Accounting Midterm

· What are the two primary functions of accounting?

Measure business activities of a company and communicate those measurements to external parties for decision-making purposes.

· What are the three basic business activities that financial accounting seeks to measure and communicate? To whom, are these activities communicated?

Financing, Investing and Operating activities. These activities are communicated to creditors and investors

· Provide a basic definition of each account type: asset, liability, stockholders' equity, revenue and expense

Asset- Resources of the company

Liability- Creditors' claims to resources

Stockholders' Equity- Owners' claims to resources

Revenue- Sales of products or services to customers

Expense- Cost of selling products or services

Accounting equation

Assets = Liabilities + Stockholders' Equity

How is net income calculated?

Net Income = Revenues - Expenses

What are the basic financial statements

Balance sheet, Income statement, Statement of cash flows, Statement of stockholders' equity

Which accounts appear in the balance sheet

assets, liabilities, and stockholders' equity

Which accounts appear in the income statement

revenues and expenses

Which accounts appear in the statement of cash flows

Measures activities involving cash receipts and cash payments over a time period, split into operating cash flows, investing cash flows, and financing cash flows

Which accounts appear in the statement of stockholders' equity

Summarizes the changes in stockholders' equity over time (stockholders' equity=common stock+ retained earnings)

· What is the chart of accounts?

A chart of accounts is a list of all your company's "accounts," together in one place. It provides you with a birds eye view of every area of your business that spends or makes money. The main account types include Revenue, Expenses, Assets, Liabilities, and Equity

· What does a T-account represent? What's the left side called? Right side?

Left side - Assets increase with debits

Right side - Liabilities and stockholders' equity increase with credits

· What is a trial balance?

A list of all accounts and their balances at a particular date, used for internal purposes only. Shows that debits equal credits

· What are adjusting entries under accrual basis accounting?

Debit an asset and credit a revenue account

What are temporary vs. permanent accounts?

Temporary: Dividends, Revenues, and Expenses

Permanent: Assets, Liabilities, Common Stock, and Retained Earnings

Deferral

Deferred revenue is revenue recognized after cash is collected, deferred expense is expense recognized after the cash is paid.

Accruals

When a company provides products or services to customers but hasn't yet received cash, it records the revenue and an asset for the amount expected to be received.

When preparing a bank reconciliation, what types of transactions will need to be accounted for in order to make it balance?

Deposits outstanding: Cash receipts of the company that have not been added to the bank's record

Checks outstanding: Checks written by the company that have not been subtracted from the bank's record

Collections made by the bank on behalf of the company, interest earned, NSF, debit card purchases, electronic fund transfers, bank service fees

Accounting definition

A systematic process of identifying, measuring, summarizing and communicating financial information to help people make economic decisions

Underlying assumptions used for GAAP

Economic entity, monetary unit, periodicity, and going concern

How to remember what increases/ decreases with credits and debits

DEA(dividends, expenses, assets)-increase w debits, decrease w credits

LOR(liabilities, owners' equity, revenue)-increase w credits, decrease w debits

What is posting

the process of transferring the debit and credit information from the journal to individual accounts in the general ledger

The General Ledger

provides in a single collection, each account with its individual transactions and resulting account balance

Accruals are...

the opposite of prepayments, they involve cash flows occurring after the revenues and expenses are recognized

Closing entries...

transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account

Direct costs...

Period costs...

costs associated with producing revenues

costs not easily matched to a particular revenue event

Fraud Triangle

opportunity, motivation, rationalization

Segregation of duties triangle

authorization->recording->custody

In the center: reconciliation

Sarbanes-Oxley Act of 2002

established guidelines related to internal control procedures with auditor/ client relations for publicly traded companies

2 types of internal controls

prevent and detect controls

Reconciling a bank statement on the company's side

Ending balance in the general ledger+ cash receipts -cash disbursements =reconciled cash balance

Reconciling a bank statement on the bank's side

Ending balance on the bank statement + deposits outstanding- checks outstanding=reconciled cash balance

stockholders equity equation

Stockholders' Equity = Common Stock + Retained Earnings