econ 3a midterm 1

ASSET

Probable future economic benefit as a result of a past transaction, examples - Cash, accounts receivable

LIABILITY

Probable future economic sacrifice as a result of a past transaction, examples - accounts payable, accrued expenses

EQUITY

Residual interest of owners, examples retained earnings, common stock

Expense is recorded when . . .

we receive the benefit

Revenue is recorded when . . .

it is earned

4 types of financial statements under GAAP

Balance Sheet, Income Statement, Statement of Retained Earnings or Stockholders' Equity, and Statement of Cashflows

Assets =

Liabilities plus equity

Balance Sheet

Statement of financial position, as of a certain date

Income Statement

How did we do? For a stated period.

Statement of Retained Earnings/Stockholders' Equity

Rolls forward retained earning and other EQUITY activity. For a stated period.

Statement of Cashflows

Where did cash come from and where did it go. Three buckets: 1. operating 2. finances 3. investing

Sole Proprietorship

Simple, easily established; Easily controlled, but lack of diversified experience

Partnership

Fairly simple/ easily established

Control begins to be shared, more diversified experience

Corporation

Complex to establish, but then easier to transfer ownership.

Can make raising "equity capital" easier

Personal liability limited to investment- "corporate veil"

BAD: Dual taxation

Corporate income taxed, then dividends are taxed also

Therefore you see many companies NOT paying dividends

LLC

Like a hybrid of Partnerships and corps

Intended to provide the legal protection of a corp without the dual taxation issues.

SFAS

Statement of Financial Accounting Standards

Documents issues by board of industry officials which details accounting standards and policies

AICPA

American Institute of Certified Public Accountants

Advices SFAS and sets auditing standards

PCAOB

Public Company Accounting Oversight Board

Oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. SEC uses them to oversee auditing of public companies.

SEC

Securities and Exchange Commission

Sets addition public company standards and oversee independent firms

FASB

Financial Accounting Standards Board

Board of accounts that work together to form SFAS.

Treasurer

The officer responsible in an organization for the safeguarding and efficient use of a company's liquid assets

Responsibilities: Tax Department and Cash Management

Controller

The chief accounting officer for a company

Responsibilities: Accounting, Budget, Financial Analysis, Payroll

Auditing

The process of examining the financial statements and the underlying records of a company in order to render an opinion as to whether the statements are fairly presented.

Internal Auditing

The department responsible in a company for the review and appraisal of its accounting and administrative controls.

Qualitative Characteristics

Relevance, Reliability, Comparability, and Consistency

Operating Cycle

How long it takes a company to initiate, perform, and deliver their primary product or service.

Current Assets

An asset that is expected to be realized in cash or sold or consumed within one year or the operating cycle, whichever is longer.

Current Liabilities

An obligation that will be satisfied within one year or the operating cycle, whichever is longer.

Liquidity

The ability of a company to pay its debts as they come due.

Working capital equals

Current Assets - Current Liabilities

Current Ratio

Measures a company’s ability to pay short-term obligations

(Current assets)/(Current Liabilities)

Elements of Annual Report

1. Financial statements

2. Notes to financial statements

3. Report of independent accountants

PUBLIC COMPANIES ALSO MUST INCLUDE:

Management's assertions (SOX 403)

Report of independent accountants on internal controls (SOX 404)

Management discussion & analysis

Summary of financial data

Letter to stockholders

Recognized

An accounting entry is recorded… it becomes reflected in the financial statements.

Realized

Regardless of whether it results in an accounting entry, the business actually receives or gives something.

Net Assets equals

Net Assets = Assets - Liabilities

Net Assets = Equity

Debits are

on left of financial statements

Credits are

on right of financial statements

Debit . . . . assets

increases

Debit . . . . liabilities

decreases

Debit . . . . equity

decreases

Debit . . . . revenue

decreases

Debit . . . . expenses

increases

Credit . . . . assets

decreases

Credit . . . . liabilities

increases

Credit . . . . equity

increases

Credit . . . . revenue

increases

Credit . . . . expenses

decreases

General Ledger

A file that contains the activity of all the accounts.

T-Account

A format used to illustrate the increases, decreases and resulting total balance for each account.

Trial Balance

A list of each account and its balance; used to prove equality of debits and credits.

Accounts payable

Current Liability

Accounts receivable

Current Asset

Accumulated depreciation

Property Plant and Equipment

Buildings

Property Plant and Equipment

Cash

Current Asset

Goodwill

Intangible Asset

Income taxes payable

Current Liability

Investment in long-term bonds

Long term investment

Land

Property Plant and Equipment

Inventory

Current Asset

Patent

Intangible Asset

Supplies

Current Asset

Salaries and wages payable

Current Liability

Service revenue

Not Appear on Balance Sheet

Interest payable

Current Liability

Debt investments (short-term)

Current Asset

Unearned service revenue

Current Liability

Stockholders' Equity

Common Stock and Retained Earning,

Long Term Liabilities

Bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.

Current Liabilities

Accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable.

Intangible Assets

Goodwill, patents, copyrights, and trademarks or trade names

Property, Plant, and Equipment

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

Current Assets

(1) cash, (2) investments (such as short-term U.S. government securities), (3) receivables (accounts receivable, notes receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (insurance and supplies).

Assets:

Current Assets, Long Term Investments, Property Plant, and Equipment, and Intangible Assets

Liabilities and Equity

Current Liabilities, Long Term Liabilities (then total liabilities), and Stockholders' Equity

Retained earnings are increased by

credits

Common stock is increased by

credits

Dividends are increased by

debits

Debits . . . revenues and . . . . expenses

decrease revenue and increase expenses

Credits . . . revenues and . . . . expenses

Increase revenue and decrease expenses

net income

revenue-expenses

current ratio is..

a better measure then working capital and is more comparable

current

within the operating cycle or one year, whichever is longer

debts to assets ratio

total liabilities/total assets

what does liquidity measure

short term financial health (current assets and liabilities)

what does solvency measure

long term financial health (all total assets and liabiltities)

economic entity assumption

Economic events can be identified with a particular unit of accountability

going concern assumption

the business will continue operations long enough to carry out existing objectives and commitments 

monetary unit assumption

only transaction data that can be expressed in terms of money should be included in accounting records 

periodicity (time period) assumption

economic life of a business can be divided into artificial time periods 

historical cost principle

assets should be recorded at their cost

revenue recognition principle

requires that companies rrecognize revenue as it is earned

matching (expense recognition) principle

let the expenses follow the revenue

full disclosure principle

information that can make a difference in users’ judgement and understanding of the financial statement must be disclosed

relevance

information must be capable of making a difference in a decision

reliability 

verifiability: similar results are obtained when using same methods

representational faithfulness: numbers and descriptions match what really existed 

neutrality: cannot select info to favor one set of interested parties over another 

comparability

info is measured and reported in similar manner so financial statements can be compared 

consistency 

use same accountning principles and methods throughout different periods 

double entry system

every transaction has a debit and a credit

general journal

list all of the journal entries during a specific period