Accounting 201: Chapter 1

FASB

"Financial Accounting Standards Board" - They make the rules

GAAP

"General Accepted Accounting Principles" - The rules we follow in accounting

SEC

"Securities & Exchange Commission" - They enforce the rules

Changes include:

-Net income/loss -dividends *Short & Easiest statement

Ethics problems deal with these 3 steps:

1) Identify the ethical dilemma 2) Identify the Stakeholders (who is effected) 3) List possible responses (What can you do)

Stockholder's Equity

Amount of assets a company owns. ex. Company buys $40,000 car- paid cash $160,000 building- Signed a mortgage 200,000 = 160,000 + 40,000

Common Stock

Amounts paid in by investors for share of stocks purchased

Accounts Payable

Amounts we expect to pay for goods of services received

Accounts Receivable

Amounts we expect to receive from customers, for goods or services provided from the business.

Expanded Accounting Equation

Assets = Liabilities + Common Stock + Retained Earnings + Revenues - Expenses - Dividends (common stock - dividends: Stockholder's Equity)

Basic accounting equation

Assets = Liabilities + Stakeholders's Equity

Transactions

Business's economic events recorded by accountants -may be external or internal -not all activities represent transactions -each transaction has a dual effect on the accounting equation

Dividends

Classification: dividends effect of equity: decreases

Rent Expense

Classification: expense effect of equity: decreases

Salaries & Wages Expense

Classification: expense effect of equity: decreases

Service Revenue

Classification: revenue effect of equity: increases

What are the 3 principles that deal with GAAP?

Cost Principle, Economic Entity Assumption, and Monetary Unit Assumption

Expenses

Cost of assets used to generate revenue (Salary, advertisement)

Liabilities

Debts and obligations of the company ex. Accounts payable, and notes payable

Recent financial scandals

Enron, WorldCom, HealthSouth, AIG, and more

The historical cost principle dictates the companies record assets at their cost. In later periods, however, the fair value of the assets must be used if fair value is higher than its cost

False, Dictates that companies record assets at their cost. Under the historical cost principle, the company must also use cost in later periods.

Relevance means that financial information matches what really happened; the information is factual

False, Faithful representation means that financial information matches what really happened; the information is factual

Accountants prepare, but do not interpret, financial reports

False, analyze and interpret information in reports as part of the communication step

The two most common types of external users are investors and company officers

False, investors and creditors

Bookkeeping encompasses all steps in the accounting process

False, involves only the recording step

Proprietorship

General owned by one person. Advantages- receives all profits Disadvantages- suffers any losses, and has unlimited liability

Identification

Identify the economic events that are relevant to the business.

What are the 4 types of financial statements

Income Statements, Retained Earning Statement, Balance sheet, and Statement of cash flows

Retained Earnings

Income that you have to keep or re-invest in your company

Revenues

Increases in assets from earning income, typically from providing a service or selling a product

Internal Users

Individuals inside the company that wants to know about financial positions ex. Marketing, management, finance, human resources, and the CEO

External Users

Individuals or businesses outside of the company that want to know about the companies financial position ex. Creditors- parties to whom we owe money to, stockholders, and investors

Monetary Unit Assumption

Only records transactions that can be expressed in terms of money

Corporation

Organized under state law, and is divided into share of stocks. Advantages- limited liability *Separate legal entity between corporation and owners

Partnership

Owned by two or more people or businesses. Disadvantages- Sharing of profit, and unlimited liability

What are the 3 forms of Business Ownership?

Proprietorship, Partnership, and Corporation

Assets

RESOURCES a company has. ex. Cash, accounts receivable, land, equipment, and buildings

Cost Principle

Record and report assets at there cost

Recording

Record the economic event in the books

Economic Entity Assumption

Records of the business must be kept separate and distinct from those of other businesses and owners.

Ethics

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

A business owner's personal expenses must be separates from expenses of the business to comply with accounting economic entity assumption.

True

Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the like hoods of future corporate scandals

True

Managerial accounting activities focus on report for internal users

True

The primary accounting standards-setting body in the United States is the Financial Accounts Standards Board (FASB)

True

The three steps in the accounting process are identification, recording, and communication

True

Which os the following financial statements is prepared as a specific date? a. balance Sheet b. income statement c. retained earnings statement d. statement of cash flows

a. balance sheet

IFRS is considered to be more: a. prinicple-based and less rules-based than GAAP b. rules-based and less principle-based than GAAP c. detailed than GAAP d. non of the above

a. principle-based and less rules-based than GAAP

Combining the activities of Kellogg and General Mills would violate that: a. cost principle b. economic entity assumption c. monetary entity assumption d. ethics principle

b. economic entity assumption

A business organized as separate legal entity under state law having ownership divided into shares of stock is a: a. proprietorship b. partnership c. corporation d. soe proprietorship

c. corporation

The Sarbanes-Oxley Act determines: a. international tax regulations b. internal control standards as enforced by the IASB c. internal control standards of the U. S. publicly traded companies d. U. S. tax regulations

c. internal control standards of the U. S. publicly traded companies

communication

communicate the economic events to interested users through the use of financial statements

Which of the following is NOT a reason why a single set of high-quality international accounting standards would be beneficial? a. mergers and acquisition activity b. financial markets c. multinational corporations d. GAAP is widely considered to be a superior reporting system

d. GAAP is widely considered to be superior reporting system

Ethics are the Standards of conduct by which one's actions are judged as: a. right or wrong b. honest or dishonest c. fair or not fair d. all of the above

d. all of the above

net income will result during a time period when: a. assets exceed liabilities b. assets exceed revenues c. expenses exceed revenues d. revenues exceed expenses

d. revenues exceed expenses

The company paid a dividend of $1,000 in cash to stockholders

decrease assets and decrease dividends

The company paid $850 for this months rent

decrease assets and decrease expenses

Expenses & Dividends

decrease stockholder's equity *you will always subtract these in the equation

Dividends

distribution of assets to investors (stockholders) or company *owner of the business is a stockholder

Accounting consists of 3 purposes

identities, recording, and communication

Stockholders purchased shares of stock for $25,000 cash

increase assets and increase common stock

The company purchased $7,000 of office equipment on credit

increase assets and increase liabilities

The company received $8,000 cash in exchange for services preformed

increase assets and increase revenue

If answer is positive

net income

If answer is negative

net loss

Sarbanes-Oxley Act (SOX)

reduced unethical corporate behavior and decreases the like hood of future corporate scandals

Income Statement

reports ONLY revenues and expenses to calculate net income or loss for the time period

Balance Sheet

reports assets, liabilities, and stock holder's equity for a specific date *purpose is to prove A = L + S/E

Statement of Cash flows

reports the in-flaws and out-flaws of cash over a time period

to calculate net income/loss take...

revenues-expenses

net

something being subtracted

Retained Earnings Statement

this reports changes in retained earnings account for the time period. (shows increases, decrease, and end point)