Financial Accounting 2303 Exam 1 Baylor University (Carpenter)

Financial Statements

Financial reports that summarize the financial condition and operations of a business

Parties That Utilize Financial Statements

-Managers

-Investors

-Creditors

-Regulatory Agencies

Four Basic Financial Statements

1.Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

4. Statement of Cash Flows

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Income Statement Reports

-Revenues

-Expenses

-Net Income

Statement of Retained Earnings

Reports the changes in the retained earnings account during the period

Statement of Retained Earnings Reports

-Beginning

-Net Income

-Dividends

-End

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Balance Sheet Reports

-Assets

-Liabilities

-Stockholders Equity

All at a Specific Date

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Statement of Cash Flows Reports

Cash inflows and cash outflows for an accounting period.

Net Income

The difference between total revenue and total expenses when total revenue is greater

Net Income Formula

Revenues - Expenses = Net Income

Assets

Money and other valuables belonging to an individual or business

Plant Assets

Resources that have physical substance, are used in the operations of the business, and are not intended for sale to customers

Paid-In Capital

The amount stockholders paid in to the corporation in exchange for shares of ownership

Accounting

An Information system that measures business activities, processes data into financial statements and reports, and communicates results to decision makers

Two Branches of Accounting

Financial and managerial

Financial Accounting

Provides relevant and accurate information to people outside of the firm

Managerial Accounting

Provides accurate and relevant information to people inside the organization

Forms of Business

-Proprietorship, partnership, corporation, limited liability company

Proprietorship

A business owned by one person who is personally liable

Partnership

A business owned by two or more people where each owner pays individual tax according to their stake in the business

General Partnership

Partnership in which partners share equally in both responsibility and liability

Limited Partnership

partnership in which only one partner is liable for the company

Limited Liability Company (LLC)

A type of business that is comprised of members not personally liable for the company and in which income flows through each member; they also pay individual taxes

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

Generally Accepted Accounting Principles (GAAP)

Accounting guidelines that govern the content and form of financial reports

Financial Accounting Standards Board (FASB)

The private board that establishes the generally accepted accounting principles used in the practice of financial accounting

Assets =

Liabilities + Owner's Equity

Liabilities=

Assets - Shareholders Equity

International Financial Reporting Standards

-Application of GAAP for public companies in the US is overseen by the U.S. securities and Exchange Commission

-Most countries follow this

Stockholders equity=

Assets - Liabilities

Entity

An organization or a section that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit

Going Concern Assumption

The assumption that an entity will remain in operation for the foreseeable future

Historical Cost Principle

States that assets should be recorded at the actual cost

Fair Value

The amount that a business could sell an asset for, or the amount that a business could pay to settle a liability

Stable Monetary Unit Assumption

Accountants assume that the dollars purchasing power will remain stable over time. i.e. ignore inflation

Cash Equivalents

Liquid assets that can be readily converted to cash

Account Payable

A liability for good or services purchased on credit

Equity

A business's assets minus its liabilities

Dividends

Assets generated by a company's operating activities which are distributed to stockholders which in turn decreases the company's retained earnings

Net Loss

The difference between total revenue and total expenses when total expenses are greater

Gross Profit

net sales - cost of goods sold

Depreciation

-Allocates the cost of a plant asset to an expense over the asset's useful life

-Decreases asset book value and increases expenses for wear and tear

Amortization

Allocating the cost of an asset (or liability) to expense over the period of its useful life

Transaction

Any event that has a financial impact on a business and can be measured reliably

Account

The record of all the changes in a particular asset, liability, or stockholders' equity during a period of time

Revenues

Expenses

Net Income

An income statement shows

Beginning Balance

Net Income

Dividends

Ending Balance

Statement of retained earnings shows

Assets

Current Assets

Total Assets

Liabilities

Current Liabilities

Total Liabilities

Stockholders' Equity

Retained Earnings

Total Stockholders' Equity

Total Liabilities and Stockholders' Equity

Balance sheet shows

Net Cash

Increases(Decreases) in Cash

Cash at Beginning

Cash at End

Cash flow statement shows

Statement of Profit and Loss

Financial statement Also Called...

Statement of Financial Position

Balance sheet is Also called...

Stockholders' Equity Increased by

-Net Income

-Sale of Stock

Assets - Owner's equity

Liabilities =

Stockholders' Equity Decreased by

-Dividends

-Net Loss

Debit

the left side of an account

Credit

the right side of an account

Three Types of Cash Flows

operating, investing, financing

Flow of Accounting Data

1) Transaction Occurs

2) Transaction Analyzed

3) Transaction Entered in the Journal

4) Amounts Posted to the Ledger Accounts

Operating Activities

Cash flow from selling goods and services to customers

Accrual Accounting

-Records the impact of a business transaction as it occurs

-Records revenues as they are earned and expenses as they are incurred

Investing Activities

Cash flows from purchasing and selling long-term assets

Cash-Basis Accounting

-Records only cash transactions- cash receipts and cash payments

-Does not follow US GAAP

Financial Activities

Cash flows from borrowing or repaying funds or equity transactions

Time Period Concept

Ensures accounting information is reported at regular intervals

Longterm Asset

Assets which last more than a year

Revenue Principle

the basis for recording revenues; tells accountants when to record revenue and the amount of revenue to record

Short Term Asset

An asset that is to be sold, converted to cash, or liquidated to pay for liabilities within one year

Expense recognition principle (matching principle)

The basis for recording expenses; includes 2 steps:

1. Identify all the expenses incurred during the accounting period

2.Measure the expense and recognize them in the same period in which any related revenue are earned

Ledger

All accounts combined

Adjusting the Accounts

Process of updating the accounts at the end of the period

Journal

an accounting record in which transactions are initially recorded in chronological order

Deferrel

An adjustment for the payment of an item or receipt of cash in advance

Accruals

An adjustment of an item in advance of the cash receipt or payment

Accrued Expenses

Recording the expense before paying cash

Accrued Revenue

Recording the revenue before collecting cash

Prepaid Expense

-Expense paid in advance

-Considered to be an asset

Plant asset

Long lived tangible assets like land, buildings, furniture, and equipment

Contra Asset

-An account with a credit balance that is deducted from the related asset account on the balance sheet.

-Like accumulated depreciation

Book Value

-The net amount of a plant asset

-Cost-accumulated depreciation

Expense

Accrued Expenses debit...

Accrued Expenses Credit...

Liabilities (debit or credit)

Unearned Revenue

The liability created by receiving revenue in advance.

Closing the Books

-Transferring net revenue and expense account balances to retained earnings for the period

-Zeroes out accounts

Temporary Accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Permanent Accounts

-Balance sheet accounts whose balances are carried forward to the next accounting period

-Includes assets, liabilities and stockholders' equity

Liquidity

The ease with which an asset can be converted into cash

Operating Cycle

The time span over which a business pays cash to produce goods and services, which then are sold to bring cash to the business

Net Working Capital

A computed dollar amount that represents operating liquidity

current assets - current liabilities

net working capital=

Current Ratio

Total current assets /Total current liabilities

Debt Ratio

total liabilities/total assets

Trial Balance

-Lists all accounts with balances

-Assets first, then liabilities and stockholders' equity

-Shows that debts equal credits

-Prepared at end of period

-Facilitates preparation of the financial statements

Assets,Liabilities,stockholders' equity

Trial balance includes

Deferred Revenue

A liability resulting from the receipt of cash before the recognition of revenue

Mantra 1: Revenue_______

Increases: Net Income, Retained Earnings, Stockholders Equity

Mantra 2: Expenses_______

Decreases: Net Income, Retained Earnings, Stockholders' Equity

Mantra 3: Dividends________

Decrease: Retained Earnings, Stockholders' Equity