MGMT 200 Exam 1 Purdue

Assets

Debit(+) Credit(-), resources

Liability

Debit(-) Credit(+), creditors claims

Equity

Debit(-) Credit(+), owners claims

Normal Balance Equation

Assets = Liability + Equity

Net income

(profit) = Revenues - Expenses

Revenues

Sales of products or services to customers

Expenses

Costs of selling products or services

Dividends

Distribution of profit to stockholders

Financing Activities

transactions the company has with investors and creditors (for borrowed money)

Investing Activities

Transactions involving the purchase and sale of resources that provide benefit for several years

Operating Activities

transactions that relate to the primary operations of the company

Financial Reports

1. Balance Sheet

2. Income Statement

3. Statement of changes in equity

4. Statement of cash flows

Storage Units

Classification as assets, liabilities, equity, revenues and expenses

Income Statement

Reports revenues and expenses over an interval of time, assess the company's ability to earn a profit from running its operations

Statement of Stockholders Equity

summarizes the changes in stockholders equity over an interval of time, =Common Stock + Retained Earnings

Balance Sheet

Presents the financial position of the company on a particular date, Financial position: resources = claims to resources

Statement of Cash Flows

measures activities involving cash receipts and cash payments over an interval of time

Operating Cash Flows

cash transactions involving revenues and expenses

Investing Cash Flows

cash transactions involving purchase and sale of long term assets

Financing Cash Flows

cash transactions involving lenders and stockholders

GAAP

Generally Accepted Accounting Principles

FASB

Financial Accounting Standards Board

SEC

Securities and Exchange Commission (governs FASB)

IASB

International Accounting Standards Board

Role of Auditors

help ensure that a mgmt applied GAAP in preparing the company's financial statements, helps investors and creditors by adding credibility to the financial statements

Objectives of Financial Accounting

1. it is useful to investors and creditors in making decisions

2. helps predict cash flows

3. tells us about economic resources, claims to resources, and changes in resources and claims

Assumptions that underlie GAAP

economic entity, monetary unit, periodicity, going concern

Functions of Financial Accounting

1. measure business activities of a company (record transactions)

2. communicate measurements to external parties for decision making (prepare financial statements)

Account

summary of all transactions related to a particular item over a period of time

Asset Accounts

ex. cash, supplies, equipment and "on account"

Liability accounts

ex. accounts payable, salaries payable, utilities payable, taxes payable, and "on account"

Stockholders equity accounts

ex. Common stock and retained earnings

Chart of Accounts

a list of all account names used to record transactions

Retained Earnings equation

Revenues - Expenses - Dividends

Normal Balance Rule

1. normal account balance

2. use the normal balance side to increase the account

3. use opposite side to decrease the account

Journal

provides a chronological record of all transactions

Journal Entry

format used for recording transactions (include a description of transaction)

Posting

process of transferring the debit and credit information from the journal to individual accounts in the general ledger

General Ledger

provides in a single location the list of transactions affecting each account and the account's balance

Trial Balance

a list of all accounts and their balances at a particular date, shows that total debits equals total credits, assists in preparing adjusting entries, used for internal purposes only

Revenue Recognition Priciple

revenues are recorded in the period in which the goods or services are provided to customers

Matching Principle

also Expense Recognition, expenses are reported in the same period as the revenues they help generate

Cash basis

not GAAP

If revenue recognition is on accrual basis

when goods and services are provided to customers

revenue recognition on cash basis

when cash is received

Expense recognition on accrual basis

in the period costs are used to help produce revenues

expense recognition on cash basis

when cash is paid

Measurement Process

-periodicity

-revenue recognition

-matching concept

-adjusting entries

Prepaid expenses

pay cash to purchase an asset in the current period that will be recorded as an expense in a future period, costs are intially recorded as assets because they provide future benefit, adjusting entry: debit an expense account and credit an asset account

Deferred Revenues

receive cash in the current period that will be recorded as a revenue in a future period, initially recorded as liability because there is an obligation to the customer, adjusting entry: debit a liability and credit a revenue

Accrued Expenses

record an expense in the current period that will be paid in cash in a future period, cost is recorded as an expense and amount owed is recorded as a liability, adjusting entry: debit an expense account and credit a liability account

Accrued Revenues

record a revenue in the current period that will be collected in cash in a future period, adjust entry: debit an asset account and credit a revenue account

Adjusting Trial Balance

lists all account balances after updating them for adjusting entries, prepared after posting the adjusting entries to the general ledger

Closing Entries

to transfer the balances of all temporary accounts to the balance of retained earnings, to reduce the balances of these temp accounts to zero to prepare them for the next period

Post-Closing Trial Balance

lists all account balances after updating for closing entries, helps verify that closing entries were prepared and posted correctly and that the accounts are now ready for the next periods transactions