Financial Accounting Chapter One

Operating expenses=

(asset decreases)

Rental revenue=

(asset increases)

Is there a right order for the Horizontal Model? If so, what is it?

1. Yes 2. THE RIGHT ORDER IS= 1.) Income Statement *Revenues (items earned) - Expenses (Items used up)= Net Income (Profit/earnings. 2.) Statement of Changes in Stockholders' Equity *Beg R.E.+Net Income (profit/earnings) - Dividends = End R.E. 3.) Balance Sheet (What do I own (assets) and what do I owe (equity/liabilities). *Assets (own)= Liabilities (owe) + Owner's Equity.

Gupta Company has $250,000 of assets, $60,000 of liabilities, and $90,000 of common stock. What percentage of the assets was provided by retained earnings?

1. assets= liabilities+ common stock + retained earnings. 2. Retained earnings= assets-liabilities- common stock 3. Retained earnings= $250,000 - 60,000- 90,000 4. Retained earnings= $100,000 THEN DETERMINE THE PERCENTAGE= 1. Percentage of assets provided by retained earnings= Retained earnings= retained earnings/Total assets 2. Percentage of assets provided by retained earnings= $100,000/250,000= .40 (40%)

The closing Process

1.) Transfers Revenue / Expenses (net income or loss) and Dividends to Retained Earnings. 2.) Establishes zero balances in all Revenue, Expense, and Dividend accounts.

Income is measured for a span of time called the=

Accounting period

What is the next statement and what does it show?

Assets are displayed in order of liquidity.

What is the accounting equation?

Assets=liabilities +Equity

Services typically offered by public accountants include_____, ________, and __________.

Audit services, tax services, and consulting services.

How often should you prepare financial statements?

Bank customers generally like to receive their account statements at the end of every month or quarter, but that doesn't prevent them from checking account balances when the need arises; they may stick to a quarterly or monthly schedule, but still publish interim accounting reports if necessary.

Nonprofit Accounting most important to least important=

Benefactors and beneficiaries, Legislators, Citizens.

Managerial accounting (internal)=

Branch of accounting focused on the info needs of managed and others working within the businesses; gather and report info that adds value to the business. Not regulated or reported to the public.

What does CPA stand for?

Certified Public Accountant

Assets=

Claims; The resources a business uses to make money

Contributed Capital is also called

Common Stock

Profit, income, or earnings.

Common terms for the added value created in the transformation process include these

What is the difference between a balance sheet and an income statement?

Companies prepare the balance sheet and the income statement periodically at the end of each accounting cycle. While a balance sheet relates to a specific date, an income statement is concerned about a particular period, or the time during an accounting cycle. Companies use the balance sheet to report their financial conditions that can be measured only at a point in time, and the income statement to report their financial performance that is tracked often over a period of time.

Reliability Concept=

Information is reliable if it can be independently verified. Appraised values are opinions and will vary from appraiser to appraiser.

Stockholders are=

Investors

What is the second source of assets?

Investors.

Managerial Accounting most important to least important=

Managers, Employees, Unions.

Losses=

Net decreases in Assets caused by operations

Earnings or income=

Net increases in assets generated from operations

Do you only see it on statement of equity?

No.

Temporary Accounts

They track financial results for a limited period of time. (expenses, Revenue, and Dividends).

Permanent accounts

They track financial results from year to year. (Assets, Liability, and Equity).

Total Assets=

Total Liabilities and Stockholders' Equity

Market

a group of people or entities organized to exchange items of value

Transaction=

a particular kind of event that involves transferring something of value between two equities.

Financial accounting (external users)=

accounting focused on the business information needs of external users (creditors, investors, governmental agencies, financial analysts).

Accounting Definition

an information system that reports on the economic activities and financial condition of a business or other organization

investing activities (IA)

an item on the cash flow statement that reports the aggregate change in a company's cash position resulting from any gains (or losses) from investments in the financial markets

The elements of financial statements represent=

broad categories.

Equity=

common stock + retained earnings

The market for business resources involves three distinct participants which are _____, ________, and ________

consumers, conversion agents, and resource owners.

Resource Owners=

control the distribution of resources to conversion agents. They also provide resources (inputs) to conversion agents who provide goods and services (outputs) to consumers.

Businesses=

conversion agents

operating activities (OA)

determine whether a company is profitable.; majority of cash flow.

not applicable (NA)

does not apply to you

Managerial accounting information is usually more detailed than____.

financial accounting reports.

Organizations communicate inför to stakeholders through________

financial reports

The specific resources businesses use to satisfy consumer demand are=

financial resources, physical resources, and labor resources.

Resource providers use accounting information to _________

identify companies with high earnings potential because those companies are more likely to return to higher profits, make interest payments, repay debt, pay higher prices, and provide high paying employment.

Labor resources=

include both intellectual and physical labor.

External financial reports=

income statement, balance sheet, statement of cash flows, and statement of changes in equity.

Retained earnings=

increase in the businesses commitments to its stockholders

________ and ___________ provide financial resources

investors and creditors

Financial Accounting most important to least important=

investors, creditors, brokers.

Audit Services

involve examining a company's accounting records in order to issue an opinion about whether or not the company's financial statements conform to generally accepted accounting principles. Adds credibility to the statements (prepared by the companies management).

Businesses use accounting to_____

keep score

Creditors=

lend financial resources to businesses. Instead of the share of the business, they expect the business to repay borrowed resources plus interest. Example= A loan

financial resources=

money

Physical Resources=

natural resources example: standing timber may be transformed into harvested logs, raw lumber, and finished furniture.

An example of resources are frequently not in a form consumers want=

nature provides trees, but consumers want furniture.

Deferral

occurs AFTER a payment or receipt.

Accural

occurs BEFORE a payment or receipt

In the USA, you compete for resources in ________

open markets

Investors=

provide money in exchange for ownership interests in businesses. Owners expect businesses to return to them a share of the business, including a portion of earned income.

Consumers use_______

resources

Net Loss=

results when expenses exceed revenues.

financing activities (FA)

shows investors the company's financial strength.

Equity may be called=

stockholders' equity, owner's capital, and partners' equity.

Consumer agents (businesses) transform resources=

such as trees into desirable products such as furniture.

Distributions, withdrawals, and dividends=

the transfer of assets from a business to its owners are called these three.

Net Income, Net Earnings, and Net Profit

used to describe the same element

Stakeholders

users of accounting information. These include resource providers, financial analysts, brokers, attorneys, government regulators, and news reporters.

Can a business borrow assets from creditors?

yes.

Elements of Financial Statements=

1. Assets 2. Liabilities 3. Equity / Contributed Capital 4. Revenue 5. Expenses 6. Dividends (Distributions) 7. Net Income

Claims on the assets are from two sources which are _______ and ________.

Creditors (liabilities) and investors or owners (equity).

Accounts=

Detailed info about the elements is maintained in records called this.

Preparing Financial Statements- Where do dividends show up?

Dividends will be reported as a use of CASH in the financing section of the statement of CASH FLOWS. Dividends are also reported on the statement of changes in stockholders' equity. Dividends on common stock are not reported on the income statement since they are not expenses.

________, ___________, and __________ may use accounting info to assess companies compliance with income tax laws and other regulations.

Financial analysts, brokers, and attorneys.

What is the order of preparing the financial statements and why?

Financial statements must be prepared in sequence because the information in one is needed for the next. The sequence of financial statements is: income statement, statement of retained earnings, balance sheet and statement of cash flows.

What is the third source of Assets?

Operations

Not-for-profit-entities (nonprofit or nonbusiness organizations)

Organizations that are not motivated by money

Preparing Financial Statements RUSTIC CAMP SITES Income Statements For the Year Ended December 31, 20XX

Rental revenue (asset increases) 85,000$ Operating expenses (asset decreases) (50,000) Net income $35,000

Historical Cost Concept=

Requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value.

Preparing Financial Statements (matching concepts)=

Revenues are matched to expenses.

Liabilities

The obligations a business has to its creditors