Financial Accounting Ch 1

Define a liability.

-A creditor's claims against the assets of a business -The company obligations to provide assets, products, or services to others -An amount owed to a creditor

Ethics can be defined as:

-Accepted standards of good and bad behavior -beliefs that distinguish right from wrong

Why is accounting important?

-Accounting info identifies, records and communicates info about a business -Accounting info summarizes or conveys info about an organization's business activities -Managers, creditors, investors and owners need reliable financial info ignorer to make decisions

A corporation's equity has two main parts:

-Contributed capital -Retained earnings

The Dodd-Frank Act was passed to:

-End notion of "too big to fall" -Promote accountability and transparency -protect consumers

Define equity.

-Equity is equal to assets minus liabilities -It is the accumulated revenues and owner's investments less the accumulated expenses and dividends since the company began -It is an amount owed to the owner of the business

Which of the following statements represent(s) how expenses affect equity? (Check all that apply.)

-If expenses increase, then total equity decreases -Higher expenses result in lower total equity

A customer of Landen Consulting makes $400 payment of cash on a bill for services provided last month. Record this transaction into the accounting equation of Landen Consulting by:

-Increasing cash, $400 -Decreasing Accounts Receivable, $400

Who are internal users of accounting information?

-Officers -Managers

Identify the roles of the International Accounting Standards Board (IASB) and International Financial Reporting Standards (IFRS).

-The IASB issues IFRS that identify preferred accounting practices -The IASB issues IFRS to increase comparability of accounting reports between companies in different countries -The IASB consists of individuals from many countries

The heading of every financial statement contains several line items. Identify those items

-The company name -The date or time period the financial statement covers -The title of the statement

What statements are true regarding the revenue recognition principle?

-The earnings process is complete when the services are performed or product is sold -The principle guides a business as to when it should recognize revenue -Revenue is to be recorded when it is earned

Which of the following statements explain how the accounting equation applies to businesses?

-The equation reflects that the total of what a business owns at any point in time will equal the total of what it owes creditors and owners -The equation applies to all monetary business transactions -The equation states the Assets = Liabilities + Equity -The relation of assets, liabilities and equity is reflected in the equation

The correct definition of a balance sheet includes what statements?

-The statement reports assets, liabilities, and equity at a point in time -The statement reports the equality of the accounting equation at any point in time -The statement reports the financial position of a company at a point in time

Identify some of the reasons why Congress passed the Sarbanes-Oxly Act

-To require public companies to apply both accounting oversight and stringent internal controls -To improve the transparency, accountability and truthfulness in reporting transactions -To help curb financial abuses at companies that issue their stock to the public

Identify some of the reasons why Congress passed the Sarbanes-Oxley Act.

-To require public companies to apply both accounting oversight and stringent internal controls -To help curb financial abuses at companies that issue their stock to the public

An income statement reports a company's net income or net loss during a period. What would appear on an income statement?

-Wages Expense -Rent Revenue -Rent Expense -Service Revenue

The three factors that must exist for a person to commit fraud include:

-opportunity -rationalization or attitude -pressure or incentive

On 6/25, supplies costing $1,000 were purchased, but only $400 of this amount was paid on 6/25. The remainder of the bill went on account. To record this transaction on 6/25: Supplies would be increased by $_______; Cash would be decreased by $______; and Accounts Payable would be increased by $_______.

1,000; 400; 600

Describe the order in which a company prepares financial statements

1. Income statement 2. Statement of retained earnings 3. Balance sheet 4. Statement of cash flows

The full disclosure principle can be summarized by which of the following statements?

A company must report the details behind financial statements that would impact users' decisions

In every financial statement, there exists single and double underlines. What are these and when do you use them?

A single-ruled line denotes an addition or subtraction and double lines indicate the final totals

Why does a business need accounting information?

Accounting records business transactions and communicates financial information

Both public and private accounting

Accounting specialists in the this area of accounting are highly regarded

Given the list of accounts, identify which are classified as liabilities: Owner's Withdrawals, Accounts Payable, Cash, Wages Payable, Notes payable, Accounts Receivable, Taxes Payable, Owner's Capital

Accounts Payable, Wages Payable, Notes Payable, Taxes Payable

What is a shareholder?

An owner of a corporation

The expanded accounting equation is defined as:

Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends

Which of the following correctly depicts the accounting equation?

Assets = Liabilities + Equity

Select the account that would be decreased if the owner of H Hair Salon Company decides to pay $40 cash dividends to its shareholders.

Cash

Define owner investments.

Cash or other assets an owner puts into the business

Which list of accounts below, identifies ONLY accounts that would appear on a balance sheet.

Common Stock, Equipment, Accounts Payable

Dividends cause a(n) (increase/decrease) _________ in equity and are recorded directly in the (retained earnings/dividends/equity) __________ account.

Decrease and dividends

Withdrawals

Decrease equity and are the assets removed from the company for personal use

Expenses

Decrease equity and are the cost of assets or services used to earn revenue

Income statement

Describes a company's revenues and expenses along with the resulting net income or loss over a period of time.

Given the list of accounts below, identify which of them would appear on a balance sheet: Utilities Expense, Rent Expense, Equipment, Cash, Rental Revenue, Accounts Payable, Retained Earnings, Supplies

Equipment, Cash, Accounts Payable, Retained Earnings, Supplies

Define equity.

Equity refers to the claims of the business's owners on the assets of a business

Describe the effect of expenses on equity.

Expenses cause equity to decrease

Statement of cash flows

Identifies the cash inflows and outflows over a period of time

Investments

Increase equity and are assets an owner puts into the business

Revenues

Increase equity and are the assets earned from a company's earning activities

Bakery Company receives its utility bill of $800 for the month and pays it immediately. Record this transaction in the accounting equation

Increase expenses and decrease cash

Owner investments cause a(n) _______ in equity and are entered directly in the _________ account.

Increase; common stock

If a customer makes a partial payment of $100 on a service for which you have already billed him, you would record this transaction into the accounting equation by:

Increasing cash and decreasing accounts receivable

Jackson's Catering Company provided cookies worth $3,000 to the local college. The college paid immediately. Record this transaction in Jackson's Catering Company accounting equation by:

Increasing cash; increasing revenues

The three sections of the statement of cash flows includes all of the following:

Investing, operating, and financing

How would you characterize a company's Accounts Receivable account?

It is an asset account

Given the following list of accounts, identify which are classified as assets: Wages Payable, Land, Dividends, Building, Cash, Accounts Receivable, Common Stock, Supplies

Land, Building, Cash, Accounts Receivable, Supplies

Balance sheet

Reports the balance of assets, liabilities and owner's equity at a point in time

Statement of retained earnings

Reports the changes in equity during a period of time

Identify which would belong on the statement of retained earnings

Retained earnings,1/31; Dividends; Retained earnings, 1/1; Net Income(loss)

Net income is calculated using what formula

Revenues - expenses = net income

Which is correct regarding revenues

Revenues cause equity to increase.

Which organization has the ultimate authority to create Generally Accepted Accounting Principles?

SEC

Which organization has the legal authority to create Generally Accepted Accounting Principles (GAAP)?

SEC (Securities and Exchange Commission)

Johna's Plant Nursery pays the salaries of its two employees. How will this transaction affect the accounting equation?

Salaries expense will be increased; Equity will be decreased

Other names for equity in a corporation include:

Stockholders' equity and capital

What are Generally Accepted Accounting Principles (GAAP)?

The concepts and rules that govern financial accounting practice

What is the most accurate definition of dividends?

The outflow of resources such as cash and other assets to stockholders Or Distributions of cash or other assets to stockholders

What is the expense recognition principle?

The principle states that expenses are recorded in the same period the were incurred to generate revenue

What is the meaning of the measurement principle?

The recorded cost of a purchased item will be based on the actual cost

Public Accounting

This area of accounting includes offering tax advice services and auditing services

Private Accounting

This area of accounting is where employees work for a business

Which statement(s) below define(s) an asset? a) Resources controlled by the business b) An amount owed to an owner c) An amount owed d) An amount owed to a creditor e) Resources with future benefits

a, c, e

The definition of revenues includes which of the following statements? a) Revenues are creditor's claims against the company. b) Revenues increase equity c) Revenues are the sales of products or services to customers by a business d) Revenues are resources owned or controlled by a company

b & c

When recording transactions into the accounting equation, which of the following statements are correct? a) cash must always equal Owner's Equity b) the accounting equation must always remain in balance c) at least two accounts will be affected when recording a transaction d) after recording the transaction, total assets will always equal total liabilities plus equity e) expenses are listed on the right side of the accounting equation and will increase the equity account

b, c, d

The equity of a corporation consists of retained earnings and _______ capital

contributed

A _______ is a business entity legally separate from its owners, also called shareholders.

corporation

Dividends cause a(n) ______ in equity and are recorded directly in the __________ account.

decrease; dividends

Dividends cause a(n) _________ in equity and are recorded directly in the ________ account.

decrease; dividends

When using the accounting equation, recording the purchase of equipment for cash would include an increase to the ________ account and a decrease to the ________ account.

equipment; cash

Financial accounting provides external users with

general-purpose financial statements

The accounting assumption which presumes that a business will continue operating indefinitely is called the:

going-concern

On May 1, Morsels Company provided catering services at a wedding. The bride is billed $4000 and will pay during the following month. Record this transaction on May 1 in the accounting equation

increasing Accounts Receivable and increasing Revenue

Russell's Consulting Services provided $1000 of services to the local college and immediately collected $700, but the college wants to pay the rest next month. Record this transaction in the accounting equation

increasing both cash and accounts receivable; and increasing revenues

Users of accounting information can be divided into two main groups. These groups include:

internal and external

Buying and selling of long-term assets such as land and equipment would be included in the ________ activities section of the Statement of Cash Flows

investing

The statement of retained earnings explains changes in equity from net income (or loss) and from any _______ and _______ over a period of time.

investments; dividends

The Accounts Payable account is a(n) _________ account.

liability

The area of accounting that serves the needs of internal users is referred to as _______ accounting

managerial

A __________ is a business owned by two or more people

partnership

All of the following are part of the FASB conceptual framework EXCEPT: recognition, objectives, measurement, qualitative characteristics, principles, elements

principles

A __________ is a business entity owned by one person

proprietorship

ABC Co. performs $200 of services for a customer, but does not get paid right away. Demonstrate how ABC Co. would record this transaction in the accounting equation: ABC Co. would increase the Accounts _______ account and increase the _______ account in the accounting equation.

receivable; revenue

The four major types of transactions that effect equity in a business are....

revenues, expenses, common stock, and dividends

To record the purchase of supplies for cash, the correct entry into the accounting equation would include an increase to _________ and a decrease to ________.

supplies; cash

Which of the following statements best represents the reason for the accounting equation?

the total of everything owned by a business must always equal the total of what the business owes to creditors and owners.