MGMT 212 - Exam 1

2 primary functions of accounting

Measure and communicate what happens

financial equation

assets = liabilities + stockholders' equity

net income/profit

revenue/sales

dividends

distribution of profit to stockholders

operating/managerial activities

transactions related to operations of a company

financing activities

outside of company to earn money paying dividends to investors - both acquisition and paying of debt

investing activities

multi-year use, invest in future cost provide long-term benefit

balance sheet

photograph/point in time - financial position of a company on a particular date

income statement

reports revenue and expenses - period of time

net income and net loss

stockholders' equity

common stock (externally funded) + Retained Earning (internally funded) example: dividents

statement of cash flows

see how company spends cash

3 categories: customers expenses, long-term assets, and cash from bank

sole proprietorship

business owned by 1 person

partnership

owned by 1 or more persons

FASB

common abbreviation for Board establishes financial accounting

best describes financial accounting

measurement of a company's business activities & communicating those measurements to external parties

if total liabilities of a company equals $16,000 & Stockholders' Equity = $9,000 then total assets equals 7,000 : true/false

false

GAAP

General Accepted Accounting

unspoken assertions

proper records exist to support all amounts, accurate, proper classification, real, complete, timely

True/False Accounting info is used by investors to decide whether to invest in a company's stock

true

2 fundamental qualitative characteristics identified by the FASB conceptual framework

relevance & faithful representation

assets

resources of the company

cash

currency in bank or on-hand

accounts receivable

amounts owed to company from customers

office supplies

unused items purchased for use in business

prepaid rent

rent paid in advance

liabilities

amount owed

accounts payable

amount paid in future for purchases

deferred revenue

cash received in advance from customers to goods

measuring external transaction steps

1. use source documents to identify accounts affected by external transactions

2. analyze the impact of the transaction on the accounting equation

3. assess whether transaction results in debit/credit to account balances

4. record transaction in journal using debit/credit

5. post transaction to general ledger

6. prepare a trial balance

asset accounts

cash, supplies, and equipment

liability account

accounts payable, salaries payable, utilities payable, & taxes payable

stockholders' equity

common stock & retained earnings

retained earnings

revenues, expenses, & dividends

trial balance

list accounts & balances at particular date

% change

(current year-period year)/prior year * 100%

which of the following is possible for a particular business transaction?

decrease assets, decrease liabilities

accrual-basis accounting

1. record revenues in the period that goods & services are provided to customers

2. record expenses in the period that costs are used to provide those goods & services to customer

revenue recognition principle

recorded in the period in which goods & services are provided to customers

cash-basis accounting

1. record rev. @ time receive cash

2. record expenses @ time pay cash

Not accepted by GAAP

prepayments

cash flow before revenue & expenses are recognized

accruals

opposite prepayments - involve cash flows occurring after the revenues & expenses are recognized

depreciation

asset takes more than 1 year to expire

-process of allocating the cost of an asset, such as equipment, to expense over the asset's useful life

accumulated depreciation

reduce assets indirectly - the account is called contra account - account with a balance that is opposite or "contra" to the related accounts

accrued sales

company recorded cash payment as an expense in December - salaries expense

interest receivable

@ end of month bank needs adjusting entry to record an asset for the amount expected to be received

adjusted trial balance

complete measurement process - update balances of assets, liabilities, revenues, and expenses for changes created by adjusting entries

Income Statement

1. total revenue = products & services provided to customers during the reporting period

2. total expenses - costs used to operate the business during the reporting period

3. net income = total revenue - total expenses

4. reports revenue & expenses over a period of time

classified balance sheet

groups a company's assets & liability accounts into current & long-term categories

operating cycle

average time it takes to provide a customer & then collect that customer's cash

closing entries

transfer balances of all temp. accounts (revenues, expenses, and dividends) to balance of retained earning account

purposes of closing entries

1. transfer balances of all temp. accounts to retained earnings account

2. reduce balances of these temp. accounts to zero to prepare them for measuring activity in the next period

post-closing trial balance

verify that we prepared & posted closing entries correctly & that the accounts now ready for next periods' transactions

SSI pays office rent in cash for next 6 months Rent $1,800/month (december-may) or $10,800 total

Deferred Rent Expense _______

____________ __________

1,800

Rent Expense 1,800

Which of the following is characteristic of adjusting entries?

allows for proper application of the revenue recognition principle or the matching principle

Chan Sports purchases one year of rent on November 1st for $12,000 ($1,000 per month), debiting prepaid rent on Dec. 31st, Chan sports would record the following year end adjusting entry

11/1 Prepaid Exp. 12000

Cash 12000

12/31 Prepaid Exp. 2,000

Prepaid Rent 2,000

Which of the following is equivalent to the book value of an asset?

cost of the asset less the accumulated depreciation

Cost 32,400 - offsets parent account

accrued revenue

debit asset & credit revenue account

adjust entry

debit an asset account & credit a revenue account

accrual wage expense

trial balance only shows payment through Dec. 23rd period from Dec.24th-Dec 31st

Wage expense 810

Wage Payable(liability) 810

obtain 2 year bank loan of $36,000, annual interest on the loan 10% due each November 30th

cash 36,000

notes payable 36,000

not a characteristic of adjusting entry

reduce the balances of revenue, expense & dividend accounts to 0

fill in the blank for the wages payable adj. entry

debit ___

credit ___

salaries expense

salaries payable

which of the following describes closing process

transfer the balances of temp. accounts to reatined earnings

the balance of retained earnings in the adjusted trial balance

equals balance of retained earnings

which of the following is listed in a post closing trial balance

salaries payable

chart of accounts

list of all account names used to record transaction of a company

general journal/book original entry

chronological record of all transactions affecting a company

carrying value/book value

asset's original cost less accumulated depreciation

accounting cycle

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

general ledger

collection each account with indirection transactions & revenues account balance

service revenue is found in which financial statement

income statement

deferred revenue would be found in which financial statement

balance sheet