ACC 2361 Exam 1

In accounting (Number) means…?

This is a negative number

Sole proprietorship-

-This is a form of business owned (and usually operated) by one individual.

Partnership-

-a formal arrangement where two or more people or groups own, manage, and run a company together

Corporation-

-a legal business structure that exists completely separate from its owners

T/F Unlike sole proprietorships and partnerships, a corporation is a separate entity from both legal and accounting perspectives.

True, Debts the corporation accrues don’t fall onto the owner(s) head’s

Corporations can raise large amounts of money for growth because they divide ____ of the corporation into ____ that can be sold to new owners

ownership; shares

Dost corporations start out as…?

1. Private

2. Public

1. Private

Why do many private companies go public?

They need a lot of financing

Most companies exist to earn profits for their ___.

stockholders

Stockholder-

-(also called a shareholder) is any person, company, or institution that owns at least one share of stock in a corporation.

Accounting is an information system designed by an organization to ___ the activities affecting its financial condition

Analyze, record, and summarize

The main goal of an accounting system is to capture information about the ____ activities of a company

operating, investing, and financing

Managerial accounting reports is used for-

-company’s employees (internal users)

Financial statements are prepared periodically to provide information to people-

-not employed by the business. (External users)

The four main groups of external users are-

• Creditors- anyone to whom money is owed. 

• Investors- include existing and potential stockholders.

• Directors-  is the short title for the members of a company’s board of directors.

• Government agencies look closely at companies’ financial statements.

The basic accounting equation is-

Assets = Liabilities + Owner’s equity

How can you change the basic accounting equation?

Liabilities = Assets - Owner’s equity

Owner’s equity = Assets - Liabilities

An ___ is defined as a company's present right to an economic benefit. 

asset

What are examples of a Asset?

• Cash,

• Supplies,

• Equipment,

• Buildings,

• Inventory

• Software.

A ___ is defined as a company's present obligation to transfer an economic benefit

liability

Stockholders’ equity represents-

-the owners’ claims on the assets of the business after creditors’ claims have been fulfilled

The owners have a claim for the amounts they contributed directly to the company in exchange for its stock.

Common Stock

The owners have a claim on profits the company has earned for them through its business operations

Retained Earnings

The business itself is viewed as owning the assets and owing the liabilities. Not the stockholders who own the business

This separation between stockholders and business is called the-

-separate entity assumption

T/F

• Assets equals Revenues

• Liabilities equals Expenses

False! They are not the same.

The Net income equation is…

Total revenue- Total expenses= Net Income

Revenues are defined-

-as inflows or enhancements of a company's assets or settlements of its liabilities.

Expenses are defined as-

-outflows or using up of a company's assets or incurrences of its liabilities.

If you increase net income, a company increases its what?

stockholders’ equity

Retained earnings get distributed out as-

-Dividends

A dividend is-

-a cash payment that a company gives to its shareholders out of its yearly profits.

What are the items that appear in Financial statements?

• Assets,

• liabilities,

• stockholders’ equity,

• revenues,

• expenses,

• dividends

There are 4 types of financial statements. What are they?

• Income statement

• Statement of retained earnings

• Balance sheet’s purpose

• Statement of cash flows

Income statement looks at a certain ____ of operations

period

A balance sheet looks at a certain ___ of operations

Point in time

If you see the title “For the Year Ended December 31”

Between an income statement and a balance sheet, you’re looking at…?

You’re looking at a Income statement

If you see the title “At December 31” you’re looking at…?

Since it’s one date, you’re looking at a Balance sheet

The heading of the income statement identifies-

1. The name of the business

2. The title of the report

3. The time period covered by the financial statement.

The unit-of-measure assumption states that-

-results of business activities should be reported in an appropriate monetary unit

Using the unit-of-measure assumption, if you do business in the EU and record in euros. The balance sheets you show people in the US should be in-

-USD

Statement of retained earnings is a more comprehensive statement of stockholders’ equity that explains changes in all stockholders’ equity accounts is provided by large corporations.

what is another word for ‘retained” in this context?

“accumulated”

Balance sheets reports on-

-a business’s assets, liabilities, and stockholders’ equity

If you see the phrase “total assets” you are looking at…?

You’re looking at a balance sheet.

You’re also going to see liabilities and stockholders’ equity

Statement of cash flows-

-includes only those activities that result in cash changing hands.

If, on a financial document, you see multiple sections on cash, you’re probably looking at a..?

You’re looking a Statement of cash flows

The statement of cash flows is divided into three types of activities:

• Operating

• Investing

• Financing

Operating-

-These cash flows arise directly from running the business to earn profit. 

Examples of Operating cash flows?

Cash paid for wages, advertising, rent, insurance, supplies

Investing-

-These cash flows arise from buying and selling productive resources with long lives

Examples of Investing cash flows?

buildings, land, equipment, and software

Examples of Financing cash flows?

 Borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock

If you’re trying to figure out if a company has enough assets to cover its liabilities, you ought to look at the-

-you ought to look at the balance sheets

If you’re a investors expect a return on your contributions to a company, you ought to look at-

-you ought to look at  the income statement for information about the company’s ability to generate profits

If you’re trying to figure out if a company is generating enough cash to pay what it owes, what financial report should you look at-

- the statement of cash flows. You will see Cash as asset on a balance sheet, but not detailed.

Generally accepted accounting principles (GAAP)

-are the minimum standards and guidelines for financial accounting and reporting.

Which of the following is not one of the items required to be shown in the heading of a financial statement

• A statement’s preparer’s name

• The title of the financial statement

• The reporting period date or period

• The name of the business entity

• A statement’s preparer’s name

This is an example of a…?

The picture is an example of a balance sheet.

I’m trying to figure out if a company generated a profit. Would I look at-

a) Balance sheet

b) Income Statement

b) Income Statement

Any account name containing “receivable” → ___

Any account name containing “payable” → ___.

asset ; liability

Creditors may find the ____ and the ____ useful to answer their questions

Balance sheet; Statement of cash flows

They’re trying to see if a company has enough money to cover its liabilities

Investors may look at the _____ and the _____.

Income statement; Statement of retained earnings

They’re trying to see what their long term return might be.

What is an example of a creditor?

A bank giving out a loan