A200 Exam #1 Indiana University with complete verified solutions

Who are internal v external decision makers?

Internal decision makers are individuals within a company who make decisions on behalf of the company, while external decision makers are individuals or organizations outside a company who make decisions that affect the company.

Difference between Financial v. Managerial accounting.

Managerial accounting focuses on an organization's internal financial processes, while financial accounting focuses on an organization's external financial processes. Managerial accountants focus on short-term growth strategies relating to economic maintenance.

Objective of financial accounting

to accurately prepare an organization's financial accounts for a specific period, otherwise known as financial statements. The three primary financial statements are the income statement, the balance sheet and the statement of cash flows.

What is GAAP and who establishes the rules? Who monitors publicly traded companies?

Generally Accepted Accounting Principles (GAAP or US GAAP) are a collection of commonly-followed accounting rules and standards for financial reporting.

The Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC). The SEC has the authority to both set and enforce accounting standards.

The Securities and Exchange Commission (SEC) is a U.S. government oversight agency responsible for regulating the securities markets and protecting investors.

Who is responsible for accounting information?

(AIS) is a structure that a business uses to collect, store, manage, process, retrieve, and report its financial data so it can be used by accountants, consultants, business analysts, managers, chief financial officers (CFOs), auditors, regulators, and tax agencies.

How are the interests of shareholders different than creditors? What do the terms "shareholder", "stockholder", and "creditor" mean?

Creditors expect their investment and interest to be repaid. Shareholders expect their market prices to be maximized. Therefore, creditors get fixed interest from their investment by using debt contracts. They also have priority of repayment in the event of bankruptcy.

What are the three primary types of business entities? How are corporations unique?

proprietorships, partnerships, and corporations.

Proprietorships and partnerships are simpler forms of business to set up and allow owners to generate revenue and report income. Corporations make the business a separate entity from the owners and bring many benefits in terms of risk management, but do incur double taxation.

Understand the accounting equation and how various entries affect the different elements of the equation.

(Understand that the equation must always stay in balance.)

Assets = Liabilities + Equity. This equation states that the total value of an entity's assets must equal the total value of its liabilities plus its equity. It is this simple equation that forms the foundation for all financial statements.

Understand what accounts are classified in each section of the equation (asset, liabilities, stockholders' equity)

What Are the 3 Elements of the Accounting Equation? The three elements of the accounting equation are assets, liabilities, and shareholders' equity. The formula is straightforward: A company's total assets are equal to its liabilities plus its shareholders' equity.

Know the accounts used to account for common transactions.

They are the most common forms of transactions, which refer to those that are dealt with cash. For example, if a company purchases office supplies and pays for them with cash, a debit card, or a check, then that is a cash transaction.

Know how the accounting equation is affected by the transaction (i.e. assets increase, liabilities increase, etc.)

- cash (an asset) increased

- accounts receivable (an asset) decreased

- equipment (an asset) increased

- loans payable (a liability) increased

Transactions that affect net income will also affect the retained earnings account in the Stockholders' Equity section of the equation.

Retained earnings are affected by any increases or decreases in net income and dividends paid to shareholders. As a result, any items that drive net income higher or push it lower will ultimately affect retained earnings. With net income, there's a direct connection to retained earnings.

Understand how dividends affect the accounting equation. Know which financial statements shows if dividends were declared, or not, during the accounting period.

The payment of both cash and stock dividends impacts the accounting equation by immediately reducing the amount of retained earnings for the company. This requires offsetting accounting entries in other financial accounts with slight changes based on the type of dividend provided.

Identify the characteristics of the three common types of legal organizations.

Which form is most common?

The most common legal forms of organization used by small businesses are the sole proprietorship, the partnership & the corporation.In a sole proprietorship, the owner receives all profits & bears all losses. The principal disadvantage of this form is the owner's unlimited liability.

Be able to identify the reporting entities given a scenario (i.e. owner, investor, lender, etc.)

Examples of reporting entities include listed public companies, large private companies with external shareholders who have no access to financial information other than the annual financial report and public interest entities such as educational institutions

Know the difference between Accrual and Cash Basis Accounting. Which one is allowed under US GAAP? Why isn't one allowed by US GAAP?

Cash accounting reflects business transactions on a company's financial statements when the cash flows into or out of the business. Accrual accounting recognizes revenue when it's earned and expenses when they're incurred, regardless of when money actually changes hands. If you want an audit done under GAAP, you should use the accrual method of accounting. ► The modified accrual method works well when inventory is accounted for using the accrual method, and the cash method is used for recording income and expenses. This method does not adhere to GAAP.

· How do the Revenue and Expense Recognition Principles affect the financial statements?

o Understand when companies should record revenues and expenses.

o Understand the timing of revenue and expense recognition is NOT always when the cash is received or paid.

The revenue recognition principle, a key feature of accrual-basis accounting, dictates that companies recognize revenue as it is earned, not when they receive payment. Accurate revenue recognition is essential because it directly affects the integrity and consistency of a company's financial reporting.

Understand the different sections on the Income Statements and the common subtotal used by companies.

· The income statement presents revenue, expenses, and net income.

· The components of the income statement include: revenue; cost of sales; sales, general, and administrative expenses; other operating expenses; non-operating income and expenses; gains and losses; non-recurring items; net income; and EPS.

Know the steps in the accounting cycle. Distinguish between temporary and permanent accounts.

With a temporary account, an organization redistributes any funds remaining at the end of a specific timeframe, creating a zero balance. While a permanent account indicates ongoing progress for a business, a temporary account indicates activity within a designated fiscal period.

Liabilities

Current Liabilities:

Accounts payable

Accrued expenses

Deferred revenue

Current portion of long-term debt

Other current liabilities

Assets

Current Assets:

Cash and cash equivalents

Short-term marketable securities

Accounts receivable

Inventory

Other current assets