CH 1 Accounting

External users

individuals and organizations outside a company who want financial information about the company.

income statement

presents the revenues and expenses and resulting net income or net loss for a specific period of time.

Common stock

the term used to describe the total amount paid in by stockholders for the shares they purchase.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Paid dividends.

Decrease in assets and decrease in stockholders' equity.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Paid monthly rent.

Decrease in assets and decrease in stockholders' equity.

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity: Dividends

Dividends is a distribution to stockholders (D); it decreases stockholders' equity.

Identify the users as being either external users or internal users: Customers

External

Identify the users as being either external users or internal users: Did the company earn a satisfactory income?

External

Identify the users as being either external users or internal users: How does the company's profitability compare to other companies?

External

Identify the users as being either external users or internal users: Internal Revenue Service

External

Identify the users as being either external users or internal users: Labor unions

External

Identify the users as being either external users or internal users: Securities and Exchange Commission

External

Identify the users as being either external users or internal users: Suppliers

External

Identify the users as being either external users or internal users: Will the company be able to pay its short-term debts?

External

Accounting consists of three basic activities

identifies, records, and communicates

Classify each item as an asset, liability, or stockholders' equity: Accounts receivable

Asset

Classify each item as an asset, liability, or stockholders' equity: Cash

Asset

Classify each item as an asset, liability, or stockholders' equity: Equipment

Asset

Classify each item as an asset, liability, or stockholders' equity: Supplies

Asset

Identify the users as being either external users or internal users: Marketing manager

Internal

(T/F) The three steps in the accounting process are identification, recording, and communication.

True

accounts payable

Accounts payable is money owed by a business to its suppliers shown as a liability on a company's balance sheet. Campus Pizza, for instance, purchases cheese, sausage, flour, and beverages on credit from suppliers.

Expanded accounting equation

Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends

The basic accounting equation

Assets=Liabilities+Stockholders' Equity

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) The furniture supplier was paid fully.

Decrease in assets (Cash -), decrease in liabilities (Accounts Payable -)

(T/F) Bookkeeping encompasses all steps in the accounting process.

False. Bookkeeping involves only the recording step.

(T/F) The two most common types of external users are investors and company officers.

False. The two most common types of external users are investors and creditors.

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) The store purchased furniture costing $17,000 on credit.

Increase in Assets (Equipment +), increase in Liabilities (Accounts Payable +)

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) The store purchased books costing $21,000 from a distributor on credit.

Increase in Assets (Inventory +), increase in Liabilities (Accounts Payable +)

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) The bank provided a loan of $30,000.

Increase in assets (Cash +), increase in Liabilities (Loan Payable +)

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) The owner invested $40,000 of capital in the business.

Increase in assets (Cash +), increase in SE (Contributed capital +)

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Purchased additional equipment for cash.

Increase in assets and decrease in assets.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Received cash from customers billed for services

Increase in assets and decrease in assets.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Purchased equipment on account.

Increase in assets and increase in liabilities

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Billed customers for services performed.

Increase in assets and increase in stockholders' equity.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Received cash from customers when service was performed.

Increase in assets and increase in stockholders' equity.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Sold common stock for cash to start business.

Increase in assets and increase in stockholders' equity.

Describe the effect of each transaction on assets, liabilities, and stockholders' equity: Incurred advertising expense on account.

Increase in liabilities and decrease in stockholders' equity.

Identify the users as being either external users or internal users: Can we afford to give our employees a pay raise?

Internal

Identify the users as being either external users or internal users: Do we need to borrow in the near future?

Internal

Identify the users as being either external users or internal users: Production supervisor

Internal

Identify the users as being either external users or internal users: Store manager

Internal

Identify the users as being either external users or internal users: Vice president of finance

Internal

Identify the users as being either external users or internal users: What does it cost us to manufacture each unit produced?

Internal

Identify the users as being either external users or internal users: Which product should we emphasize?

Internal

Classify each item as an asset, liability, or stockholders' equity: Accounts payable

Liability

Classify each item as an asset, liability, or stockholders' equity: Notes payable

Liability

Classify each item as an asset, liability, or stockholders' equity: Salaries and wages payable

Liability

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity: Rent Expense.

Rent Expense is an expense (E); it decreases stockholders' equity.

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity: Salaries and Wages Expense.

Salaries and Wages Expense is an expense (E); it decreases stockholders' equity.

Classify the following items as issuance of stock (I), dividends (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases stockholders' equity: Service Revenue.

Service Revenue is revenue (R); it increases stockholders' equity.

Classify each item as an asset, liability, or stockholders' equity: Common stock

Stockholders' Equity

Expenses

decreases in stockholders' equity that result from operating the business

retained earnings

determined by three items: revenues, expenses, and dividends.

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) Books costing $100 were sold to a customer for cash at a price of $120.

increase in assets (Cash + $120) (Inventory - $100), increase in SE (Sales Revenue + $120) (Cost of Goods Sold (expense) +$100 (reduce equity))

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) A customer paid $1,000 in advance. Bestseller will provide certain newspaper and magazines to this customer over the year.

increase in assets (Cash +), increase in liabilities (Unearned revenue +)

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) Machine costing $10,000 were purchased for cash.

increase in assets (Equipment +), decrease in assets (Cash -)

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) Rent was paid in advance for two months (at $4,000 per month).

increase in assets (Prepaid Rent +), decrease in assets (Cash -)

Indicate the effect of each of the following transactions on Bestseller's balance sheet (i.e., indicate whether assets, liabilities, and owner's equity increased, decreased or stayed the same) Wages of $500 were owed to an employee at the end of the first week.

increase in liabilities (Wages Payable +), increase in SE (Wages Expenses + (reduce equity))

two most common types of external users

investors and creditors

Internal users

managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors, and company officers.

balance sheet

reports the assets, liabilities, and stockholders' equity of a company at a specific date.

note payable

represent liabilities owed to financial institutions captured in the form of formal promissory notes. eg. Campus Pizza also has a note payable to First National Bank for the money borrowed to purchase the delivery truck.

statement of cash flows

summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time.

retained earnings statement

summarizes the changes in retained earnings for a specific period of time.

Revenues

the increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business

Creditors (such as suppliers and bankers)

use accounting information to evaluate the risks of granting credit or lending money.

Investors

(owners) use accounting information to decide whether to buy, hold, or sell ownership shares of a company.

(T/F) Accountants prepare, but do not interpret, financial reports.

Accountants prepare, but do not interpret, financial reports.