ACCT 2001 Exam 1 - Peters

Sole Proprietorship

simple to establish, owner-controlled, tax advantages, personal liabilities

Partnership

simple to establish, shared control, broader skills and resources, tax advantages, personal liabilities

Corporation

easier to transfer ownership, easier to raise funds, no personal liability, separate legal entity with stockholders, higher taxes

Accounting

the information system that identifies, records, and communicates the economic events of an organization to interest users

Internal users

answers questions relevant to their jobs (helps plan, run, and organize)

External users

make investing decisions, evaluate risks of lending, ensure compliance to regulations

Sarbanes-Oxley Act (SOX)

regulations passed by Congress to reduce unethical corporate behavior and decrease likelihood of future corporate scandals

Financing

acquiring funds needed to be used by a business

Investing

purchasing the resources (assets) needed to operate

Operating

conducting day to day operations

Income statement

shows how successful your business performed; period of time

Revenue-Expenses=Net Income(loss)

Retained Earnings Statement

indicates how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth; period of time

Beginning Retained Earnings+Net Income(loss)-Dividends=End Retained Earnings

Balance Sheet

gives a picture at a point in time of what your business owns and what it owes; point in time

Liabilities+Stockholder's Equity=Assets

Statement of Cash Flows

reports about cash receipts and cash payments; period of time

Operating, Investing, Financing

Assets

resources owned by a business

Liabilities

amounts owed to creditors in the form of debts and other obligations.

Stockholders' Equity

the owners' claim to assets.

Common Stock

total amount paid in by stockholders for the shares they purchase

Dividends

payments of cash from a corporation to its stockholders

Retained Earnings

the amount of net income retained in the corporation

Revenue

the increase in assets or decrease in liabilities resulting from the sale of goods or the providing of services

Expenses

the cost of assets consumed or services used in the process of generating revenues.

Net Income

the amount by which revenues exceed expenses.

Net Loss

the amount by which expenses exceed revenues.

Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

Financial Statements

financial reports that summarize the financial conditions and operations of a business

Management Discussion & Analysis

management's view on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations

Notes of Financial Statements

notes clarify information presented in the financial statements and provide additional information

Auditor's Opinion

report prepared by independent outside auditors as to the fairness of the presentation of the financial statement

Financial Statement Order

1. Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

4. Statement of Cash Flows

Assets include

current assets

long-term investments

property, plant, and equipment

intangible assets

Liabilities and Stockholders' Equity include

current liabilities

long-term liabilities

stockholders' equity

Operating Cycle

the average time it takes from the purchase of inventory to the collection of cash from customers

Current Assets are

listed in the order in which it can be converted to cash (liquidity)

Order of Liquidity

cash

investments

receivables

inventory

prepaid expenses

Long-term Investments

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations; and (3) long-term notes receivable.

Property, Plant, and Equipment (PP&E)

Assets with long useful lives that are currently used in operating the business; also called Plant Assets or Fixed Assets

Depreciation

used to allocate the cost of these assets to a number of years

Accumulated Depreciation

shows the total of depreciation that a company has taken so far on it's assets

Intangibles

assets that do not have a physical substance yet are often valuable

Current Liabilities

obligations that a company expects to pay within the next year or operating cycle, whichever is longer

Long-term Liabilities

obligations that a company expects to pay after one year

Stockholders' Equity consists of

common stock and retained earnings

Ratio Analysis

expresses the relationship among selected items of financial statement data

Ratio

expresses the mathematical relationship between one quantity and another

Intra -company

2 years for the same company

Industry-average

comparisons of average ratios for a particular industry

Inter-company

comparisons was a competitor in the same industry

Profitability Ratios

measures the income or operating success of a company for a given period of time; earnings per share

Liquidity Ratios

measure the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash; working capital and current ratio

Solvency Ratios

measure the ability of the company to survive over a long period of time; debt to total assets and free cash flow

Earnings Per Share (EPS) equation

(net income - preferred dividends) / average common shares outstanding

Working Capital equation

current assets - current liabilities

Current Ratio equation

current assets / current liabilities

Debt to Total Assets Ratio equation

total liabilities / total assets

Free Cash Flow (FCF) equation

net cash provided by operating activities - capital expenditures - dividends paid

Comparability

results when different companies use the same accounting principles

Consistency

results when a company uses the same principles and methods from year to year

Verifiability

information that can be proved that is free from error

Timeliness

Information that is available to decision makers before it loses capacity to influence decision makers

Understandability

information has this quality if it is presented in a clear and concise fashion

Monitory Unit Assumption

requires that only things that can be expressed in money are included in the accounting records

Economic Entity Assumption

states that every economic entity can be separately identified and accounted for

Periodicity Assumption

states that the life of a business can be divided into artificial time periods

Going Concern Assumption

states that the business will remain in operation for the foreseeable future

Full Disclosure Principle

indicates that companies disclose all circumstances and events that would make a difference to financial statement users

Generally Accepted Accounting Principles (GAAP)

a set of rules and practices, having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposes

Securities and Exchange Commission (SEC)

agency of federal gov that oversees the US federal markets and accounting standard setting bodies

Financial Accounting Standards Board (FASB)

private organization; primary accounting standard setting body - define and amend GAAP

International Accounting Standards Board (IASB)

issue standards for countries abroad; issue International Financial Reporting Standards (IFRS)

Public Company Accounting Oversight Board (PCAOB)

issue audit standards for US companies; created by Sox Act in 2002; review the performance of auditing firms

Accounting Information System includes

1. collecting

2. processing transaction data

3. communicating financial information to decision making

Accounting Cycle

a six-step procedure that results in the preparation and analysis of the major financial statements.

Transactions

economic events that require recording in the financial statements

An account has 3 parts

1. title

2. debit (left side)

3. credit (right side)

If debits are _________ than credits, the account will have a ________ balance.

greater; debit

If credits are ________ than debits, the account will have a _________ balance.

greater; credit

Debits should be greater than credit in

assets, expenses, and dividends

Credits should be greater that debits in

liabilities, common stock, retained earnings, and revenue

Ledger

contains the entire group of accounts maintained by a company and their amounts; provides balance in each of the accounts and tracks the changes in their balances

Posting

the process of transferring amounts from the journal to the ledger accounts

Trail Balance

a list of accounts and their balances at a given time; purpose is to prove debits equal credits

Revenue Recognition Principle

when companies recognize revenue in the accounting period in which the performance obligation is satisfied (when service is performed)

Expense Recognition Principle

when expenses are matched with revenue in the period when efforts are expenses to generate revenues (aka matching principle)

Accrual Basis Accounting

accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged

Cash Basis Accounting

accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash

Adjusting Entries

entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed

Deferals

cash paid or received BEFORE; includes prepaid expenses and unearned revenues

Prepaid Expenses

expenses paid in cash before they are used or consumed

Unearned Revenue

cash received before services are performed

Accruals

cash paid or received AFTER; includes accrued revenue and accrued expenses

Accrued Revenues

revenues for services performed but not yet received in cash or recorded

Accrued Expenses

expenses incurred but not yet paid in cash or recorded

Prepaid Expense before Adjustment

assets too high and expenses too low

Unearned Revenue before Adjustment

liabilities too high and revenue too low

Accrued Revenue before Adjustment

assets too low and revenues too low

Accrued Expense before Adjustment

expenses too low and liabilities too low

Adjusted Trial Balance shows

1. Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

Closing the Books

at the end of the accounting period, companies transfer the temporary account balance to the permanent stockholder's equity account - retained earnings

Post-closing Trial Balance

to prove the equality of the permanent account balances that the company carries forward into the next accounting period; all temporary accounts have a zero balance