Accounting Exam 1

• Owned by one person

• Simple to establish

• Owner controlled

• Barber shops, auto shops, etc

Sole Proprietorship

• Owned by two or more people

• One individual lacks economic resources

• More skills and resources

• Professional practices like lawyers and CPAs

partnership

• Owned by stockholders

• Separate legal entity from owners

• No personal liability

corporation

• Borrowing funds from individuals or entities

• Repaid with interest

• Interest paid on debt is tax deductible - use interest to reduce the amount you pay in taxes to the government 

debt financing

Borrowing funds from individuals or entities
like bank

creditors

Interest paid on debt is ____ - use interest to reduce the amount you pay in taxes to the government

tax deductible

• Raising funds through owner investment and selling shares of ownership - stock

• No repayment is required though investors typically do through dividends 

• Dividends paid to investors are NOT tax deductible

equity financing

Raising funds through owner investment and selling shares of ownership

stock

The means by which we measure and describe the economic activities of a business and communicate these results to interested users

accounting

• Information used inside the company to make decisions

managerial accounting

• Used by ‘outsiders’ 

  • Investors (owners, stockholders) 

  • Creditors (lenders, bankers)

  • Taxing authorities, customers, competitors, analysts, regulatory agencies

financial accounting

are a set of accounting reports that convey information to the outside users such as creditors & investors

financial statements

types of financial statements (4)

• Balance sheet (statement of financial position)

• Income statement

• Statement of owners equity

• Statement of cash flows 

concepts, standards, guidelines, and conventions companies are supposed to follow when preparing financial statements

GAAP

what does GAAP stand for

generally accepted accounting principles

organizations responsible for the development of GAAP

FASB and SEC

• Private sector organization that develop most accounting rules

• Does not have authority to develop GAAP

Financial Accounting Standards Board

• Public sector organization that has authority from congress the develop  

  • Has allowed professional to form GAAP

Securities Exchange Commission

• Required to safeguard investors and creditors

• Must issue an report that will state if the statements are fair 

• Report must accompany the financial statements

• Necessary for managers to have incentives to use flexible accounting methods to manipulate the statements to avoid tax liability, debt, or deception

Audit

US companies that are publicly traded must provide shareholders with this

Annual report

Annual report includes

financial statements

notes to the financial statements

independent auditors report

management report

• Covers companies abilities to pay debts that are due and fund operations and expansions and results of operation 

• Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these factors

management report

a set of accounting reports that convey economic and financial information to outside users such as creditors and investors

financial statement

financial statement that provides a snapshot of a specific point in time - what it owes and owns

balance sheet

two types of assets

current and long term

• Expected to turned into cash or used up within one year 

current assets

what are the current assets

accounts receivable

cash

inventory

supplies

Assets expected to be used in business operations for longer than 1 year

long term assets

what do long term assets include

PPE

Accumulated Depreciation

Intangible assets

• Long term assets that have a physical substance

• Examples: land, buildings, equipment

Property Plant and Equipment

• Assets that Lack a physical substance

intangible assets

assets are to be shown on the balance sheet at their cost (amount company paid to acquire them), not shown in their current value or adjusted over time

historical cost concept

• Debt owed by business (creditors)

liabilities

• Liabilities or debts expected to be paid within one year 

current liabilities

liabilities are accounts that end with ___

payable

• Debts paid in longer than one year

long term liabilities

• Amount of the owners investment in the business; depends on business type (for our class corporation)

equity

parts of equity (2)

common stock

retained earnings

• Investments made by owners into the business through purchase of organizations stock or known as common stock 

common stock

what is contributed capital also known as

• Net income earned by corporation and kept within the company for growth and expansion (rather than given to the stockholders in the form of dividend) 

retained earnings

fundamental accounting equation

Assets = Liabilities + Equity

• Shows the profitability of the company for a period of time

income statement

parts of an income statement

Revenues

Expenses

• Amount earned during the accounting period (year)

• Selling inventory, services, renting property, lending money will earn revenue

revenue

revenue on income statement ends with ___

revenue

• Cost incurred in the process of earning revenues

expenses

expenses on a balance sheet end with ___ + __

expenses

cost of goods sold

Net income formula

net income = revenues - expenses

gross profit equation

gross profit = sales revenue - cost of goods sold

If expenses are larger than revenues or negative net income then it is a

net loss

• Financial statement that shows changes in equity over a period of time 

statement of owners equity

Common stock formula (ending)

• Beginning balance + additional sales of common stock = ending common stock

• retained earnings formula

• Beginning balance + net income - dividends = ending retained earnings

• Financial statement that shows the changes in cash over a period of time 

statement of cash flows

statement of cashflows categories (3)

Operating

investing

financing

Accounts categorized as operating

• Cash from sales, cash you pay to employees, taxes, interest, inventory

Accounts categorized as investing

• Sale of assets such as land, buildings, and equipment, and purchases of these assets (PPE)

Accounts categorized as financing

• Sale of common stock, from borrowing money, payments to stockholders as dividends, to creditors for repayment of funds borrowed 

• Cash receipts are ___ and Cash payments are ____

inflows

outflows

total equity equation

• Total equity = common stock + retained earnings 

Ending equity / beginning equity equation

• Beginning equity + additional sales of stock + net income - dividends = Ending equity 

Does not follow GAAP

Record revenues when cash is received

Record expenses when cash is paid

Used by company who doesn’t sell stock to the public, used by individuals often

cash accounting

• Based on GAAP

• Revenues are recorded in the period earned and expenses are recognized in the period incurred

• If getting loans they likely will want you to use accrual accounting because cash accounting can be easily manipulated 

• Required for all companies who sell stock to the public

accrural accounting

• When revenues should be recorded

The earnings processes is virtually complete

There is reasonable certainty as to the collectability of the asset to be received (usually cash)

realization principle - GAAP

• When we should record expenses

Matching concept - GAAP

In the matching concept - ___ should be recorded in the same accounting period the revenue is earned 

expenses

In the matching conept - Only recorded in the year ___ was earned, not before or after

revenue

place where all decreases and increases in financial statements are recorded

account

how do we analyze accounts

using t charts

what is on each side of a t chart

debits on left and credtis on right

Asset: inc _ Dec _

D, C

Liability: inc _ Dec _

C, D

Equity: inc _ Dec _

C, D

Revenue: inc _ Dec _

C, D

Expense: inc _ Dec _

D, C

cash spend or dec _ cash gain or increase _

C, D

economic events that require recording in the financial statements

accounting transactions

• all accounts of the company, taken together (all the T accounts in the company)

ledger

the place where all accounting transactions are initially recorded, when we first enter into a transaction

journal

the means used to record transactions in the journal

credits and debits accounts

will both equal

journal entry

• every transaction must be recorded with at least one debit and one credit within the total dollar debits always equaling the total dollar credits 

double entry accounting

transferring debit and credit amounts from journal to the ledger or transferring amounts in the journal entries to the T accounts

• Allows us to determine ending balance in each account with relative means 

posting

• Income statement affects the balance sheet because __ increases retained earnings, an equity account 

net income

recorded when you sell an asset other than inventory for more than its cost; selling price - cost

gain

what account is a gain

revenue

recorded when you sell an asset other than inventory for less than its cost’ cost - sling price

losswh

what account is a loss

expense

what account is a dividend

contra

• Record transactions in the journal using journal entries

• Post debit and credit amounts from journal to the ledger

• Prepare an unadjusted trial balance

• Record and post year-end adjusting entries

• Prepare adjusted trial balance 

• From trial balance, prepare financial statements

• Record closing entries

accounting cycle

relationships between financial statement amounts

• Used by investors and creditors to make decisions

• Whether or not to invest or make a loan to a company

financial ratios

working capital ratio

current assets - current liabilities

current ratio

current assets/current liabilities

acid test ratio / quick ratio

• (cash + accounts receivable) / current liabilities 

journal entries made at the end of an accounting period to update account balances

Required because of accrual accounting and are required each time a financial statement is prepared

adjusting entries

Transaction for which cash is received or paid but revenue expense had not been recorded - cash before action

deferrals

• Company pays for an expense item in advance

• Recorded as an asset and becomes an expense when the asset is used up

deferred expenses

examples of defered expenses

prepaid insurance, prepaid rent, supplieso

• Supplies - when purchased are classified as an ___ however once used up they are considered an ___

asset, expense

• Company receives cash in advance for services to be performed later

deffered revenues