Accounting Exam 1

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Accounting

Back 1

a system that collects and processes financial information about an organization and reports that information to decision makers

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Balance Sheet

Back 2

Assets = Liabilities + Stockholder's Equity

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Balance Sheet (Statement of Financial Position)

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Reports the amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time

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Accounting Entity

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the organization for which financial data are to be collected

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Income Statement

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Reports the revenues less the expenses of the accounting period

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Income Statement

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Net Income = Revenues - Expenses

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Accounting Period

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The time period covered by the financial statements

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Statement of Retained Earnings

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Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period

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Statement of Retained Earnings

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Beginning RE + Net Income - Dividends = Ending RE

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Statement of Cash Flows

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Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing

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Statement of Cash Flows

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+/- Cash Flows from Operating Activities (CFO)
+/- Cash Flows from Investing Activities(CFI)
+/- Cash Flows form Financing Activities (CFF)
= Change in Cash

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Generally Accepted Accounting Principles (GAAP)

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The measurement rules used to develop the information in financial statements

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Securities and Exchange Commission

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The U.S. government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that the must use in producing those statements

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Financial Accounting Standards Board (FASB)

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The private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles

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Audit

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An examination of the financial reports to ensure that they represent what they claim and conform with GAAP

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Relevant Information

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Can influence a decision; it is timely and has predictive and/or feedback

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Reliable Information

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Is accurate, unbiased, and verifiable

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Separate-Entity Assumption

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Business transactions are accounted for separately from the transactions of owners

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Unit-of-Measure Assumption

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Accounting information should be measured and reported in the national monetary unit

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Continuity (or going-concern) Assumption

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Businesses are assumed to continue to operate into the foreseeable future

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Assets (def)

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Economics resources with probable future benefits owned by the entity as a result o past transactions

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Historical Cost Principle

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Requires assets to be recorded at historical cost-cash paid plus the current dollar value of all noncash considerations given on the date of the exchange

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Current Assets

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Assets that will be used or turned into cash within one year (inventory is always an asset regardless of the time needed to produce and sell it)

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Liabilities (def)

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Probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services

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Current Liabilities

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Obligations that will be settled by providing cash, goods, or services within the coming year

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Stockholders' Equity (aka shareholders' equity or owners' equity)

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The financing provided by the owners and business operations

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Contributed Capital

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Results from owners providing cash (and sometimes other assets) to the business

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Retained Earnings

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The cumulative earnings of a company that are not distributed to the owners and are reinvested in the business

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Materiality

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Suggests that small amounts that are not likely to influence a user's decision can be accounted for in the most cost-beneficial manner

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Conservatism

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Suggests that care should be taken not to overstate assets and revenues or understand liabilities and expenses

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Transaction

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1) an exchange of assets or services for assets, services, or promises to pay between a business and one or more external parties to a business or 2) a measurable internal event such as the use of assets in operations

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Account

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A standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item

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Transaction Analysis

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the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation

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Debit

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+ Assets
- Liabilities

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Credit

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- Assets
+ Liabilities

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Journal Entry

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An accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format

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T-Account

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Tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities

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Assets (list)

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- Cash
- Accounts Receivable
- Inventory
- Prepaid Expenses
- Buildings and Equipment

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Liabilities (list)

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- Accounts Payable
- Notes Payable
- Accrued Expenses Payable
- Unearned Revenues
- Taxes Payable

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Stockholders' Equity (list)

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- Contributed Capital
- Retained Earnings

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Adjusting Entries

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Entries necessary at the end of the accounting period to measure all revenues and expenses of that period

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Deferred (Unearned) Revenues

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When a customer pays for goods or services before the company delivers them

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Accrued Revenues

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When companies perform services or provide goods (earn revenue) before customers pay

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Deferred Expenses

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Already acquired assets that have generated revenue but have not yet been recorded (must record amount of asset used)

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Accrued Expenses

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Expenses that are incurred in the current period without being paid for until the next period (salaries expense); accumulate over time but not recognized until end of period in adjusting entry

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Contra-Account

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Accounts that are directly linked to another account but with an opposite balance (accumulated depreciation XA for property and equipment)

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Net Book Value

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acquisition cost - accumulated deprecation (reported on balance sheet)

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Accrued Expense Examples

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principle and interest payable, salary and wage expenses, utilities, interest

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Deferred Revenue examples

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unearned rent revenue, depreciation, property insurance

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Accrued Revenue examples

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franchise royalties, performing service before paying

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Deferred Expense Examples

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insurance, rent, prepaid expenses