ACC231 Chapter 1

equity method

method of accounting required for investments where 20% to 50% (no more) of voting interest is owned

gross profit

revenue from a particular activity minus the direct costs associated with earning that revenue

What's Found on a Balance Sheet

Accounts Payable Common Stock Inventory Cash Retained Earnings Long-term Debt

Liabilities

Accrued Expenses Payable Notes Payable Long-term Debts Accounts Payable

operating activities

Activities that create revenue or expenses in the statement of cash flows. Operating activities affect the income statement

investing activities

Activities that increase or decrease the long-term assets available to the business; a section of the statement of cash flows.

financing acitivities

Activities that obtain from investors and creditors the cash needed to launch and sustain the business, a section of the statement of cash flow

liability

An economic obligation (a debt) payable to an individual or an organization outside the business.

asset

An economic resource that is expected to be of benefit in the future

entity

An organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit.

net profit

another name for net income

The nature of an asset is best described as

an economic resource that's expected to benefit future operations

During February, assets increased by $86,000 and liabilities increased by $30,000. Stockholders' equity must have

increased by $56,000

Smith Company had total assets of $215,000 and total stockholders' equity of $80,000 at the beginning of the year. During the year, assets increased by $43,000 and liabilities increased by $11,00. Stockholders' equity at the end of the year is.

$112,000

The Stockholder's equity of Kovsky Company at the beginning and end of 2014 total $126,000 and $139,000, respectively. Assets at the beginning of 2014 were $150,000. If the liabilities of Kovsky Company increased by $74,000 in 2014, how much were total assets at the end of 2014? Use the accounting equation

$237,000

Liability

A debt payable to an outsider

generally accepted accounting principles (GAAP)

Accounting guidelines formulated by the Financial Accounting Standards Board that govern how accounting is practiced

International Financial Reporting Standards (IFRS)

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

Balance Sheet

Also called the statement of financial position

capital

Another name for the equity of a business

Income Statement

Answers the question "How well did the company perform during the period?"

The accounting equation can be expressed as

Assets-Liabilities = Owners' equity

Liabilities (Account Classifications)

Bonds Payable Accounts Payable Salaries Payable

Equity (Account Classifications)

Common Stock Retained Earnings Sales Revenue

Expenses

Costs of doing business

dividends

Distributions (usually cash) by a corporation to its stockholders

What's Found on a Statement of Cash Flows?

Dividends Net Income Cash Increase or Decrease in Cash Net Cash provided by operating activities Net Cash used for Financing activities

Investors and creditors

Entities that provide money to finance a company's operations

Assets (Account Classifications)

Equipment Cash Accounts Receivable Inventory

net income

Excess of total revenues over total expenses. Also called net earnings or net profit.

Ex: (Jan 18) Performed services for cash $200

Increase Assets Increase Stockholders' equity

Ex. (Jan 21) Received cash for payment on account from revenue on Jan 10

Increase and Decrease Assets

Ex: (Jan 2) Purchased office supplies on account for $500

Increase: Assets Increase: Liabilities

Ex: (Jan 10) Performed services on account for $2000

Increase: Assets Increase: Stockholders' equity

Ex: (Jan 4) Issued common stock for cash $5,000

Increase: Assets Increase: Stockholders' equity

Revenues

Inflows of resources resulting from delivering goods or services to customers

Equity

Insider claims of a business

Cash Flows from financing activities

Issuance of common stock Payment of dividends

Increase an asset and increase stockholders' equity

Issuance of stock Revenue transaction (ex: provided services on account or for cash)

balance sheet

List of an entity's assets, liabilities, and owners' equity as of a specific date. Also called the statement of financial position.

Bookkeeping

Mechanical part of accounting

Cash Flows from Operating Activities

Net Income Adjustments to reconcile net income to net cash provided by (used for) operating activities

Corporation

Owned by stockholders whose liability is limited to the amount they have invested in the business

Compute the missing amount in the accounting equation for each company (amounts in billions): Perfect Cleaners: Assets $?, Liabilities $43, and stockholders' Equity $33 Northeast Bank: Assets $23, Liabilities $?, and Stockholders' Equity $15 Hair Styles: Assets $30, Liabilities $15, and Stockholders' Equity $?

Perfect Cleaners: Assets $76 Northeast Bank: Liabilities $8 Hair Styles: Stockholders' Equity $15 Northeast Bank appears to have the strongest financial position because its liabilities make the the smallest percentage of company assets. This percentage is 34.78%

Financial Accounting

Provides information for decision makers outside the organization

Statements of Cash Flows

Reports cash flows from operating, investing, and financing activities

Ethical Duties

Responsibilities of the members of society to each other

What's Found on an Income Statement?

Salary Expenses Net Income Interest revenue Sales Revenue

Owner's Equity

See equity and stockholders' equity

Historical Cost Principle

States that assets should be recorded at their actual cost on the date of purchase

Depreciation

The allocation of the cost of a plant asset to expense it over its useful life

managerial accounting

The branch of accounting that generates information for the internal decision makers of a business, such as top executives

Financial Accounting Standards Board (FASB)

The regulatory body in the United States that formulates generally accepted accounting principles (GAAP).

equity

The claim of the owners of a business to the assets of the business. Also called capital, owners' equity, stockholders' equity, or net assets.

accounting

The information system that measures business activities, processes that turn data into reports and financial statements, and communicates results to decision makers

common stock

The most basic form of capital stock

accounting equation

The most basic tool of accounting: Assets = Liabilities + Owners' Equity.

accounting cycle

The process by which financial statements are prepared

Prairie Corporations holds cash of $11,000 and owes $29,000 on accounts payable. Prairie has accounts receivable of $40,000, inventory of $32,000, and land that cost $55,000. How much are Prairie's total assets and liabilities?

Total Assets of $138,000 and Liabilities of $29,000

Net Income

Total revenues less total expenses

current liability

a debt due to be paid within one year or within the entity's operating cycle if the cycle is longer than a year

Supposed you manage a Coffee Run! restaurant. Identify the missing amount for each situation: Total Assets = Total Liabilities + Stockholders' Equity a. $_____?_____ = $290,000=$390,000 b. 95,000 =65,000+_____?_____ c. 390 ,000=_____?_____+ 330,000

a. Total Assets = $680,000 b. Stockholders' Equity = $30,000 c. Total Liabilities = $ 60,000

current asset

an asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business's normal operating cycle if longer than a year

net earnings

another name for net income

long-term assets

assets that are expected to be used in business operations for longer than one year. These usually include investments, property and equipment (plant assets) and intangible assets

intangible assets

assets with no tangible form that represent resources that have a value and future benefit

financial statements

business documents that report financial information about a business entity to decision makers

net loss

excess of total expenses over total revenues

deficit

negative balance in retained earnings caused by net losses over a period of years

historical cost principle

principle that states that assets should be recorded at their actual cost

going-concern assumption

the assumption that an entity will remain n operation for the foreseeable furture

financial accounting

the branch of accounting that provides information to people outside the firm

The PRIMARY objective of financial reporting is to provide information

useful for making investment and credit decisions

Regert, Inc., has current assets of $220 million; property, plant, and equipment of $370 million; and other assets totaling $160 million. Current liabilities are $100 million and long-term liabilities total $340 million REQUIREMENTS: 1. Use these data to write Regert's accounting equation. 2. How much in resources does Regert have to work with? 3. How much does Regert owe creditors? 4. How much of the company's assets do the Regert stockholders actually own?

1.Assets: $750 Liabilities: $440 Stockholders' equity: $310 2. 750 3. 440 4.310

Partnership

A business form with two or more owners who are each personally liabe for all of the business's debts

Proprietorship

A business organization form with a single owner who is personally liable for all of the business's debts

Limited Liability Company (LLC)

A business organization in which the business (not the owner) is liable for the company's debts

corporation

A business owned by stockholders. A corporation is a legal entity, an "artificial person" in the eyes of the law

income statement

A financial statement listing an entity's revenues, expenses, and net income or net loss for a specific period. Also called the statement of operations.

board of directors

A group elected by a company's stockholders to set the policy of the corporation and to appoint its officers

long-term debts

A liability that falls due beyond one year from the date of the financial statements

Accounting definitions are precise, and you must understand the vocabulary to properly use accounting. Sharpen your understanding of key terms by answering the following questions: 1. How do the assets and owners' equity of Apple, Inc. differ from each other? Which one (assets or owners' equity) must be at least as large as the other? Which one can be smaller than the other? 2. How are Apple, Inc.s liabilities and owners' equity similar? Different?

Assets are the economic resources of a business that are expected to be of benefit in the future. Owners' equity represents claims to the assets held by the owners of the business Assets must be at least as large as owners' equity. Owner's equity can be smaller than assets. Both liabilities and owners' equity are claims to assets. Liabilities are the outsider claims to the assets of a business. Owners' equity represents the insider claim to the assets of the business

Ex: (Jan 15) Paid amount owed to vendor for the office supplies purchased on account on Jan. 2

Decrease Assets Decrease Liabilities

Ex: (Jan 31) Paid employees for monthly payroll $1500

Decrease Assets Decrease Stockholders' equity

expenses

Decreases in retained earnings that result form operations< the cost of doing business< the opposite of revenues

What's Found on a Statement of Retained Earnings

Dividends Net Income Retained Earnings

Asset

Economic resources that are expected to produce a benefits in the future

Decrease an asset and decrease stockholders' equity

Expense transaction (ex: recieved and paid utility bill) Declaration and payment of dividends to stockholders

Assets

Land Supplies Equipment Prepaid Expenses Accounts Receivable Merchandise Inventory

Managerial Accounting

Provides information for managers of the organization

Increase one asset and decrease another asset

Purchase of asset for cash Sale of asset for cash equal to the asset's book value Collection of an account receivable

Increase an asset and increase a liability

Purchase of asset on account Borrow money

Cash Flows from Investing Activities

Purchases of property, plant, and equipment Sales of property, plant, and equipment Other investing cash payments

Stockholders' Equity

Retained Earnings Common Stock

Decrease an asset and decrease a liability

Return an asset purchased on account Pay a liability

continuity assumption

See the "going-concern" assumption; Holds that the entity will remain in operation for the foreseeable future.

ethics

Standards of right and wrong that transcend economic and legal boundaries. Ethical standards deal with the way we treat others and restrain our own actions because of the desires, expectations, or rights of others, or because of our obligations to them

paid-in capital

The amount of stockholders' equity that stockholders have contributed to the corporation. Also called contributed capital

fair value

The amount that a business could sell an asset for, or the amount that a business could pay to settle a liability

amortization

allocating the cost of intangible assets to expense it over its useful live