ACC 201 Kyle Goodin MSU Exam 2

Accounting

the process of identifying, measuring, recording, and communicating financial information about a company's activities so decision-makers can make informed decisions

Assets

Cash, Accounts Receivable, Inventory, Land, buildings, equipment, and intangible assets

Audit Report

the auditor's opinion as to whether the company's financial statements are fairly stated in accordance with generally accepted principles (GAAP)

Balance Sheet

a financial statement that reports the resources (assets) owned by a company and the claims against those resources (liabilities and stockholders' equity) at a specific point in time

Capital

a company's assets - liabilities (stockholders' equity)

Corporation

a company chartered by the state to conduct business as an "artificial person" and owned by one or more stockholders

Creditor

the person to whom money is owed

Current assets

cash and other assets that are reasonably expected to be converted into cash within one year or one operating cycle, whichever is longer

Current liabilities

obligations that require a firm to pay cash or another current asset, create a new current liability, or provide goods and services within one year or one operating cycle, whichever is longer

Current ratio

Current assets / Current liabilities

Greater than .5 = more liabilities than assets

Less than .2 = more assets than liabilities

Expenses

the cost of assets used, or the liabilities created, in the operation of the business

Financial accounting

accounting and reporting to satisfy the outside demand (primarily investors and creditors) for accounting information

Financial statements

a set of standardized reports in which the detailed transactions of a company's activities are reported and summarized so they can be communicated to decision-makers

Fiscal year

an accounting period that runs for one year

Fundamental accounting equation

Assets = Liabilities + Stockholders' Equity

Purpose of Balance Sheet

to report a company's financial position on a particular date

Purpose of Income Statement

To show income, expenses and profit for the business.

Statement of Cash Flows

Financial statement that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.

Financial activities

involve bringing in new money for businesses or obtaining funds

Operating Activities

what you are doing with your money

Investing Activities

buying assets to generate revenue

Generally Accepted Accounting Principles (GAAP)

accounting guidelines that govern the content and form of financial reports

Gross margin (gross profit)

sales revenue - cost of goods sold

income from operations

gross profit - operating expenses

Liability

An amount owed by a business

Liquidity

the ease with which an asset can be converted into cash

Long-term investments

Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

Net Income

Revenues - Expenses

Net Loss

The amount by which expenses exceed revenues.

Net Profit Margin

Net Income/Sales

Operating Cycle

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Partnership

A business in which two or more persons combine their assets and skills

PPE

property, plant, and equipment

Retained Earnings Statement

a financial statement that reports how much of the company's income was retained in the business and how much was distributed to owners for a period of time.

Sole Proprietorship

a business owned and managed by a single individual

Stockholders' Equity

common stock and retained earnings

Working Capital

current assets - current liabilities

Balance Sheet Title

As of a Specific Date, NOT a period of time

Accounts payable

Current liability on balance sheet

Accounts Receivable

Current asset on balance sheet

Accumulated Depreciation - Equipment

PPE on balance sheet

Cash

current asset on balance sheet

Common Stock

Stockholder's Equity on balance sheet

Cost of goods sold

Expense on income statement

Depreciation Expense

Expense on income statement

Dividends

Stockholder's Equity on retained earnings statement

Equipment

PPE on balance sheet

Income Tax Expense

Expense on income statement

Income tax payable

current liability on balance sheet

Insurance expense

expense on income statement

Interest expense

expense on income statement

Inventory

Current asset on balance sheet

Land

PPE on balance sheet

Mortgage Payable

Long-term liability on balance sheet

Notes Payable

Current liability on balance sheet

Prepaid insurance

current asset on balance sheet

Retained earnings

Stockholder's equity on retained earnings statement

Sales revenue

revenue on income statement

Stock investments

current assets on balance sheet

Salaries and wages expense

Expense on income statement

Salaries and wages payable

current liability on balance sheet

When starting a new company, retained earnings starts with what?

Zero

What is always the last expense?

Income tax expense is last

Retained Earnings Equation

Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

Current ratio equation

current assets divided by current liabilities

Accounting Cycle

the procedures that a company uses to transform the results of its business activities into financial statements

Chart of accounts

A list of accounts used by a company

Conservatism Principle

a principle which states that when more than one equally acceptable accounting method exists, the method that results in the lower assets and revenues or higher liabilities and expenses should be selected.

Credit

the right side of a t-account

Debit

the left side of a t-account

Double-entry accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

General ledger

a collection of all the individual financial statement accounts that a company uses

Going Concern Assumption

Assumes that the entity will remain in operation for the foreseeable future.

Historical Cost Principle

An accounting principle that states that companies should record assets at their cost.

Journal

A chronological record of the transactions of a business.

Journal entry

The form of recording a transaction in a journal.

Invested a capital (I/D?)

Increase assets and increase stockholder's equity

Acquired a building with cash (I/D?)

Increase and decrease on assets, net zero

Bought furniture for cash (I/D?)

Increase and decrease in assets, net zero

Purchase t-shirts from a manufacturer (I/D?)

Increase and decrease in assets, net zero

Sold t-shirts on credit (I/D?)

Increase in assets and stockholder's equity

Purchased t-shirts on credit (I/D?)

Increase assets and liabilities

Paid cash to a payable (I/D?)

Decrease in assets and liabilities

Collected cash from a receivable (I/D?)

Increases and decreases assets, net zero

Paid cash for expense (I/D?)

Decrease asset and stockholder's equity

Borrowed money from a bank (I/D?)

Increases assets and liabilities

If ABC Inc. has assets of $32,000 and Liabilities of $8,000, total Stockholder's Equity would be:

A) 40,000

B) 32,000

C) 24,000

D) 8,000

C

If total liabilities increased by $15,000 and stockholder's equity increased by $5,000 during a period of time, then total assets must change by what amount and during that same period of time?

A) 20,000 decrease

B) 15,000 increase

C) 20,000 increase

D) 15,000 decrease

C

Which of the following statements is false?

A) Ethics is the application of a code of conduct to everyday life.

B) All business activities which are legal are in fact thereby ethical business activities.

C) Professional ethics involves the application of a code of conduct to the practice of a profession.

D) Every person who becomes an accountant is responsible for upholding the high standards of the profession.

B

The accounting equation can be expressed as follows:

A) Assets = Liabilities + Capital

B) Assets = Liabilities + Owner's Equity

C) Assets = Liabilities + Stockholder's Equity

D) All of the above

D

Because some totals from one financial statement carry forward to another financial statement, it is necessary to prepare the financial statement in the following order:

A) Income Statement, Balance Sheet, Statement of Cash Flows, Statement of Retained Earnings

B) Statement of Retained Earnings, Income Statement, Statement of Cash Flow, Balance Sheet

C) Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows

D) None of these

C

An information system that provides useful information to people who make rational investment, credit, and similar decisions to help them reach better decisions.

A) Bookkeeping

B) Budgeting

C) Accounting

D) Internal auditing

C

Which of the following terms fit this description "The area of accounting principally concerned with reporting to external users."

A) Double-entry concept

B) Managerial accounting

C) Financial accounting

D) Matching principle

C

Long-term assets held for use in the production of sale of other assets or services are called:

A) Plant and equipment

B) Current assets

C) Intangible assets

D) Accrued expenses

A

Which of the following statements is true about revenue?

A) Revenue is the amount charged to customers for goods and services sold to them

B) Revenue accounts are increased by crediting them

C) Revenue is recorded when a sale is made on credit

D) All of the above is true

D

Account

a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item

Economic Entity Assumption

one of the four basic assumptions that underlie accounting that assumes each company is accounted for separately from its owners

Expense Recognition Principle

this principle requires that an expense be recorded and reported in the same period as the revenue it helped generate

Monetary unit assumption

one of the four basic assumptions that underlie accounting that requires that a company account for and report its financial results in monetary terms (e.g., U.S. dollar, euro, Japanese yen).

What is the primary role of internal controls in managing a business?

To constrain subordinates' activities in order to prevent employees from deviating from the scope of their responsibilities and encouraging them to act in the best interest of the business.