accounting test one
Retained earings
( reveunue - expenses) aka net income . Dividends make retained earnins go down( expanded accounting equation
time
3 months in a quarter, 4 quarters in a year. Balance sheet use accounting equation . Is ffor one day
()
= subtraction
name and describe three different forms of business organization
A sole proprietorship is a business entity owned by one person. A partnership is a business entity owned jointly by two or more individuals. Proprietorships and partnerships are not legally separate from the personal affairs of the owners. That is, the owners are responsible for the debts of the business. A corporation is a separate legal entity formed by one or more persons called stockholder(s). A corporation is legally separate from the affairs of its owners, which limits the stockholders' legal responsibility for the debt of the business to the amount that the stockholders invested in the business. Corporate shareholders generally pay more taxes than owners of sole proprietorships or partnerships. Although the combined number of sole proprietorships and partnerships greatly outnumber the number of corporations, the majority of business in the United States is conducted by corporations.
whay is there a deman for acounting information? name five groups that create demand for accounting inofrmation about businesses, and describe how each group uses accounting information.
Accounting information is demanded or needed by decision-makers both inside and outside the business to provide information about business activities and finances so that informed decisions can be made. Five groups that create the demand for accounting information and their uses of accounting information are described below. (1) Managers need accounting information to plan and make decisions about the business (e.g., predicting the consequences of their actions and deciding on which actions to take) and to control its operations (e.g., evaluating the effectiveness of their past decisions). (2) Employees use accounting information about their employer to aid in planning their careers (e.g., judging the future prospects of the company). (3) Investors (owners) need accounting information about a business to evaluate the future prospects of a business and to decide where to invest their money. (4) Creditors (lenders) need accounting information to decide whether or not to lend money or extend credit to a business. (5) Governments need accounting information about businesses to determine taxes owed by businesses, to implement a variety of regulatory objectives, and to make national economic policy decisions
define accounting. how does accounting differ from bookkeeping?
Accounting is a system for identifying, measuring, recording, and communicating financial information about an organization's activities to permit informed decisions by users of the information. Bookkeeping is the process—made up of mechanical "steps"—of recording transactions and maintaining accounting records. While bookkeeping is part of accounting, accounting is viewed as the complete information system that communicates the economic activities of a company to interested parties. Accounting is often referred to as the "language of business" because it communicates information about economic activities of a company that help people make decisions.
what is an accounting entity?
An accounting entity is a company that has an identity separate from that of its owners and managers and for which accounting records are kept. There are three main forms that accounting entities take: a sole proprietorship, a partnership, and a corporation.
define the terms assets, liabilities, and stockholders equity. how are the three terms related?
Assets are the economic resources or future economic benefits obtained or controlled by a business. Liabilities are the creditors' claims on the resources of a business. Stockholders' equity is the ownership claim on the resources of a business. Stockholders' equity is considered a residual interest in the assets of a business that remain after deducting the business's liabilities. All three items appear on the balance sheet, forming the following equation: Assets = Liabilities + Stockholders' Equity
The fundamential acounting equaiton
Assets= liabiites + stockholders equity
The expanded accounting equations
Assets= liabilties+ stockholders equity Assets= liablites + contributed captial( common stock) + retained earnings Assets= liabites+ contributed captial + beginning retianed earnings + revenues - expenses -dividnds
Depreciaiton
Companies assign, or allocate, a portion of the assets cost as an expense in each period in which the assets is used.
distinguish between comparabiltiy and consistency.
Comparability refers to the ability to compare information across different companies or with similar information about the same company for another time period. Consistency refers to the use of the same accounting principles for the same items, either from one time period to another time period within a company or in a single period across companies.
define current assets and current liablites. why are current assets and current liablites separated from noncurrent assets and long term liabities on the balance sheet?
Current assets are cash and other assets that are reasonably expected to be converted to cash within 1 year or the operating cycle, whichever is longer. Current liabilities are obligations that will be satisfied within 1 year or the operating cycle, whichever is longer. Since current assets are presented separately from other assets, statement users can see if the firm is likely to have enough resources available to meet its current liabilities as they come due. If current assets were presented among other assets, such a determination would be difficult. Current liabilities are separated from long-term liabilities because current liabilities will require asset outflows (or replacement with another liability) much sooner than will long-term liabilities. If all liabilities were presented together, financial statement users would have difficulty determining the assets (economic resources) required in the near future to satisfy the current liabilities.
describe how items are ordered within the current assets ansd current liablites sections on a balace sheet.
Current assets are generally listed on the balance sheet in order of liquidity or nearness to cash, whereas current liabilities are usually listed in the order in which they will be paid.
what information is included in the heading of each of the four finacial statements?
Each financial statement includes a heading that is comprised of (a) the name of the company, (b) the title of the financial statement, and (c) the time period covered—either a point-in-time measurement (an exact date) or a period-of-time description (e.g., a year ended in a specific date).
in order for a transaction to be recorded in a business accounting records, the effects of the transaction must be faithfully represented. what is faithful representation, and why is it important?
Faithful representation refers to information faithfully representing the economic event that it is intending to portray. Faithfully presented information should be complete, neutral, and free from error. If information is not faithfully represented, it may mislead decision-makers. These decision-makers would find it extremely difficult, if not impossible, to use information that is incomplete or subject to significant error and/or bias
The conceptal framework
Flows logically from the fundamental objective of finaical reporting: to provide information that is useful in making investment and credit decisions. Support the development of a consistent set of accounting standards and provide a consistent body of thought financial reporting. Helps explain why accounts adopt certian practices.
business
Lots of corporation start off as sole proprtorship or a partnership.Corporations don't have to owned by more than one owner.Onwed by one person- sole protetorship. Can make and sell goods- all Owned by more than one person- partnership Legally, a separate enity from the owners- corporation Income statements: revenue- expenses= net income or net loss
of all the events that ocur each day, how would you describe those that are recorded in a firms accounting records?
Many events occur that affect the financial position and the operations of a business, but only those that qualify for recognition as transactions are recorded in the accounting records. To qualify as a transaction, the effect of the underlying events must impact a financial statement element (asset, liability, stockholders' equity, revenue, or expense) and, thus, the company's financial statements. In addition, the event must be able to be faithfully represented.
what equation describes the income statement ?
Net Income = Total Revenues - Total Expenses
describe the items( other than the finacial statements) found in the annual report.
Other than the financial statements, users will find notes to the financial statements, management's discussion and analysis of the condition of the company, and the auditor's report in the annual report of a company. The notes to the financial statements are an integral part of the financial statements that clarify and expand upon the information in the financial statements. Management's discussion and analysis provides a discussion and explanation of various items reported in the financial statements. Additionally, management uses this opportunity to highlight favorable and unfavorable trends and significant risks facing the company. The auditor's report expresses the opinion of the auditor as to whether the financial statements fairly present the financial position and results of operations of the company
what is point in time measurment? how does it differ from period of time ameasurment ?
Point-in-time measurement means as of a particular date. The balance sheet is a point-in-time measurement. The period-of-time description applies to what has happened over a time interval. The income statement is a period-of-time measurement that explains the business activities between balance sheet dates. The statement of cash flows and the statement of retained earnings are also period-of-time measurements.
Five steps to prepare a balacce sheets:
Prepare a heading tht includes the name of the compnay, the titile fo the finacial statement, and the time perido covered.List the assets of the company in order of thier liquidity or nearness to cash. Use apporpariate classificatiosn. Add the assets and double underine the total.List the liablites of the company in order of their time to maturity. Use appropriate clasifiations.List the stockholders equity balacnces with approprate classifications.Add the liablites and stockholder equity and double underline the total
define the terms revenue and expense?
Revenues are the increases in assets (resources) that result from the sale of products or services. Expenses are the costs of assets (resources) used, or the liabilities created, in the operation of the business. If revenues are greater than expenses, a corporation has earned net income. If expenses are greater than revenues, a corporation has incurred a net loss.
Classified balance sheet:
Spilt between current( convert account balances to cash within one year) and non current( does not convert in one year)
Measuring business activites: the accounting cycle
Step 1: analyze transations. Stept 2: journalize transactions Stept 3: post to the ledger Step 4: prepare traial balance Step 5: adjust the accounts Step 6: prepare finaicl statemetns Step 7: close the accounts
identify the characteristics of useful information ?
The conceptual framework identifies two fundamental qualitative characteristics—relevance and faithful representation. Relevant information is capable of making a difference in a decision by helping users predict future events or providing feedback about prior expectations. Relevant information is also material. Faithfully represented information portrays the economic event it intends to portray. Faithfully represented information should be complete (includes all necessary information for the user to understand the economic event), neutral (unbiased), and free from error (as accurate as possible). In addition to the fundamental qualitative characteristics, the FASB has identified four enhancing characteristics—comparability, verifiability, timeliness, and understandability. Comparable information allows external users to identify similarities and differences between two or more items. Comparability includes consistency, which can be achieved by a company applying the same accounting principles for the same items over time. Verifiable information describes a situation in which independent parties can reach a consensus on the measurement of the activity. Information is timely if it is available to users before it loses its ability to influence decisions. Finally, if users who have a reasonable knowledge of accounting and business can, with reasonable study effort, comprehend the meaning of the information, it is considered understandable.
what is the conceptual framework accounting?
The conceptual framework of accounting is the collection of general concepts that logically flow from the objective of financial reporting—to provide information that is useful in making business and economic decisions. The conceptual framework supports the development of generally accepted accounting principles (GAAP) and provides a consistent body of thought for financial reporting. An understanding of the conceptual framework will provide a logical structure to financial accounting that will help in understanding complex accounting standards.
describe the constraint on providing useful information.
The cost constraint limits the ability of a company to provide useful information. The cost constraint refers to the idea that some information that is useful would be too expensive for the company to provide based on the benefit that is achieved from providing it.
how are the finaical statements related to genrally accepted accounting principles
The financial statements summarize the economic performance and status of a business and are issued at least annually. Generally accepted accounting principles (GAAP) are the rules and conventions that guide the preparation of financial statements. GAAP provides a "common ground" that makes it easier to use financial statements over time and across companies.
name and briefly describe the purpose of the four finaicial statements.
The four primary financial statements are: (1) Balance sheet: a presentation of information about a company's economic resources (assets) and the claims against those resources by creditors and owners (liabilities and stockholders' equity) at a specific point in time (2) Income statement: a report on how well a company has performed its operations— the profitability of a company—over a period of time (3) Retained earnings statement: a report on how much of the company's income was retained in the business and how much was distributed to owners over a period of time (4) Statement of cash flows: a report on the changes in a company's cash during a period of time. The statement of cash flows provides information about the company's cash inflows (sources) and outflows (uses) from operating, investing, and financing activities.
identify the four assumptions that underlie accounting.
The four underlying accounting assumptions are the economic entity assumption, continuity (goingconcern) assumption, time-period assumption, and monetary unit assumption. The economic entity assumption requires that a company be accounted for separately from its owners. The continuity assumption assumes that a company will continue to operate long enough to carry out its existing commitments. The time-period assumption allows the life of a company to be divided into artificial time periods so net income can be measured for a specific period of time. The monetary unit assumption requires that a company account for and report its financial results in monetary terms.
write the fundamental accounting equation. why is it significant?
The fundamental accounting equation is: Assets = Liabilities + Stockholders' Equity The equation is significant because it means that the balance sheet must always balance. This implies that what a company owns (its resources) must always be equal to the claims of its creditors (liabilities) and investors (stockholders' equity).
how is the retained earnings statement related to the balance sheet? how is the income statement related to the retained earnings statement?
The retained earnings statement describes the changes in retained earnings, a balance sheet account, that occur between two balance sheet dates. One of the major sources of change in retained earnings is the net income (or net loss) for the year, which is determined on the income statement. The other major source of change in retained earnings is dividends, which are not considered a part of income
name and descibe the three categories of the statement of cash flows
The statement of cash flows classifies cash flows into three categories: (1) cash flows from operating activities, (2) cash flows from investing activities, and (3) cash flows from financing activities. Cash flows from operating activities are the cash flows related to the normal operations of the business in earning income, and include cash sales and collections of accounts receivable minus cash paid for goods, services, wages, salaries, and interest. Cash flows from investing activities are cash flows related to the acquisition or sale of investments and long-term assets, including cash received from the sales of property, plant, and equipment; investments; and other long-lived assets minus the cash spent to purchase long-term assets. The cash flows from investing activities by a healthy, growing business will usually represent an excess of expenditures over receipts. Cash flows from financing activities are the cash flows related to obtaining the capital of the company, including the cash contributed by owners and borrowed from creditors minus amounts paid as dividends and repayments of liabilities. A business can finance its growth either internally with cash generated by operations or externally with cash from owners and creditors.
name and describe the trhee main types of business organization
The three main types of business activities are financing activities, investing activities, and operating activities. Financing activities involve obtaining the funds necessary to begin and operate a business. These funds come from either issuing stock or borrowing money. Investing activities involve buying and selling assets that enable a corporation to operate. Operating activities are the normal business activities that a company engages in as it conducts its business. These activities involve selling products or services, purchasing inventory, collecting amounts due from customers, and paying suppliers.
name the two main components of stockholders equity. describe the main sources of change in each component.
The two main components of equity are contributed capital and retained earnings. Contributed capital is increased by investments of new capital in a company by its owners (the issue of common stock to stockholders). Retained earnings is the accumulated net income of a company that has not been distributed to owners. Retained earnings is increased by net income and decreased by net losses and dividends.
discuss the four principles that are used to measure adn recored business transactions.
There are four principles used to measure and record business transactions. First, the historical cost principle requires transactions to be recorded at their cost—the exchange price at the time the activity occurs. Second, the revenue recognition principle determines when revenue is recorded and reported by a company. Under this principle, revenue must be earned and the collection of cash must be reasonably assured in order to record and report revenue. Third, the expense recognition (or matching) principle requires that an expense be recorded and reported in the same period as the revenue it helped generate. This may or may not be in the same period that cash is paid. Finally, the conservatism principle states that accountants should take care to avoid overstating assets or income
what types of questions are answered by the finacial statements?
There are many questions that can be answered based on each of the financial statements: (1) Balance sheet: a. What is the total amount of assets (economic resources) of a corporation? What is the total amount of liabilities (claims against the resources) for a corporation? b. How much equity do the owners of the corporation have in its assets? c. Is the corporation able to pay its debts as they become due? (2) Income statement: a. How much revenue was earned last month? Last quarter? Last year? b. What was the total amount of expenses incurred to earn that revenue? c. How much better off is the corporation at the end of the year than it was at the beginning of the year? d. Was the corporation profitable, and what are the prospects for the corporation's future profitability? e. What are the prospects for the future growth of the corporation? (3) Retained earnings statement: a. How much income was distributed in dividends by the corporation? b. What amount of equity in the business has been generated internally? (4) Statement of cash flows: a. How much cash was taken in or paid out as a result of operations? b. How much cash was invested in new equipment? c. How much cash was used to pay off business debt?
Single steps inocme statement:
There are only two categories- total reveues and total expenses. Total expenses are subtracted from toalt revue in a single step to arive at net income. The advantage of a single step inocme statemetn its it simplicity
discuss the trade offs that may be necessary between the qualitative characteritics.
Tradeoffs are often necessary between the qualitative characteristics. For example, the most relevant information may not be able to be faithfully represented. Similarly, a change in accounting principle may temporarily reduce comparability but improve the relevance of the information. The goal should be to provide the most relevant information that can be faithfully represented
what is the basic process used in transaction analysis?
Transaction analysis usually begins with gathering the source documents that describe business activities. Accountants must then analyze these documents to determine which transactions should be recognized in the accounting system. If the transaction is to be recorded in the accounting system, the transaction must then be analyzed to determine the effects it will have on the fundamental accounting equation. This analysis involves three steps: (1) write down the accounting equation; (2) identify the financial statement elements that are affected by the transaction; and (3) determine whether the element increased or decreased
how do revenues and expenses affect the accounting equation?
When a firm earns revenue, its net income is increased. When a firm incurs an expense its net income is decreased. At the end of the accounting period, net income is added to retained earnings, a stockholders' equity account. Therefore, an increase in revenue increases stockholders' equity and a decrease in revenue decreases stockholders' equity. Likewise, an increase in expense decreases stockholders' equity and a decrease in expense increases stockholders' equity.
Using income statemtn information
When investors belive that future income will imporove they will buy stock. Creditiors rely on their judgemetn of a compnay future income to make loans. Investors and crditors estimates of the future profitablity and growth of a compnay are aided by a careful examination of how a compnay has earned its revue and manged its expens
in analyzing a transaction, can a transaction only affect onee side of the accounting equation?
Yes, it is possible for a transaction to affect only one side of the accounting equation. While the accounting equation must always remain in balance (meaning there must always be a dual effect on the accounting equation), these effects can be on the same side of the accounting equation. An example of this is when a customer pays cash for an accounts receivable. Both cash and accounts receivable are asset accounts (on the left side of the equation). One asset, accounts receivable, is decreasing, while another asset, cash, is increasing by the same amount. This results in the accounting equation remaining in balance, even though only one side of the equation was affected.
Accounting period begins with
a balace sheet. During the year, the company earns net income form operating its business. Net income form the income statemetn increases retained earings on the retained earnst statement. Eding retaiend earnings is then reported in the stockholders equity section fot he balace sheet at the end of the accounting period.
If revenue are greater than expenses
a corpaortion has earned net income.
If expenses are greater than revenue,
a corporation has incurred a net loss
Bonds payable
a form of an interst bearing note payable issured by coporations in an effort to attract a large amount of investors
Fiscal year
accounting period that runs for 1 year. Some compnies adopt a fiscal year tha tmore closely corresponds with their business cycles
Control assets
accumulated depreciation is subracted from the cost of an asset
Wages payable
amount owed to emplyees for work performed
Notes payable
an obligation to repay cash borroweed at a future daye
Purchase and salse of these assetst that are used in operations( commonly referred to as property, plant, and equipment)
are a corporatiosn investing activites.
Double taxation
at the corporate level as in come is earned, and at the individual level as earnings are distributed to stockholders.
Most companies prepare finaicla statemtns
at the end of each motnh, quarter, and year
Partnership:
busineess owned jointly by two or more individuals. Small business and professioanl practices are often organized as partnerships. Provide increased accessto finaical resoruces as well as access to the individual skill of each partner. Accounting eny is deparate from the partneres. Partners are jointly responsible for all the debt of the partnership .
Corporation:
business organized under the laws of a particular state. Stockholders( ownership interst are reperesented by shares fo stock. Advantage fo corporat is the abilitiy to raise large amounts of money ( captial) by issuing shares fo stock. Is an " artifical person" and the stochholders legal responbiti8y for the debt of the business is limited toh the amount thye invested in the busines. Shares of stock can be transfered from one owner to another through captial market without affecting the coportation. Abilityto raise captial by selling new shares , the limited legal liablity of owners, and the transferablity of the shares give the coporation an advantage. Owners of coprotation pay more taxes than owners of other buines becasuse the corporate income ta rate is greater than the individual income tax rate. Also corporation income is taxed twice.
Sole proriptor ship:
business owned by one person. 70% of all business. Popular because it is siimple to set up and gives the owner control over the business. The owner is personally responsible for the debt of the business. Can be formed or dissolved at the wishes fo the owner
The company assets
but be alwasy equal or be in balace with the claims agaisnt those resources liabilites and stockholders equity
Generally accepted accounting principles( GAAP)
common set of rules and conventions have been developed to guide the preparation of fiancial statements.
Current assets
cosnsit of cahs and othe rassets that are resonalbiy expected to be converted into cash within 1 year or one operating cycle
Expenses
cost of assets used or the liablites created int he operation of the business
Financial statements-
detailed transactions are summerixed and reported in a set of standardized reporsts. Provide info that helps investors, creditors, and others make judgements and preditions that serve as the basis for the various decisons they make.
Owners equity is the
difference betweens assets and liablites. Owners equity=stockholders equity
Common stock
dollar amount paid to a corporation for thse shares , represents the basic ownership interst ina corporation
Income statemetn can be viewd as
explaining, throught the retained earnins statement, the change in the finacial position during the year. The statemetn cash flows, explains th e hange in cash durignt he year
Securites and exchange commission ( SEC)
has the power to set accounitng rules for public.y traded compnies. Has delgated this authoirity to the finaical accounting standards board(FSAB)
Account payable
if coproration puchases good on creadit from a suplier, the ogligation to repy the supplier
Short term investments or marketable sercuites-
investments in the debt and stock of othe rcompnies as well as governmetn decuires
Acounting entity
is a company that has an identyty separate from that of its owners and mangers and for which accounting records are kept
Current ratio
is an alternative measure of liquidty that allows comparaison to be made between different companies. Current ratio= current assets/current liabites
Operating cycle-
is teh average time that it takes a compnay to purchase goods, resell the goods, and collect the cash from customers
Revenue
is the increase in assets tha result from the sale of products or services.
Common way for a corporation to obitain cash
is to borrow money with the promise to repay the amount borrowed pluss interest at a future date- notes payable
Once corporation has obtained funds through financing
it buys assets that enable ti to operate.
Once a corportation has acquired the assets that it needs,
it can begin to operate
Liablity
obligation to repay a creditior
Finanacing activities:
obtain the funds neccessary to begina dn operate a business( funds come from stock or borrowing money). when a coprotation borrows money from another enity ( bank) it must repay the amount borrowed
In order for an event to be recorded,
or regonized in the accounting system, the items making up the event must impact a finacial statmetn element( asset, liabilty, stockholders equity, revenue, or expense) should be a faithful representation of the vent
Creditior
person to whom the coroprtion owes money to
Dividends
portions of corporation earnings to stockholders on a regular basis
supplies and inventory
products helf for resale)
Multipe step income statement :
provides classification of revuens and expenses that finacial statemetn userss find useful. had gross margin, income, net income
Accounting cycle
simple and orderly process, based on a seris of steps and conventions
Bond payable
special form of not payable that is used by corporation to obtain large amounts of money
Corporations may also obtain intangible assets that lack phyical substance
such as copy rights and patents
Fiancial statements are accompanied by
supporting information and explantory material called the notes to the finaical statement
Income taxes payable
taxes owed to the government
Retained earnings-
the accumulated net income of a company that ha s not been distbuted to owners in the form of dividends
Stockholders equity In case fo financial difficulty or distress
the claim of the creditors( liablites) must be paid prior to the claims of the stockholds. Considered a residual interest in the assets of a corporation that remain after ducting liablites
Income from operation
the difference betwen gross marginad operating expenses. indicates the level of profit produced by the principal activites of the company
Net income
the difference betwwen inocme from operation snad any nonoperating revues and expenes
Gross margin( gross profit)-
the differnce betwwen net sales and cost of goods sold ( or cost of sales). ross margin= net sales- cost of goods sold Represent the initial profit made from selling a product, but it is not a measure of total profit because other operating expense have not yet been subracted. A change in a company gross margin can give insights into a company current pricing and purchasing policies , insigt into the comapy future perforance
Accounts reciveable
the right to collect an amount due from customers
accounts recivalble
the right to collect an amount due from customers)
Company hire auditor
to give the userws of the finacial statemetns assurace or confidence that the finaicla statemetns are a fair presentation fo the company finacial health
Multiple step income statement
usees percents . The gross margin / net sales * 100. the percent tells you how much profit you make ( gross margin %)
