Survey in Accounting ACCT 2100 Exam 1 Study Guide

Exercise 2.10

Be able to use the balance sheet equation to fill in missing financial data (similar to Exercise 2.10, #3 of your ch 2 homework).

-Net income increases retained earnings. -A net loss decreases retained earnings -Dividends decrease retained earnings

Does net income increase or decrease retained earnings? What about a net loss? What about dividends?

A revenue or expense and an asset or liability

Every journal entry recording an adjusting entry will affect what two types of accounts?

Net income = Revenues - Expenses

How do revenues and expenses affect retained earnings?

-Management -Investors/shareholders -Creditors/suppliers -Employees -Securities and Exchange Commission.

Identify the users of accounting information

-Integrity - Being honest and forthright in dealings and communications with others. -Objectivity - Being impartial and free from conflict of interest. -Independence - Important for auditors to be independent both in appearance and in fact. -Competence - Having the knowledge and professional skills to adequately perform the work assigned.

Know and understand each of the four ethical standards for accountants.

Accounts are used to organize like-kind transactions, just like file folders are used to organize information stored in a file cabinet.

What are accounts and what do they summarize?

A journal entry consists of: the date of the transaction, the description of the transactions involved including both debits and credits and the amount of each transaction.

What are some characteristics of a proper journal entry?

-Assets = Liabilities + Stockholders' Equity -Assets = Liabilities + Paid-in Capital + Retained Earnings + Revenues - Expenses

What are some different ways that we can express and expand the balance sheet equation?

-What's going on? -What accounts are affected? -How are they affected? -Does the balance sheet balance? -Does my analysis make sense?

What are the five questions you should answer in transaction analysis?

-Balance sheet - Presents the financial position of an entity at the end of an accounting period. -Income statement - Reports the earnings of an entity for the accounting period. -Statement of cash flows - Shows the cash inflows and outflows during the period. -Statement of changes in stockholders' equity - Reports the investments and distributions to owners during the period.

What are the four financial statements that must be prepared by companies?

-They report quantitative economic data -They do not reflect qualitative economics variables, such as the value of the management team or the employees' morale. Qualitative economic variables are usually subjective in value and cannot be quantified in terms of dollars and cents that can be verified.

What are the limitations to the financial statements?

Generally Accepted Accounting Principles

What are the rules that accountants must follow when recording accounting information and preparing financial statements? (hint: abbreviated GAAP)

-Paid-In Capital and Retained Earnings. -Paid-in Capital is the total amount stockholders have invested in the entity, which included common stock, the number of shares of authorized, issued, and outstanding (shares still held by stockholders). -Retained earnings reports the cumulative net income of the entity that has been retained for use in the business minus the dividends, which are distributions of earnings to stockholders.

What are the two sections of Stockholders' equity? What is the difference between them?

Economic interchanges between entities that are accounted for and reflected in financial statements.

What are transactions?

The closing process simply transfers the year-end balances of all income statement accounts (revenues, expenses, gains, and losses that have accumulated during the year) to the retained earnings account, which is part of stockholders' equity on the balance sheet. The revenue and gain accounts are zeroed by debiting the accounts equal to their respective year-end adjusted balances.

What does a company do when it closes the books? What types of accounts get zeroed out?

-A credit is the right side of a T-account. -Liability and equity accounts are increased with a credit. -Asset accounts are decreased with a credit.

What does a credit represent? What types of accounts are increased with a credit? What types of accounts are decreased with a credit?

-A debit is the left side of a T-account. -Asset accounts are increased with a debit. -Liabilities and equities are decreased with a debit.

What does a debit represent? What types of accounts are increased with a debit? What types of accounts are decreased with a debit?

-Current assets are those assets that are likely to be converted into cash or used to benefit the entity within one year. -Current liabilities are those liabilities that are to be paid within one year.

What does the distinction "current" mean in regards to assets and liabilities?

The normal balance of an account is reflected on the same side of the T-account in relationship to the accounting equation.

What does the normal balance represent?

The annual period used for reporting to owners, the government, and others. The fiscal year ends after a 12 month period.

What is a fiscal year? What is the fiscal year end?

-Assets represent the amount of resourced owned by the entity. -Liabilities are amounts owed to other entities. -Equity is the ownership right of the owner(s) of the entity in the assets that remain after deducting the liabilities.

What is an asset? What is a liability? What is stockholders' equity?

-Balance Sheet - Presents the financial position of an entity at the end of an accounting period. -Income Statement - Reports the earnings of an entity for the accounting period. -Statement of Cash Flows - Shows the cash inflows and outflows during the period. -Statement of Stockholders' Equity - Reports the investments and distributions to owners during the period.

What is covered in each financial statement?

-Revenues result from the entity's operating activities (e.g., selling, merchandise). -Expenses are incurred in generating revenues and operating the entity.

What is revenue? What are expenses?

Revenues - Expenses = Net Income

What is the basic calculation for net income (not the full income statement shown in the book, just the basic general calculation)?

Financial Accounting Standards Board (FASB)

What is the current accounting standard-setting body in the United States?

The process of identifying, measuring, and communicating economic information about an organization to external and internal users for the purpose of making decisions and informed judgments.

What is the definition of accounting?

-Accruals are transactions for which cash has not yet been received or paid, but the effect of which must be recorded in the accounts in order to accomplish a matching of revenues and expenses. -Reclassifications are the initial recording of a transaction that does not result in assigning revenues to the period in which they were earned or expenses to the period in which they incurred.

What is the difference between an accrual and a reclassification?

-Financial accounting - Generally refers to the process that results in the preparation and reporting of financial statements for an entity. -Managerial accounting - Concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision-making process. -Cost accounting - Relates to the determination and accumulation of product, process, or service costs. -Auditing (public accounting) - Provide auditing services and issue an independent auditor's report that usually contains four brief paragraphs and states whether the financial statements are prepared in conformity with GAAP. Can be qualified or an unqualified, "Clean" opinion. -Internal auditing - Professional accountants who perform functions much like those of an external auditor. Internal auditors are employed in industry rather than public accounting. -Government and non-for-profit accounting - Require same accounting functions to be performed as do other accounting entities. -Income tax accounting - Tax practitioners often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues.

Be familiar with the different types of accounting/accountants.

-Individual firms or entities -External users -Historical cost -Benefits exceed costs -Timely information -Notes and disclosures -Accrual accounting -Does not measure value of the firm -Evolving -Financial reporting is done for individual firms, or entities, rather than for industries or the economy as a whole. It is aimed primarily at meeting the needs of external users of accounting information who would not otherwise have access to the firm's records. Financial accounting is historical scorekeeping; it is not future-oriented. Financial accounting information is developed and used as a cost, and the benefits to the user of accounting information should exceed the cost of providing it. A primary objective of financial reporting is to provide timely information about a firm's earnings and cash flow. Financial reporting includes detailed notes and other disclosures. Accrual accounting involves accounting for the effect of an economic activity, or transaction, on an entity when the activity has occurred, rather than when the cash receipt or payment takes place. Financial accounting does not attempt to directly measure the value of a firm, although it can be used to facilitate the efforts of those attempting to achieve such an objective. Financial accounting standards are still evolving; with each new update to the FASB Codification, accounting procedures are modified to mirror new developments in the business world as well as current views and theories of financial reporting.

Be familiar with the nine accounting concepts discussed in Concepts Statement No. 8.

-The difference between accrual accounting and cash flow is the matching concept. -The rules for accrual accounting state that: 1) Revenue is recognized at the point in time that a service or product is delivered to another entity. In other words, an "economic exchange" of value between two entities. 2) The exchange of cash is not required to recognize revenue. If the product or service has been delivered to the customer, revenue must be recognized. 3) Expenses are recognized at the point in time incurred. For example, your electric bill for the month of May is not received from the electric company until June and will be paid in June. The cost of the electricity for May is directly related to the revenue for that month and needs to be reflected as an expense for the month of May. 4) The matching principle of accounting dictates that all expenses related to generating revenue for a given accounting period be matched to the same accounting period regardless of when cash changes hands. Cash flow recognizes revenue when payment is received for services rendered or products sold and recognizes expenses when they are paid.

What is the difference between cash and accrual accounting? How are revenues and expenses treated under each method?

-Transactions are initially recorded in a journal. -Transactions are then recorded and posted to individual accounts in the ledger.

What is the difference between the journal and the ledger?

FASB

What is the standard setting body for governmental accounting?

-Balance Sheet - Point in time -Income Statement - Period of time -Statement of Cash Flows - Period of time -Statement of Stockholders' Equity - Period of time

What is the time period associated with each financial statement (i.e. a period of time vs a point in time)

Auditing public accountant

What type of accountant is certified to express an opinion on the company's financial statements?

Exercise 4.7 and 4.8

You will have a problem where you are given several transactions and you must prepare the journal entries. This will be similar to Exercise 4.7 and 4.8 (#3 and #4 of your Chapter 4 homework).

Exercises 2.7 and 2.8

You will have a problem where, for several accounts you will have to determine what type of account it is (asset, liability, etc.) and on which financial statement you would find the account. This will be similar to Exercises 2.7 and 2.8 (#2 of the Chapter 2 in-class and homework problems).