ACCT 215- Exam 1

What are the 3 basic Activities of the Accounting Process?

1. Identification

2. Recording

3. Communication

Who are the internal users of our reports? (3)

Managers

Company Officers

Finance Directors

Who are the external users of our reports? (4)

Investors/ Shareholders

Creditors/ Lenders

Regulators/ IRS

Board of Directors

What does GAAP stand for?

Generally Accepted Accounting Principles

What does SEC oversee?

U.S. financial markets and accounting standard setting bodies

What is FASB?

- *Financial Accounting Standards Board*

- The primary accounting STANDARD SETTING body in the U.S.

What two measurements principles that the GAAP uses?

Cost Principle

Fair Value Principle (FV)

What is the cost principle?

Historical cost

records assets at cost

What is the Fair value Principle?

Assets and Liabilities are reported at FV

What is the Basic Accounting Equation?

Assets = Liabilities + Equity

What is an asset?

Resources a business owns that have future services or benefits

EX. cash and equipment

What is a liability?

Claims against assets (existing debts and obligations

EX. Accounts payable, notes Payable

What is equity?

Total Assets minus Total liabilities- Owner's claim on assets

What are the 2 subdivisions that increase equity?AND their defs

1. common stock- reflects inflow of cash and net assets in exchange for stock

2. Revenues- Gross increases in Equity resulting from earned income from sales or services provided

What are the 2 subdivisions that decrease equity?

1. Dividends- outflows of cash and other assets to stockholders that reduce equity

2. Expenses- Cost of Assets consumed or services used in the processor earning revenues

What is the Expanded Equity equation?

A= L+common stock- dividends+rev. - Exp.

What must all transactions have?

a dual effect or an effect on both sides of the accounting equation (balancing act)

What is an account?

Individual accounting record increases and decreases in specific asset, liability, to owner's equity item

What is a Normal Balance?

1. Increasing side of the account

What is journalizing?

Entering transaction data in the General Journal

What is a general journal?

Provides a chronological record of transactions

What is a simple journal entry?

Involves 2 accounts

What is a compound entry?

Involves 3 or more accounts

What is a general ledger?

the entire group of accounts maintained by a company

The general ledger contains....(3 things)

1. all asset accounts

2. all liability accounts

3. all O/E accounts

What are ledgers ordered by?

Chart of accounts

What is the chart of accounts?

List of accounts and account numbers

What is the Chart of Accounts numbered by?

Financial statement presentation

- usually starts with the balance sheet, then the income statement

That is a trial balance?

List of accounts and their balances at a GIVEN time

What is the purpose of a trial balance? (3)

1. Proves mathematical equality of DR's and CR's after posting( debits should = credits)

2. Uncovers errors

3. Useful tool in preparing financial statements

What are the 4 financial statements and their purposes?

1. Income statement- describes a company's revenues and expenses and compute net income or loss over a period of time

2. statement of retained earnings- explains changes in retained earrings from net income or loss and from any dividend over a period of time

3. balance sheet- describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time.

4. Statement of cashflows- Identifies cash flows (receipts) and cash outflows( payments) over a period of time.

What is accrual basis accounting?

Records transaction that change the financial statements in the period they offer

What is cash basis accounting?

Records revenues and expenses when cash is received or paid out

What are the 2 Principles in Accrual Basis Accounting?

1. Revenue Recognition Principle

2. Expense Recognition Principle( AKA matching Principle)

What is the expense recognition principle?

- Efforts matched with accomplishments

- Expenses are matched with revenues in period in which efforts are expanded to generate revenues

What are the 3 reasons a TB isn't up to date or complete at the end of a period?

1. Some events are not recorded daily

2. Cost expire with time rather than as a result of a transaction

3. Items may be unrecorded

What are the 2 types of Accrual Adjusting Entries?

1. Accrued Revenue

2. Accrued expense

What are some accrued revenue examples?

- Intrest revenue

- Rent revenue

Services performed but not collected on

What are some Accrued expense examples?

- Accrued Intrest

-Accrued salaried and wages

What are the 2 types of referral Adjusting entires?

1. prepaid expenses (ASSETS)

2. unearned revenues (LIABILITIES)

What are some examples of prepaid Expenses in Deferral Adjusting entries?

- Supplies

- prepaid Rent of Prepaid Insurance

-Depreciation

What are some examples of unearned revenues in Deferral Adjusting entries?

- Season tickets

- Concert tickets

- Consulting Services

What is Depreciation? ( textbook def)

the process of allocating the cost of an asset to expense it over its useful life in a rational and systematic manner

What is Accumulated Depreciation?

- Is a constraint asset account

- offset against an asset account on the balance sheet

What 2 things does Unearned Revenue have to be? And why?

Cash received AND recorded as a LIABILITY because services haven't been preformed

When is the Adjusted Trial Balance created?

AFTER adjustments have been journalized and posted

Adjusted Trial Balance proves what?

- Equality of DRs and CRs after adjustments

What is prepared directly from Adjusted Trial Balances?

Financial statements

When do closing entries happen?

At the end of the accounting period

What are the 4 Temporary accounts?

Revenues

expenses

dividend

income summary

What are the 4 permanent Accounts?

Assets

Liabilities

Common Stock

Retained Earnings

What do closing entries formally recognize?

The transfer of net income or loss and dividends to retained Earnings

What do closing entries produce and what for?

0 Balances in each temporary account to be ready for the next accounting period.

What is the purpose of preparing a Post- closing Trial balance?

To prove the equality of the permanent account balances carried forward

What are the only accounts the Post-closing Trial balance and balance sheet contain? why?

ONLY Permanent because all temporary accounts will have zero balances

What does the Post- Closing trial balance not prove

That all transaction are journalized or not posted twice

What is the 9 step Summary of the Accounting Cycle?

1. Analyze Transactions

2. Journalize transactions

3. post to the general ledger

4. prepare trial balance

5. journalize and post adjusting entries

6. prepare adjusted trial balance

7. prepare the financial statements- Income statements, statement of retained earnings, balance sheet, statement of cash flows

8. journalize and post closing entries

9. Prepare a post-closing trial balance

What is the Classified Balance sheet?

Groups together similar assets and similar liabilities

What are the Assets of the Classified balance sheet?

Current assets

Long tern investments

PP&E

Intangible assets

What is a current asset?

Within a year ( A/R, cash, supplies)

What is a long term investment?

Normally heard for >1 year

What is PP&E?

long useful life (land, buildings, equipment)

What is an intangible asset?

Can't touch (Patents, copyrights)

What are liabilities on the Classifies balance sheet?

1. Current Liabilities

2. Longterm liabilities

What is a current liability?

Pay within a year

What is a long term liabilities?

Pay after a year (bonds payable)

What is Owner's (Stockholders') equity?

Dividend into common stock and retained earnings