Financial accounting chapter 1 and 2
Resources equals creditors and owners claims to those resources
Balance Sheet
Milton Corp. has beginning retained earnings of $800. During the year Milton had $2,000 of revenues and $900 in expenses. Milton paid a dividend of $100. What is retained earnings at year-end?
$1,800 800+2,000-900-100= 1,800
The theory or benchmark used by standard setters for creating a consistent set of financial reporting rules is referred to as....
Conceptual Framework
The last step for analyzing the effect of transactions is...
Confirm the assets are equal to liabilities plus stockholders equity
Independent, private-sector group that is primarily responsible for setting financial reporting standards in the U.S.
FASB
_____________ _____________ represent a company's primary means of communication info. to eternal users.
Financial Statements
Faithful representation requires that info is complete, neutral, and ______
Free from material error
What is an important purpose of GAAP?
It facilitates comparison of financial info among companies
Amounts Owed
Liabilities
Assets=
Liabilities + Stockholders Equity
Group that has been given power by congress to enforce the proper applications of financial reporting rules for companies whose securities are publicly traded
SEC
The legal authority to set accounting and reporting standards for companies whose securities are publicly traded lies with the....
SEC
SEC stands for
Securities and Exchange Commission
The three most common forms of business organization are.....
Sole Proprietorship Partnership Corporation
What situations would require Zenda Company to record revenue in the current period.
Zenda performs services on account or Zenda performs services for cash
Which of the following aspects related to the info. provided in an income statement: a) Ability to earn a profit from its operations during the current period b) Assurance that the company will pay dividends to stockholders c) Assurance that the company will pay its obligations when they become due
a
If a transaction decreases cash by $100, the balance sheet will balance if what occurs?
Another asset is increased and a liability is decreased
A __________ is a resource, such as cash, land, or buildings, that is owned by a company.
Asset
Resources of a company
Assets
True or False: The SEC has delegated the primary responsibility for setting accounting standards to the AICPA
False Reason: The SEC delegated the standard setting for FASB
FASB stands for
Financial Accounting Standards Board
when services are provided on account, what is the effect on stockholders equity?
Increase
What qualitative characteristic requires that financial info should not influence decision making to achieve a predetermined result?
Neutrality
In addition to the financial statements, what else must be included in the annual reports?
Notes Disclosures Management Discussion and Analysis
The accumulated net income earned since the inception of the corporation and not yet paid to stockholders is referred to as......
Retained Earnings
consitant with the _______ recognition principle, compares record revenue at the time goods are provided to customers.
Revenue
Sales of products or services
Revenues
Net Income=
Revenues - Expenses or Common Stock + Retained Earnings
Rory purchases supplies for cash. What occurs?
Total assets remain the same
Post
Transfer balances from the journal to the general ledger
What is contained in the FASB conceptual framework?
Underlying concepts of accounting
Jackson Corp. has beginning retained earnings of $400. During the year Jackson had $800 of revenues and $200 in expenses. Jackson paid a dividend of $100. What is his retained earnings at year-end?
$900 400+800-200-100= 900
Financial accounting should provide info that:
-Tells about resources, claims to resources, and changes in resources and claims -Is useful to investors and creditors in making decisions -Helps to predict cash flows
What type of transactions are typically measured only at the end of the CCOUNTING PERIOD?
Internal transactions
IASB stands for
International Accounting Standards Board
Transactions involving the purchase and sale of resources that are expected to benefit the company for several years, such as the purchase of equipment
Investing Activities
Retained Earnings=
All Net Income - All Dividends or Revenues - Expenses - DividendsM
________ is the common abbreviation for the board that currently establishes financial accounting and reporting standards in the U.S.
FASB
True or False: Dividends paid to shareholders are recorded on the income statement as an expense
False
True or False: The fundamental activities of a business are selling activities and marketing activities.
False
The financial statement that summarizes the profit generating activities of the company during a particular time is the......
Income Statement
LMN Enterprises performs accounting services for a client for $3,000 cash. What is the effect on the accounting equation?
Increase assets and increase earnings
What are the effects of providing services on account to customers?
Increased Assets and Increased Retained Earnings
Rahls issues stock to investors for $20,000, and has $5,000 of net income in its first year of operations. During year 2, Rahls earns $10,000 in net income and pays a dividend of $4,000. What is the balance in stockholders equity at the end of year 2?
$31,000 20,000+5,000+10,000-4,000= 31,000
The objectives of FASB are.....
- Report on economic resources -Help predict cash flows -Provide useful info to investors and creditors
Steps for analyzing the effect of transactions in order
1. Determine one account in the accounting equation that will increase or decrease 2. Determine a second account in the accounting equation will increase or decrease 3. Confirm that assets are equal to liabilities plus stockholders equity
The steps for measuring transactions in the correct order...
1. Use a source document to identify accounts affected 2. Analyze the impact of the transaction of the accounting equation 2. Assess whether the transaction results in a debit or credit to account balances 4. Record the transaction in a journal 5. Post the transaction to the general ledger
The concept of understandability assumes that the users of financial statements should have.....
A reasonable understanding of business and economic activities
The system that maintains records of a company's operations and then communicates that info to decision makers is referred to as ___________.
Accounting
The fundamental model of business valuation is commonly referred to as the:
Accounting Equation
What is used to record the summary of effects on one particular item?
An account
Management discussion and analysis and note disclosures to the financial statements are included in the .......
Annual Report or 10K
If a transaction decreases cash by $100, the balance sheet will balance if what occurs?
Another asset is increased and A liability is decreased
Accounts receivable are..
Assets
What items are found on a balance sheet?
Assets Liabilities Stockholders Equity
Using the accounting equation, stockholders claims on resources of the corporation can be expressed as.......
Assets-Liabilities
What is the accounting equation?
Assets= Liabilities+Stockholders Equity
Independent intermediaries that help to ensure that management appropriately applies financial reporting rules in preparing the company's financial statements
Auditors
Costs of selling products or services
Expenses
The financial statement that displays a firms financial position on a particular date is the ________ __________.
Balance Sheet
The financial statement that reflects the accounting equation is referred to as the ________ _______.
Balance Sheet
Ending retained earnings is calculated as.....
Beginning Retained Earnings + Net Income - Dividends
What is an external transaction?
Borrowing money from the bank and Purchasing inventory from suppliers
Deferred Revenue
Cash received from customers for services to be performed in the future
Stockholders Equity=
Common Stock + Retained Earnings
London Corp. issues 1,000 shares of stock for $20 per share. What are the effects of the transaction?
Common Stock is Increased and Cash is Increased
Wolfgang Companys assets and stockholders equity both increased by $50,000 as a result of a single transactions. What transaction would explain the increase?
Common Stock was sold for Cash
Enhancing Qualitative Characteristics Components:
Comparability, Consistency, Verifiability, Timeless, and Understandability
Faithful Representation Components:
Completeness, neutrality, and freedom from material error
According to the conceptual framework, for accounting info to be relevant, what two qualities must it possess?
Confirmatory Value and Predictive Value
Example of Predictive Value is:
Consistently increasing income helps forecast the company's ability to generate future cash
Who has the responsibility for preparing financial statements in accordance with generally accepted accounting principles?
Corporate Management
The form of business organization where an entity is legally separate from its owners and issues shares of stock is a ____________.
Corporation
Constraints Components:
Cost Effectiveness
Summer Leasing received $10,600 from a customer to cover 24 months of rent in advance. How should Summer record the transaction?
Debit Cash and Credit Deferred Revenue
The main priority in the hierarchy of qualitative characteristics of financial reporting info is....
Decision Usefulness
After the accountant analyzes the impact of a transaction on the accounting equation, the next step in the measurement process is to...
Determine the accounts to debit and credit
Analyze Transactions
Determine the dual effect of business events on the accounting equation
Any amount owed to a creditor is classified in the balance sheet as a/an _________.
Dividend
Distributions to stockholders
Dividends
Stockholders equity arises primarily from amounts invested by stockholders and amounts __________.
Earned by the Corporation
What are the GAAP Underlying Assumptions?
Economic Entity Monetary Unit Periodicity Going Concern
The economic activities of the business are separate from the economic activities of the owners and other entities
Economic Entity Assumption
Transactions the company has with investors and creditors, such as issuing stock and borrowing money from a local bank
Financing Activities
In financial accounting, what are the three types of business activities of a company?
Financing Activities Investing Activities Operating Activities
What are the attributes of FASB?
Full-Time Board Members Private Sector Org. Independence
The abbreviation GAAP stands for....
Generally Accepted Accounting Principles
In the absence of info to the contrary a business entity will continue to operate idefinitely
Going Concern Assumption
Body that is attempting to develop a single set of high quality, understandable global accounting standards
IASB
Profitability of the company
Income Statement
The financial statement that is most useful in explaining a company's stock price performance is the.....
Income Statement
What is deferred revenue classified as?
Liability
Trial Balance
List of accounts and their balances
A chart of accounts is a....
List of all account and numbers used by a company
Who has the responsibility to apply accounting standards when communicating with investors and creditors?
Management Reason: Auditors express an opinion on the financial statements, which are the responsibility of a companys management
Financial info. that may impact investors and creditors decisions is referred to as _______ and must be reported under GAAP.
Material
The impact of financial accounting info on investors and creditors decisions is closely related to the concept of....
Materiality
The primary functions of accounting are to:
Measure a company's activities and Communicate info to decision makers
The economic activities of the business are measured and recorded using a stable monetary currency
Monetary Unit Assumption
What appears on the stockholders equity statement?
Net income, Dividends, and Beginning balance of retained earnings
The characteristic that a new accounting standard should not favor one group of companies over others or achieve a particular social outcome is an example of:
Neutrality
______________ activities involve purchasing goods for suppliers, designing and manufacturing products, and selling products to customers.
Operating
Transactions that relate to the primary operations of the company, such as providing products and services to customers and costs like rent, salaries, utilities, taxes, and advertising
Operating Activities
The statement of cash flows classifies items as.....
Operating, Investing, and Financing
The two sources of stockholders equity are amounts......
Paid in from shareholders and Earned by the corporation
What are the operating activities?
Paying advertising expenses, Providing services to customers, and Paying salaries to employees
The economic activities of the business can be divided into periods
Periodicity Assumptions
Example of Confirmatory Value is:
Positive income is consistent with the effectiveness of management
Relevance Components:
Predictive Value and Confirmatory Value
Journal
Record of all transactions affecting a company
Predictive value and confirmatory value are components of what fundamental qualitative characteristics?
Relevance
The hierarchy of qualitative characteristics of financial info require that, in order to be useful for decision making, info should provide the fundamental characteristics of.....
Relevance and Faithful Representation
Cray purchases equipment for cash. Total assets will....
Remain the same
Change in owners claims to resources
Statement of Stockholders Equity
For a corporation, the owners claims to resources of a company are called......
Stockholders Equity
Owners claims to resources
Stockholders Equity
The purpose of an account is to....
Summarize all transactions for that item
The heading of an income statement should include.......
The accounting period covered by the statement, The title of the financial statement, and the name of the business
Accounts receivable are assets which represents...
The amounts owed by customers
Retained Earnings represents...
The total net income earned over the life of the company that has not been distributed as dividends
The qualitative characteristic wherein info is available early enough allowing it to be useful for a decision describes the concept of....
Timeless
True or False: An external transaction is a transaction the firm conducts with a seperate economic entity
True
True or False: The statement of Stockholders Equity indicates the changes in the various eequity accounts
True
When cash is received in advance for services to be performed at a later date, an asset is increased and....
a liability is increased