Financial Accounting

Taxing Authorities

(Internal Revenue Service) want to know whether the company complies with tax laws

Labor Unions

(Major League Baseball Players Association) wants to know whether the owners have the ability to pay increased wages and benefits

Regulatory Agencies

(Securities and Exchange Commission or the Federal Trade Commission) want to know whether the company is operating within prescribed lines

Historical Cost Principle

(cost principle) dictates that companies record assets at their cost

Business documents

(ex: sales slip, check, or a bill) provide evidence of the transaction

Investors

(owners) uses accounting information to decide whether to buy, hold, or sell ownership shares of a company

Creditors

(such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money

Three basic activities of Accounting

-Identifies -Records -Communicates (the economic events of an organization to interested users)

Accruals include:

1) Accrued Revenues (revenues performed but not yet received in cash or recorded) 2) Accrued Expenses (expenses incurred but not yet paid in cash or recorded)

Companies record such assets as buildings, equipment, and motor vehicles at _____ as required by the Historical Cost Principle

1) Cost

Adjusting entries are classified as either ______ or _______

1) Deferrals: expenses or revenues that are recognized at a date later than the point when cash was originally exchanged 2) Accruals

An adjusting entry for a prepaid expense results in a ________to an expense account and a ________ to an asset account

1) Increase (a debit) 2) Decrease (a credit)

Deferrals include:

1) Prepaid Expenses (expenses paid in cash before they are used or consumed) 2) Unearned Revenues (cash received before services are performed)

Each adjusting entry affects _________ and ___________

1) balance sheet 2) income statement

The adjust entry for unearned revenues results in a ______ to a liability account and a _______to a revenue account

1) decrease (debit) 2) increase (credit)

Prepaid expenses are costs that ______either with the passage of time (rent, insur.) or through use (supplies)

1) expire

An adjusting entry for accrued expenses results in ________to an expense account and an ______ to a liability account

1) increase (debit) 2) increase (credit)

Without the salaries and wages adjusting entry, expenses are _______ and its liabilities are _________

1) understated 1) understated

Without the adjust entry of the accrued expense, liabilities and interest expense are _________, and net income and SE are _________

1) understated 2) overstated

INSURANCE If not made the adjusting entry, October expenses are ______ by $50 and net income is_____ by $50. Moreover, both assets and SE will be _______ by $50 on the October 31 balance sheet

1) understated 2) overstated 3) overstated

SUPPLIES If not made the adjusting entry, October expenses are ______ and net income is ________by $1,500. Moreover, both Assets and SE will be _______ by $1,500 on the October 31 balance sheet

1) understated 2) overstated 3) overstated

The purpose of depreciation is not______ but a means of ______

1) valuation 2) cost allocation

Net Income on the income statement is added to the ___________ in the ____________

1)beginning balance of retained earnings in the 2) retained earnings statement

Journal does 3 things

1)complete effects of a transaction 2) chronological record 3)prevent or locate errors

A trial balance may also uncover ____ in journalizing and posting. However it is useful in the preparation of ____________

1)errors 2) financial statements

Every adjusting entry will include one _______ account and one _______ account

1)income statement 2)balance sheet

An adjusting entry for accrued revenues results in an ______ to an asset account and an ______ to a revenue account

1)increase (debit) 2) increase (credit)

The trial balance does not prove that the company has _____ all transactions or that the the ______ is correct

1)recorded 2)ledger

The purpose of transaction analysis is first to identify the ________involved, and then to determine whether to make a ______or a ______ to the account

1)type of account 2)debit or 3)credit

T-Account

3 parts: title, left side (debit), right side (credit)

What kind of concept is depreciation?

Allocation Concept -it allocates an asset's cost to the periods in which it is used. Depr. does NOT attempt to report the actual change in the value of the asset

Accounting Equation

Assets= Liabilities + Stockholder's Equity

Expanded Accounting Equation

Assets= Liabilities + Stockholder's Equity Stockholders Equity: 1) Common Stock 2) Retained Earnings (Revenues-Expenses-Dividends)

Stockholders must transfer all or part of their ownership shares to other investors at any time (i.e. sell their shares)

Because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life*

What type of basis accounting is not in accordance with generally accepted accounting principles (GAAP)?

Cash-Basis (does not match expenses with revenues) -produces misleading financial statements

In the account form, we record the increases in cash as ____ and the decreases in cash as _____

Debits Credits

Credit effects- assets and liabilities how?

Decrease assets Increase liabilities

Debit affects common stock how?

Decrease common stock

Credits affect dividends how?

Decrease dividends

Debits affect revenues and expenses how?

Decrease revenues Increase expenses (normal balance)

Debit affects retained earnings how?

Decreases retained earnings (ex: dividends or net losses)

Book Value

Difference b/t the cost of any depreciable asset and its related accumulated deprection

Dividends are NOT __________

Expenses

Internal user or External user question: Is General Electric earning satisfactory income?

External User

2 types of Transactions

External:involve economic events between the company some outside enterprise (ex: Campus Pizza's purchase of cooking equipment from a supplier, payment of a monthly rent to the landlord, and sale of pizzas to customers) Internal:economic events that occur entirely within one company (ex: the use of cooking and cleaning supplies are internal transactions of Campus Pizza)

Adjusting entries for accruals will ______ both a balance sheet and an income statement account

Increase

Debit effects- assets and liabilities how?

Increase assets Decrease liabilities

Debits affect dividends how?

Increase dividends (normal balance)

Credits affect revenues and expenses how?

Increase revenues (normal balance) Decrease expenses

Credit affects common stock how?

Increases common stock (normal balance)

Credit affect retained earnings how?

Increases retained earnings (normal balance) (ex:net income)

Accounting Time Periods

Interim: monthly and quarterly Fiscal Year: one year Calendar Year: January 1-December 31 (most businesses use this time period)

Internal user or External user question: Is cash sufficient to pay dividends to Microsoft stockholders?

Internal User

Bookkeeping

Involves only the recording of economic events

Internal Users

Managers who plan, organize, and run the business (Examples: marketing managers, production supervisors, finance directors, and company officers

Net Income vs Net Loss

Net income: when revenues exceed expenses Net loss: when expenses exceed revenue

Usually, only a relatively small amount of money (capital) is necessary to start in business as a _______. The owner (proprietor) receives any profits, suffers any losses, and is personally liable for all debts of the business

Proprietorship

Income Statement includes:

Revenues, Expenses, and Net Income -reports the success or profitability of the company's operations over a specific period of time ("For the month ended ***Date***")

Revenues increases ___________

Stockholder's Equity

When companies receive cash before services are performed, they record a liability by increasing (crediting) a liability account which is called _________

Unearned revenue (ex: airlines have the receipts of tickets recorded as unearned revenue until the flight service is provided)-United, American, Delta

International Accounting Standards Board (IASB)

accounting standards many countries outside of the U.S. have adopted an these standards are called International Financial Reporting Standards (IFRS)

Second category of adjusting entries

accruals

Securities and Exchange Commission (SEC)

agency of the U.S. government that oversees the U.S. financial markets and accounting standard-setting bodies

Debit

an account shows a debit balance IF the total of the debit amounts exceeds the credits

Credit

an account shows the credit balance IF the credit amounts exceed the debits

Adjusted Trial Balance

another trial balance from the ledger accounts where a company journalized and posted all adjusting entries

Customers

are interested in whether a company like General Motors will continue to honor product warranties and support its product lines

Asset accounts normally show ______ Liability accounts normally show ______

asset accounts->debit balances liability accounts->credit balances

Balance Sheet includes:

assets, liabilities, and stockholder's equity of a company at a specific date

Companies recognize supplies expense when?

at the END of the accounting period

Retained earnings at the end of the reporting period in the retained earnings statement is reported on the __________

balance sheet

Journal

book of original entry

Corporation

business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock (Ex: Wal-Mart, Ford, Apple)

Proprietorship

business owned by one person

Partnership

business owned by two or more persons associated as partners

Transactions

business transactions that are the business's economic events recorded by accountants

Liabilities

claims of those to whom the company owes money (creditors) Ex: debts and obligations -Accounts Payable -Note Payable -Salaries and Wages Payable -Sales and Real Estate Taxes Payable

Cash-Basis Accounting

companies record revenue when they RECEIVE CASH and record an expense when they PAY OUT CASH

Accrual-Basis Accounting

companies record transactions that change a company's statements IN THE PERIODS IN WHICH THEY OCCUR Ex: companies recognize revenues when they perform the services (rather than when they receive cash) and recognize expenses when incurred (rather than when paid)

General Ledger

contains all the asset, liability, and stockholder's equity accounts

Accumulated Depreciation is called an _________ account

contra asset account -discloses both the ORIGINAL COST of the equipment and the TOTAL COST that has been used to EXPENSE IT

The trial balance proves the mathematical equality of _____ and _____ after posting

debits and credits

Expenses

decreases in Stockholders' equity that result from operating the business

Retained Earnings

determined by 3 items: revenues, expenses, and dividends

Dividends

distribute cash or other assets to stockholders -reduce retained earnings but are NOT an expense

Expense Recognition Principle (matching principle)

ditcates efforts (expenses be matched with results (revenues) (ex: Dave should report salary incurred in performing the June 30 cleaning service in the same period in which it recognizes the service revenue *the critical issue in expenses recognition is when the expense makes its contribution to revenue which may or may not be the same period in which the expense is paid. If Dave's does not pay the salary incurred on the June 30 until July, it would report salaries payable on its June 30 Balance Sheet)

Double-Entry System

dual (two-sided) effect of each transaction is recorded in appropriate accounts

Adjusting entries do what? (ensures that...) Why are they necessary?

ensure that the revenue recognition and expense recognition principles are followed -they are necessary because the trial balance may not contain up-to-date and complete data (required every time a company prepares financial statements)

Ledger

entire group of accounts maintained by a company -provides a balance in each of the accounts as well as keeps track of changes in these balances

Accrued Expenses

expenses incurred but not yet paid or recorded at the statement date (interest, taxes and salaries)

Companies can prepare _______ directly from the adjusted trial balance

financial statements

Revenues

gross increases in Stockholders' equity resulting from business activities entered into fro the purpose of earning income

Account

individual accounting record of increases and decreases in a specific asset, liability, or stockholder's equity item

External Users

individuals and organizations outside a company who want financial information about the company (ex: investors and creditors)

Sarbanese -Oxley Act (SOX)

intent to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

Holders of the shares (stockholders) enjoy ________

limited liability*: they are not personally liable for the debts of the corporate entity

Chart of accounts

lists the accounts and the account numbers that identify their location in the ledger

Relevance

means that financial information is capable of making a difference in a decision

Faithful Representation

means that the numbers and descriptions match what really existed or happened- they are factual

General Journal

most basic form of journal

What is a worksheet?

multiple-column form used in the adjustment process in preparing financial statements (it's a working tool but NOT A PERMANENT ACCOUNTING RECORD) -usually used through excel -used in preparing adjusting entries and the financial statements -IS OPTIONAL

Retained Earnings

net income that is kept (retained) in the business

Stockholder's Equity

ownership claim on a corporation's total assets Assets-Liabilities (creditors' claims)....the remainder of this is the stockholders' claim on the assets(SE) also known as residual equity: "left over" after creditors' claims are satisfied

Financial Accounting Standards Board (FASB)

primary accounting standard-setting in the United States

The purpose of an adjusted trial balance is to ___________ of the total debit balances and total credit balances in the ledger after all adjustments

prove the equality

Managerial Accounting

provides internal reports to help users make decisions about their companies (ex: financial comparisons of operating alternatives)

Dividend

reduce the stockholder's claims on retained earnings (cash dividend)

Temporary accounts

relate only to a given accounting period (include all income statements and Dividends account) -the company closes all temporary accounts at the end of the period Include: 1)all revenue accounts 2)all expense accounts 3)dividends

Permanent accounts

relate to one or more future accounting periods (consist of all balance sheet accounts, including SE accounts) -They are NOT closed from period to period Include: 1)all asset accounts 2)all liability accounts 3)SE

Monetary Unit Assumption

requires that companies include in the accounting records only transaction data that can be expressed in money terms

Revenue Recognition Principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied (ex: Dave records revenue in June- he records receivable on the balance sheet and revenue in its income statement for the service performed in June when he was paid in cash in July)

Economic Entity Assumption

requires that the activitie of the entity be kept sepearte and distinct from the activites of its owner and all other economic entities

Compound entry

requires three or more accounts

Assets

resources the business owns (capacity to provide future services or benefits) -Assets of a business are either claimed by creditors or stockholders

Accrued Revenues

revenues for services performed but not yet recorded at the statement date (they accumulate (accrue) with the passing of time

Generally Accepted Accounting Principles (GAAP)

set of standards that indicate how to report economic events

Ethics

standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair

Cash on the balance sheet is reported on the __________

statement of cash flows

Fair Value Principle

states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

The effect of debits and credits on revenue accounts is the same as their effect on ___________

stockholder's equity

Statement of cash flows includes:

summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time

Retained Earnings Statement includes:

summarizes the changes in retained earnings for a specific period of time

What is the primary basis for the preparation of financial statements?

the adjusted trial balance

Closing the books means...

the company distinguishes between and temporary and permanent accounts

Creditors

the people or entities to whom the business owes money

Depreciation

the process of allocating the cost of an asset to expense over its useful life

Common Stock

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

Posting

transferring journal entries to the ledger account

Without the adjusting entry for accrued revenue, assets and SE on the balance sheet and revenues and net income on the income statement are ______

understated