Accounting Test 1

D. Income Statement

Which of the following financial statements displays a company's revenues and expenses? A. Balance Sheet B. Statement of Cash Flows C. Statement of Stockholders' Equity D. Income Statement

C. Revenue recognition

Which of the following is a primary principle underlying accrual accounting? A. Materiality B. Cash flows C. Revenue recognition D. Income statement

B. Borrowing money from a bank

Which of the following is an example of a financing activity? A. Acquisition of land B. Borrowing money from a bank C. Producing and selling a product D. Disposition of old equipment

activity

The income statement, statement of stockholders' equity, and statement of cash flows report ________ for a period of time.

B. Analyze

What is the first step in the accounting cycle? A. Report B. Analyze C. Record D. Adjust

Interrelated objectives and fundamentals for external financial reporting.

1. Financial reporting objectives 2. Financial statement elements 3. Qualitative characteristics of accounting information 4. Recognition and measurement criteria for financial statement items

The components of the financial statements

1. Assets 2. Liabilities 3. Stockholders' equity 4. Investments by owners 5. Distributions to owners 6. Revenues 7. Expenses 8. Gains 9. Losses 10. Comprehensive income

Creating a journal entry

1. Date 2. Account titles affected from the chart of accounts 3. Dollar amounts 4. An explanation

The Accounting Process

1. Identify the relevant economic activity 2. Quantify these activities 3. Record the results

Sole Proprietorship

A business owned by one person, The most common form of business

Financing Activities

A company needs to acquire money in order to support its operations

Investing Activities

A company needs to purchase resources in order to run its day-to-day operations. Investing activities involve acquisition or disposition of items such as land, buildings, and equipment.

Blockchain technology

A distributed ledger that provides a secure means to view recorded transactions

U.S. Securities and Exchange Commission (SEC)

A federal agency whose primary focus is to regulate the interstate sale of stocks and bonds

The Trial Balance

A listing of all accounts from the general ledger with their respective debit or credit balances Prepared at the end of the accounting period - Serves as a check that debits = credits - Aids in the preparation of the financial statements

Corporation

A separate legal entity, The owners of the corporation are the stockholders, The dominant organizational type

Partnership

A voluntary association of two or more persons to act as co-owners of a business for profit

Generally Accepted Accounting Principles (G.A.A.P.)

Accounting principles with substantial authoritative support A set of rules that is understood by the users of financial reports A guide to action that can, and does, change over time Differ among countries - Efforts are being made to create greater international harmony

Accounting Transaction

An economic event that must be recorded in the company's accounting records. An event that affects any of the elements of the accounting equation—assets, liabilities, or stockholders' equity. The accounting equation must stay in balance, therefore at least two elements are always affected by each recorded transaction. Double-entry accounting

Private Accounting

Analyst, Internal Audit, Tax, Budgeting, Cost Accounting, etc.

The Accounting Cycle

Analyze, Record, Adjust, Report, Close

Public Company Accounting Oversight Board (PCAOB)

Approves auditing standards, known as generally accepted auditing standards (GAAS)

International Financial Reporting Standards (IFRS)

Approximately 120 nations or reporting jurisdictions require or permit its use Reduce information-generating costs of multinational companies

Examples of permanent accounts

Assets Liabilities Common stock Retained Earnings

The Accounting Equation

Assets = Liabilities + Stockholders' Equity

Long-Term Assets

Assets the company does not expect to convert into cash during the normal operating cycle, or one year, whichever is longer. Common types: Property, plant, and equipment Intangible assets Other long-term assets

Government

Auditor, Tax, Budgeting, Criminal Investigation, etc.

Public Accounting

Auditor, Tax, Consulting

Debt financing

Borrowing money from creditors

Current Assets

Cash and other assets that can be converted into cash or used up within the normal operating cycle, or one year, whichever is longer. Listed first on the balance sheet in order of liquidity.

Example of Statement of Stockholders' Equity Heading

Columbia Sportswear Company Statement of Stockholders' Equity for Year Ended December 31, 2017 (in thousands)

Example of Balance Sheet Heading

Columbia Sportswear Company Balance Sheet December 31, 2017 (in thousands)

Example of Income Statement Heading

Columbia Sportswear Company Income Statement for Year Ended December 31, 2017 (in thousands)

Example of Statement of Cash Flows Heading

Columbia Sportswear Company Statement of Cash Flows for Year Ended December 31, 2017 (in thousands)

Faithful representation

Complete, neutral, free from error, verifiable

Notes to Financial Statements

Contains information about assumptions, estimates, measurement procedures, and details behind the summary numbers.

Relevance

Contribute to the predictive and evaluative decisions

Classified Balance Sheet Common sub groups

Current assets Long-term assets Current liabilities Long-term liabilities Stockholders' equity

Verifiability

Different individuals could reach the same conclusion

Comparability

Disclosure required in the notes to financial statements of the chosen accounting policies

A. Comprehensive income

Each of the following is a qualitative characteristic of accounting except: A. Comprehensive income B. Verifiability C. Faithful representation D. Relevance

C. The most common form of business

Each of the following is an attribute of a corporation except: A. The owners are the stockholders B. The dominant organizational type C. The most common form of business D. A separate legal entity

Sole Proprietorship Advantages

Easiest to form Tax advantages Owner can control

Corporation Advantages

Easiest to raise capital Easiest to transfer ownership Protection for the stockholders against personal liability

Examples of Corporate Responsibility

Examples include carbon emissions, employee safety, and workforce diversity.

Expense Recognition (Matching)

Expenses incurred to generate revenue are recognized (matched) in the same time period. As with revenues, cash payment may occur at the same time, before, or after expense recognition.

Balance Sheet

Reported at a point in time Lists the firm's assets, liabilities, and stockholders' equity - Assets are the firm's resources. - Liabilities are the firm's obligations. - Stockholder's equity represents the stockholders' claim on the assets of the firm.

External Users

Investors need to know how profitable the company is compared to its competitors. Regulators need to know if rate increases are justified. Creditors need to know if the company has the ability to repay its loans.

Adjust

Journalize adjusting entries Prepare adjusted trial balance

Close

Journalize closing entries Prepare post-closing trial balance

Record

Journalize transactions Prepare unadjusted trial balance

Property, Plant, and Equipment Examples

Land Buildings Equipment Vehicles Furnishings

Internal Users

Management needs to know the profitability of each division. The finance department needs to know if there is enough cash to pay its short-term expenses. Human resources needs to know the effect of a four percent raise for all employees.

Management discussion and analysis (MD&A)

Management's interpretation of the company's recent performance and financial condition. Management's "forward-looking" opinions.

Ethics in Accounting

Many business have a written code of ethics to help guide the behavior of employees. Accounting organizations such as the American Institute of Certified Public Accountants have a professional code of ethics.

Report

Prepare financial statements

A. Common stock

The following is not a type of accrual adjustment? A. Common stock B. Accrued expenses C. Prepaid expenses D. Unearned revenue

C. An increase in assets and an increase to liabilities

Purchasing supplies on account involves: A. An increase and a decrease to assets B. An increase in assets and a decrease to liabilities C. An increase in assets and an increase to liabilities D. A decrease to assets and a decrease to liabilities

A. A credit to cash and a debit to wage expense

Recording the cash payment for wage expense involves: A. A credit to cash and a debit to wage expense B. A debit to cash and a debit to wage expense C. A debit to cash and a credit to wage expense D. A credit to cash and a credit to wage expense

Partnership Advantages

Relatively easy to start Taxed at the personal tax rate Access to funds from multiple sources or partners

Statement of Cash Flows

Reports a company's cash inflows and outflows during a given period of time. -Cash flows from operations reveals cash spent on operating expenses and cash received from the sale of goods and services. -Cash flow from investing includes the cash payments and receipts when a company buys and sells long-term assets that it uses in its operations. -Cash flow from financing reports the issuance and repurchase of company stock and the cash borrowed from and repaid to creditors.

Statement of Stockholders' Equity

Reports the events causing an increase or decrease in a company's stockholders' equity during a given period of time. Consists of two parts - Contributed capital contributed by the stockholders - Earned capital Some companies have a separate statement of retained earnings, but most include retained earnings as part of the statement of stockholders' equity.

Income Statement

Reports the results of operations for a given period of time Reports revenues and expenses - Revenues are increases in a company's resources from providing goods or services - Expenses are decreases in resources from providing revenue Net income results when revenues exceed expenses

Financial Accounting Standards Board (FASB)

Reports to the Security and Exchange Commission (SEC) A nongovernmental entity whose pronouncements establish U.S. GAAP FASB has codified how GAAP is organized and communicated

Accrual Accounting

Required by GAAP Requires companies to measure and report accounting transactions without the necessity that cash has been received or paid Based on two primary principles: - Revenue recognition - Expense recognition (matching)

Examples of temporary accounts

Revenues, expenses, dividends, income summary

Unethical Behavior in Accounting

Sarbanes-Oxley Act of 2002 was written to help deter unethical behavior.

equity financing

Selling stock to investors

International Accounting Standards Board (IASB)

Taken the lead role in formulating international accounting principles

financial position

The beginning-of-period balance sheet shows the company's __________ __________ at the earlier point in time. The end-of-period balance sheet reports the company's __________ __________ at this later point in time.

Operating Activities

The day-to-day activities of producing and selling a product or providing a service The reason the company exists

There is no accounting transaction at the time of hiring since no asset, liability, or stockholders' equity account is affected at this time.

The employee will be paid $1,000 per month.

cash balance

The ending ____ _________ on the statement of cash flows is shown on the balance sheet.

A. Income statement

The first financial statement to be prepared is: A. Income statement B. Balance sheet C. Statement of cash flows D. Statement of stockholders' equity

B. Revenues are closed to retained earnings by crediting retained earnings.

The following is a true statement regarding the closing process: A. Dividends are closed to retained earnings by crediting retained earnings. B. Revenues are closed to retained earnings by crediting retained earnings. C. Expenses are closed to retained earnings by crediting retained earnings. D. Revenues are closed to retained earnings by debiting retained earnings.

Data Analytics

The process of examining sets of data to discover useful information from patterns in the data.

Auditor's Report

The report of the independent auditor containing an opinion regarding the financial statements.

1. Financing 2. Investing 3. Operating

Three types of Business activities

Financial Reporting Objectives

Useful in making financial decisions Helpful in assessing the ability of a company to generate future cash flows Provide information about a company's economic resources and the claims on those resources

Net Income

___ __________ from the income statement is used to compute ending retained earnings on the statement of retained earnings.

Analyze

______ transactions from source documents

Debits, credits

_______ and _______ are terms used to indicate the recording of data entries.

Ending

________ common stock, retained earnings, and total equity from the statement of stockholders' equity is shown on the balance sheet.

Accounting

_________ is the process of measuring economic activity of an entity in monetary terms and communicating the results to users.

Permanent accounts

accounts whose balances carry over from one accounting period to the next - accounts on the balance street

Prepaid Expenses

allocating previously recorded assets to expenses, to reflect the proper expenses incurred during that period

Unearned revenue

allocating previously recorded unearned revenue to earned revenue

Income summary

can be used to help in the closing process Any temporary account with a debit balance is credited with the offsetting debit to Income Summary Any temporary account with a credit balance is debited with the offsetting credit to Income Summary

Unethical Behavior

can result in misleading financial statements.

Ethics

deals with the values, rules, and justifications that govern one's way of life.

Worksheet

is a tool, it is not part of the formal accounting records using a program such as Microsoft Excel may be used to facilitate the adjusting and closing process.

Financial reporting

is constrained by the requirement that only monetary amounts can be reported.

A post-closing trial balance

is prepared once the temporary accounts have been closed to Retained Earnings.

The Global Reporting Initiative

pioneered a widely used sustainability reporting framework with a wide range of measures.

Revenue

recognized as the amount the seller expects to be paid for the transferred goods or services.

Accrued expenses

recording operating expenses that have not yet been paid or recorded

Accrued revenues

recording revenues that have not yet been received or recorded, to reflect revenue earned during the period

C. Serves as a check to debits = credits.

the trial balance: A. Is prepared at the beginning of the accounting period. B. Is prepared after the financial statements. C. Serves as a check to debits = credits. D. Lists only the accounts from the general ledger with debit balances.

Temporary accounts

used to gather information for a particular accounting period and then reset to zero by transferring the balance to a permanent account zeroed out at the close of the accounting period in order to "start fresh" in the next period

Classified Balance Sheet

§Presents the main categories of the basic accounting equation—Assets, Liabilities and Stockholder's Equity.