ACC 101 Exam 1

Chapters 1 & 2

Types of Business Activities

Financing activities, Investing activities, Operating activities

Financing Activities

transactions (loans and/or investors) the company has with investors and creditors, paying dividends, long-term liabilities, common stock

Investing Activities

long-term assets (equipment, marketing, land, warehouses, large things of value, etc.) and long-term investments (transactions involving the buying and selling of resources that have long-term benefits)

Operating Activities

Day-to-day/short-term activities (revenue, expenses); transactions that relate to the primary operations of the company

Types of Business Organizations

corporations, sole proprietorships, and partnerships

corporation

company that is legally separate from its owners; stockholders have limited liability if something bad happens (i.e. a lawsuit)

sole proprietorship

business owned by one person; no limited liability, they have to face the full liability for anything that happens; taxes for the company are filed with the person’s individual taxes, they are charged corporation tax.

Partnership

businesses owned by two or more people; no limited liability, they have to face the full liability for anything that happens (even if only one person does something wrong everyone sinks); taxes for the company are filed with the person’s individual taxes, they are charged corporation tax.

Accounting Equation

Assets = Liabilities + Stockholder’s Equity

Assets: total resources of the company

Liabilities: amount owed to creditors

Stockholder’s Equity: owner’s claims to resources

Assets

resources of value (cash, buildings, accounts receivable, inventory (to sell), land, supplies, equipment, prepaid accounts, etc.) that will benefit future operations

Liabilities

what you owe (credit cards, anything payable, loans, etc.)

Stockholder’s Equity

common stock and retained earnings ( dividends and net income); owners’ claim to resources

Net Income

Revenue - Expenses

(also known as earnings/profit)

Accounts Receivable

Money that is owed to you for a good/service but hasn’t been paid yet

Prepaid Account

Payment for an expense in advance

Accounts Payable

money i owe for a good/service done for me by someone else

Deferred Revenue

(liability) when someone pays me in advance for future goods/services

Dividends

Not an expense, go directly to retained earnings, usually paid in cash to stockholders; do not go on income statements (only go on cash flow)

4 Financial Statements

Balance Sheet, Income Statement, Statement of Cash Flow (financing, investing, operating), Statement of Stockholder’s Equity

They are interrelated:

• Net income from the income statement is on the SOSE

• Total Stockholder’s Equity from SOSE is on the balance sheet

• Total cash from statement of cash flows shows up on the balance sheet

Balance Sheet

Presents the financial position of the company at a particular date Financial position:

resources = claims to resources

assets = liabilities + stockholder’s equity (accounting equation)

Income Statement

Reports revenues and expenses of a company

Revenue > expenses = net income

Revenue < expenses = net loss

Statement of Cash Flow

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

operating CF: cash transactions involving revenue and expense activities

financing CF: ct with lenders and stockholders

investing CF: ct for the purchase and sale of investments and long-term assets

Statement of Stockholder’s Equity

summarizes the changes in stockholder’s equity over time (common stock + retained earnings); the companies’ value

common stock

investor money (external)

retained earnings

paid dividend + net income/loss at year end (internal)

Note disclosures

(Part of a company’s annual report) They are used to explain financial statements or to provide information that they failed to include

Management Discussion and Analysis (MD&A)

management (CEO’s) views on significant events, trends, and uncertainties pertaining to the companies operations and resources

not audited; what the company tells you about themselves (financially and overall)

What do accountants (investors and creditors?) follow in the U.S.?

the generally accepted accounting principles (GAAP) which are controlled and updated by the Financial Accounting Standards Board (FASB), which are governed by the Securities and Exchange Commission (SEC)

What do accountants follow outside the U.S.?

the international accounting standards board (IASB)

What do auditors do?

They help ensure that management has appropriately applied GAAP in preparing the company’s financial statements and play a major role in investors’ and creditors’ decisions by adding credibility to the financial statements.

They come into a company and test financial statements, controls, and numbers to see if they’re right

Journal entry

Recording of a business transaction

Posting

the processing of transferring the debit and credit information to journal to individual ledger accounts

General ledgers and ledgers

general ledger: provides, in a single collection, each account with its individual transactions and resulting account balance

ledger: the transaction and balance of one single account

T-Accounts

account title at the top, the left side recording debits, and the right side recording credits

Trial balance

a list of all accounts and their balances at a particular date, showing that total debits equal total credits (they must!!!)

basis of putting together financial statements (balance sheet, income statement, statement of cash flow, and statement of stockholder’s equity)

cheat sheets

2-39/2-6 and 2-41/2-7

which are debits and which are credits?

Debits: Cash, Accounts Receivable, Supplies, Prepaid Accounts (Rent), Equipment, Dividends, Salaries Expense, Rent Expense, Interest Expense, Supplies Expense, and Utilities Expense

Credits: Accounts Payable, Salaries Payable, Interest Payable, Deferred Revenue, Notes Payable, Common Stock, and Retained Earnings

debits vs. credits (short)

DEA vs LOR

debits (up)

D: Dividends

E: Expenses

A: Assets

credits (up)

L: Liabilities (anything payable)

O: Owners Equity ( common stock + retained earnings)

R: revenue

Credit and Debit basic rules

Receive Cash = Debit cash

Spend Cash = Credit cash