ACC 210 [EXAM 1 REVIEW]

Chapter 1, Chapter 2, and Chapter 3. Exam 1 (Sept 9th at Cox Hall) consists of 36 questions with [Chapter 1: 10 questions, Chapter 2: 12 questions, and Chapter 3: 14 questions.]

Accounting (CHAPTER 1)

A system of maintaining records of a company’s operations and communicating that information to decision makers.

Financial Accounting (CHAPTER 1)

Measurement of business activities of a company and communication of those measurements to decision makers outside of the company (external reporting).

Creditors (CHAPTER 1)

Lend money to a company, expecting to be paid back the loan amount plus interest.

Two Primary Functions of Financial Accounting (CHAPTER 1)

1) Measure business activities of a company.

2) Communicate info about activities to investors, creditors, and others for decision-making purposes.

Financing Activities (CHAPTER 1)

Transactions companies have with INVESTORS AND CREDITORS.

Investing Activities (CHAPTER 1)

BUYING/SELLING RESOURCES (i.e. Equipment) that are expected to benefit the company for SEVERAL YEARS.

Operating Activities (CHAPTER 1)

Transactions related to PRIMARY OPERATIONS of company (i.e. providing products/services to customers and associated costs of doing so; Rent, salaries, utilities, taxes, and advertising).

Assets (CHAPTER 1)

RESOURCES of a company.

Liabilities (CHAPTER 1)

Amounts OWED to CREDITORS.

Stockholders’ Equity (CHAPTER 1)

Owners’ CLAIMS TO RESOURCES, which arise primarily from contributions by the OWNERS AND COMPANY OPERATIONS. Also, shareholders’ equity, owners’ equity, or just equity.

THE ACCOUNTING EQUATION (CHAPTER 1)

ASSETS (RESOURCES) = LIABILITIES (CREDITORS CLAIMS) + SE (OWNERS CLAIMS).

Revenues (CHAPTER 1)

Amounts recognized when the company SELLS PRODUCTS OR SERVICES to customers.

Expenses (CHAPTER 1)

COSTS of providing PRODUCTS AND SERVICES and other business activities during the current period.

Net Income (CHAPTER 1)

REVENUES - EXPENSES = NET INCOME

Best explains company stock price performance.

Dividends (CHAPTER 1)

DISTRIBUTIONS to STOCKHOLDERS, typically in the form of cash.

Corporation (CHAPTER 1)

An entity that is legally separate from its owners and even pays its own income taxes.

Advantages Of a Corporation (CHAPTER 1)

• Easier to transfer ownership.

• Easier to raise funds.

• No personal liability.

• LIMITED LIABILITY - PREVENTS STOCKHOLDERS FROM BEING HELD PERSONALLY RESPONSIBLE FOR FINANCIAL OBLIGATIONS OF CORPORATION.

Disadvantages Of a Corporation (CHAPTER 1)

DOUBLE TAXATION -

1) Company pays corporate income taxes on income it earns.

2) Stockholders pay personal income taxes when company distributes that income as dividends to them.

Sole Proprietorship (CHAPTER 1)

A business owned by one person.

Advantages Of a Sole Proprietorship (CHAPTER 1)

• Simple to establish.

• Owner-controlled.

• Tax advantages (based on personal income tax return).

Disadvantages Of a Sole Proprietorship (CHAPTER 1)

• Owners must have sufficient personal funds to finance business.

• Ability to borrow money.

• DOESN’T offer LIMITED LIABILITY (OWNERS ARE HELD PERSONALLY RESPONSIBLE FOR ACTIVITES OF BUSINESS)!!

Partnership (CHAPTER 1)

Business owned by two or more persons.

Advantages Of a Partnership (CHAPTER 1)

• Simple to establish.

• Shared control.

• Broader skills and resources.

• Tax advantages (based on personal income tax return).

Disadvantages Of a Partnership (CHAPTER 1)

• Owners must have sufficient personal funds to finance business.

• Ability to borrow money.

• DOESN’T offer LIMITED LIABILITY (OWNERS ARE HELD PERSONALLY RESPONSIBLE FOR ACTIVITES OF BUSINESS)!!

Limited Liability Companies / Partnerships (LLC/LLP) (CHAPTER 1)

Evolved in response to liability issues and tax treatment.

Offer limited liability and AVOID DOUBLE TAXATION!

Businesses don’t pay taxes on profits.

Financial Statements (CHAPTER 1)

Periodic reports published by the company for the purpose of communicating a company’s business activities to those outside of the company.

INCOME STATEMENT (CHAPTER 1)

A financial statement that reports the company’s revenues and expenses over an interval of time. Also, statement of operations, statement of income, profit and loss statement, or P&L.

REVENUES - EXPENSES = NET INCOME !!

STATEMENT OF STOCKHOLDERS EQUITY (CHAPTER 1)

A financial statement that summarizes the changes in stockholders’ equity over time.

SE = COMMON STOCK + RETAINED EARNINGS.

Statement of RE - Column in Statement of SE representing RE.

Common Stock (CHAPTER 1)

Amounts invested by stockholders when they purchase shares of stock; external source of equity.

BEGINNING COMMON STOCK + NEW ISSUANCES = ENDING COMMON STOCK

Retained Earnings (CHAPTER 1)

Earnings not distributed as dividends to stockholders over the life of the company.

BEGINNING RE + NI (- DIVIDENDS) = ENDING RE

BALANCE SHEET (CHAPTER 1)

A financial statement that presents the financial position of the company on a particular date. Also, statement of financial position.

ASSETS = LIABILITIES + SE !!

STATEMENT OF CASH FLOWS (CHAPTER 1)

A financial statement that summarizes activities involving cash inflows and cash outflow over a period of time.

CHANGE IN CASH = OPERATING CASH FLOWS + INVESTING CASH FLOWS + FINANCING CASH FLOWS!!

OPERATING CASH FLOWS (CHAPTER 1)

Cash transactions involving revenue and expense activities, such as providing products or services to customers and the associated costs of doing so, like rent, salaries, utilities, taxes, and advertising.

INVESTING CASH FLOWS (CHAPTER 1)

Cash transactions involving the purchase and sale of investments and long-term assets, such as equipment.

FINANCING CASH FLOWS (CHAPTER 1)

Cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders, such as issuing stock and paying dividends.

LINKS AMONG FINANCIAL STATEMENTS (VISUAL) (CHAPTER 1)

1) Income Statement (NI)

2) Statement of SE (Ending Balance)

3) Balance Sheet (Cash)

4) Statement of Cash Flows (Total Cash)

Capital Markets (CHAPTER 1)

A composite of all investors and creditors who provide funds to businesses who need them.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES / GAAP (CHAPTER 1)

The formal standards that have been established for the purpose of financial reporting.

Securities and Exchange Commission (SEC) (CHAPTER 1)

Government agency in the United States responsible for overseeing and enforcing accounting and disclosure requirements for companies issuing and selling securities (stocks and bonds) to the public.

Financial Accounting Standards Board (FASB) (CHAPTER 1)

An independent, private body that has been given responsibility by the SEC for establishing accounting and reporting standards (GAAP) for public and private companies in the United States.

International Accounting Standards Board (IASB) (CHAPTER 1)

An international accounting standard-setting body established to issue global standards to help make accounting practices more comparable worldwide.

FISCAL YEAR (CHAPTER 1)

12-month period company chooses for accounting purposes.

ANNUAL REPORTS (CHAPTER 1)

INCLUDES:

1) FINANCIAL STATEMENTS.

2) MANAGEMENT DISCUSSION AND ANALYSIS (MD&A).

3) NOTES TO THE FINANCIAL STATEMENTS.

4) AUDITOR’S REPORT.

Management’s Discussion and Analysis (MD&A) (CHAPTER 1)

In addition to the financial statements and accompanying disclosure notes, each annual report requires a lengthy discussion and analysis provided by the company’s management. In this section, management provides its views on significant events, trends, and uncertainties pertaining to the company’s

operations,

liquidity,

capital resources,

off-balance sheet arrangements, and

critical accounting estimates.

While the MD&A section may embody management’s biased perspective, it can offer valuable insights for better clarity that might not be available elsewhere.

Disclosure Notes (CHAPTER 1)

Some financial statement amounts include supporting discussion, calculations, and schedules in the notes following the financial statements. These notes include:

additional discussion and details of various items such as investments, inventory, property and equipment, intangible assets, debt, leases, taxes, and employee compensation.

“COOKING THE BOOKS (CHAPTER 1)”

Managers purposefully providing misleading financial accounting information.

Auditors (CHAPTER 1)

Trained individuals hired by a company as an independent party to express a professional opinion of the conformity of that company’s financial statements with GAAP.

ONLY CERTIFIED PUBLIC ACCOUNTANTS (CPAs) MAY PERFORM AUDITS!!

Public Accounting (CHAPTER 1)

Auditing, tax preparation/planning, and business consulting.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION (VISUAL) (CHAPTER 1)

Relevance - Accounting information that possesses confirmatory value and/or predictive value, and that is material.

Materiality - reflects the impact of financial accounting information on investors’ and creditors’ decisions.

Faithful representation - Accounting information that is complete, neutral, and free from error.

Comparability - The ability of users to see similarities and differences between two different business activities.

Consistency - The use of similar accounting procedures either over time for the same company, or across companies at the same point in time.

Verifiability - A consensus among different measurers.

Timeliness - Information being available to users early enough to allow them to use it in the decision process.

ASSUMPTIONS THAT UNDERLIE GAAP (VISUAL) (CHAPTER 1)

Economic entity assumption - All economic events with a particular economic entity can be identified.

Monetary unit assumption - A unit or scale of measurement can be used to measure financial statement elements.

Periodicity assumption - The economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting.

Going concern assumption - In the absence of information to the contrary, a business entity will continue to operate indefinitely.

ACCOUNTING CYCLE (CHAPTER 2)

Full set of procedures used to accomplish the measurement/communication process of financial accounting.

SIX STEPS IN MEASURING TRANSACTIONS (CHAPTER 2)

Step 1 Use source documents to identify accounts affected by a transaction.

Step 2 Analyze the impact of the transaction on the accounting equation.

Step 3 Assess whether the transaction results in a debit or credit to account balances.

Step 4 Record the transaction in a journal using debits and credits.

Step 5 Post the transaction to the general ledger.

Step 6 Prepare a trial balance.

CHART OF ACCOUNTS (CHAPTER 2)

A list of all account names used to record transactions of a company.

EXPANDED ACCOUNTING EQUATION (VISUAL) (CHAPTER 2)

SE = COM. STK + RE = RE = REVENUES - EXPENSES - DIVIDENDS

REV. = INCREASE RE. / SE.

EXPENSES AND DIVIDENDS = DECREASE RE. / SE.

REVENUE RECOGNITION PRINCIPLE (CHAPTER 2)

Record revenue in the period in which goods or services are provided to customers for the amount the company expects to be entitled to receive.

DEBIT (CHAPTER 2)

LEFT SIDE of an account. Indicates an INCREASE to asset, expense, or dividend accounts, and a DECREASE to liability, stockholders’ equity, or revenue accounts.

Debits > Credits

Account has Debit Balance (ADD Debits SUBTRACT Credits)

CREDIT (CHAPTER 2)

RIGHT SIDE of an account. Indicates a DECREASE to asset, expense, or dividend accounts, and an INCREASE to liability, stockholders’ equity, or revenue accounts.

Credits > Debits

Account has Credit Balance (ADD Credits SUBTRACT Debits)

DEBIT AND CREDIT EFFECTS ON ACCOUNTING EQUATION (VISUAL) (CHAPTER 2)

Assets: Debits Increase [NORMAL BALANCE], Credit Decrease

Liabilities/SE: Debits Decrease, Credits Increase [NORMAL BALANCE]

DEBIT AND CREDIT EFFECTS ON EXPANDED ACCOUNTING EQUATION (VISUAL) (CHAPTER 2)

Common Stock/RE/Revenues: Debits Decrease, Credits Increase [NORMAL BALANCE]

Expenses/Dividends: Debits Increase [NORMAL BALANCE], Credit Decrease

DEALOR (VISUAL) (CHAPTER 2)

DEA [INCREASE WITH DEBIT] -

DIVIDENDS,

EXPENSES,

ASSETS,

~~~

LOR [INCREASE WITH CREDIT] -

LIABILITIES

SE/OWNERS EQUITY.

REVENUES.

Journal (CHAPTER 2)

A chronological record of all transactions affecting a firm.

Posting (CHAPTER 2)

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

General Ledger (CHAPTER 2)

A collection of each account with its individual transactions and resulting account balance.

Trial Balance (CHAPTER 2)

A list of all accounts and their balances at a particular date, showing that total debits equal total credits.

Order of Accounts:

1) Assets, Liabilities, SE [BALANCE SHEET]

2) Dividends [STATEMENT OF SE]

3) Revenues, Expenses [INCOME STATEMENT]

ACCRUAL-BASIS ACCOUNTING (CHAPTER 3)

Record revenues when goods and services are provided to customers, and record expenses for the costs used to provide those goods and services to customers.

Creates timing differences between cash inflows and their related revenues, and between cash outflows and their related expenses. These timing differences are recorded as assets and liabilities under accrual-basis accounting.

CASH-BASIS ACCOUNTING (CHAPTER 3)

Record revenues at the time CASH IS RECEIVED and expenses at the time CASH IS PAID.

NOT A PART OF GAAP.

ACCRUAL-BASIS VS CASH-BASIS (REVENUE VISUAL) ACCOUNTING (CHAPTER 3)

FOR REVENUE.

ACCRUAL-BASIS VS CASH-BASIS (EXPENSE VISUAL) ACCOUNTING (CHAPTER 3)

FOR EXPENSE.

ADJUSTING ENTRIES (CHAPTER 3)

Entries at the end of the period used to update balances of revenues and expenses (and changes in their related assets and liabilities) that have occurred during the period but that we have not yet recorded.

Include ONE income statement account (revenue/expense) and ONE balance sheet account (asset/liability).

PREPAID EXPENSES (CHAPTER 3)

Arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period.

Adjusting entry is needed to:

1. Decrease the asset’s balance to its remaining (unused) amount and

2. Recognize an expense for the cost of asset used.

CONTRA-ACCOUNT (CHAPTER 3)

An account with a balance that is opposite, or “contra,” to that of its related accounts.

ACCUMULATED DEPRECIATION IS A CONTR-ASSET ACCOUNT AND GETS CREDITED!!

DEFERRED REVENUES (CHAPTER 3)

Arise when a company receives cash in advance from customers, but goods and services won’t be provided until a later period.

Adjusting entry is needed to:

1. Decrease the liability to its remaining amount owed and

2. Recognize revenue.

ACCRUED EXPENSES (CHAPTER 3)

Occur when a company has used costs in the current period, but the company hasn’t yet paid cash for those costs.

Adjusting entry is needed to:

1) Record the liability to be paid and

2) Recognize the cost as an expense.

ACCRUED REVENUES (CHAPTER 3)

Occur when a company provides products or services but hasn’t yet received cash.

Adjusting entry is needed to:

1) Record an asset for the amount expected to be received and

2) Recognize revenue.

NO ADJUSTMENT NECESSARY (CHAPTER 3)

Adjusting entries are unnecessary in two cases:

1) For transactions that do not involve revenue or expense activities and

2) For transactions that result in revenues or expenses being recorded at the same time as the cash flow (i.e. a company receiving cash on the same day for a service they performed).

ADJUSTED TRIAL BALANCE (CHAPTER 3)

A list of all accounts and their balances after we have updated account balances for adjusting entries.

CLASSFIED BALANCE SHEET (CHAPTER 3)

Balance sheet that groups a company’s assets into current (LESS than one year) assets and long-term (MORE than one year) assets and that separates liabilities into current liabilities and long-term liabilities.

PERMANENT ACCOUNTS (CHAPTER 3)

All accounts that appear in the BALANCE SHEET, INCLUDING RETAINED EARNINGS; account balances are carried forward from period to period.

ASSETS, LIABILITIES, AND SE!!

TEMPORARY ACCOUNTS (CHAPTER 3)

All REVENUE, EXPENSE, AND DIVIDEND accounts; account balances are maintained for a single period and then closed (or zeroed out) and transferred to the balance of the Retained Earnings account at the end of the period.

CLOSING ENTRIES (CHAPTER 3)

Entries that transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained Earnings account.

Revenues—All revenue accounts have credit balances. To transfer these balances to the Retained Earnings account, we debit each of these revenue accounts for its balance and credit Retained Earnings for the total. The revenues included in closing entries are the same as those in the income statement.

Expenses—All expense accounts have debit balances. To transfer these balances to the Retained Earnings account, we credit each of these accounts for its balance and debit Retained Earnings for the total. The expenses included in closing entries are the same as those in the income statement.

Dividends—The Dividends account has a debit balance. To transfer this balance to the Retained Earnings account, we credit Dividends for its balance and debit Retained Earnings for the same amount. Dividends are reported in the statement of stockholders’ equity.

QUESTIONS FOR CLOSING ENTRIES CONTEXT (CHAPTER 3)

1. What is the balance of each individual revenue, expense, and dividend account after closing entries?

• Answer: Zero. We have “closed” these accounts to a balance of $0, so we can start from scratch in measuring revenues, expenses, and dividends of the next period.

2. What is the ending balance of Retained Earnings after closing entries?

• Answer: The beginning balance of Retained Earnings plus net income (revenues minus expenses) less dividends for the period. In this example, the beginning balance is $0 because this is Eagle’s first month of operations (there was no net income or dividends before this month). After closing entries, the balance is updated to reflect all transactions related to revenues, expenses, and dividends during the period. This can be seen in the T-account below.

POST-CLOSING TRIAL BALANCE (CHAPTER 3)

A list of all accounts and their balances at a particular date after we have updated account balances for closing entries.