MA 2000 - Exam 1 Purdue

Indirect method to statement of cashflows

Indirect method to statement of cashflows

take net income and reconcile it all:

Net income
+Non cash items (like depreciation and amortization)
-change in operating assets

Sole Proprietorship

A business owned by one person

Partnership

a business organization owned by two or more persons who agree on a specific division of responsibilities and profits

Operating Activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. Sell, buy and marketing.

Corporation

business owned by stock holders who share profits but are not personnally responsable for debts

Financing Activities- Debt Financing

1. Borrowing from bank 2. Borrowing from investors through bonds payable

Financing Activities- Equity Financing

Selling shares or "equity" in exchange for capital; Part of cash flow statement

Investing Activities

Activities that increase or decrease the long-term assets available to the business; a section of the statement of cash flows.

External user of accounting

Potential and current investors, Creditors and lender, Taxation authority and regulators

Internal users of accounting

Marketing department, Management team, Finance Department

Accounting Equation

Assets = Liabilities + Owner's Equity

Income Statement

Revenues - Expenses = Net Income

statement of stockholders' equity

Common Stock + Retained earnings

Common Stock

Prev. Balance - repurchased stock + common stock issued

Retained Earnings

Prev. Retained earnings + Net income - Dividends and other

Statement of Cash flows

What order are statement sheets written?

1. Income statement
2. Statement of stockholders equity
3. the balance sheet
4. statement of cash flows

Notes to financial statements

Notes clarify information presented in the financial statements and provide additional detail.

MD&A

Management Discussion and Analysis; A section of a company's annual report in which management discusses numerous aspects of the company, both past and present

Accounting Eq. Issuing stock

Debit(+) Assets -> Cash

Credit(+) Stockholders equity ->Common Stock

Accounting Eq. Paid Rent in advance

Credit(-) Assets -> Cash

Debit(+) Assets -> Prepaid Expenses

Accounting Eq. Purchase office supplies on Account

Debit(+) Assets -> Operating Expense

Credit(+) Liabilities -> Accounts payable

To indicate a liability do you add(Credit) or or subtract(Debit) the liability account

Add(Credit)

Accounting Eq. Signed bank Note in Exchange for Cash

Debit(+) Assets -> Cash

Credit(+) Liabilities -> Notes payable

Accounting Eq. Purchased equipment w/ cash

Credit(-) Assets -> Cash

Debit(+) Assets -> Operating expenses

Customer prepayment is also known as ..

Deferred or unearned revenue

Accounting Eq. Received customer prepayment

Debit(+) Assets -> Cash

Credit(+) Liabilities -> Deferred/Unearned revenue

Accounting Eq. Hired an employee

Non-accounting transaction until employee paid

Accounting Eq. Provided service to customer for cash

Debit(+) Assets -> Cash

Credit(+) Stockholders Equity -> Revenue

Accounting Eq. Provided service for cash on account

Debit(+) Assets -> Accounts receivable

Credit(+) Stockholder Equity -> Revenue

Accounting Eq. Paid employee wages

Credit(-) Assets -> Cash

Debit(-) Stockholder Equity -> Expense

Accounting Eq. Received Payment On Account from Customer

Debit(+) Assets -> Cash

Credit(-) Assets -> Accounts Receivable

Accounting Eq. Paid Cash Dividend

Credit(-) Assets -> Cash

Debit(-) Stockholders Equity -> Dividends

Chart Account

List of all account titles grouped into six major titles in the following order:
Assets, liabilities, Equity, Revenues, Expenses, Dividends

T-Account

For the left side if the T account debit is a ____ and credit is a _____

Increase, decrease

For the left side if the T account debit is a ____ and credit is a _____

decrease, increase (Except: Expense and dividend T accounts, where it is flipped)

Source Document

A business paper from which information is obtained for a journal entry

Journal entry

The initial recording of an accounting transaction

General journal

The record in which ANY type of business transaction can be recorded in chronilogical order (high flexibility)

Compound Journal Entry

A journal entry that is characterized by having multiple debits and/or multiple credits

General Ledger

Journal where any transaction can be recored, however organized by account.

Trial balance

All credits and debits from all ledgers are listed into two columns. Prepared during each financial period in summation of the closing of the previous ledgers. Used to pinpoint errors made during the creation of the ledger.

Five major steps of accounting

Analyze, Record, Adjust, Report, Close

Revenue Recognition Principle

1. Identify the contract with customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue at the point the performance obligations are satisfied

Ex. I give you a $1 apple and you tell me you'll pay me for it next month, when do i recognize the revenue($1) ?

Right now, my performance obligations have been filled.

Ex. I give you $1 and you tell me you'll give me an apple for it next month, when do you recognize the revenue($1) ?

Next month, when you satisfy your performance obligations.

Expense Recognition Principle (Matching Principle)

The recognition of expense is matched to the recognition of revenue in the same period.

cash basis vs accrual basis accounting

cash basis: revenues/expenses recorded when cash is received/paid; not allowed under GAAP; easier to follow

accrual basis: revenue recorded when earned; expenses matched with revenue; provide a better picture of a business's net income or loss; used by most business

Accounting adjustments: Defferals

1. Prepaid expenses: Future expenses that are paid in advance and hence recognized initially as an asset (ex. Prepaid rent)

[assets down, expenses up]

2. Unearned revenues: Allocating previously recorded unearned revenue unearned revenue to revenue.

[Liabilities down revenue up]

Accounting adjustments: Accruals

1. Accrued Expenses : Recording expenses that have not yet been paid.

[Liabilities up, Expenses up]

2. Accrued Revenue : Recording revenues that have not yet been received.

[Assets up, revenue up]

Asset Depreciation

A process that is concerned with the decrease of the value of an asset over time

straight line depreciation

cost / useful life(years)

Contra Accounts

An account (ex. Depreciation expense) that offsets against another account. (ex. office equipment)

Book Value

the difference between the cost of a depreciable asset and its related accumulated depreciation on balance sheet

How do Amortization and depreciation affect operating cash flows

They dont

Ammortization

the reduction of a loan balance through payments made over a period of time

Unlike income statement, Statement of cashflows, And statement of stockholder equity, the balance sheet...

Is not a statement coving a fixed period of time, it is ever growing

Permanent Accounts

All accounts that appear in the balance sheet; account balances are carried forward from period to period - Assets, Liabilities, common stock, retained earnings

Temporary Accounts

Information within. a particular period. - revenues, expenses, dividends

What happens to temporary account balances at the end of the accounting period

They are transferred to retained earnings.

Current Assets or Current Liabilities

Assets-
Will be consumed or turned to cash within one year
Liabilities- Will require payment w/in one year

Order of balance sheet

Assets
- Current Assets
-Non Current
Liabilities
-Current Liabilities
- Non Current
Stockholders Equity
-common stock
-retained earnings

Cash Equivalents

Short-term, highly liquid investments that can be readily converted to a specific amount of cash

Non-cash expenses

Depreciation and Amortization...intangibles

In a T chart, where are the beginning and ending balances

The same side that would be positive (relative to the account the t chart is of) on the accounting equation.

what part of accounting eq. are revenue and expenses

Equity

In the statement of cash flows, Paying interest on a loan or receiving interest/dividend payments is a ________ , however, Paying dividends in your own stock and taking out and paying a loan itself is _______

operating activities,
financing activities

What part of accounting eq. are wages payable

Equity (retained earnings -> expenses)

Amortization

the process of gradually expensing the cost of an intangible asset (like patents, trademarks, or goodwill) over its useful life. It's similar to depreciation, which applies to tangible assets (like machinery or buildings).