Accounting Chapter 2

Stanga, inc. issues 1000 shares of common stock at $10 a share. As a result of this transaction, the owner's equity will increase by

$10,000

Summers inc. bought a piece of equipment for $100,000 by issuing a long term note for $80,000 and paying cash of

$20,000

Neel inc., reports total asset of $400,000 and total liabilities of $340,000. Owner's equity is

$60,000

Identify the 3 primary financial statements

*Statement of financial position (balance sheet) *Statement of cash flows *Income statement

Crook, Inc. issues 4,000 shares of capital stock at $30 per share. As a result of this transaction, liabilities will increase by

0

Which of the following are the advantages of the corporate form of organization

1. The ability to accumulate large amounts of capital 2. Limited Liability 3. Transferability of ownership

Which statement describes revenues

1. They result from profit directed activities 2. They result in positive cash flows 3. They increase net assets

statement of cash flows

3 categories of cash flows: 1. operating activities: the cash effects of revenue and expense transactions that are included in the income statement. 2. Investing Activities: The cash effect of purchasing and selling assets such as land and buildings 3. Financing Activities: The cash effects of the owners investing in the company and the repayment of either or both.

Identify each section of the statement of financial position

3 sections: 1. Assets 2. Liabilities 3. Owner's equity

Stable Dollar Assumption

A limitation of measuring assets at historical cost is that the value of monetary unit or dollar is not always stable..

LO2-2 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles

Accountant prepare financial statements by applying a set of standards or rules referred to as generally accepted accounting principles. Consistent application of these standards permits comparisons between companies and between years of a single company. Generally accepted accounting princples allow for significant latitude in how certain transactions should be accounted for, meaning that professional judgment is particularly important.

The objectivity principle

Accountant use the term objective to describe the asset valuations that are factual and can be verified by independent experts. land cost = purchase price. market value is not objective.

Which of the following are not shown at cost

Accounts receivable are typically not shown at cost.

Fuller provided $30,000 of consulting services during the month of December. Half of which was paid in cash and half of which is due on account. Which effect did this transaction have on the accounting equation?

All of the following: 1. Owner's equity increased by $30,000. 2. Retained Earnings increased by $30,000. 3. Total assets increased by $30,000.

Powers, Inc. pays $22,000 to settle an account payable. What is the effect of this transaction of the accounting equation

All of the following: 1. Total Liabilities decrease by $22,000. 2. Accounts Payable decrease by $22,000. 3. Total Assets Decrease by $22,000 4. Cash decreases by $22,000

Henry, Inc. bought a $500,000 building by making $100,000 cash down payment and issuing a $400,000 long term note. Which immediate effects did this transaction have on the accounting equation.

All of the following: 1. Total Liabilities increased by $400,000. 2. The Building Account Increased by $500,000. 3. The cash account decreased by $100,000.

Going Concern Assumption

An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption.

A fundamental characteristic of every statement of financial position is that the total for assets always equals the total of liabilities plus owner's equity.

Assets = liabilities + owner's equity $360,000 = $96,000 + $264,000

Another exception to the cost principle

Certain investments in other enterprises are included in the balance sheet at their current market value if management plan include conversion int cash in the near future.

Any decrease in total assets is accompanied by a

Decrease in liabilities or owner's equity

Decrease in Owner's Equity

Decreases in owner's equity also are caused in two ways 1. Payments in cash or transfers of other assets to owners 2. Losses from unprofitable operation of the business

Expenses

Decreases in the company's asset from its profit directed actitivies. They result in negative cash flows.

Adequate Disclosure

Disclosure is adequare if financial statements users have all the information necessary for the proper interpretation of the statements.

Entity Principal

Financial statement s describe the activity of a specific economic entity. (According to GAAP)

LO2-1 Explain the nature and general purpose of financial statements.

Financial statements are presentations of information in financial terms about enterprise that are believed to be fair and accurate. They describe certain attributes of the enterprise that are important for decision makers, particularly investors and creditors

The cost principle

Historical cost refers to the original amount the entity paid to acquire the asset. Examples: building, land, equipment.. Examples of asset reported at net realizable value or fair value include accounts receivable and investments.

Investors are generally most interested in which financial statement

Income Statement

The cash effects of purchasing and selling assets are including in which section of the statement of cash flows

Investing

An advantage of a partnership as compared to a sole proprietership

Is able to raise large amount of capital

Cunningham, Inc. purchased $8,000 of supplies on account. Which immediate effect did this transaction have on owner's equity.

It had no effect on owner's equity. The cash and assets (supplies) are both on the asset side.

Window Dressing

Measures taken by management specifically intended to make a business look as strong as possible in its balance sheet, income statement, and statement of cash flows

Which financial statement describes where an enterprise stands on a specific date

Statement of financial position or (balance sheet)

Because the balance sheet, the income statement and the statement of cash flows are derived from the same underlying financial information

The 3 statements are said to articulate

Corporation

The corporation is a unique form of organization that allows manay owners to combine their resources into a busines enterprise that is larger than would be possible based on the financial resources of a single owner or a small number of owners.

Liabilities represent claims again the borrowers assets

The owners of a business have a claim on the company's assets

Increases in Owner's equity

The owners' equity in a business comes from two primary sources: 1. Investments of cash or other assets 2. Earnings from profitable operations of the business

The accounting equation is most closely related to which financial statement

The statement of financial position. (Balance Sheet)

If assets do not equal liabilities plus owner's equity there must be a mistake in the financial statements

True

Ranall, Inc. begins a lawn mowing service by establishing a small, closely held corporation. Capital stock is issued to Ranall and family. 5,000 shares for $50,000. What is the effect of this transaction on the accounting equation.

Two effects of the issuance of capital stock: 1. Capital Stock increases $50,000. 2. Cash increases to $50,000.

Which features describe a partnership

Unincorporated Involved 2 or more people

An increase in one asset must be accompanied by

a decrease in another asset. If one asset increase, then either another asset decreases or ( liabilities or owners equity increases)

A note payable

a written promise to repay the amount owed by a particular date and usually calls for the payment of the interest as well.

accured expenses

an accounting term communicating that th epayment of certain expense has been delayed or deferred. (ex. expenses at the end of the year: wages, interest, taxes...)

Revenues

are a increase in the company's assets from its profit direction activities.

Assets

are economic resources owned by a business and are expected to benefit future operations.

Liabilities

are financial obligations or debts.

order of assets on balance sheet

assets are ordinarily presented in their order of permance. starting with cash. next - receivable (close to cash) followed by permandent assets - land. liabilities are usually presented in the order in which they become due.

A business that lacks the liquidity to pay its debts as they come due may be forced into

bankruptcy

The 3 primary financial statements are based on the same transactions

but present a different views of the company

Owner's Equity is separated into two parts

capital stock and retained earnings

On the statement of financial position (balance sheet)

cash is listed first, followed by other assets soon to be converted into cash or be used up in business operations.

Most large organizations are organized as a

corporation

The person or organization to whom a debt is owed is called a

creditor

The statement of financial position or balance sheet

describes where the enterprise stands at a specific date.

The balance sheet of a business is prepared on the assumption that the business is a continuing enterprise or a

going concern

Statement of Financial Position

heading: 1. name of business 2. name of financial statement 3. Date body: 1. assets a. cash b. notes receivable c. other assets soon converted into cash d. permanent assets - land, buildings 2. Liabilities a. notes payable b. accounts payable c. salaries payable 3. owner's equity a. capital stock b. retained earnings

Financial Statement

is a a declaration of what is believed to be true about an enterprise, communicated in terms of a monetary unit, such as the dollar. There are 3 types of financial statement: Statement of financial position (balance sheet), Income statement, Statement of cash flow.

A business entity

is a economic unit that engages in identifiable business activities.

The income statement

is a summarization of the company's revenue and expense transactions for a period of time.

Inflation

is a term used to describe the situation where the value of the monetary unit decreases meaning that it will purchase less than it did previously. Historically, the United States have experienced modest inflation rather than deflation. When inflation becomes severe, historical cost amounts for assets lose their relevanc e as a bases for making business decision.

Income statement

is an activity statement that shows the revenues and expenses for a designated period of time.

business entity

is an economic united that engages in identifable business activities. The business entity is an economic unit that controls resources, incurs obligations and engages in business activities. For accounting purposes, the business entity is regarded as separate from the personal activities of its owners.

The statement of cash flows

is important in understanding an enterprise for the purpose of investment and credit decisions. The statement of cash flows shows the ways cash changes during a designated period. The cash received from revenues and other transactions as well as the cash paid for certain expenses and other acquisitions during the period.

Net Income

is the difference between the revenues and expenses for a specified period of time.

Deflation

is the opposition of inflation. The value of the monetary unit increases, meaning thtat it will purchase more that it did previously.

The fact that the owners of a corporation are not personally liable for its debts is a concept known as

limited liability

Expenses result in

negative cash flows

The balance sheet of business is prepared on the assumption that the business is a continuing enterprise

or a going concern

Which asset lacks a physical form, but provides a valuable legal right or claim.

patents

Revenues result in

positive cash flows

The heading for the Income statement

refers to a period of time, rather than a point in time as was the case with the balance sheet.

The income statement

reports on the financial performance of the company in terms of earning revenue and incurring expenses over a period of time and explains , in part, how the company's financial position changes between beginning and ending of that period.

Capital Stock

represents the amount that the owners originally paid into the company to become owners.

Capital Stock

represents the amount that the stockholder originally invested in the business in exchange for shares of the company stock

Owner's equity

represents the owner's claim on the assets of the business. Because liabilities or creditor's claims have legal priority over those of the owners, owner's equity is a residual amount. - If you are the owner of a business, you are entitled to assets that are left after the claims of the creditors are paid in full. Owner's equity equals total assets minus total liabilities.

When an asset is shown at a historic cost

that is the original amount the business entity paid to acquire the asset.

A limitation of measuring assets at historical cost is

that the value of the monetary unit or dollar is not always stable

Net realizable value (an exception to the cost principle)

the amount that approximates the cost that is expected to be received when the receivable is collected.

articulation

the close relationship that exists among the financial statements that are prepared on the basis of the same underlying transaction information.

The cost principle of accounting

the widely used principle of accounting to asset at their original cost to the current owners.

An income statement is prepared for a period of time

true

When an asset is purchased for cash, the numbers on the right hand side of the balanced sheet are

unchanged

Virtually all businesses prepare a financial statement at the end of each

year.