Financial Accounting Exam 1

Financial Accounting Exam 1 / Pittsburgh Institute of Mortuary Science / Exam date: 02/04/25

Sole-proprietorship

Unlimited liability

Single owner

Not a legal entity

East to form/start

Limited life = owner is alive

Taxation = personal income

Partnerships

Unlimited liability

Two or more owners

Not a legal entity

East to form/start

Limited life = all partners are living

Pass-through taxation

• Business does not file taxes

• Only personal taxes filed

Corporation

Limited liability

Separate legal entity

• More difficult to form

• Double taxation

Owners = 1 or more

Stock transfer = unlimited life

Shareholders elect board of directors

Board of directors appoint officers (ceo)

Cash flow

Amount of cash a company generates and uses during a period

Operating cash flow

The usual business operations of a company

Investing cash flow

The purchasing and/or sale of resources

Financing cash flow

Having to do with debt or equity financing

Accounting

A language of business to measure and communicate financial information by

• Analysing

• Recording

• Classification

• Summarization

• Reporting

• Interpretation of financial statements

Leads to the ability to compare

Financial accounting

Production of financial statements

Primary users

• Relative to company size and dynamic

• Potential investors and shareholders

• Creditors/lenders

Tax accounting

Preparation of records for tax filing

Annual legislative changes

Taxing techniques/regulations may influence business decisions

Managerial accounting

Internal reports

Analysing data

Decisions regarding operations

Assets

Property of monetary value owned by a business

Makes a business money

Liability

Any debts that a business owes

Costs a business money

Owner’s equity

Amount by which the total assets exceed the total liabilities of a business

• What’s left of assets after all liabilities are satisfied?

How much is actually owned

Revenue (income)

An inflow of assets as a result of selling a product or providing a service

Day to day basis

Gain

An inflow of assets as a result of a peripheral transaction/secondary operation

Expense

A decrease in assets as a result of efforts to produce revenues

Does not include withdrawals by the owner

Loss

A decrease in assets from a peripheral transaction

Order of financial statements

Income statement

Statements of RE

Balance sheet

Statements of cash flows

The income statement

Presents the revenues, expenses, and resulting net profit or net loss for a given period

Net income (NI) = Total revenues for the period - Total expenses for the period

Types of revenue

Sales revenue

Service revenue

Interest revenue

Dividend income/revenue

Gain on the sale of assets

Types of expenses

Cost of goods sold

Wage expense

Salary expense

Rent expense

Supplies expense

Research & development expense (R&D)

Selling, general, and admin expenses

Depreciation expense

Amortization expense

Interest expense

Losses on the sale of assets

Current assets

Cash

Petty cash

Accounts receivable

Supplies

Prepaid expenses

Inventory

Current portion of a long-term asset

Note Receivable

Long-term assets

Equipment

Automobiles

Furnishings

Land

Buildings

Intangible assets such as patents and trademarks

Current liabilities

Accounts payable

Taxes payable

Wages payable

Long-term liabilities

Mortgage payable

Notes payable

Bonds payable

Cash basis accounting

Revenue is not recognized in the accounting records until received and which expenses are not recognized until paid

Accrual accounting

Recording in each fiscal period applical, expenses, whether income paid or not, and income whether collected or not

Accrued income/revenue

Income earned during an accounting period, not received until the future period

Leads to AR

Accrued expense

An expense incurred during an accounting period but not yet paid

Leads to AP

The statements of retained earnings

AKA statement of stockholder’s equity, statement of owner’s equity

A financial statement that summarized all changes in owner’s equity during a specific period

Beginning retained earnings + net income - dividends = ending value/balance of RE

The balance sheet

Formal financial statement

Assets = Liabilities + Owner’s Equity

Resources = Borrowings from creditors/lenders + Investments of the Owner

Accounting equation

Assets = Liabilities + Owner’s Equity + Revenue - Expenses - Dividends

A=L+OE+R-E-D

Accounts payable (AP)

An unwritten promise to pay creditors for property or services

Purchased on credit

Accounts receivable (AR)

Unwritten promise

By a customer to pay

At a later date

Goods sold or services rendered

Account owned by person being paid

“Credit on account”

• An agreement

• Payment for a product or service will be made at some later date