Accounting Chapter 2
Stanga, inc. issues 1000 shares of common stock at $10 a share. As a result of this transaction, the owner's equity will increase by
$10,000
Summers inc. bought a piece of equipment for $100,000 by issuing a long term note for $80,000 and paying cash of
$20,000
Neel inc., reports total asset of $400,000 and total liabilities of $340,000. Owner's equity is
$60,000
Identify the 3 primary financial statements
*Statement of financial position (balance sheet) *Statement of cash flows *Income statement
Crook, Inc. issues 4,000 shares of capital stock at $30 per share. As a result of this transaction, liabilities will increase by
0
Which of the following are the advantages of the corporate form of organization
1. The ability to accumulate large amounts of capital 2. Limited Liability 3. Transferability of ownership
Which statement describes revenues
1. They result from profit directed activities 2. They result in positive cash flows 3. They increase net assets
statement of cash flows
3 categories of cash flows: 1. operating activities: the cash effects of revenue and expense transactions that are included in the income statement. 2. Investing Activities: The cash effect of purchasing and selling assets such as land and buildings 3. Financing Activities: The cash effects of the owners investing in the company and the repayment of either or both.
Identify each section of the statement of financial position
3 sections: 1. Assets 2. Liabilities 3. Owner's equity
Stable Dollar Assumption
A limitation of measuring assets at historical cost is that the value of monetary unit or dollar is not always stable..
LO2-2 Explain certain accounting principles that are important for an understanding of financial statements and how professional judgment by accountants may affect the application of those principles
Accountant prepare financial statements by applying a set of standards or rules referred to as generally accepted accounting principles. Consistent application of these standards permits comparisons between companies and between years of a single company. Generally accepted accounting princples allow for significant latitude in how certain transactions should be accounted for, meaning that professional judgment is particularly important.
The objectivity principle
Accountant use the term objective to describe the asset valuations that are factual and can be verified by independent experts. land cost = purchase price. market value is not objective.
Which of the following are not shown at cost
Accounts receivable are typically not shown at cost.
Fuller provided $30,000 of consulting services during the month of December. Half of which was paid in cash and half of which is due on account. Which effect did this transaction have on the accounting equation?
All of the following: 1. Owner's equity increased by $30,000. 2. Retained Earnings increased by $30,000. 3. Total assets increased by $30,000.
Powers, Inc. pays $22,000 to settle an account payable. What is the effect of this transaction of the accounting equation
All of the following: 1. Total Liabilities decrease by $22,000. 2. Accounts Payable decrease by $22,000. 3. Total Assets Decrease by $22,000 4. Cash decreases by $22,000
Henry, Inc. bought a $500,000 building by making $100,000 cash down payment and issuing a $400,000 long term note. Which immediate effects did this transaction have on the accounting equation.
All of the following: 1. Total Liabilities increased by $400,000. 2. The Building Account Increased by $500,000. 3. The cash account decreased by $100,000.
Going Concern Assumption
An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption.
A fundamental characteristic of every statement of financial position is that the total for assets always equals the total of liabilities plus owner's equity.
Assets = liabilities + owner's equity $360,000 = $96,000 + $264,000
Another exception to the cost principle
Certain investments in other enterprises are included in the balance sheet at their current market value if management plan include conversion int cash in the near future.
Any decrease in total assets is accompanied by a
Decrease in liabilities or owner's equity
Decrease in Owner's Equity
Decreases in owner's equity also are caused in two ways 1. Payments in cash or transfers of other assets to owners 2. Losses from unprofitable operation of the business
Expenses
Decreases in the company's asset from its profit directed actitivies. They result in negative cash flows.
Adequate Disclosure
Disclosure is adequare if financial statements users have all the information necessary for the proper interpretation of the statements.
Entity Principal
Financial statement s describe the activity of a specific economic entity. (According to GAAP)
LO2-1 Explain the nature and general purpose of financial statements.
Financial statements are presentations of information in financial terms about enterprise that are believed to be fair and accurate. They describe certain attributes of the enterprise that are important for decision makers, particularly investors and creditors
The cost principle
Historical cost refers to the original amount the entity paid to acquire the asset. Examples: building, land, equipment.. Examples of asset reported at net realizable value or fair value include accounts receivable and investments.
Investors are generally most interested in which financial statement
Income Statement
The cash effects of purchasing and selling assets are including in which section of the statement of cash flows
Investing
An advantage of a partnership as compared to a sole proprietership
Is able to raise large amount of capital
Cunningham, Inc. purchased $8,000 of supplies on account. Which immediate effect did this transaction have on owner's equity.
It had no effect on owner's equity. The cash and assets (supplies) are both on the asset side.
Window Dressing
Measures taken by management specifically intended to make a business look as strong as possible in its balance sheet, income statement, and statement of cash flows
Which financial statement describes where an enterprise stands on a specific date
Statement of financial position or (balance sheet)
Because the balance sheet, the income statement and the statement of cash flows are derived from the same underlying financial information
The 3 statements are said to articulate
Corporation
The corporation is a unique form of organization that allows manay owners to combine their resources into a busines enterprise that is larger than would be possible based on the financial resources of a single owner or a small number of owners.
Liabilities represent claims again the borrowers assets
The owners of a business have a claim on the company's assets
Increases in Owner's equity
The owners' equity in a business comes from two primary sources: 1. Investments of cash or other assets 2. Earnings from profitable operations of the business
The accounting equation is most closely related to which financial statement
The statement of financial position. (Balance Sheet)
If assets do not equal liabilities plus owner's equity there must be a mistake in the financial statements
True
Ranall, Inc. begins a lawn mowing service by establishing a small, closely held corporation. Capital stock is issued to Ranall and family. 5,000 shares for $50,000. What is the effect of this transaction on the accounting equation.
Two effects of the issuance of capital stock: 1. Capital Stock increases $50,000. 2. Cash increases to $50,000.
Which features describe a partnership
Unincorporated Involved 2 or more people
An increase in one asset must be accompanied by
a decrease in another asset. If one asset increase, then either another asset decreases or ( liabilities or owners equity increases)
A note payable
a written promise to repay the amount owed by a particular date and usually calls for the payment of the interest as well.
accured expenses
an accounting term communicating that th epayment of certain expense has been delayed or deferred. (ex. expenses at the end of the year: wages, interest, taxes...)
Revenues
are a increase in the company's assets from its profit direction activities.
Assets
are economic resources owned by a business and are expected to benefit future operations.
Liabilities
are financial obligations or debts.
order of assets on balance sheet
assets are ordinarily presented in their order of permance. starting with cash. next - receivable (close to cash) followed by permandent assets - land. liabilities are usually presented in the order in which they become due.
A business that lacks the liquidity to pay its debts as they come due may be forced into
bankruptcy
The 3 primary financial statements are based on the same transactions
but present a different views of the company
Owner's Equity is separated into two parts
capital stock and retained earnings
On the statement of financial position (balance sheet)
cash is listed first, followed by other assets soon to be converted into cash or be used up in business operations.
Most large organizations are organized as a
corporation
The person or organization to whom a debt is owed is called a
creditor
The statement of financial position or balance sheet
describes where the enterprise stands at a specific date.
The balance sheet of a business is prepared on the assumption that the business is a continuing enterprise or a
going concern
Statement of Financial Position
heading: 1. name of business 2. name of financial statement 3. Date body: 1. assets a. cash b. notes receivable c. other assets soon converted into cash d. permanent assets - land, buildings 2. Liabilities a. notes payable b. accounts payable c. salaries payable 3. owner's equity a. capital stock b. retained earnings
Financial Statement
is a a declaration of what is believed to be true about an enterprise, communicated in terms of a monetary unit, such as the dollar. There are 3 types of financial statement: Statement of financial position (balance sheet), Income statement, Statement of cash flow.
A business entity
is a economic unit that engages in identifiable business activities.
The income statement
is a summarization of the company's revenue and expense transactions for a period of time.
Inflation
is a term used to describe the situation where the value of the monetary unit decreases meaning that it will purchase less than it did previously. Historically, the United States have experienced modest inflation rather than deflation. When inflation becomes severe, historical cost amounts for assets lose their relevanc e as a bases for making business decision.
Income statement
is an activity statement that shows the revenues and expenses for a designated period of time.
business entity
is an economic united that engages in identifable business activities. The business entity is an economic unit that controls resources, incurs obligations and engages in business activities. For accounting purposes, the business entity is regarded as separate from the personal activities of its owners.
The statement of cash flows
is important in understanding an enterprise for the purpose of investment and credit decisions. The statement of cash flows shows the ways cash changes during a designated period. The cash received from revenues and other transactions as well as the cash paid for certain expenses and other acquisitions during the period.
Net Income
is the difference between the revenues and expenses for a specified period of time.
Deflation
is the opposition of inflation. The value of the monetary unit increases, meaning thtat it will purchase more that it did previously.
The fact that the owners of a corporation are not personally liable for its debts is a concept known as
limited liability
Expenses result in
negative cash flows
The balance sheet of business is prepared on the assumption that the business is a continuing enterprise
or a going concern
Which asset lacks a physical form, but provides a valuable legal right or claim.
patents
Revenues result in
positive cash flows
The heading for the Income statement
refers to a period of time, rather than a point in time as was the case with the balance sheet.
The income statement
reports on the financial performance of the company in terms of earning revenue and incurring expenses over a period of time and explains , in part, how the company's financial position changes between beginning and ending of that period.
Capital Stock
represents the amount that the owners originally paid into the company to become owners.
Capital Stock
represents the amount that the stockholder originally invested in the business in exchange for shares of the company stock
Owner's equity
represents the owner's claim on the assets of the business. Because liabilities or creditor's claims have legal priority over those of the owners, owner's equity is a residual amount. - If you are the owner of a business, you are entitled to assets that are left after the claims of the creditors are paid in full. Owner's equity equals total assets minus total liabilities.
When an asset is shown at a historic cost
that is the original amount the business entity paid to acquire the asset.
A limitation of measuring assets at historical cost is
that the value of the monetary unit or dollar is not always stable
Net realizable value (an exception to the cost principle)
the amount that approximates the cost that is expected to be received when the receivable is collected.
articulation
the close relationship that exists among the financial statements that are prepared on the basis of the same underlying transaction information.
The cost principle of accounting
the widely used principle of accounting to asset at their original cost to the current owners.
An income statement is prepared for a period of time
true
When an asset is purchased for cash, the numbers on the right hand side of the balanced sheet are
unchanged
Virtually all businesses prepare a financial statement at the end of each
year.