Accounting 121 - Chapter 1

What a business owns is _______

(assets).

What it owes to creditors is ___________

(liabilities).

stock

A _______ certificate is a legal document representing ownership in a corporation.

public private

A ________ accountant is contracted to provide advice to a variety of businesses where as a ______ accountant works as an employee for one business.

financial statements

Cash is reported on the ___________.

Definitions: income statement

Definitions: Reports the financial performance of business during the current accounting period.

net loss

If revenues are less than expenses, the business would have a ________.

income statement and the statement of retained earnings

Net income appears both on the _______________.

dividends.

Profits earned by a company that are paid to stockholders are called __________.

make a profit

The primary goal of most companies is to _________

partherships

legal liability is the responsibility of two or more owners

primary responsibility for setting the underlying rules of accounting.

Currently, in the United States, the Financial Accounting Standards Board (FASB) has the _________________________________

Definitions: Statement of retained earnings

Definitions: Reports the accumulation of profits kept by the business during the current accounting period with that of prior periods.

Definitions: Statement of Cash flows

Definitions: Reports the operating, investing and financing activities effect on cash.

earned by selling goods or services to customers

Definitions: Revenues are ____________.

Definitions: Accounts

Definitions: _________________ are used to accumulate and report the effects of each different business activity separately rather than combining the various types of activities.

Definitions: Balance Sheet

Definitions: reports the financial position of the business at a point in time.

generally accepted accounting

The underlying rules of accounting in the us are called ________________ principles.

true

True or False: -Equipment is furniture or machinery that can be used for years. -Supplies are assets that can be used in the process of earning revenue in the near future.

false

True or False: -Supplies are assets, but equipment is a liability -Supplies are purchased from suppliers, while equipment is donated by stockholders.

Assets

Liabilities + Stockholders' Equity = _____________ which are economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future. Assets include things like cash, supplies, furniture, and equipment.

US Dollars

Liberty, Inc., A US company, sold merchandise to Belle, A French company, for 10,000 euros. In Liberty's US financial statements, this sale should be reported in ______.

expenses

Wages and supplies expenses are examples of __________.

-choosing the alternative that is most ethical -identifying who will be affected by the situation -identifying and evaluating the alternative courses of action

When faced with an ethical dilemma, you should follow a 3-step process that includes: ______________________.

receivable

accounts _______ is an asset on the balance sheet that reports the amounts owed by customers for sale or services provided on credit.

Companies are allowed to choose a _________ or fiscal year-end. A _________ year is a 12-month period ending on December 31, and a fiscal year is a 12-month period ending on a day other than December 31.

calendar

Financing

cash flows from ______ activities on the statement of cash flows the cash activity with stockholders and creditors such as banks.

Cash, common stock & total stockholders' equity

An owner gives $5,000 cash to his company in exchange for stock. This will increase the company's ______.

financial statements

Assets, liabilities, stockholders' equity, revenues, expenses, and dividends appear in different reports in the _____________.

20000

At December 31, Equate, Inc.'s assets equal $50,000 and liabilities equal $30,000. Stockholders' equity must equal $____.

the buying and selling of productive resources such as land, buildings and equipment

Cash flows from investing activities on the statement of cash flows reports the cash activity from ____________________.

balance sheet and statement of retained earnings

The ending retained earnings balance appears on the ______.

income statement and statement of retained earnings

The line item "net income" appears on the _______________.

directly related to running the business to earn profit

The operating activities section on the statement of cash flows reports the activities ___________.

Retained Earnings

The second reason why claims arise for stockholders equity is: the owners have a claim on amounts the company has earned through profitable business operations, _________________________

External Financial Reporting: The main goal of external financial reporting is to _________________________________________

ensure companies produce financial information that is useful to present and potential investors, lenders, and other creditors in making decisions in their capacity as capital providers.

balance sheets, income statement, statement of cash flows and statement of retained earnings all appear the ___________

financial statement

Companies are allowed to choose a calendar or _________-end. A calendar year is a 12-month period ending on December 31, and a ________ is a 12-month period ending on a day other than December 31.

fiscal year

Corporations

income is taxed twice

The four basic financial statements are not complete without ______ to help financial statement users understand how the amounts were derived and what other information may affect their decisions

notes

how financial statement amounts were derived and includes other information that may affect the users' decision

notes to the financial statements help users understand ___________________________.

External Financial Reporting: For financial information to be judged useful, it must be __________________________________________

relevant and a faithful representation. Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities.

Net income can either be left in the company to accumulate (called _________________) or paid out to the company's stockholders for their own personal use (called dividends).

retained earnings

Net income equals ______________

revenue minus expenses

What is left over for the owners of the company's stock is ________

(stockholders' equity).

Corporation

A separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation.

1.Retained earnings, Sept. 1 2. Net Income 3. Dividends 4.Retained earnings, Sept. 30

A statement of retained earning would following in the order of _____________________.

to land a dream job, whether you hope to work in production and operations management, human resources, finance, or marketing.

Accounting knowledge can make the difference in your ability ______________________________

it provides valuable information for people in these positions to make day to day decisions

Accounting knowledge is not just for Accountants. Accounting knowledge is vital to other positions as _____________________________________________________. Such as a Customer Business Developer with Procter & Gamble will need to collaborate with the accounting department on enhancing customer profits and cash flows.

Generally Accepted Accounting Principles, or GAAP for short (pronounced like the name of the clothing store)

As a group, these underlying rules of accounting are called ________________________________. The accounting rules in the United States are similar, for the most part, to those used elsewhere in the world, but some important differences exist.

liquidity liabilities

Assets are listed in order of ___________, that is, how quickly they are used up or converted into cash. Likewise, ___________s are listed in order of how soon each is to be paid or settled.

Sole Proprietorship

Business organization owned by one person. The owner is personally liable for all debts of the business.

Partnership

Business organization owned by two or more people. Each partner is personally liable for all debts of the business.

all its members to adhere to a Code of Professional Conduct.

Ethical Conduct: As you will see throughout this course, some accounting and business issues have clear answers that are either right or wrong. However, many situations require accountants, auditors, and managers to weigh the pros and cons of alternatives before making final decisions. To help ensure these decisions are made in a professional and ethical manner, the American Institute of Certified Public Accountants (AICPA) requires _____________________________________

the standards of conduct for judging right from wrong, honest from dishonest, and fair from unfair.

Ethical Conduct: Ethics refers to __________________________

unethical and illegal

Ethical Conduct: Intentional financial misreporting is both _____________________

Choose the alternative that is the most ethical —and that you would be proud to have reported in the news.

Ethical Conduct: Not all ethical dilemmas are clear-cut. Some situations will require you to weigh one moral principle (e.g., honesty) against another (e.g., loyalty). When faced with an ethical dilemma, you should follow a three-step process: 1. Identify who will benefit from the situation (often the manager or employee) and how others will be harmed (other employees, the company's reputation, owners, creditors, and the public in general). 2.Identify the alternative courses of action. 3.______________________________________

Identify the alternative courses of action.

Ethical Conduct: Not all ethical dilemmas are clear-cut. Some situations will require you to weigh one moral principle (e.g., honesty) against another (e.g., loyalty). When faced with an ethical dilemma, you should follow a three-step process: 1.Identify who will benefit from the situation (often the manager or employee) and how others will be harmed (other employees, the company's reputation, owners, creditors, and the public in general). 2.____________________________ 3.Choose the alternative that is the most ethical —and that you would be proud to have reported in the news.

Identify who will benefit from the situation (often the manager or employee) and how others will be harmed (other employees, the company's reputation, owners, creditors, and the public in general).

Ethical Conduct: Not all ethical dilemmas are clear-cut. Some situations will require you to weigh one moral principle (e.g., honesty) against another (e.g., loyalty). When faced with an ethical dilemma, you should follow a three-step process: 1.__________________________________ 2.Identify the alternative courses of action. 3.Choose the alternative that is the most ethical —and that you would be proud to have reported in the news.

supplies expense

Financial statement reports: ______ would appear on the income statement.

supplies

Financial statement reports: ________ would appear on the balance sheet.

comparing assets and liabilities reported.

Here is how creditors and investors use financial statements: Does the company have enough assets to cover its liabilities? Creditors will find this information on the balance sheet by _________________________________

income statement (and statement of retained earnings) for information about the company's ability to generate profits (and distribute dividends).

Here is how creditors and investors use financial statements: Investors expect a return on their contributions to a company. The return may be immediate (through dividends) or long-term (through selling stock certificates at a price higher than their original cost). Dividends and higher stock prices are more likely if a company is profitable. As a result, investors look closely at the _________________________

find this information on the statement of cash flows.

Here is how creditors and investors use financial statements: Is the company generating enough cash to make payments on its loans? Creditors will ______________________________________

Investors

Here is how creditors and investors use financial statements: ___________ expect a return on their contributions to a company. The return may be immediate (through dividends) or long-term (through selling stock certificates at a price higher than their original cost). Dividends and higher stock prices are more likely if a company is profitable.

note payable

If a company borrows from a bank, it would owe a liability called a ____________ because banks require borrowers to sign a legal document called a note that describes details about the company's promise to repay the bank. The business is likely to owe suppliers who deliver goods and services to the business. When a company buys goods from another company, it usually does so on credit by promising to pay for them at a later date.

Accounting

Information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization.

corporation characteristics

It can raise large amounts of capital more easily than sole proprietorships and partnerships. it also pays federal income taxes on its income.

accounting system

Most companies exist to earn profits for their stockholders. They earn profits by selling goods or services to customers for more than they cost to produce. To know just how successful a company is, the company will need to establish and maintain a good system of financial recordkeeping—an _________________

(Income Statement)Revenues

On the income statement, __________ is first in order.

(Income Statement)Expenses(highest to lowest)

On the income statement, __________ is second in order.

(Income Statement)Net Income

On the income statement, __________ is third in order.

operating

On the statement of cash flow, ________ appears first.

investing

On the statement of cash flow, ________ appears second.

financing

On the statement of cash flow, ________ appears third.

basic accounting equation

One of the central concepts to understanding financial reports is that what a company owns must equal what a company owes to its creditors and stockholders. In accounting, there are special names for what a company owns (assets) and the claims on these items by creditors (liabilities) and stockholders (equity). The relationship between assets (A), liabilities (L), and stockholders' equity (SE) is known as the _______________.

Partnerships 4%

Organizational Forms: Least amount of businesses are ______________ at _______

Sole proprietorships 72%

Organizational Forms: Majority of the businesses are ______________ at _______

50 30

Over Armour Inc. sold 5 shirts that cost $6 each to its customer for $10 each. Total Revenues equal $__ and the expense equals $__.

ending Cash reported on the statement of cash flows.

The Cash on the balance sheet is equal to the _________________________________

_____________________________________________ Summarizes how a business's operating, investing, and financing activities caused its cash balance to change over a particular period of time.

The Statement of Cash Flows

heading

The _________ of every report answers three questions: who (name of the business), what (title of the report), and when (accounting period).

balance sheet

The _____________'s purpose is to report the amount of a business's assets, liabilities, and stockholders' equity at a specific point in time. Think of the balance sheet as a picture or screen capture of SonicGateway's resources and claims to resources at the end of a particular day (in this case, September 30, 2015).

unit of measure assumption

The ________________ states that results of business activities should be reported in an appropriate monetary unit, which in the United States is the U.S. dollar.

statement of retained earnings

The _______________________ reports the way that net income and the distribution of dividends affected the financial position of the company during the period. A more comprehensive statement of stockholders' equity that explains changes in all stockholders' equity accounts is provided by large corporations. For SonicGateway, most changes in stockholders' equity relate to generating and distributing earnings, so a statement of retained earnings is just as informative as a detailed statement of stockholders' equity.

ending retained earnings balance for the period

The _______________________________is also reported on the balance sheet. If we did not report the ending retained earnings balance on the balance sheet, our balance sheet would not balance. So the statement of retained earnings must be prepared before the balance sheet may be completed.

International Financial Reporting Standards, or IFRS for short.

The accounting rules in the United States are similar, for the most part, to those used elsewhere in the world, but some important differences exist. The FASB is working alongside the International Accounting Standards Board (IASB) to eliminate these differences. The accounting rules developed by the IASB are called _______________________

Financial Managerial

The accounting system produces two kinds of reports which are _________ and __________

Account Payable

The amount owed is called an _______________ because purchases made using credit are said to be "on account." As you may have noticed, anything with the word payable in its name is considered a liability.

the resources (assets) equal the claims to the resources (liabilities and stockholders' equity).

The balance sheet "balances" because __________________

separate entity assumption

The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the _______________, which requires that a business's financial reports include only the activities of the business and not the personal dealings of its stockholders.

Common Stock

The first reason why claims arise for stockholders equity is: the owners have a claim on amounts they contributed directly to the company in exchange for its stock, _________________

statement of cash flows

The fourth financial report of interest to external users is the _______________________. It includes only those activities that result in cash changing hands.

The name of the business, "at December 31, 2015" & "The title 'balance sheet'"

The heading of a balance sheet might include _______________________.

income statement

The purpose of the _____________ is to report the amount of revenues less expenses for a period of time. For SonicGateway, revenues are earned from selling apps to customers. Expenses are the costs incurred during the period to earn the revenue. The _______________ is prepared first in order for us to calculate the amount of net income, as net income then is placed on the statement of retained earnings.

Operating Activities, Investing Activities and Financing Activities.

The statement of cash flows is divided into three types of activities: ____________

Luca Pacioli.

The system of financial statement reporting in use today has a long history—all the way back to a publication in 1494 by an Italian monk and mathematician, __________________

Stockholders' equity

____________ represents the owners' claims on the business. These claims arise for two reasons. 1. First, the owners have a claim on amounts they contributed directly to the company in exchange for its stock (Common Stock). 2. Second, the owners have a claim on amounts the company has earned through profitable business operations (Retained Earnings).

Financial statements

______________ can be prepared at any time during the year, although they are most commonly prepared monthly, every three months (quarterly reports), and at the end of the year (annual reports).

Financial accounting reports

_______________ (called financial statements) are prepared periodically to provide information to people not employed by the business. These external financial statement users are not given access to the detailed internal records of the company, so they rely extensively on the financial statements. The four main groups of external users are (1) creditors, (2) investors, (3) directors, and (4) government.

Operating activities

_______________ are directly related to running the business to earn profit. They include selling apps and services, paying employee wages, buying advertising, renting a building, obtaining insurance coverage, and so on.

Managerial accounting

________________ reports include detailed financial plans and continually updated reports about the operating performance of the company. These reports are made available only to the company's employees (internal users) so that they can make business decisions related to production, marketing, human resources, and finance. For example, ________________ reports are needed when determining whether to build, buy, or rent a building; whether to continue or discontinue making particular products; how much to pay employees; and how much to borrow.

Investing activities

_________________ involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and lending to others.

Net income from the income statement

_________________ is a component in determining ending Retained Earnings on the Statement of Retained Earnings.

Limited liability companies

____________________ is a hybrid business entity that has certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are).

Dividends, ending balance of retained earnings and net income

_____________________ appears on the statement of retained earnings

Financing activities

_____________________ include any borrowing from banks, repaying bank loans, receiving cash from stockholders for company stock, and paying dividends to stockholders.

External Financial Reporting: The usefulness of financial information is enhanced when it is ______________________________________

comparable (to prior periods and other companies), verifiable, timely, and understandable.

A net loss will _______

decrease retained earnings.

Net income can either be left in the company to accumulate (called retained earnings) or paid out to the company's stockholders for their own personal use (called ____________).

dividends

The term ________________ refers to four accounting reports, typically prepared in the following order: 1.Income Statement 2.Statement of Retained Earnings 3.Balance Sheet 4.Statement of Cash Flows

financial statements

assets, liabilities & stockholders' equity at a single point in time

A balance sheet shows _____________________.

Partnerships and sole proprietorships

Owners have unlimited liability

Accounts payable of $200 on its balance sheet

Ace electronics received $200 of copy paper from its supplier and promised to pay for it next month. ace should report __________.

$5,000

Ace electronics sold $5,000 of goods to customers of which $3,000 has been collected. using accrual accounting, Ace electronics should report revenues of __________.

account payable

Alpha Sold $2,000 of merchandise to Beta on Credit. Beta promised to pay for it next month. Beta will report a $2,000 ____.

owned owed

An asset is an amount ______, while a liability is an amount _____.

may be prepared more than once a year and may have a fiscal year end other than December 31

Financial Statements ____________.

Net income

Financial statement reports: _____ appear on the income statement.

investing activities

Financial statement reports: ______ appear on the statement of cash flows.

Cash paid for supplies

Financial statement reports: _______ would appear on the Statement of cash flows.

investing

Financial statement reports:_______ appear on the statement of cash flows.

Is the company generating enough cash to make payments on its loans?

Here is how creditors and investors use financial statements: Creditors are mainly interested in assessing two things:

its liabilities

Here is how creditors and investors use financial statements: Does the company have enough assets to cover __________?

relevant

Information that ALWAYS makes a difference in a decision is ________.

employees

Managerial accounting reports are used by the company's __________.

nothing about this trip

Mauricio, The Owner of pizza aroma, spend $2,500 of his own money to take his family to disney world. Pizza aroma's financial statement will report _______.

Pizza aroma

Mauricio, the owner of pizza aroma, inc., arranged for the business to borrow $25,000 from river bank. Which entity should show liability on its financial statements?

increase

Net income, as opposed to a net loss, causes retained earnings to _________.

Cash Retained earnings

On a balance sheet ______ would be listed first and ________ would be listed last.

30

Over Armour Inc. sold 5 shirts that cost $6 each to its customer for $10 each. Over Armour Inc. should record a total of $__ as an expense for the cost of the goods sold.

Net income

Revenue - expenses = ______________: which is equal to revenues minus expenses. By generating net income, a company increases its stockholders' equity. Net income can either be left in the company to accumulate (called retained earnings) or paid out to the company's stockholders for their own personal use (called dividends).

Expenses

Revenues - _____________ = Net Income: they are the costs of business necessary to earn revenues, including wages to employees, advertising, insurance, utilities, and supplies used in the office.

Accounting Standards Board (IASB)

The FASB is working alongside the International _______________________ to eliminate these differences.

Liabilities

__________ are measurable amounts that the company owes to creditors. If a company borrows from a bank, it would owe a liability called a note payable because banks require borrowers to sign a legal document called a note that describes details about the company's promise to repay the bank. The business is likely to owe suppliers who deliver goods and services to the business. When a company buys goods from another company, it usually does so on credit by promising to pay for them at a later date. The amount owed is called an Account Payable because purchases made using credit are said to be "on account." As you may have noticed, anything with the word payable in its name is considered a liability.

relevance and faithful representation

___________ are characteristics that are needed in order for information to be useful.

notes payable, taxes payable, wages payable & accounts payable

____________ accounts are all liabilities.

common stock and retained earnings

____________ are part of the stockholders' equity.

Revenue

_____________ - Expenses = Net Income: it is the sales of goods or services to customers. They are measured at the amount the business charges the customer.

cash paid to suppliers, cash received from customers & cash paid to employees

_____________ are included in the operating activity second of the statement of cash flows

Stockholders' equity, cash, assets, liabilities & retained earnings

______________ are all reported on the balance sheet.

-they are reported on the income statement -expenses are the costs of doing business necessary to earn revenues -revenues equal the amount of goods or services delivered to a customer

_______________ are all true about revenues and expenses.

Cash paid to buy equipment and build a new corporate headquaters

________________ are reported as cash flows from investing activities.

suppliers, government agencies, stockholders & customers

__________________ are all users of the financial statements.

Operating, Investing & financing activities

___________________ are types of activities found on the statement of cash flow.

Revenues and expenses

____________________ would appear on the financial income statement report.