Accounting 2101 GSU Exam 1: Key Terms & Definitions

Corporation

Advantages-

- Easier to transfer ownership.

-Easier to raise funds.

-No personal liability.

Disadvantages-

-Double taxation

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Internal Users

-Users inside the company.

-Marketing

-Management

-Finance

-Human Resources

External Users

-Users outside the company.

-Investors

-Creditors

Accounting Equation

Assets=Liabilities+Stockholder's equity.

Assets

Resources owned by a business including:

-Cash

-Equipment

Liabilities

Arising from expenses including:

-Accounts Payable

-Interest Payable

-Wages Payable

-Sales taxes Payable

-Income taxes payable

Stockholder's equity

-Investors who have stock in the company that get income.

Operating Activities

-Once a business has the assets it needs, it can begin its operations.

-Revenues- Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue).

-Inventory- Goods available for sales to customers.

-Accounts Receivable- Right to receive money from a customer as a result of a sale.

Investing Activities

-Purchase of resources a company needs to operate. Hope to generate revenue.

-Resources owned by a business are assets.

Financing Activities

1) Borrowing money -liabilities are amounts owed

-Party to whom amounts are owed are creditors.

2) Selling shares of stock for cash (payments to shareholders are dividends)

Income Sheet

-Reports revenues and expenses for a specific period of time.

-Net income- Revenues exceed expenses.

-Net loss- Expenses exceed revenues.

-Past net income provides information for predicting.

Retained Earnings Statement

-Net income is needed to determine the ending balance in retained earnings.

-Statement shows amounts and causes of changes in retained earnings during the period.

-Time period is the same that is covered by the income statement.

-Users can evaluate dividend payment practices.

Balance Sheet

-Ending balance in retained earnings is needed in preparing the balance sheet.

-Reports assets and claims to assets at a specific point in time.

-Assets = Liabilities + Stockholder's Equity.

-Lists assets first, followed by liabilities and stockholder's equity.

Interrelationships between Income sheet, Retained Earnings Sheet and Balance sheet.

-Net income is found on income statement and Retained Earnings Sheet.

-Cash is found on balance and statement of cash flows.

-Cash on balance sheet is ending cash balance on statement of cash flows.

-Retained earnings is on the balance sheet (on stockholders equity) and it is also on statement of retained earnings.

Purpose of Auditor's Report

-Auditor's opinion as to the FAIRNESS of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles (GAAP)

Types of Assets

-Current Assets- Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer.

Ex: Cash, investments, receivables, inventories, prepaid expenses.

-Long-term investments-Investments in stocks and bonds of other corporations that are held for more than one year.

Ex. Land or buildings that company is NOT using in operating activities, long-term notes receivable.

-Property, plant, and equipment- Long useful lives. Currently used in operations.

Ex. Land, buildings, equipment, delivery vehicles, and furniture.

Depreciation- Allocating the cost of assets to a number of years.

Accumulated depreciation- Total amount of depreciation expensed thus far in the asset's life.

-Intangible assets- Assets that do not have physical substance.

Ex. Goodwill, patents, copyrights, trademarks/trade names.

Earnings Per Share

Measures the net income earned on each share of common stock

EPS= (Net Income -Preferred Dividends) / Average Common Shares Outstanding

Identify the reason companies pay dividends

-To keep stockholders happy so that they can maybe invest more stocks in the company, keep their stocks in their company, and attract more people to buy stocks.

Current Ratio

-Measure the short term ability to pay maturing obligations and to meet unexpected needs for cash.

- Current Assets / Current Liabilities

Debt to asset ratio

Total liabilities / Total assets

-A high debt to asset ratio is bad. You want the lowest debt to asset ratio possible. If you think logically about it, you do not want more liabilities then asset ratios.

Free Cash Flow

Measurement to provide additional insight.

-Free Cash Flow = Cash provided by Operations - Capital Expenditures - Cash Dividends

Generally Accepted Accounting Principles (GAAP)

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

-Relevance- Accounting information has relevance if it would make a difference in a business decision.

Effect of business transactions on the accounting equation

-Assets have to equal liabilities + stockholders equity.

-Also think about buying supplies. This is a little bit different from the accounting equation. This will increase assets for supplies and also decrease assets because your buying with cash. So some things like this will have two asset transactions instead of an asset transaction and a liability transaction.

Characteristics of the double entry-system

- Each transaction must affect two or more accounts to keep the basic accounting equation in balance.

-Recording done by debating at least one account and crediting another.

-Debits MUST EQUAL Credits

Sequence in Recording Process

1) Analyze each transaction.

2) Enter transaction in a journal.

3) Transfer journal information to ledger accounts (entire group of accounts maintained by a company).

Prepare or analyze journal entries

When you are preparing or analyzing journal entries make to:

1) Disclose the complete effects of a transaction.

2) Provides a chronological record of transactions.

3) Helps to prevent or locate errors because the debit and credit amounts can be easily compared.

Identify source documents

A sales slip, a check, a bill, or a cash register tape that provides evidence of a transaction.

Apply debit/credit rules and normal account balances

-Debit must equal credits.

-Debit on left side

-Credit on right side and INDENTED

Analyze account activity and calculate ending account balances

-For instance when you do t-charts, do a t-chart for cash and add up the total. For service revenues you would do the same and add up the total.

Purpose of a trial balance

-PURPOSE is to prove that debits equal credits.

Characteristics of Trial balance

-A list of accounts and their balances at a given time.

-Accounts are listed in the order in which they appear in the ledger.

-May also uncover errors in journalizing and posting.

-Useful in the preparation of financial statements

Apply the Revenue Recognition Principle

-Companies recognize revenue in the accounting period in which the performance obligation is satisfied.

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Calculate net income using accrual basis of accoutning

-The revenues are recognized WHEN SERVICE IS PREFORMED, regardless if payment is given so calculate revenue WHEN SERVICE IS PREFORMED.

-Expenses are recognized WHEN INCURRED REGARDLESS of when they are paid off

Why are adjusting entries needed

They are needed to:

-Ensure that the revenue recognition and expense recognition principles are followed.

-Are required every time a company prepares a financial statements.

-Includes one income statement and one balance sheet account.

-Never include cash.

What is the impact of not making adjusting entries

-It looks bad because you would overstate or understate assets or liabilities. The numbers you have will be incorrect.

Define Depreciation

-Buildings, equipment and motor vehicles (long-lived asset) are recorded as assets, rather than an expense in the year acquired.

-Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset's useful life.

-Depreciation does not attempt to report the actual change in the value of the asset.

Characteristics of adjusted trial balance

-After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (Adjusted Trial Balance).

-The adjusted trial balance's purpose is to prove the equality of debit balances and credit balances in the ledger.

-The adjusted trial balance is the primary basis for the preparation of the financial statements.

Purpose of Post-Closing Trial Balance

-Prove the equality of the permanent account balances that the company carries forward into the next accounting period. All temporary accounts will have zero balance.

Calculate the retained earnings balance after closing entries

If 200 dollars supply expense is debited, we need to credit 200 dollars supply expense in order to 0 out. After that we would debit 200 dollars Retained earnings and then credit supplies expense 200.

closing Journal entries

-Brings the revenues and expenses (temporary accounts) to 0.

-The reason you do it is because you want to know your net income on a yearly basis so your temporarily bringing it to zero, and then resuming your accounts at the start of the next year.

• Identify the advantages of the corporate form of business organization

Easier to transfer ownership

Easier to raise funds

No personal liability

Identify the disadvantages of the corporate form of business organization

double taxed

file annual paperwork

• Identify internal users of financial information.

Marketing- price for ipod to maximize net income?, Management- which product line most profitable;should eliminate any products?, Finance- have enough money to pay dividends?, Human Resources- can we give raises?

Identify external users of financial information.

Investors- is company earnings satisfactory income?, Creditors- Will company be able to pay its debts?, Investors- how does company a compare in size and profitability to company B.

What is the accounting equation?

Assets = Liabilities + Stockholders' Equity

What order does the balance sheet go in?

assets first, followed by liabilities and stockholders' equity.

What are the three activities within a business?

Operating, Investing, and Financing

Name the two primary sources of outside funds in Financing activities and what they do.

1. Borrowing money

•Liabilities - amounts owed

•Creditors- party to whom amounts are owed

•Notes Payable, Bonds Payable- different types of liabilities

2. Issuing (selling) shares of stock for cash.

•Dividends- payments to stockholders

Name some Investing activities

Purchase of resources a company needs to operate.

• Computers, delivery trucks, furniture, buildings, etc. (property, plant, and equipment)

•Resources owned by a business are called assets.

•Investments are another example of an investing activity

Name some operating activities

Revenues - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue).

• Inventory - Goods available for sale to customers.

• Accounts receivable - Right to receive money from a customer as the result of a sale.

Revenues

- Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue).

Inventory

Goods available for sale to customers.

Accounts Receivable

Right to receive money from a customer as the result of a sale.

Expenses

cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).

Liabilities from expenses

include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.

Net Income

when revenue exceeds expenses

Net Loss

when expenses exceed revenues

What order does the paperwork go in?

Income Statement → Retained Earnings Statement → Balance Sheet → Statement of Cash Flows

Identify the purpose of the auditor's report.

Auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

Identify the different categories of assets found on the balance sheet

Current assets, Long-term investments, property,plant,equipment, Intangible assets

Define a current asset

Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer

How do companies list current assets

Companies list current asset accounts in the order they expect to convert them into cash.

Name the 5 types of current assets

1) cash, (2) investments, (3) receivables, (4) inventories, and (5) prepaid expenses

Name the Long Term Liabilities

Include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities

Name the Current Liabilities

are accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable.

Calculate EPS

EPS=(Net Income-Preferred Dividends)/(Average Common Shares Outstanding)

Identify the reasons companies pay dividends.

Tax benefits,, but mainly because it provides certainty for the company's well being, and obtain more investors

Calculate the current ratio and its purpose

(Current Assets)/(Current Liabilities)

The purpose is to see for every dollar of liability, the company has ___$__ of current assets

Calculate a high debt to assets ratio and its purpose

(Total Liabilities)/(Total Assets)

This ratio measures the percentage of total financing provided by creditors, rather than stockholders.

o The ratio means that every dollar of assets was financed by __$__ of debt

Define Free Cash Flow

Cash Provided by Operations - Capital Expenditures - Cash Dividends

• Define 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

Define relevance in accounting

it would make a difference in a business decision. Information is considered relevant if it provides information that has predictive value, that is, helps provide accurate expectations about the future

Define transactions

economic events that require recording in the financial statements.

What is the effect of business transactions on the accounting equation.

Dual effect on the accounting equation

Identify the characteristics of the double-entry system.

o Each transaction must affect two or more accounts to keep the basic accounting equation in balance (debits must equal credits)

Identify the sequence of steps in the recording process.

o Analyze each transaction → Enter transaction in a journal → Transfer Journal information to ledger accounts

•More detailed: The Journal&Journalizing → The Ledger → Chart of Accounts → Posting to Ledger

Identify source documents

such as a sales slip, a check, bill, or a cash register tape, provide evidence of the transaction.

• Apply debit/credit rules and normal account balances.

• Debit is up on asset, expense

• Debit is down on liability, equity, revenue

• Credit is up on liability equity, revenue

• Credit is down on asset, expense

• Identify the purpose of a trial balance.

Purpose is to prove that debits equal credits.

Define the Revenue Recognition Principle

Companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Identify the difference in Accrual Basis of Accounting

transactions recorded in the periods in which the events occur.

• Revenues are recognized when services performed, even if no cash received.

• Same goes for expenses ^

Identify why adjusting entries are needed and analyze the impact of not making adjusting entries.

o They ensure that the revenue recognition and expense recognition principles are followed

o Required every time a company prepares financial statements

o Includes one income statement account and one balance sheet account

o NEVER include cash

o Apple example with iPhone revenue

Define depreciation.

Companies report a portion of the cost of a long-lived asset as an expense (aka, depreciation) during each period of the asset's useful life

When are Buildings, equipment, and motor vehicles (long-lived assets) are only recorded as assets?

In the year acquired; afterwards due to depreciation has it as an expense

What is the first step before having Financial Statements?

An Adjusted Trial Balance

Identify the purpose of closing entries

o To see the overall profitability of the company

o Produce a zero balance in each temporary account

Name the Long Term Liabilities

Credits gain with

Gains

Income

Revenues

Liabilities

Stockholders' (Owner's) Equity

Debits gain with

Dividends (Draws)

Expenses

Assets

Losses