Accounting Midterm # 1

Propiertorship

-Business owned by one person -Relatively little start-up capital is required -Owner receives all profits and suffers all loses -Personally liable for debts (unlimited liability) -Accounting records of the business activities are kept separate from the personal records and activities of the owner -70% of US companies, but 6.5% of gross revenue

Qualitative characteristics of accounting information

-Relevance: predictive, feedback value, timing -Reliability: free of error and bias, verifiable -Comparability: accounting methods must be disclosed -Consistency: use of same accounting principles and methods

Corporation

-business as a separate legal entity -limited liability -stockholders may transfer ownership -unlimited life

Partnership

-more than one owner -partnership agreement (initial investment, duties of each partner, division of net income or loss, settlement on death or withdrawal) -unlimited personal liability -the partnership affairs keep separate from the personal activities of the partners

Sources of increases to stockholders' equity are a. additional investments by stockholders b. purchases of merchandise c. dividends d. expenses

A

The account

An account is an individual accounting record of increases and decreases in a specific asset, liability, or stockholder's equity

Normal balance

An account is on the side where an increase in the amount is recorded

Liabilities

Assets - stockholders' equity

The operating guidelines do no include A. Principles B. Elements C. Assumptions D. Constraints

B. Elements

Materiality

Based on an item's impact on a firm's overall financial condition and operation Compare with such items as total assets, total liabilities, and net income

Going concern assumption

Business will continue operation

Debit balance

Occurs when the amount on the left (debit) side exceeds the amount on the right (credit) side

Credit balance

Occurs when the amount on the right (credit) side exceeds the amount on the left (debit) side

Monetary unit assumption

Only transaction data that can be expressed in terms of money be included in the accounting records

Paid-in Capital

Paid-in capital is the total amount paid in by stockholders Investment of cash and other assets in the corporation by stockholders in exchange for capital stock -common stock - ownership interest -other stock

Communicate

Preparing, analyzing, and interpreting financial statements

Income statement

Presents information about 1) revenue, 2)expenses, 3) net income for a specific period of time Purpose: to report the profitability of the company over a specific period of time

Income statement

Presents information about 1) revenues 2) expenses 3) net income or loss for a specific period of time

Assumptions

Provide a foundation for the accounting process

Depreciation estimate

divide the cost of the asset by its useful life ex. Building is 12,000; useful life is 10 years Journal entry: Oct. 1 Depreciation expense 100 Accumulated depreciation - building 100 (to record monthly deprecation)

Accrued expenses

expenses incurred but not yet paid in cash or recorded adjustments are to 1) to record that obligation that exists at the balance sheet; 2) to recognize the expenses that apply to the current accounting period

Prepaid expenses

expenses paid in cash and recorded as assets before they are used or consumed

Accumulated depreciation

is a contra asset account (Normal balance: credit) Written in balance sheet as Building 10,000 Less: Accumulated depreciation-building 1,000

Depreciation

is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner

Chart of accounts

lists the accounts and the numbers that identify their location in the ledger

Accrual

recorded in time periods in which the events occur *only accrual accounting is in accordance with GAAP

Cash-basis

revenue is recorded when cash is received, and expense is recorded when cash is paid

Accrued revenues

revenues earned but not yet received in cash or recorded Adjusting entry is required to 1) show the receivable that exists at the balance sheet date and 2) to record the revenue that has been earned during period

Book value

the difference between cost of depreciable asset and its related accumulated depreciation

Useful life

the term of service

Balance sheet

Reports the assets, liabilities, and stockholder's equity of a business at a specific date It's the snapshot of the company's financial condition at a specific moment in time

Trail balance

Is a list of accounts and their balances at any given time Prepared at the end of an accounting period Purpose is to check that the debits equal the credits after posting Used to uncover mistakes

Accounting

Is an information system that identifies, records, and communicates the economic events of an organization to interested users

Depreciation

Is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner

General Journal (journal)

Is the book of original entry in which transactions are recorded in chronological order Journaling is entering transactions in a journal Significant contribution 1. It discloses in one place the complete effects of a transaction 2. It provides a chronological record of transactions 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared

Ledger

Is the entire group of accounts maintained by a company Keeps in one place all the information about changes in specific account balances Ledger contains all assets, liabilities, and stockholders' equity 3-column form of account: debit, credit, and balance

Assets=

Liabilities+stockholders' equity

Time period assumption

Life of business can be divided into time period

Internal users

Managers and supervisiors

Process of analyzing ethical issues

1. Recognize that an ethical issue is involved 2. Identify and analyze the principle elements in the situation (especially those harmed or benefited) 3. Identify the alternatives and weigh the impact of each alternative on various stakeholders 4. Select the most ethical alternative

Objectives of financial reporting

1. The information is useful to those making investments and credit decisions 2. The financial reports are helpful in assessing future cash flows 3. The economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims are clearly identified

Steps in the recording process

1. analyze each transaction for its effects on the account 2. Enter the transaction information in a journal 3. Transfer the journal information to the appropriate accounts in the ledger

Financial Accounting Standard Board (FASB)

A private organization that establishes general reporting standards and specific accounting rules

Cost priniciple

Assets should be recorded at their cost and cost is the value exchanged at the time something is acquired. -Cost vs. Market value -The cost amount continues to be used in the accounting records -Cost-reliable, objectively measured, verified, and usually documented

Stockholders' equity=

Assets- liabilities

0=

Assets-liabilities-stockholders' equity

Liabilities a. are future economic benefits b. are existing debts and obligations c. possess service potential d. are things of value used by the business in its operation

B

The qualitative characteristics of accounting information include A. Materiality B. Conservatism C. Consistency D. Full disclosure

C. Consistency

Economic entity assumption

Can be any organization or unit in society, activities of an entity to be kept separate and distinct from the activities of its owner and all other economic entities

Full disclosure principle

Circumstances and events that make a difference to financial to financial statement users to be disclosed -Included in the notes to financial statements and a summary of significant accounting policies

External users

Creditors, investors, tax agency, etc.

The economic entity assumption requires that the activities of a. different entities be combined if all the entities are corporations b. all entities be reported to the Securities and Exchange commission c. a sole proprietorship be combined with the personal economic events of its owners d. an entity be kept separate from its owners' activities

D

Which of the following would not be considered an internal user of accounting data for the Harris Country Club? a. Human resources manager b. Golf shop manager c. Chef d. SEC (Security and exchange commission

D

The right side of an account is referred to as the A. Footing B. Chart side C. Debit D. Credit

D. Credit

Which of the following accounts would be increased with a debit? A. Rent payable B. Common stock C. Service revenue D. Dividends

D. Dividends

Depreciation estimate

Divide the cost of the asset by its useful life

Identify

Economic activities relevant to a particular organization

Matching principle

Expenses must be matched with revenue in periods when efforts are made to generate revenues -Costs are sources of expenses -Types of expense: ---Costs of goods sold: cost of merchandise, cost of ingredients ---Operating expenses: store supplies, prepaid insurance

The adjusting entry for unearned revenues results in a debit to an asset account and a credit to a revenue account (T/F)

False

The elements of financial statements include the characteristics of relevance and reliability (T/F)

False

The ledger is the entire group of accounts and is referred to as the book of original entry (T/F)

False

The monetary unit assumption assumes that the unit of measure changes over time

False

When the columns of the trial balance equal each other, it proves no errors occurred in recording and posting (T/F)

False

An account will have a credit balance of the total debit amounts exceed the total credit

False - This would be a credit balance

Monthly and quarterly time periods are commonly referred to as fiscal periods (T/F)

False - fiscal is an entire year

Assets are increased by debits and liabilities are decreased by credits

False - liabilities are increased by credits

The revenue recognition principle dictates that revenue be recognized in the period in which it was received rather that when it was earned (T/F)

False - recognized when it was earned

The cost principle states that assets should be recorded at their fair market value (T/F)

False - should be recorded of their cost at the time or purchase

The basic accounting equation states that Assets + Stockholders' equity = Liabilities (T/F)

False: A-SE=L

Double - entry system

For each transaction, debit must equal credit

GAAP

Generally Accepted Accounting Principles (GAAP) are standards that define how to report economic events

Securities and Exchange Commission (SEC)

Governmental agency that requires companies to file financial reports following GAAP

Revenue recognition principle

Revenue should be recognized in the accounting period in which it is earned

Retained earmings

Revenues (increase in SE) - Business activities entered into for the purpose of earning income. From sell of merchandise, providing services, rental activities, or lending money. -Expenses (decrease in SE) - Result from operating the business, cost of ingredients, wages, utility expenses, etc. --Dividends (decrease in SE) - Money distributed to stockholders. Dividends are not expense!

Statement of cash flows

Summarizes information about cash in-flows (receipts) and cash outflows (payment) for a specific period of time

Retained earnings statement

Summarizes the changes in retained earning for a specific period of time Beginning RE +net income -dividends = retained earnings

Record

Systematic and chronological diary of economic events

Book value

The difference between cost of depreciation Original value - depreciation

Expense

What others have done for me during a certain period in time

Equity

The leftovers Stockholders' equity os the ownership claim on total assets -pain-in capital (contributed) -retained earning (earned capital)

Ethics

The standards of conduct by which one's action are judged as right or wrong, honest or dishonest, fair, or not fair

Useful life

The term of service

Conservatism

When in doubt, choose the method that will be least likely to overstate assets and income -Lower the cost or market value for inventories, LIFO, interests

Accounting is the information system that identifies, records, and communicates the economic events of an organization to interested users

True

Assets= liabilities + common stock + retained earnings - dividends + revenues - expenses is a correct form of the expanded basic accounting equation (T/F)

True

Bookkeeping deals with the record-keeping process and is only one aspect of account

True

Consistency means that a company uses the same accounting principles and methods from year to year (T/F)

True

Depreciation is the allocation of the cost of an asset to expense over its useful life in a rational and systematic manner (T/F)

True

Ethics is a standard of conducts by which one's actions are judged as right or wrong

True

Internal users are those who manage the business

True

Payments of expenses that will benefit more than one accounting period are referred to as prepaid expenses (T/F)

True

The Financial Accounting Standards Board is a private organization that established broad reporting guidelines of general applicability as well as specific accounting rules

True

The basic steps in the recording process are 1) analyze each transaction 2) to enter the transaction in a journal, and 3) to transfer the journal entry to the appropriate ledger accounts (T/F)

True

The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities

True

The full disclosure principle dictates that circumstances and events the make a difference to financial statement users be disclosed (T/F)

True

The going concern assumption assumes that the business will continue in operation long enough to carry out its existing objectives (T/F)

True

The retained earnings account is increased by credits

True

Revenue

What I did for others during a certain period of time

Asset

What I have, What others owe me Assets are the resources owned by the business, capacity to provide future services or benefits -buildings -furniture -equipment -inventory -cash -account receivbable

Liability

What I owe them Liabilities are the claims against assets, or existing debts and obligations (owes money). -accounts payable -notes payable -taxes payable -wages payable

Adjusting enteries

are needed to ensure that the revenue recognition and the matching principle are followed. ex. consumption of supplies, earning of wages by employees, depreciation, rent, prepaid insurance, utility service bill not be received in same accounting period adjusting entries are required every time financial statements are prepared

Unearned revenue

cash received and recorded as liabilities before revenue is earned ex. customer deposits, magazine subscriptions, airline ticket revenue, etc.