Accounting 2013 Class Notes, 8E - Vocabulary Flashcards

The balance sheet shows assets, liabilities, and stockholders’ equity (A, L, SE).
Assets are listed in order of liquidity; liabilities are listed by when they are due.
The balance sheet balances because: A = L + SE.
The ending retained earnings (RE) balance for the period is reported on the balance sheet; the RE statement must be prepared before the balance sheet can be completed.
Cash on the balance sheet equals the ending cash reported on the statement of cash flows.

Core equation: A = L + SE.
This represents resources controlled by the company (assets) and the sources of those resources (liabilities and stockholders’ equity).
The equation is the basis for the balance sheet and proves the balance (assets = claims on assets).

Assets: listed from most liquid to least liquid (e.g., cash, accounts receivable, supplies, equipment).
Liabilities: listed from current (due soon) to long-term (if applicable).
Stockholders’ Equity: consists of accounts such as Common Stock and Retained Earnings.
Total assets equal total liabilities plus total stockholders’ equity: ext{Total Assets} = ext{Total Liabilities} + ext{Total SE}.
Review exercise concepts (from the transcript): match common balance sheet accounts to their descriptions (e.g., cash, A/R, supplies, equipment, accounts payable, notes payable).

Net income from the income statement increases ending retained earnings.
Dividends reduce retained earnings.
Ending Retained Earnings on the balance sheet ties back to the income statement and the statement of retained earnings.
Statement of Retained Earnings (SRE) shows the changes in RE for the period; it reconciles beginning RE, net income, and dividends to ending RE.
Core RE relationship: RE{end} = RE{beg} + Net ext{ Income} - Dividends.

Notes explain how amounts were derived and provide additional information.
The four financial statements fit together:
- Income Statement reports period results; net income is a component of ending RE on the SRE.
- Ending RE is reported on the Balance Sheet.
- The SRE is prepared before the Balance Sheet to ensure the balance.
- Cash on the Balance Sheet aligns with the Ending Cash on the Statement of Cash Flows.

United States uses GAAP (Generally Accepted Accounting Principles) set by FASB.
International standards use IFRS set by IASB (International Accounting Standards Board).
FASB and IASB are working toward convergence to reduce differences between GAAP and IFRS.

Ethics define standards of conduct for right and wrong, honesty, and fairness.
Intentional misreporting is unethical and illegal.
When faced with dilemmas, follow three steps:
1. Identify beneficiaries and those harmed.
2. Identify alternative actions.
3. Choose the most ethical alternative.
The AICPA Code of Professional Conduct guides member ethics.

External reporting aims to provide useful information for decision making.
Useful information must be:
- Relevant (differs decision outcomes)
- Faithful Representation (economic substance faithfully depicted)
Enhancing characteristics: Comparable, Verifiable, Timely, Understandable.

Balance Sheet equation: A = L + SE
Ending Retained Earnings: RE{end} = RE{beg} + Net\ Income - Dividends
Cash on the Balance Sheet equals Ending Cash on the Statement of Cash Flows.
Common balance sheet accounts (typical):
- Assets: Cash, Accounts Receivable, Supplies, Equipment, Software, etc.
- Liabilities: Accounts Payable, Notes Payable, etc.
- Stockholders’ Equity: Common Stock, Retained Earnings, etc.
Income Statement items: Revenues, Expenses (e.g., Income Tax Expense, Supplies Expense, Advertising Expense).

Practice items include classifying items as I/S, B/S, or SRE and identifying account types.
Exercises show how assets, liabilities, and SE interact and how the four financial statements connect.
Example problems (like M1-12 and E1-3) illustrate preparing a statement of retained earnings and a balance sheet from given data.