ACCT 201A - Final Flashcards

Off the notes

2 Primary Functions of financial accounting

1) To measure business activities

2) To communicate those measurements

Business Activities

• Financing Activities

• Investing Activities

  • Operating Activities

Types of Business Organizations

• Sole Proprietorship

• Corporation

• Partnership

What is the Basic Accounting Equation?

Assets = Liabilities + Stockholder’s Equity

What type of claim are liabilities?

Creditors Claim

What type of claim are Stockholder’s Equity?

Owner’s Claim

What is the equation for Net Income ?

Net Income = Revenue - Expenses

What are the 4 primary financial statements?

• Income Statement

• Statement of Stockholder’s Equity

• Balance Sheet

• Statement of Cash Flows

Income Statement

Report of company revenue and expenses over an internal of time

Statement of Stockholder’s Equity

Changes in Stockholder’s equity over an interval of time

What makes up Stockholder’s Equity?

Common Stock + Retained Earnings

Balance Sheet

Financial Position of a company on a particular date

What are the 3 sections of the balance sheet?

Assets, Liabilities, and Equity

Financial Position

Resources = Claim to Resources

Resources are

Assets

Claim to Resources are

Liabilities and Stockholder’s Equity

Statement of Cashflow

Measures activities with cash receipts and cash payments over an interval of time

What are the 3 activities included in the Statement of Cash Flow?

• Operating Cashflows

• Investing Cashflows

• Financial Cashflows

External Transactions

Transactions with a company and a separate company or individual

Internal Transactions

No exchange with separate economic entities

Accounts

Record of transactions over a particular time

What goes in the Asset Account?

• Cash

• Supplies

• Equipment

What goes in the Liabilities Account?

• Accounts Payable

• Salaries Payable

• Utilities Payable

• Taxes Payable

What goes in the Stockholder’s Equity Account?

• Common Stock

• Retained Earnings

Chart of Accounts

List of all account names used

How do Assets increase according to accounting equation?

Either Liabilities or Stockholder’s Equity increased

How do Assets decrease according to accounting equation?

Either Liabilities or Stockholder’s Equity decreased

What is the Expanded Accounting Equation?

Assets = Liabilities + Common Stock + Revenue - Expenses - Dividends

DEALER stands for what?

Dividends + Expenses + Common Stock = Liabilities + Owner’s Equity + Revenue

What is the purpose of DEALER?

- First half “DEA” are debits

- Last half “LER” are credits

General Ledger

A collection that stores complete record of all accounts and journal entries

Posting

Transferring debits and credits from Journal to individual general ledger accounts

Journal

Chronological record of all transactions

Trial Balance

List of all accounts and balances at a particular date

What does the Trial Balance assist with later?

Assist in preparing adjusting entries for internal transactions

What is the Trial Balance used for?

Used for internal Purposes

Cash basis Accounting

Recording transactions only at the time cash is received or paid

Accrual Basis Accounting

Recording as assets, liabilities, revenue, and expenses occur

In Accrual Basis Accounting, when are assets recorded?

At the time resources are obtained

In Accrual Basis Accounting, when are liabilities recorded?

At the time obligations occur

In Accrual Basis Accounting, when is revenue recorded?

At the time goods or services are provided

In Accrual Basis Accounting, when are expenses recorded?

At the time cost used in running the company

Prepaid Expense

Paying cash to acquire an asset that is not used until a later period

When are prepaid expenses seen as assets?

Prepaid Expense is an asset when purchased

When are prepaid expenses seen as expenses?

Prepaid Expense is an expense when used

Accrued Expense

Used cost in period, but haven’t paid cash for cost yet

What are the steps in adjusting entries for accrued expense?

1) Record liability to be paid

2) Recognize cost as expense

Accrued Revenue

When provided products or services but not yet received cash

What are the steps in adjusting entries for accrued revenue?

1) Record as an asset

2) Recognized as revenue

When are Adjusting Entries needed?

1) Obligations occur before revenue or expense

2) Cashflow occurs after revenue or expense

When are Adjusting Entries unneccessary?

1) Transactions don’t involve revenue or expenses

2) Transactions result in revenue or expenses recorded at the same time as cash flow

Closing Cost

Transfer balances of all temporary accounts to retained earnings

Are revenue expenses and dividends temporary accounts?

Yes, revenue expenses and dividends are all temp accounts

What are reasons for incorrect financial Statements

1) Errors

2) Fraud

3) Occupational Fraud

Errors

Accidental or Intentional mistakes

Fraud

Deceiving others for personal gain

Occupational Fraud

Deliberate misuse of applications for gain

What makes up the Fraud Triangle?

• Opportunity

• Motivation

• Rationalization

Fraud Opportunity

Situations fraud is possible to occur

Fraud Motivation

The need to commit fraud

Fraud Rationalization

Justification for the fraud act

Internal Controls

Attempt to eliminate opportunity for fraud

What is the purpose of internal controls?

• Safeguard assets

• Improve Accuracy of financial accounting information

Sarbanes-Oxley Act of 2002

Required to file financial statements with SEC

What are the guidelines of the Sarbanes-Oxley Act of 2002?

• Internal controls procedures

• Auditor-client relations

What are the components of Internal Controls?

1) Risk Assessment

2) Control Activities

3) Monitoring

4) Information and Communication

What are the types of Control Activities?

• Separation of Duties

• Physical Control

• Proper Authorization

• Employee Management

• E-Commerce Control

Who is responsible for internal controls?

Top Executives

What are the components that make up cash?

• Coins + Currency

• Checks Received

• Savings Accounts

• Checking Accounts

• Credit Card Sales

• Debit Card Sales

• Cash Equivalents

How long must something mature to be a cash equivalent?

Must mature in 3 months

How are Credit Card Sales recorded?

Debit Cash and Service Fee Expense
Credit Service Revenue

If an advertising expense was paid with a company credit card how would it be recorded?

Debit: Advertising Expense

Credit: Accounts Payable

Bank Reconciliation

Matching balance of company cash and bank records

What can cause possible differences in cash balance with company and banks?

1) Timing differences

2) Errors

Steps to reconciling bank accounts

1) Reconcile bank’s cash balance

2) Reconcile company cash balance

3) Update company cash account by recording items

Debit Cash

Cash added to balance

Credit Cash

Cash subtracted from balance

Petty Cash Fund

Cash kept for minor purchases

How are company-issued debit and credit cards dealt with?

• Debit cards are in bank reconciliation

• Credit must be recorded

Where is Cash reported in Financial Statements?

Balance Sheet and Statement of Cashflows

Credit Sale

Selling a product or service and accept a promise to pay in the future

What is another term for credit sales?

Sales on Account

What are the benefits of sales on account?

• The seller makes purchases more convenient for customers

• In long term, increases profitability

What are negatives of sales on account?

• Delay of collecting cash from customers

• Decrease in operating efficiency

• Possible for customers not pay

Invoice

A source document that can identify the date of sale, customer, specific items sold, dollar amount, and payment terms

What is the Equation for Net Revenue?

Net Revenue = Total revenue - returns - allowance - discounts

Trade discounts

A reduction in the listed price

What is the purpose of trade discounts?

It provides incentives to purchase from the company

A company performs surgery for $3,000 with a 10% discount, which is $2,700. How is this recorded if paid on account?

Debit: Accounts Receivable

Credit: Service Revenue

Sales Return

Returns goods previously purchased

Sales Allowance

Customers don’t return goods, reducing customer balance

A pair of sunglasses is purchased for $250, but later returned. How is this transaction recorded?

Debit: Accounts Receivable $250
Credit: Sales Revenue $250
Later
Debit: Sales Return $250
Credit: Account receivable $250

What type of account is Sales Return?

Sales Return is a contra-revenue account

What does the 4 and 10 mean in “4/10”?

Customers receive a 4% discount if payment is made in 10 days

What is the 30 in “n/30” mean?

If customer does not take the discount, full payment is due in 30 days

In a transaction, cash was collected within 10 days, 4/10, n/30. How is this recorded?

Debit: Cash, Sales Discount

Credit: Account Receivable

What does GAAP require for uncollectable accounts to use?

The Allowance Method

Uncollectable Accounts

Bad Debt; Customers accounts we no longer consider collectable

Allowance Method

Company reports its accounts receivable for the net amount expected to be collected

How do people find the amount to be collected in the allowance method?

They estimate amount of current accounts receivable that will be uncollectable in the future