BUSM 2020 Test 1

Debit vs Credit

*debits is left don't increase left credit is right both must equal

Financial Statements

1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows

Functions of Accounting

1. Measure business activities of a company 2. Communicate those measurements to external parties for decision-making purposes

The Accounting System

1. Operating, Investing and Financing Activities 2. Accounting System 3. Accounting Reports(Financial/Managerial)

Sole Proprietorship

Business organization owned by one person. The owner is personally liable for all debts of the business

Partnership

Business organization owned by two or more people. Each partner is personally liable for all debts of the business

Dividends

distributions of a company's earnings to its stockholders as a return on their investment (profit distributed) *dividends are not an expense

Assets

economic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future (cash, supplies, equipment)

Relationships Among the Financial Statements(2)

ending Retained Earnings from the Statement of Retained Earnings is then reported on the Balance Sheet

Retained earnings

equity earned by the company

Common Stock

equity paid in by stockholders

Financial Reports

external users(creditors, investors, etc.) which also evaluate the company and lead back to operating activities

Marginal Reports

internal users(managers, supervisors etc.) which run the company and lead back to operating activities

Accounting

is a system of analyzing, recording, summarizing and reporting the results of a business's activities

Relationships Among the Financial Statements(1)

net income from the income statement is a component in determining ending Retained Earnings on the Statement of Retained Earnings

Stockholders' Equity

owners' claim to the business resources

Liabilities

probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events (notes/accounts payable)

The Statement of Retained Earnings

reports the way that net income and the distribution of dividends affected the financial position of the company during the period

Investors

revenue, expenses, net income

Revenues

sales of goods or services to customers. They are measured at the amount the business charges the customer

The Statement of Cash Flows

summarizes how a business's operating, investing, and financing activities caused its cash balance to change over a particular period of time

Expenses

the costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities, and supplies used in the office

Separate Entity Assumption

the financial reports of a business are assumed to include the results of only that business's activities

Income Statement

the unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit

Revenue Recognition Principle

Record revenue in the period in which we provide goods and services to customers

The Balance Sheet

Reports at a point in time 1.What a business owns (assets) 2.What it owes to creditors (liabilities) 3.What is left over for the owners of the company's stock (stockholders' equity)

Six Steps to Measuring External Transactions

1. Use source documents to identify accounts affected by an external transaction 2. Analyze the impact of the transaction on the accounting equation 3. Assess whether the transaction results in a debit or credit to account balances 4. Record the transaction in a journal using debit and credit 5. Post transaction to the general ledger 6. Prepare a trial balance

Chart of Accounts

A list of all account names used to record transactions of a company

Corporation

A separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation.

Account

A summary of the effects of all transactions related to an item over a period of time Ex: asset accounts (cash, supplies) and liability accounts (accounts payable, salaries payable)

Basic Accounting Equation

Assets(by the company) = Liabilities(to the creditors) + Stockholders' Equity(to stockholders) (Resources owned)=(Resources owed)

Using Financial Statements

Creditors and Investors

Internal Transactions

Events that effect the financial position of a company but do not include an exchange with a separate company or individual Ex: using supplies already purchased and using revenues after having received cash in advance from a customer

Accounting Cycle

Full set of procedures used to accomplish the measurement and communication process of financial accounting

Revenue Expenses and Net Income Equation

Revenues - Expenses = Net Income

External Transactions

Transactions the firm conducts with a separate economic identity Ex: selling products to a customer, borrowing money from the bank

Relationships Among the Financial Statements(3)

cash on the Balance Sheet is equal to the ending Cash reported on the Statement of Cash Flows

Creditors

company making enough cash? company have enough assets to cover liabilities?