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300 Cards in this Set
- Front
- Back
- 3rd side (hint)
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What are the three forms of business organization?
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partnership
sole proprietorship corporation |
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What is an advantage for corporations relative to partnerships and sole proprietorships?
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Reduced legal liability for investors
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Regulatory authorities are considered internal/external users?
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external
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Management is considered an internal/external user?
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internal
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Taxing authorities are considered internal/external users
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external
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Present creditors are considered internal/external users?
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external
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What resulted from the Sarbanes-Oxley Act?
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Independence of auditors increased
Penalties for fraudulent activity increased Top management must now certify the accuracy of financial information |
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What are the three primary business activities?
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Investing
Financing Operating |
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What is the following an example of?
Issuing shares of common stock |
financing activity
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Net income will result during a time period when:
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revenues exceed expenses
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The financial statements for Harold Corporation contained the following information.
Accounts Receivable: 5,000 Sales Revenue: 75,000 Cash:15,000 Salaries expense:20,000 Rent expense: 10,000 What was Harold's net income? |
$45,000
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What section of a cash flow statement indicates the cash spent on new equipment during the past accounting period?
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The investing section
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Which statement presents information as of a specific point in time?
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Balance Sheet
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Which financial statement reports assets, liabilities, and stockholders' equity?
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Balance Sheet
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Stockholders' equity represents claims of who?
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claims of owners
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As of December 31, 2007, Stoneland Corporation has assets of $3,500 and stockholders' equity of $2,000. What are the liabilities for Stoneland Corporation as of December 31, 2007?
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$1,500
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The segment of a corporation's annual report that describes the corporation's accounting methods is the:
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notes to the financial statements
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The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the:
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auditor's opinion
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Sole proprietorships and partnerships are taxable entities.
True/False |
False
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While sole proprietorships and partnerships must file information returns with the IRS, their income is taxed on the individual's tax return (Forms of Business Organization).
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Internal users of accounting information include a company's investors (or stockholders).
True/False |
False
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Since stockholders are not normally officers, directors, or managers of the company they are considered external users of accounting information (Internal Users & External Users).
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Interest expense would be classified under operating activities.
True/False |
True
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Since interest expense is the cost of obtaining operating capital it is properly classified as an expense under operating activities (Operating Activities).
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The balance sheet reports assets and claims to those assets at a specific point in time.
True/False |
True
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Assets and claims to those assets are reported on the balance sheet as of a specific point in time (Balance Sheet).
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The notes to the financial statements are not required.
True/False |
False
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The notes to financial reports are required. The notes clarify and expand the numerical information contained in the financial statements (Notes to the Financial Statements).
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The Statement of Cash Flows reports only cash flows from operations.
True/False |
False
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The Statement of Cash Flows is divided into cash flows from operating activities, cash flows from investing activities and cash flows from financing activities (Statement of Cash Flows).
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Only Certified Public Accountants may perform audits.
True/False |
True
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Only persons who obtain the CPA designation may audit a company's financial statements (Auditor's Report).
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Easy transfer of ownership is a characteristic of which form of business organization?
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Corporation
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In which forms of business organization are the owners personally liable for all the debts of the business?
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Sole proprietorship and partnerships
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Owners are personally liable for all debts of the business in both sole proprietorships and partnerships (Forms of Business Organization).
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Internal users want answers to which of the questions?
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What price for our product will maximize the company's net income?
Which product line is most profitable? Is cash sufficient to pay dividends to stockholders |
Many items are important to internal users of accounting data. The requirement for valid information is not limited to product price, product profitability or availability of cash.
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Which of the following is not an external user of accounting data?
finance directors economic planners customers labor unions |
finance directors
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Since the finance director is within the organization and has access to information not released to the public, he or she is an internal user of accounting data (Internal Users & External Users).
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Paying interest expense and receiving interest revenue are examples of:
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operating activities
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Since interest expense and interest revenue are usually part of the everyday operations of the company, they are operating activities (Operating Activities).
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The payment of dividends is an example of a(n):
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financing activity
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The payment of dividends is an example of a financing activity because it is a return on investment to the stockholders of the organization's stock (Financing Activities).
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Cost of goods sold is classified as what type account?
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expense
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Cost of goods sold is an expense of the period (Income Statement).
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Which of the following would not appear on the income statement?
net income dividends paid service revenue interest expense |
dividends paid
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Dividends paid is an item shown on the retained earnings statement and the statement of cash flows because it relates to ownership rather than operations (Retained Earnings Statement).
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Which of the following would not appear on the retained earnings statement?
net income service revenue beginning retained earning balance dividends |
service revenue
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Service revenue is reported on the income statement (Income Statement).
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The financial statements are usually prepared in which sequence?
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Income statement, retained earnings statement, balance sheet, and statement of cash flows
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Saira's Maid Service began the year with total assets of $120,000 and stockholders' equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. Stockholders' equity at the end of the year was:
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$110,000
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Saira's Maid Service began the year with total assets of $120,000 and stockholders' equity of $40,000. During the year the company earned $90,000 in net income and paid $20,000 in dividends. Total assets at the end of the year were $215,000. Total liabilities at the end of the year were:
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$105,000
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The ending balance of stockholders' equity is the sum of the beginning balance of stockholders' equity ($40,000) and net income ($90,000) less the dividends paid ($20,000) during the period or $110,000. With the formula of Assets = Liabilities + Stockholders' Equity and known values of $215,000 = Unknown + $110,000, the liabilities must be $105,000 (Balance Sheet).
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When the auditor is satisfied that the financial statements are presented in accordance with generally accepted accounting principles, a(n):
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unqualified opinion is expressed.
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The ending retained earnings balance appears on:
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Both the retained earnings statement and the balance sheet.
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This is the correct answer. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet (Interrelationships of Statements).
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The issuance of common stock is reported on the statement of cash flows as a(n):
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financing activity
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On the statement of cash flows, the issuance of common stock is reported as a financing activity (Statement of Cash Flows).
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The effects on the basic accounting equation of performing services for cash are to:
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increase assets and increase stockholders' equity
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Genesis Company buys a $900 machine on credit. This transaction will affect the:
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balance sheet only
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Which of the following events is not recorded in the accounting records?
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an employee is terminated
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During 2010, Gibson Company assets decreased $50,000 and its liabilities decreased $90,000. Its stockholders' equity therefore:
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increased $40,000
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An account is an individual accounting record of what?
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increases and decreases in specific asset, liability, and stockholders' equity items.
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Debits do what to assets and liabilities?
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increase assets and decrease liabilities
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How is a revenue account affected by credits?
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increased
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Which accounts normally have debit balances?
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assets, dividends, and expenses
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Paying an account payable with cash affects the components of the accounting equation in the which way?
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Decreases assets and decreases liabilities.
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what is part of the recording balance?
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analyzing transactions, entering transactions in a journal, posting transactions
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What are some benefits of a journal?
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it discloses in one place the complete effect of a transaction
It provides a chronological record of transactions It helps to locate errors becasue the debit and credit amounts for each entry can be readily explained |
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What is a ledger?
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it is a collection of the entrie group of accounts maintained by a company
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What is posting?
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transfers journal entries to ledger accounts
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What is a trial balance?
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is a list of accounts with their balances at a given time
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What is this an example of?
$100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100 |
a trial balance
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Expenses decrease retained earnings?
T/F |
True
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The costs that a firm incurs when operating its business (expenses) cause retained earnings to decrease (Event 6, Payment of Rent).
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Every account has a left or credit side and a right or debit side.
T/F |
False
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The left side is the debit side while the right side is the credit side (The Account).
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Every transaction affects at least two accounts
T/F |
True
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. There must be at least one debit and one credit account (Debit and Credit Procedures).
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Assets are increased with credits
T/F |
False
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Assets are increased by debits, or additions to the left side of the account.(Dr. / Cr. Procedures for Assets and Liabilities).
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Transactions are recorded in chronological order in the general journal.
T/F |
True
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The general journal is an original entry document that establishes the sequence of events within the organization (The Journal).
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The entire group of accounts maintained by a company is referred to collectively as the Journal.
T/F |
False
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The entire group of accounts maintained by a company is referred to collectively as the ledger
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Issuance of Stock is an investing activity.
T/F |
False
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Issuance of Stock is a financing activity (Keeping An Eye On Cash).
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What decreases retained earnings?
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expenses
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What happens if an expense is paid with cash?
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assets will decrease
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What increases if cash is received in advance from a customer?
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liabilities will increase
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A liability such as unearned revenue will increase and cash (an asset) will also increase (Event 4, Receipt of Cash in Advance from Customer).
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Receipt of an unearned revenue does what to an asset and liability?
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increases both
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This event increases cash and increases an associated liability such as unearned revenue (
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What happens to cash and retained earnings with a payment of a dividend?
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decrease cash
decreases retained earnings |
Correct! Payment of dividends reduces both cash and stockholders' equity
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Accounts with normal debit balances include
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expenses and assets
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Expenses and assets both have debit balances.
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Accounts with normal credit balances include:
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liabilities and stockholders' equity.
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Liabilities and stockholders' equity accounts both have normal credit balances
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Which of the following is not a part of a complete journal entry?
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The balance of each account affected by the transaction.
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The current balance of an account is not needed when making journal entries
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The first place every transaction is recorded is the:
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journal
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The first place entries are recorded is the journal. It is sometimes referred to as the book of original entry
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Issuing stock to investors for cash would result in:
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a debit to cash and a credit to common stock
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This event is recorded by debiting Cash and crediting Common Stock.
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The entire group of accounts maintained by a company is collectively referred to as the:
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ledger.
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The ledger contains all the accounts to which the journal entries are posted
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What is the appropriate order for a company's chart of accounts?
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assets, liabilities, stockholders' equity, revenues, expenses.
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The order of the accounts in the chart of accounts follows the order of the sections of the balance sheet and income statement, namely assets, liabilities, stockholders' equity, revenues, and expenses
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The process of transferring entries from the journal to the ledger is called:
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posting
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Posting is the process of transferring the journal entries to the specific ledger accounts (Posting).
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When a trial balance balances, it is an indicates what about debits and credits
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debits equal credits
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When the trial balance balances it simply means that all of the debits equal all of the credits as shown in the document (The Trial Balance).
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Accounts are listed on the trial balance in what order?
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the order that they appear in the ledger.
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Accounts will appear in the trial balance in the same order that they appear in the ledger (The Trial Balance).
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On. Jan. 10, Novis Company purchased manufacturing equipment for $80,000 cash. This is an example of a (an) ______ activity
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investing activity
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Purchasing manufacturing equipment is an investment activity (Keeping an Eye on Cash).
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What is the evidence that a transaction has occured?
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source document
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What is the time period assumption?
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The economic life of a business can be divided into artificial time periods.
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Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?
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matching principle
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Companies record revenue only when they receive cash, and record expense only when they pay out cash.
True/False |
False
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Adjusting entries are made to ensure that:
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expenses are recognized in the period in which they are incurred.
revenues are recorded in the period in which they are earned. balance sheet and income statement accounts have correct balances at the end of an accounting period. |
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What are the main types of adjusting entries?
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prepaid expenses
accrued revenues accrued expenses |
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The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is:
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supplies= 750
supplies expense=750 |
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Adjustments for unearned revenues do what to liabilities and revenues
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decrease liabilities
increase revenues |
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Adjustments for prepaid expenses do what to assets and expenses?
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decrease assets
increase expenses |
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Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows:
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Depreciation expense: 1,000
Accumulated Depreciation-Delivery Equipment: 1,000 |
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Adjustments for accrued revenues do what to assets and revenues?
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increase assets
increase revenues |
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Colleen Mooney earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Colleen's employer at September 30 is:
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Salaries Expense: 400
Salaries Payable: 400 |
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What are some main properties of the adjusted trial balance?
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The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries
The adjusted trial balance provides the primary basis for the preparation of financial statements An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made |
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Which account will have a zero balance after a company has journalized and posted closing entries?
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service revenue
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Which types of accounts will appear in the post-closing trial balance?
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permanent accounts
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What are some required steps of the accounting cycle
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preparing an adjusted trial balance
preparing a post-closing trial balance journalizing and posting closing entries |
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The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received.
True/False |
False
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Revenue should be recognized in the accounting period in which it is earned (The Revenue Recognition Principle)
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The matching principle requires that expenses be recognized in the same period that they are paid.
True/False |
False
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The matching principle requires expenses to be included in the accounting period in which they are incurred to earn revenues (The Matching Principle).
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The cash basis of accounting is in accordance with generally accepted accounting principles.
True/False |
False
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Because cash basis accounting does not match revenues and expenses in the proper accounting period, cash basis accounting does not meet GAAP requirements (Accrual Versus Cash Basis of Accounting).
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Book value is equal to cost minus accumulated depreciation.
True/False |
True
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The formula for computing book value is cost minus accumulated depreciation. This is the value shown in the financial statements (Depreciation - Statement Presentation).
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Accrued expenses are expenses that have already been paid.
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False
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Accrued expenses are expenses that have been incurred in the period but which have not yet been entered into the financial records. Accruals are done to follow the concept of matching revenues and expenses (Accrued Expenses).
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Closing entries produce a zero balance in each temporary account.
True/False |
True
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Closing entries zero out temporary accounts so they are ready to accumulate data about revenues, expenses and dividends in the next accounting period (Preparing Financial Statements).
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Cash received in advance from a customer would not cause a difference between net income and cash provided by operating activities.
True/False |
False
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Cash received in advance from a customer would affect cash provided by operating activities but would not affect Net Income in the period received (Keeping an Eye On Cash).
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A company receives their electricity bill on May 20, closes its books on May 31, sends a check in payment of the bill on June 5, and verifies the electric company received the check on June 11. Under the matching principle, the expense should be recognized on:
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May 20
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If revenues are recognized only when a customer pays, what method of accounting is being used?
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Cash basis
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Under the cash basis of accounting, revenues are recognized when cash is received, not when services or products are provided (Accrual Versus Cash Basis of Accounting).
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What are the types of adjusting entries?
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unearned revenues
accrued expenses accrued revenues prepaid expenses |
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What are some examples of prepaid expenses?
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supplies
rent insurance |
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The difference between an asset's cost and its accumulated depreciation is called:
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book value
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book value is cost less accumulated depreciation
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Payments received in advance of services provided are recorded as
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liabilities
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An advance payment for services should be recorded as a liability because it represents a future obligation for the organization (Unearned Revenues).
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What are some examples of accrued expenses?
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wages
interest taxes |
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What will happen to liabilities and revenues if the adjusting entry is not made for unearned revenues
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overstate liabilities
understate revenues |
The missing entry would reduce a liability through a debit entry and increase revenues through a credit entry
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Medina Company purchased office supplies costing $5,000 and debited Office Supplies for the full amount. Supplies on hand at the end of the accounting period were $1,300. The appropriate adjusting journal entry to be made would be:
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debit office supplies expense: $3,700
credit office supplies: $3,700 |
This entry correctly adjusts office supplies to a balance of $1,300 and records the expense for the period of $3,700 (Prepaid Expenses - Supplies).
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On September 1 the Mini-Mite Store paid $12,000 to the Maxi-Mall Co. for 3 months rent beginning September 1. Prepaid Rent was debited for the payment. If financial statements are prepared on September 30, the appropriate adjusting journal entry to make on September 30 would be:
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debit rent expense: $4,000
credit Prepaid rent: $4,000 |
This entry will correctly reduce the Prepaid Rent account by one month's rent (Prepaid Expenses).
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On August 1 the Hwang Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 would be:
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debit Depreciation Expense: $700
credit Accumulated Depreciation: $700 |
This entry correctly adjusts the accounts and amount to be charged for the 5 months between August 1 and December 31 (Depreciation).
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Redlands Property Management Co. received a check for $30,000 on October 1, which represents a one year advance payment of rent on an office it rents to a client. Unearned Rental Revenue was credited for the full $30,000. Financial statements are prepared on December 31. The appropriate adjusting journal entry to make on December 31 would be:
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debit unearned rental revenue: $7,500
credit rental revenue: $7,500 |
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On July 1, East Lake, Inc. purchased a 3-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be:
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debit insurance expense: $2,100
credit prepaid insurance: $2,100 |
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On August 1, Hacienda Corporation signed a $30,000, 14%, 2-year note to help finance some renovations they were making to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry would be:
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debit Interest Expense $1,750; credit Interest Payable $1,750.
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This entry correctly adjusts the accounts and interest incurred for a five month period (Accrued Interest).
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Employees at the Topanga Taco House were paid on Friday, December 27 for the five days ending on December 27. The next payday is Friday, January 3. Employees work 5 days a week. The weekly payroll amounts to $3,800. The appropriate adjusting journal entry on December 31 would be to credit Wages Payable for:
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$1,520
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This is the correct amount because it represents wages for December 30th and 31 (Accrued Salaries).
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Which of the following transactions will not cause a difference between net cash provided by operations and net income?
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Salaries paid equal salaries incurred.
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Which is the primary basis for the preparation of the financial statements?
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The adjusted trial balance
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The adjusted trial balance is the primary basis for the preparation of the financial statements.
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A worksheet is not...
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a permanent accounting record
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The worksheet is a working tool for the accountant. It is not a permanent accounting record.
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Accounting
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The information system that identifies, records, and communicates the economic events of an organization to interested users.
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Annual Report
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A report prepared by corporate management that presents financial information including financial statements, notes, a management discussion and analysis section, and an independent auditor's report.
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Assets
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Resources owned by a business.
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Auditor's Report
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A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting standards.
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Balance Sheet
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A financial statement that reports the assets and claims to those assets at a specific point in time.
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Basic Accounting Equation
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Assets = Liabilities + Stockholders' Equity.
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Certified Public Accountant (CPA)
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An individual who has met certain criteria and is thus allowed to perform audits of corporations.
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Common Stock
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Term used to describe the total amount paid in by stockholders for the shares they purchase.
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Comparative statements
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A presentation of the financial statements of a company for more than one year
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corporations
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A business organized as a separate legal entity having ownership divided into transferable shares of stock.
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Dividends
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Payments of cash from a corporation to its stockholders.
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Expenses
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The cost of assets consumed or ser vices used in the process of generating revenues
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Income Statement
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A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.
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Liabilities
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The debts and obligations of a business. Liabilities represent the amounts owed to creditors
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Management discussion and analysis (MD&A)
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A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.
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Net Income
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The amount by which revenues exceed expenses
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Net loss
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The amount by which expenses exceed revenues.
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Notes to the financial statements
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Notes that clarify information presented in the financial statements, as well as expand upon it where additional detail is needed.
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Partnership
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A business owned by two or more persons associated as partners.
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Retained Earnings
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The amount of net income retained in the corporation
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Retained Earnings statement
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A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific period of time.
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Revenue
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The increase in assets that result from the sale of a product or service in the normal course of business.
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Sabanes-Oxley Act
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Regulations passed by Congress in 2002 to try to reduce unethical corporate behavior.
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Sole proprietorship
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A business owned by one person.
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Statement of Cash flow
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A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.
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Stockholders' equity
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The owners' claim on total assets.
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Account
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An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue or expense items.
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Accounting information system
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The system of collecting and processing transaction data and communicating financial information to interested parties.
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Accounting transactions
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Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity.
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Chart of accounts
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A list of a company's accounts.
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Credit
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The right side of an account.
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Debit
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The left side of an account
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Double-entry system
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A system that records the dual effect of each transaction in appropriate accounts.
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General Journal
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The most basic form of journal.
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General Ledger
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A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts.
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Journalizing
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The procedure of entering transaction data in the journal.
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Journal
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An accounting record in which transactions are initially recorded in chronological order.
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Ledger
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The group of accounts maintained by a company.
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Posting
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The procedure of transferring journal entry amounts to the ledger accounts.
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T account
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The basic form of an account.
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Trial balance
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A list of accounts and their balances at a given time.
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Accrual-basis accounting
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Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.
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Accrued expenses
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Expenses incurred but not yet paid in cash or recorded.
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Accrued revenues
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Revenues earned but not yet received in cash or recorded.
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Adjusted trial balance
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A list of accounts and their balances after all adjustments have been made.
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Adjusting entries
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Entries made at the end of an accounting period to ensure that the revenue recognition and matching principles are followed.
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Book Value
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The difference between the cost of a depreciable asset and its related accumulated depreciation.
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Cash-basis accounting
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Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays out cash.
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Closing entries
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Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.
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Contra asset account
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An account that is offset against an asset account on the balance sheet.
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Depreciation
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The process of allocating the cost of an asset to expense over its useful life.
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Earnings management
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The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.
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Fiscal year
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An accounting period that is one year long.
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Income summary
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A temporary account used in closing revenue and expense accounts.
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Matching principle
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The principle that dictates that companies match efforts (expenses) with accomplishments (revenues).
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Permanent accounts
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Balance sheet accounts whose balances are carried forward to the next accounting period.
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Post-closing trial balance
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A list of permanent accounts and their balances after a company has journalized and posted closing entries.
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Prepaid expenses (prepayments)
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Assets that result from the payment of expenses that benefit more than one accounting period.
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Quality of earnings
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Indicates the level of full and transparent information that a company provides to users of its financial statements.
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Revenue rocognition principle
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The principle that companies recognize revenue in the accounting period in which it is earned.
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Reversing entry
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An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.
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Temporary accounts
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Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.
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Time period assumption
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An assumption that the economic life of a business can be divided into artificial time periods.
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unearned revenues
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Cash received before a company earns revenues and recorded as a liability until earned.
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useful life
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The length of service of a productive asset.
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worksheet
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A multiple-column form that companies may use in the adjustment process and in preparing financial statements.
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What are the four basic financial statements?
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balance sheet
income statement statement of RetainedEarnings Statement of Cash Flows |
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What are the contents of a balance sheet?
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financial position on a specific date
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What are the contents of an income statement?
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results of operations
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What are the contents of a statement of Retained Earnings?
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cumulative net income and dividends
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What are the contents of a statement of cash flow
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cash inflows and outflows
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The three types of business activities are
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operating
investing financing |
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What are sources of cash for funding a business
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cash of operations
issue debts issue equity |
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Revenues are earned (recognized) when...
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goods or services are provided to customers
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When should expenses be recognized?
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in the period when the company receives goods or services
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Gross profit=
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Revenue-cost of goods sold
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What does this represent
Net income =/= Cash |
an accrual basis income statement reports revenues and expenses when earned and incurred, respectively
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What is managerial accounting?
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concerned with providing information to managers and other internal users
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What is financial accounting?
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concerned with measuring and communicating information about business activities to external users
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For financial accounting, how is the information usually communicated?
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through financial statements
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What is a publicly-traded corporation?
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the stock of the company is available for public to purchase on stock exchange
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Who owns corporations?
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stockholders
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When are financial statements prepared?
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at the end of various time periods
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What is the 12 month accounting period used by companies called?
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fiscal year
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What are some examples of assets?
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cash
accounts receivable inventory plant and equipment |
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What do economic resources and future benefits represent?
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assets
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What do obligations/creditors' claims to assets represent?
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liabilities
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What are some examples of liabilities?
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accounts payable
taxes payable loans |
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What do owner's claims to assets represent?
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stockholders' equity
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What are examples of stockholders' equity?
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common stock
retained earnings |
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What is a financial position?
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economic resources that belong to the company and the claims against those resources
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Where is the financial position expressed?
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balance sheet
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economic resources that a firm has acquired the right to use and are expected to benefit future operations
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assets
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obligations of a business to pay cash, transfer assets, or provide services to other entities in the future
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liabilities
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whatever is left of the firm's assets after deducting its liabilities
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stockholders' equity
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summarizes the company's operations in its revenues earned and expenses incurred over a period of time
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the income statement
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______ include the amounts charged to customers for the sale of goods or provision of services during the period, whether or not cash has been received yet.
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Revenues
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_______ are the costs of resources that have been consumed by the company during the period, whether or not cash has been paid yet
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expenses
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Net income=
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revenues minus expenses
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reinvested profits=
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net income minus dividends
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Dividends are
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distributions of the net income of a company to its stockholders
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Basic format of retained earnings
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beginning balance in RE
Add: Net income for the period Subtract: Dividends for the period Ending balance in RE |
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The statement of cash flows
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provides information about cash receipts and cash payments; or cash inflows and cash outflows over a period of time
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What shows up on a balance sheet?
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cash
supplies accts. receivable common stock prepaid rent accounts payable marketable securities wages payable land prepaid insurance income taxes payable notes payable unearned revenue interest receivable office equipment |
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what shows up on an income statement?
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supplies expense
service revenue wages expense |
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GAAP stands for
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Generally Accepted Accounting Principles
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Financial statements are prepared in accordance with
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GAAP
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What are the accounts that go with operating?
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inventory
prepaid expense accounts payable service revenue |
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what are the accounts that go with investing
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property, plant & equip
building |
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What are the account that go with financing
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common stock
long term debt |
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The accounting information system
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collects and processes transaction data and communicates financial information to decision makers
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an economic even that changes the financial position of a firm
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accounting transaction
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What do the financial statements summarize?
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the impact of business transactions on the company
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when is revenue recorded?
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when the service is provided or goods are delivered not when cash is received
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When are expenses recorded?
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when incurred (when the related resource is consumed); not when cash is paid
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Genesis Company buys a $900 machine on credit. This transaction will affect the
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balance sheet only
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How are accounts numbered?
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in the order of the balance sheet first then the income statement
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What kind of system is used to prepare journal entries?
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double-entry system of accounting
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Debit/Credit
Asset |
increase debit
decrease credit |
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Debit/Credit
Liability |
decrease debit
increase credit |
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Debit/Credit
Stockholders' Equity |
decrease debit
increase credit |
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Debit/Credit
Revenues |
decrease debit
increase credit |
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Debit/Credit
expenses |
increase debit
decrease credit |
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Debit/Credit
dividends |
increase debit
decrease credit |
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assets _____ with a debit and _____ with a credit
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increase
decrease |
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Debits increase:
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(DEAD)
expenses assets dividends |
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Credits increase:
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(CRLS)
Revenues Liabilities Shareholders' equity |
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Normal/Natural balance
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Whichever increases the account's balance
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increases assets and decreases liabilitites
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debits
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What are the 3 steps involved when preparing journal entries?
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analyze the transaction-decide what accounts are increased or decreased and by how much
Recall the rules of debits and credits as they apply to the transaction that is being analyzed prepare the journal entry using the rules of debits and credits |
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what are ledger accounts used to summarize?
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effects of all transactions on the different accounts
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Typically show a balance of the normal debit or credit for the type of account and will net to a debit, a credit or occasionally zero
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T accounts
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In a trial balance, what must be equal?
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the total debits in a trial balance must equal total credits
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What is a trial balance used for?
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to prepare the financial statements
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If someone buys equipment on account for $1,100; which account is credited?
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accounts payable
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A company bills jeff gore $700 dollars for welding work done. Which account is credited?
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revenues
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The accounting cycle
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1. analyze transactions
2. record the transactions in journal entry form 3. post the journal entries to the ledger 4. prepare an initial trial balance 5. record and post adjusting journal entries 6. prepare an adjusted trial balance 7. prepare the financial statements 8. close temporary accounts and prepare a post-closing trial balance |
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What basis of accounting does the GAAP use?
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accrual
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In cash basis of accounting, when is revenue recognized?
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when cash is received
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In cash basis of accounting, when is an expense recognized?
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when cash is paid
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In accrual basis accounting, when is revenue recognized?
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when earned
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In accrual basis accounting, when is an expense recognized?
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when incurred
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What does recognition mean?
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the process of recording an item into the financial statements as an asset, liability, revenue, expense, etc.
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What are the benefits of accrual basis accounting?
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1. more accurate
2. gives forward looking information in the balance sheet. |
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GAAP requires that firms recognize revenues in the accounting period in which:
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the goods are sold or the services are performed
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What is one of the most important steps in applying accrual accounting?
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adjusting the accounts at the end of the accounting period
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What must be done in addition to the accrual accounting journal entries that arise from business transactions?
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we must post other journal entries to match revenues and expense to the business periods in which they occur.
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When are AJE's made?
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made at the end of each accounting period
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What are the 4 main types of AJEs
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Deferred (delayed) expense
Accrued (accelerated) expense Deferred (delayed) revenue Accrued (accelerated) revenue |
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Deferred (delayed) expense:
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results when cash is paid before expense is incurred
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Accrued (accelerated) expense
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results when expense is incurred before cash is paid
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Deferred (delayed) revenue
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results when cash is received before revenue is earned
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Accrued (accelerated) revenue
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results when revenue earned before cash is received
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every AJE with post to both the ____ and ____ but will not _____
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B/S
I/S Cash |
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Deferred expenses ________ Net Income and _______ assets
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overstate
overstate |
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Accrued expenses _______ Net Income and ______ liabilites
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overstate
understate |
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What must be done in addition to the accrual accounting journal entries that arise from business transactions?
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we must post other journal entries to match revenues and expense to the business periods in which they occur.
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When are AJE's made?
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made at the end of each accounting period
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What are the 4 main types of AJEs
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Deferred (delayed) expense
Accrued (accelerated) expense Deferred (delayed) revenue Accrued (accelerated) revenue |
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Deferred (delayed) expense:
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results when cash is paid before expense is incurred
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Accrued (accelerated) expense
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results when expense is incurred before cash is paid
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Deferred (delayed) revenue
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results when cash is received before revenue is earned
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Accrued (accelerated) revenue
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results when revenue earned before cash is received
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every AJE with post to both the ____ and ____ but will not _____
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B/S
I/S Cash |
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Deferred expenses ________ Net Income and _______ assets
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overstate
overstate |
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Accrued expenses _______ Net Income and ______ liabilites
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overstate
understate |
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Deferred revenues ______ Net Income and ________ liabilities
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understate
overstate |
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Accrued revenues ______ net income and _______ assets
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understate
understate |
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economic resourcce that benefits future operations
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asset
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What does an expense represent
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the cost of a resource which has been consumed (used) by the company
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Most common examples of transactions that give rise to deferred expenses
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The firm prepays an expense
The firms buys supplies to be used in operations The firms buys buildings, ofice space, or equipment |
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Initially the prepayment of an expense is recorded as an
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asset
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When a prepaid expense is used it becomes what?
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expense
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When a company buys plant and equipment the cost of the plant and equipment is recorded as what?
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asset
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For plant and equipment, the cost of the asset is allocated to a(n) _________ as the asset is used over its useful life.
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expense
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Depreciation expense is shown as what on the income statement.
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expense
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Depreciation expense is shown as what on an income statement?
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expense
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What type of accounts are depreciation account?
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contra-asset accounts
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AJEs for unearned revenues do what to liabilities and revenues
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decrease liabilities
increase revenues |
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Permanent (or real) accounts
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assets, liabilities and stockholder's equity
They carry their end-of-period balances into the next accounting period |
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What accounts would be included in a post closing trial balance?
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accumulated depreciation
retained earnings accounts payable |
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