Financial Accounting - Module 3: Introduction to the accounting cycle

Which retained earnings account balance should appear on a company's balance sheet?

the balance at the end of the accounting period

When preparing financial statements, the net income amount on an income statement is transferred to:

the statement of retained earnings (or statement of stockholders' equity)

A stockholder gives $40,000 cash in exchange for common stock in Red Corp. The analysis of Red Corp.'s accounting equation would be:

+ $40,000 (cash) = +$40,000 Owners' Equity (common stock)

Blue Corp. received $40,000 in cash from a sale to a customer during the year. The analysis of Blue Corp.'s accounting equation would be:

+$40,000 (cash) = +$40,000 Owners' Equity (retained earnings)

What are the 5 basic components of an Accounting Cycle?

1) Analyze transactions 2) Prepare Unadjusted Trial Balance 3) Prepare Adjusting Entries 4) Prepare an Adjusted Trial Balance 5) Closing process

What are the 2 types of claims against a company's economic resources?

1) Creditor claim 2) Owner claims

List at least 4 examples of common Source Documents

1) Promissory note, deposit slip - company took cash loan from bank 2) Purchase order invoice, receiving report - company ordered and received inventory from a supplier 3) Sales invoice, cash register receipt - company sold merchandise or provided services to a customer 4) Timecards, employee contract - Paying employees 5) Utility bill - company used utilities 6) Check stub, receipt of purchase - company made cash payment 7) Check stub, copy of insurance policy - company purchased insurance policy 8) Lease agreement - company is leasing an asset

What are the 2 ways that an owner claim can arise?

1) issuance of the company's stock 2) company's retained earnings (that is, the earnings which have been retained in the business)

Every transaction should affect the cash account balance.

False Some transactions do not affect the cash balance. For example, if a company purchases supplies on account, the supplies account is increasing and accounts payable is increasing.

What is the Goal of an Accounting Cycle?

Have financial statements and accompanying notes

How does a company know whether a transaction has occurred?

Most transactions generate a source document

The first step in the accounting cycle is to:

Perform transaction analysis

What is the Accounting Cycle?

Process and procedures used during the year to: a) identify b) collect c) record d) communicate financial information

What is a Transaction Analysis?

Process of analyzing how a transaction affects a company's accounting equation

What is the nature of an Expense?

Should be matched into a period that they occur to earn revenue

On April 16, Calumet Corp. performed services valued at $15,000 on account. The customer will pay in May for those services. Which of the following statements is correct with respect to how this transaction should be shown on the transaction worksheet?

The accounts receivable account will increase retained earnings account will increase.

On June 8, Calumet Corp. paid $600 for interest owed on a note. Which of the following statements is correct with respect to how this transaction should be shown on the transaction worksheet?

The cash account will decrease retained earnings account will decrease.

The process of analyzing how a transaction affects a company's accounting equation is referred to as:

Transactional analysis

A transaction may affect both sides of the accounting equation or just one side of the accounting equation. (T/F)

True

A transaction should affect the accounting equation in such a way that it always stays balanced. (T/F)

True

In accounting you cannot decrease a liability unless previously increased (T/F)

True

True or False: A source document serves as evidence that a transaction occurred.

True

True or False: A transaction is an economic event that changes a company's financial position.

True

When working with a transaction worksheet, any amount written in the "Retained Earnings" column should be detailed out as either a revenue, expense, or dividend. (T/F)

True

What is the first step of the Accounting Cycle and main objectives?

a) Analyze transactions - Prepare journal entries, post journal entries, compute account balances

Economic Resources = ______ claims + ______ claims OR in accounting ________ = ____________ + Owners' Equity

a) Creditor b) Owners c) Assets d) Liabilities

Why are Transaction analysis important? (2 facts)

a) Transactions affect account balances b) it is the account balances as a result of those transactions that ultimately go on the first 3 financial statements

On account means what two accounts are involved?

a) accounts receivable b) accounts payable

What is an Account Balance? what are examples?

a) the difference between the increases and decreases in an account b) "Cash" account or "Account payable" account

The "Dividends" account balance is reported on which financial statement?

statement of retained earnings (or statement of stockholders' equity)

What is a Source Document?

A paper or electronic version to serve as evidence that a transaction has occurred.

What is an Account?

A specific component within assets, liabilities, or owners equity

Which of the following statements is true with respect to what should appear on the income statement, statement of retained earnings, and balance sheet?

Account balances should appear on these financial statements.

The processes and procedures used during the year to identify, collect, record, and communicate financial information to users is referred to as the:

Accounting Cycle

When a customer owes a company money, we say that the company's _________ account should increase.

Accounts Receivable

When a customer owes our company money, that is a ______ because we will be receiving that money.

Accounts Receivable

When a company owes another entity money, we say that the company's _________ account should increase.

Accounts payable

If a transaction causes the cash account to increase by $1,000, then: (select all that apply) a) another asset account could decrease by $1,000. b) a liability account could increase by $1,000. c) an owners' equity account could increase by $1,000.

All are true

What is a Transaction?

An economic event that changes a company's financial position

What is an Accounting?

An information system that systematically a) identifies b) collects c) records d) communicates financial information about an economic entity to decision makers

_____ provides a future economic benefit

Asset

What is a Transaction Worksheet?

Basic transaction analysis that will be illustrated to learn accounting fundamentals

What is the nature of Rent?

Cost incurred with the passage of time, so paying rent is always in ADVANCE

D.) Purchased supplies costing $1,000 on account. F.) Provided services to customers for $5,000 on account. G.) Paid $1,000 for the supplies purchased in "D" above. H.) Received $5,000 from the customers in "F" above.

D.) Supplies (increase), Accounts payable (increase) F.) Accounts Receivable (increase), Retained earnings (increase) G.) Cash (decrease), Accounts payable (decrease) H.) Cash (increase), Accounts receivable (decrease) = no effect

Prepaid does not equal an Asset

FALSE