accounting

two functions of financial accounting

1. how is the business activity being measured 2. how is it being communicated

4 primary financial statements

1. income statement 2. statement of stockholders equity 3. balance sheet 4. statement of cash flow

three categories of cash flow

1. operating 2. investing 3. finacning

measurement process

1. prepaid asset 2. supplies on account 3. depreciation 4. unearned revenue 5. accrued expenses 6. accrued revenues

liabilities examples

accounts payable, salaries payable

provides better info/timely info our investors because you record them as they happen

accrual accounting

we record revenues when we earn them and we record expenses with related revenues

accrual-basis accoutning

when the balance of the unearned revenue account decreases during an accounting period

accrual-basis revenues exceed cash collections from customers

expense incurred before cash is paid

accrued expense

when a company has a cost but hasn't yet paid cash or recorded an obligation to pay for that cost, it still should record the cost as an expense and also a liability for the amount owed

accrued expense

when a company has earned revenue but hasn't yet received cash or recorded an amount receivable, it still should record the revenue and an asset for the amount expected to be received

accrued revenue

we received cash after (service is performed, we earned the revenue and before payment is recorded, an asset is received)

accrued revenues

record events that have occurred but that we have not yet recorded

adjusting entries

things that have happened internally

adjustments

economic resource that will be a benefit to the future

asset

on sept. 30 MFP Co paid employee salaries of $7,000 including $1,000 it owed to its employees last month. What are the effects of this transaction on the accounting equation

assets decreased, liabilities decreased and expenses increased

financial statement that presents the financial position of the company on a particular date

balance sheet

equals its original cost less accumulated depreciation

book value

cost-accumulated depriciation

booking value/caring value

putting the assets you buy on your balance sheet

capitalizing assets

a company paid $900 to workers during May. Of this amount, $600 was for work performed in April, while the other $300 was for work performed during May. What would the impact of this transaction be during May on each of the following three items?

cash balance - decrease cash-basis net income - decrease accrual-basis net income - decrease

when cash payments are made to stockholders, what is the effect on the company's accounts

cash decreases and dividends increase

asset examples

cash, equipment, building, supplies

record revenues at the time we receive cash and expenses at the time we pay cash

cash-basis accounting

owners equity

common stock and retained earnings

stockholders equity examples

common stock and retained earnings

two primary components of stockholders equity

common stock and retained earnings

account with a balance that is opposite to that of its related accounts

contra account

make decisions related to lending money to the company

creditors

resources or benefits within the year

current assets/liabilities

allocate cost over time in contra account (contra account goes against)

depreciation

process of allocating the cost of an asset, such as equipment, to expense over the assets useful life

depreciation

cash payments to stockholders

dividends

payment to shareholders, decrease retained earnings

dividends

costs of providing products and service

expenses

resources used

expenses

transactions the firm conducts with a separate economic entity

external transactions

Suppose Simeon Company beings the year with $1,000 in supplies, purchases an additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The year-end adjusting entry includes Supplies Expense of $5,800

false

measuring business activities and communicating them to external parties

financial accounting

periods reports published by the company for the purpose of providing information to external users

financial statements

financial statement that reports the company's revenues and expenses over an interval of time

income statement

two methods of cash flows

indirect and direct

want to make good decisions related to buying and selling the company's stock

investors

obligation and amounts owed to creditors

liabilites

companies typically report expenses in the same period as the revenues they help to generate

matching principle

recognizes expenses along with those revenues that are generated from those expenses, described as cause and effect

matching principle

measure the difference between revenues and expenses

net income

what is the best reflection of what will happen in the future

net income

what cash flow activity is different between the 2 methods

operating

cash flows proceeds the benefit (rent realize benefit as month goes on)

prepaid asset

making insurance payments in advance is an example of

prepaid expense

goal of statement of cash flow

reconcile accrual versus cash basis

represents the cumulative amount of net income, earned over the life of a company, that has been kept in the business rather than distributed to stockholders as dividends

retained earnings

when you receive a dividend it comes out of

retained earnings

matching principle dictates:

revenue recognition and expense recognition

amounts earned from selling products or services to customers

revenues

income statement

revenues - expenses = net income/loss

three major captions in the income statement

revenues, expenses, net income

financial statement that measures activities involving cash receipts and cash payments over an interval of time

statement of cash flow

financial statement that summarizes the changes in stockholders' equity over an interval of time

statement of stockholders equity

owners claims to resources

stockholders equity

obtain now, pay later and update balance based on usage

supplies on account

Unearned revenues occur when cash is received before the revenue is earned

true

adjusting entries are needed because we use accrual-basis accounting

true

if the beginning of retained earnings equals $10,000, net income for the year equals $6,000, and dividends for the year equal $2,000, then the ending balance of retained earnings equals $14,000

true

cash is received before service is performed

unearned revenue

A company provided $1,500 of services to customers during the month of May. The customers paid in June. What would the impact of these transactions be during May on each of the following three items?

Cash balance - no effect cash basis net income - no effect accrual-basis net income - increase