on sound _____.

accounting equation

assets = liabilities + Stockholders' Equity

stockholders' (owners') equity

Owners' claims to the assets of the business.

Two Parts:

Paid In Capital (Capital Stock): Amount invested in corporation by its owners

Common Stock

Retained Earnings: From operations (income producing activities)

Kept in business for use

Accumulated amount of earnings (net income) retained in business for future use.

Expanded Accounting Eq.

Assets = Liabilities + SE

SE = CS + RE

RE = Beg RE + NI - Dividends

NI = R - E

current assets

Expected to be converted to cash or used up within one year or the operating cycle, whichever is longer.

operating cycle

is the average time it takes from the purchase of inventory to the collection of cash from customers.

short term investments

are temporary investments in marketable securities. Companies often invest cash, which otherwise would be idle such as the stocks or bonds of other companies or debt securities issued by governments.

Inventory

products for resale to customers

supplies

items used in the business

not inventory (office supplies)

Prepaid expenses

are advance payments to suppliers. They are usually small in relation to other assets. Examples are prepayment of rent and insurance premiums for coverage over the coming operating cycle.

Long term assets

Assets which are used by the business which are not expected to be used/consumed or converted to cash during the next 12 month period.

Property, Plant and Equipment (PPE)

are examples of fixed assets or tangible assets—physical items that a person can see and touch. Companies usually provide details about __________ in a footnote to the financial statements.

Depreciation

to allocate the asset's original cost to the particular periods that benefit from the use of the asset.

Based on cost, useful life, residual

accumulated depreciation

Total depreciation taken since asset was purchased

Book Value

= Cost - Accumulated depreciation

Intangibles

Assets that do not have a physical substance yet are often valued.

Give the company an exclusive right.

current liabilities

Obligations that due or payable within the next 12 months (year) or operating cycle, whichever is longer.

Current Maturities of Long-Term Obligations

Amount of Long-Term Notes Payable due within the next 12 months.

Not an account just a reclassification of a part of notes payable

Salaries payable

amounts owed to employees and are types of accrued liability

unearned Revenue

An obligation to deliver goods ordered or provide a service that customers have already paid for.

Ration Analysis

Expresses the relationship among selected items of financial statement data.

Ratio

expresses the mathematical relationship btw one quantity and another

Profitability

income statement; Operating success for specific period of time

Liquidity

Balance Sheet (Short-term)

Solvency

Balance Sheet (Long-Term) - ability to pay interest as it comes due.

Debt to Total Assets Ratio

percent assets that have been financed by creditors; higher percent of debt, the riskier the business. Lower the better

_____= Total liabilities / total assets

Earnings Per Share

Measures the net income earned on each share of common stock

______= (NI - Prefered dividends)/ (weighted - Average CS Outstanding)

Shareholder

stockholders are also called

Internal users of accounting information

are managers who plan, organize, and run a business.

dividends

cash payments to stockholders

cost of goods sold

such as cost of materials

selling expenses

such as the cost of salespersons' salaries

marketing expenses

such as the cost of advertising

administrative expenses

such as the salaries of administrative staff, and telephone and heating costs incurred at the corporate office

interest expense

amounts of interest paid on various debts

income taxes

corporate taxes paid to the government

The income statement helps

users determine if the company's operations are profitable.

retained earnings statement helps

users determine the company's policy toward dividends and growth

balance sheet helps

users determine if the company relies on debt or stockholders' equity to finance its assets.

liabilities

also referred to as debt

statement of cash flows helps

users determine if the company generates enough cash from operations to fund its investing activities.

accounting information system

It's a system of collecting and processing transaction data and communicating financial information to decision makers

Accounting transactions

They're economic events, such as change in assets, liabilities, or stockholders' equity items, that require recording in the financial statements that are exchanged btw parties. Thus the accountings equation changes. (Not all activities are transactions)

Transaction Analysis

It identifies the impact of events on the Accounting Equation.

Steps for Transaction Analysis

1. describe what happened

2. what accounts are involved

3. did the accounts increase or decrease

4. apply the rule of debits and credits.

3 Points about transaction analysis

• The Accounting Equation must always balance.

• Each transaction has a dual (double-sided) effect on the equation.

• Two or more accounts are impacted by a transaction.

Account

A detailed record of increases and decreases in a specific asset, liability, equity, revenue or expense item.

journal

book of original entry

journalizing

process of recording transactions in journal

ledger

contains the entire group of accounts maintained by a company

posting

The procedure of transferring journal entry amounts to ledger accounts is called posting. This phase of the recording process accumulates the effects of journalized transactions in the individual accounts.

Chart of accounts

a list of a company's accounts

Debit

left side of an account

+ with debit

- with credit

Credit

right side of an account

- with debit

+ with credit

steps in recording process

1. Analyze business transaction

2. journalize the transactions

3. post to the ledger accounts

trial balance

a list of accounts and their balances at a point in time. accounts are listed in order which they appear on ledger and is prepared at the end of a period

3 reasons of Trial balance

1. Prove that debits equals credits

2. may help uncover errors

3. aids on preparation for financial statements

limitations of the trial balance

1. transaction is not journalized

2. a correct journal entry is not posted

3. a journal entry is posted twice

4. incorrect accounts are used in journalizing or posting

5. offsetting errors are made in recording the amount of a transaction