Accounting 201 Exam 1

Sole Proprietorship

business owned by one person

simple to establish

owner controlled

tax advantages

owner personally liable

financially difficult

Partnership

2 or more owners

simple to establish

shared control

broader skills and resources

tax advantages

personally liable

Corporation

separate legal entity owned by stockholders

easy to transfer ownership

greater capital raising potential

unfavorable tax treatment

lower legal liabilities for owners

Internal Users of Financial Info

Managers

-Finance borrow $ or issue stock?

-Marketing advertising costs

-HR hire or lay off ppl?

-Management expand busi? sell off parts?

External Users of Financial Info

-Investors who should I invest in?

-Creditors should I loan them $?

-Others regulatory agencies, tax authorities, customers, labor

Types of Business Activities - Financing

get large sums of $ from 2 sources:

1. Creditors- borrowing creates liabilities(things the company owes)

2. Owners- selling/issuing stock to shareholders(shareholders equity-how much of a company a stockholder owns)

Types of Business Activities - Investing

obtaining resources or assets(things that have value to the company) to operate a business

e.g. buying and selling land, buildings, equipment, vehicles

Types of Business Activities - Operating

primary activities of business - normal activities the company performs to run their business

e.g. selling goods, providing services, paying employees, advertising, paying utilities

1. Revenues - increase assets resulting from the sale of g&s

2. Expense - cost of assets consumed or services used to generate revenue

Accounting

info system that identifies, records, and communicates the economic events of an organization to interested users.

uses 4 financial statements

Income Statement

reports operating success or failure for a period of time

summarizes revenues and expenses

Statement of Retained Earnings

income the company has earned over its life and kept in the company (not paid to owners in dividends)

over a period of time

Balance Sheet

reports asses and claims to assets at one point in time

assets- resources owned by the company

=cash, a/r, inventory, investments, furniture, equipment, and supplies

liabilities- obligations or debts of the company

=a/p(verbal promise to pay), n/p(written promise to pay), interest payable(we owe interest from borrowing $), salaries payable, unearned revenue </p><p>stockholder's equity- owner's claims on assets</p><p>=common stock or PIC($ contributed by owners when they buy stock), RE

Basic Accounting Equation

Assets = Liabilities + Stockholder's Equity

Statement of Cash Flows

Shows where cash came from and where cash went for a period of time

organized by 3 business activities

Annual Report

public companies are required by law to provided audited financial statements and other material once/yr

Includes: 4 financial stmts, Management discussion and analysis-liquidity(ability to pay debt in 1 yr), capital resources(ability to find operations and expansion), results of operations; Notes to F/S(clarify and expand on info presented, describe accounting policies, describe uncertainties; Auditors report=certified public accountant CPA, to see if fair and follows GAAP and if yes -- Unqualified opinion

Classified Balance Sheet

divides assets and liabilities into current and non-current

helps users see if company has enough assets to pay liabs

Current Assets

assets that are expected to be converted to cash or used up w/in 1 year or one cycle

listed in order of liquidity(how fast converted into cash)

Cash, ST investments, A/R, ST N/R, inventory, supplies, prepaid expenses

Long term investments

investments in stock and bond of other companies which will be held onto for many years

investments in LT assets that we dont use to operate our business

Property, Plant, and Equipment

assets with relatively long useful lives that we use to operate our business

land, buildings, machinery, equipment, vehicles, furniture

Depreciation- allocating the asset's purchase price to the years it will be used instead of expensing the full cost of purchase

Accumulated Depreciation- shows the total amount of depreciation that company has expensed this far in the asset's life

Contra Assets

negative assets

Deprec exp stays the same

carrying value= cost-A/D

Intangible Assets

have no physical substance but have value because they give the company exclusive rights or privileges

noncurrent assets

patents, copyright, trademark, franchise

Current Liabilities

obligations that are due within one year or one operating cycle, whichever is longer

A/P, Wages Payable, ST N/P, Interest payable, taxes payable, unearned revenue

Long term Liabilities

debt expected to be paid after 1 year

LT N/P, bonds payable, lease liabilities, employees pension obligations

Stockholder's Equity (Classified B/S)

PIC paid-in-capital

RE

Ratio Analysis

shows relationship among financial statement data (CA vs CL)

ratios by themselves are a little useful, but they are most useful when used in comparison

intracompany-same ratio for same company

intercompany-same ratio for different companies

industry avg- same ratio against the average of related companies

Profitability Ratios

measures the income or operating success of a company

1. Earnings/share=(NI-perferred stock dividends)/(avg common shares outstanding)

>better

another type of stock in a company

Liquidity Ratios

measures the ST ability of a company to pay current obligations and meet unexpected needs for cash

1. Working Capital=CA-CL

measures ST ability to pay debt

>1 better

2. Current Ratio=CA/CL

measures ST ability to pay debt

>1 better inventory throws this off

Solvency Ratios

measures the ability of the company to survive long into the future (long run success)

1. Debt to total asset ration= Total Liabs/Total Assets

measures the % of assets financed by creditors rather than owners

smaller is better, but still good to have liabilities

Generally Accepted Accounting Principles (GAAP)

the accounting rules publicly traded companies must follow

Financial Accounting Standards Board (FASB)

Creates GAAP

Securities and Exchange Commission (SEC)

enforces the rules for publicly traded companies

technically in charge of creating GAAP but they delegated it to FASB

Accounting Information

the primary goal of accounting is to provide useful information

Characteristics of Useful Information

1. Relevance- info makes a diff in decisions

-predictive value=helps provide accurate expectations

-confirmatory value=helps confirm correctness of prior expectations

2.Faithful Representation- info accurately depicts what really happened

-Complete and Neutral

Enhancing Qualities of Useful Info

1. Comparability

2. Consistency

3. Verifiable

4. Timely

5. Understandability

Accounting Assumptions

1. monetary units- expressed in terms of money

2. economic entity- every entity can be separately identified and corporations and separate entities than the owners

3. periodicity-artificial time periods

4.going concern-continue operating into foreseeable future

5.accrual basis- record transactions in periods they occur

Accounting Principles

1.cost-records assets at cost, not their true market value

2.fair value principle-records assets and liabs at fair value

3.full disclosure- disclose all info that may affect a financial statement user's decision

Constraints in Accounting

1.Materiality- companies do not have to follow GAAP for a small amounts that would not affect user's decision

2.Cost-Benefit-benefit of providing info should outweigh the cost to gather info

3.Conservation-when in doubt, choose the option that will be least likely to overstate assets and income -- better to be on the safe side

Accounting Info System

the system of collecting and processing transactional data and communicating financial info to decision makers

Transaction Analysis

the process of identifying the specific effects of economic events on the accounting equation

Each transaction has a dual effect on the accounting equation

Logic of Transaction Analysis

What happen?

What accounting things were affected?

Did the increase/decrease?

Accounts

an individual accounting record of increases and decreases in a specific asset, liab, or SE item

e.g. cash, supplies, A/P,RE

accounts increase/decrease by debiting/crediting them

if debits>credits---said to have a "debit balance"

T Account

Three Parts:

1. the title

2. left side--debit

3. right side--credit

--whichever side you increase is the "normal balance"

Journal Entries

we keep track of accounting info for our accounts by first recording it in entries

Debits=credits

Basic Steps in Recording Process

1. analyze transaction-what happened? what accounts were affected? did they increase or decrease?

2. journalize transactions-make the journal entry in the "General Journal"(accounting record where journal entries are listed in chronological order)

3. post transaction- transfer (post) the journal info to the "General Ledger"(a 'book' that has a separate page for all our assets, liabs,and SE accounts)

Chart of Accounts

a list of a company's accounts (numbered)

Trial Balance

a list of all our accounts and their debit or credit balance

shows debit=credit

aids in preparation of F/S

Accounts Receivable

Asset

Increases with Debit

Decreases with Credit

Prepaid Insurance

Asset

Increases with Debit

Decreases with Credit

Accounts Payable

Liabilities

Increases with Credit

Decreases with Debit

Unearned revenue

Liabilities

Increases with Credit

Decreases with Debit

Common Stock

Stockholders’ Equity

Increases with Credit

Decreases with Debit

Retained Earnings

Stockholders’ Equity

Increases with Credit

Decreases with Debit

Service Revenue

Stockholders’ Equity

Increases with Credit

Decreases with Debit

Salaries Expense

Stockholders’ Equity

Increases with Debit

Decreases with Credit

Utility Expense

Stockholders’ Equity

Increases with Debit

Decreases with Credit

Contra-asset

Asset

Increases with Credit

Decreases with Debit

Dividends

Stockholders’ Equity

Increases with Debit

Decreases with Credit

Advertising Expense

Stockholders’ Equity

Increases with Debit

Decreases with Credit

Bonds Payable

Liabilities

Increases with Credit

Decreases with Debit

Deprecation Expense

Stockholders’ Equity

Increases with Debit

Decreases with Credit

Buildings

Asset

Increases with Debit

Decreases with Credit

Cash

Asset

Increases with Debit

Decreases with Credit

Rent Revenue

Stockholders’ Equity

Increases with Credit

Decreases with Debit

Equipment

Asset

Increases with Debit

Decreases with Credit

Inventory

Asset

Increases with Debit

Decreases with Credit

Equipment

Asset

Increases with Debit

Decreases with Credit

Wages Payable

Liabilities

Increases with Credit

Decreases with Debit

Taxes Payable

Liabilities

Increases with Credit

Decreases with Debit

Short & Long-Term Loans

Liabilities

Increases with Credit

Decreases with Debit