A200 Exam #1: Indiana University Latest exam update with accurate solutions

Absentee Ownership

Shareholders are not present to see what happens in the company. (Ex: Owners live in another state than the company)

SEC- Securities & Exchange Commission

-Created to establish rules for financial statements

-Created shortly after the Great Depression

First rule of SEC

Giving shareholders financial statements that are reviewed by CPA officials that reflect how the company is doing.

Equity Investor

The Shareholders who receive profits based on their investment

Dividend

A share of the company's profits to the shareholders (A RETURN OF PROFITS AND NOT COUNTED AS AN EXPENSE)

Return Potential

Taking a risk to have the potential for a reward

Sole Proprietorship

A business that has only one owner and is not affiliated with a cooperation

Partnership

A business that has two or more owners and is not affiliated with a cooperation

Cooperation

A business that is treated like a person and has human rights.

Double Taxation

After taxes are calculated from the cooperation, the dividends paid to the shareholders are taxed as well. (Company and Individual are taxed)

LLC- Limited Liability Company

A business that has limited liability

Insiders

People who receive information about the financial situation of the companies and the future situation of the company. (BOD, CEO, CPA)

Bond

Legal Contract that proves a company will owe a person money. (Interest rate expressed annually)

Annual Percentage Rate (APR)

Rate that a bond will increase over time

Maturity Date

The date that the loan is to be paid by

Debt Investors

People who invest through bonds into a company.

Monthly Percentage Rate (MPR)

The rate on a loan is to be paid every month.

Financial Accounting Standard Board (FASB)

The board that standardizes the rules for companies to publish their reports

Generally Accepted Accounting Principals (GAAP)

The rules that insure that financial statements follow the rules and look the same every 12 months

Fiscal Year

The 12 month period that a company has adjusted on the candler based on their slowest, or most convenient, time of the year to publish their financial statements.

CPA

The person or firm that reviews the financial statements for a company to insure the statement follows GAAP rules.

Common Stock

1 Share = 1 Vote (no guarantees)

Preferred Stock

Traditionally: No voting rights (guaranteed by contract)

Zuckerburg: No dividends or money, but higher voting rights

Stockholders Equity

"Net Worth" of a company, how much assets belong to a person after liabilities are paid.

Revenue Recognition Principal

Record revenue in the period that it is earned (not received)

Matching Principle

Record expenses in the period, in which, they help generate revenue

Expense

The using up of an asset or the encoring of an expense during the production of revenues.

What is the difference between an Asset VS Liabilities

Asset- Provides a future benefit

Liabilities- Pays for a past benefit

Investors

People who provide financial resources in exchange for ownership in the company

Creditors

People who lend money in exchange for interest on the loan

General Ledger

Collection of a company's accounts

Asset Source Transaction

Increase in the total amount of assets and claims

Asset Exchange Transaction

Increase one asset, decrease another

Asset Use Transaction

The decrease in the total amount of assets and claims

MMM

A company that used fraud to create a fake company for investors to see returns at first but then soon see the company fail losing all their money.

Accrual Accounting

Takes into the account of money when it is earned

Cash Bias Accounting

Record revenue only when cash is received or when cash is paid. (not generally accepted)

Accrued Interest Expense

An expense that has been Incurred but not paid (A/P Increase, When collected A/P and Cash Decrease)

Accrued Revenue

Revenue which has been earned but not collected (A/R Increase, when collected A/R Decreases and Cash Increases)

Deferred Expense

Cash paid before the benefit is received

Historical Cost

Record an asset at historical cost and do not change the value.

Long Term Asset

An asset that lasts for a large amount of time or a lifetime (depreciation only exists on long term assets)

What is the difference between an Expense VS Cost?

Expense- An accounting term

Cost- An economic term

Depreciation

The allocation of the cost of an asset to the period benefited. (Estimating the useful life of an asset)

Temporary Accounts

Creating separate columns for revenue and expenses