Chapter 1: Accounting in Action

Who are internal users?

The marketing team, management, finance team, Human Resources team

(+ or -) Revenue

+

(+ or -) Dividends

-

(+ or -) Expenses

-

The 4 type of financial statements are

1) balance sheet 2) income statement 3) retained earnings statement 4) statement of cash flow

What 3 basic activities does accounting consist of?

1) identifying 2) recording 3) communicating

In what order are the account titles on the balance sheet?

1st) assets 2nd) liabilities 3rd) S/H equity

Which of the following is NOT part of the accounting process? Select one: a. Financial decision making b. Communicating c. Identifying d. Recording

A

Define stakeholders

Anyone effected by the company's situation

As of December 31, 2013, Morley Company has liabilities of $5,000 and stockholders' equity of $7,000. It received revenues of $23,000 during the year ended December 31, 2013. What are the assets for Morley Company as of December 31, 2013? Select one: a. $25,000. b. $12,000. c. $2,000. d. $35,000.

B. $5,000 + $7,000 = $12,000, so assets must equal $12,000. The $23,000 of revenues is already included in the December 31, 2013 equity, so it isn't used in this calculation.

Morreale Beaver Company buys a $12,000 van on credit. This transaction will affect the: Select one: a. income statement, retained earnings statement, and balance sheet. b. balance sheet only. c. income statement only. d. income statement and retained earnings statement only.

B. Use the accounting equation to see the effect of this transaction.

Get common stock and retained earnings for Retained Earnings Statement

Balance Sheet

Balance in retained earnings is needed in preparing the

Balance sheet

Proves the balance in the accounting equation

Balance sheet

The only financial statement (out of the 4) that is for a specific date

Balance sheet

This statement includes assets, liabilities, and S/H Equity

Balance sheet

Usually a snapshot of month-end or year-end

Balance sheet

What is needed to prepare statement of cashflows?

Balance sheet and income statement

Provides the underlying framework for recording and summarizing economic events

Basic Accounting Equation

How to calculate Retained Earnings Statement

Beg RE, add: net income, less: dividends = End Retained Earnings

The accounting process includes what function?

Bookkeeping

Internal users of accounting data include: Select one: a. customers b. economic planners c. company officers d. investors

C

Can you assign a dollar value to customer/employee satisfaction?

No, because you can only IDENTIFY but not RECORD

Poindexter Co. pays a $500 dividend in cash. The effect on the specific items in the basic accounting equation is: Select one: a. an increase in Accounts Receivable and a decrease in Retained Earnings. b. an increase in Retained Earnings and a decrease in Cash. c. a decrease in Retained Earnings and a decrease in Cash. d. an increase in Salary Expense and a decrease in Cash.

C

The Relias Uptown Grill receives a bill of $400 from the Erml Advertising Agency. The owner, John Relias, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is: Select one: a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in Retained Earnings. c. an increase in Accounts Payable and a decrease in Retained Earnings. d. a decrease in Accounts Payable and an increase in Retained Earnings.

C (advertising expense)

A company might carry on many activities that do NOT represent business transactions such as: Select one: a. using office supplies. b. borrowing money from the bank. c. placing an order for merchandise with a supplier. d. paying wages.

C *placing*

Preparing accounting reports (financial statements) and analyze/interpret for others

Communication

Who are external users?

Creditors, investors, IRS

A net loss will result during a time period when: Select one: a. assets exceed liabilities. b. assets exceed stockholders' equity. c. revenues exceed expenses. d. expenses exceed revenues.

D

The monetary unit assumption: Select one: a. is unimportant in applying the cost principle. b. is only used for financial statements of banks. c. provides that the unit of measure fluctuates over time. d. requires that only transaction data capable of being expressed in terms of money be included in the accounting records of the economic entity.

D

Which of the following would NOT appear on the DeFlippo Company's balance sheet? Select one: a. Wages payable. b. Retained earnings. c. Accounts receivable. d. Utilities expense.

D. The balance sheet shows assets, liabilities, and equity accounts.

The distribution of cash or other assets to stockholders

Dividends

What kind of effect do transactions have on the accounting equation

Dual

Assumption that requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities

Economic Entity Assumption

The cost of assets consumed/services used in the process of earning revenue

Expenses

What does FASB and the SEC do?

FASB makes rules and the SEC enforces them

The price received to sell an asset or settle a liability

Fair value

Measurement principle that states that assets and liabilities should be reported at the fair value

Fair value principle

T o F: Accountants prepare, but do not interpret, financial reports

False

T o F: Bookkeeping encompasses all steps in the accounting process

False

T o F: Relevance means that financial info matches what really happened; the information is factual.

False

T o F: The 2 most common types of external users are investors and company officers

False

FASB stands for

Financial Accounting Standards Board

Another word for: accounting reports

Financial statements

Developed standards that are generally accepted and universally practiced

GAAP

GAAP stands for

Generally Accepted Accounting Principles

Measurement principle that dictates that companies record assets at their costs (the price paid)

Historical Cost Principle

Which accounting activity does the statement represent: Select economic events (transaction)

Identification

Does NOT include investment and dividend transactions between the stockholders and the business

Income statement

Lists revenues first, followed by expenses

Income statement

Reports the profitability of business operations for a specific period of time

Income statement

Shows net income (or loss)

Income statement

Sometimes referred to as the statement of operations, earnings statement, or profit/loss statement

Income statement

Who uses accounting data?

Internal and external users

represent the total amount paid in by stockholders for the shares they purchase

Investments by stockholders

Debts and obligations to creditors. Ex: accounts payable and notes payable

Liabilities

Assumption that requires companies to include in the accounting record only transaction data that can be expressed in terms of money (can you assign a dollar value to it?)

Monetary Unit Assumption

Results when revenues exceed expenses

Net income

Why is ethics so important to accounting?

People rely heavily on financial statements

What are the 3 types of business ownership?

Proprietorship, partnership, corporation

Which accounting activity does the statement represent: Record, classify and summarize (with the bookkeeper)

Recording

Net income is needed to determine the ending balance in

Retained earnings

Reports the change in retained earnings for a specific period of time

Retained earnings statement

The information provided in this statement indicates the reasons why retained earnings increased or decreased during the period

Retained earnings statement

The time period is the same as that covered by the income statement

Retained earnings statement

Result from business activities entered for the purpose of earning income

Revenue

How to calculate Income Statement

Revenue - expenses = net income/loss

What do retained earnings consist of on the accounting equation?

Revenue, expenses, dividends

Congress passed the ______________ because regulators and lawmakers were concerned that the economy would suffer if investors lost confidence in corporate accounting

Sarbanes-Oxley Act

SEC stands for

Securities and Exchange Commission

Over a period of time, reports the in and out flows of cash, what is was used for, where it came from, and the change in cash balance

Statement of Cash Flows

Contains common stock and retained earnings. Also sometimes referred to as "residual equity"

Stockholder's equity

Another word for investors

Stockholders

A business's economic events recorded by accountants

Transactions

T o F: Dividends are NOT an expense

True

T o F: Managerial accounting activities focus on reports for internal users

True

T o F: Transactions may be external or internal

True

List some assets

cash, accounts receivable, equipment, supplies, inventory, prepaid expense

Define limited liability

the condition by which shareholders are legally responsible for the debts of a company only to the extent of the nominal value of their shares.

How to calculate the Balance Sheet

total assets = total liabilities + S/H equity

Claims of creditors (liabilities) must be paid before ownership claims (stockholder's equity) when the business is...

liquidated

Define unlimited liability

personally liable for ALL debts

What types of ownerships have UNLIMITED liability?

proprietorship, partnership

Ethics are the standards of conduct by which one's actions are judged as

right or wrong, honest or dishonest, fair or not fair