Accounting Chapter 1

Accounting equation 1

ASSETS = LIABILITIES + STOCKHOLDERS EQUITY

MIRRORS THE FORMAT OF THE BALANCE SHEET

Accounting Equation

Right to receive money from a customer,in the future, as the result of a sale.

Accounts receivable

Transactions are recorded in the periods in which the events occur.

Accrual-Basis

Transactions are recorded in the periods in which the events occur

Accrual-Basis of Accounting

Which of the following is not one of the three primary business activities? Operating Advertising Investing Financing

Advertising

LIABILITES + STOCKHOLDERS EQUITY=

Assets

Liabilities + Stockholders' Equity=

Assets (balance Sheet)

Assets, Liabilites, and common stock are found on the

Balance Sheet

Lists assets first, followed by liabilities and stockholders' equity.

Balance Sheet

Reports assets and claims to assets at a specific point in time.

Balance Sheet

Reports the assets, liabilities and stockholder's equity (SHE) as of a specific date. Assets = Liabilities + SHE

Balance Sheet

Required Financial Statements

Balance Sheet, Income Statement, Retained Earnings Statement, Statement of Cash Flows and Required Footnotes for those Financial Statements.

Which statement presents information as of a specific point in time? Retained earnings statement Statement of cash flows Balance sheet Income statement

Balance sheet

Which financial statement reports assets, liabilities, and stockholders' equity? Income statement. Statement of cash flows. Retained earnings statement. Balance sheet.

Balance sheet The balance sheet is a formal presentation of the accounting equation, such that Assets = Liabilities + Stockholders' Equity.

Which of the following is not an external user of accounting data? Economic planners Chief Financial Officer Customers Labor unions

Chief Financial Officer

Easy transfer of ownership is a characteristic of which form of business organization? Partnership All of the answer choices are correct Sole proprietorship Corporation

Corporation

Which is not one of the three forms of business organization? Partnership Creditorship Sole proprietorship Corporation

Creditorship

An asset that is convertible within 12 months of balance sheet to cash

Current Asset

Payable debt/short term

Current Liabilities

Which of the following would not appear on the income statement? Net income Service revenue Interest expense Dividends paid

Dividends paid

States that the life of a business can be divided into artificial time periods.

Periodicity

Which is an advantage of corporations relative to partnerships and sole proprietorships? Reduced legal liability for investors Most common form of organization Increased difficulty of raising funds Harder to transfer ownership

Reduced legal liability for investors

Statement shows amounts and causes of changes in retained earnings during the period.

Retained Earnings Statement

Time period is the same as that covered by the income statement.

Retained Earnings Statement

Users can evaluate dividend payment practices.

Retained Earnings Statement

Summarizes the changes in retained earnings that have occurred as of a specific date. Beg. Retained Earnings +/- Net Income/Deficit - Dividends = Ending Retained Earnings.

Retained Earnings Statement

Retained earnings at beginning+Net Income-Dividends=

Retained earnings at the end

Amounts earned from the sale of products

Revenues

How was cash used during the period?

Statement of Cash Flows

Summarizes information concerning the cash in flows (receipts) and outflows (payments) for a specific period of time and is categorized by operating, investing and financing activities

Statement of Cash Flows

What was the change in the cash balance during the period?

Statement of Cash Flows

Where cash came from and where it was spent

Statement of Cash Flows

Where did cash come from during the period?

Statement of Cash Flows

Operating Activities, Investing Activities and financing activities all show up on what statement

Statement of cash flows.

Common Stock + Retained Earnings; common stock represents the total amount paid in by stockholders to own shares of the company; retained earnings equals the cumulative net income/loss of the company since its inception.

Stockholders Equity

Which of the following is the most appropriate and modern definition of accounting? Electronic collection, organization, and communication of vast amounts of information The interconnected network of subsystems necessary to operate a business The information system that identifies, records, and communicates the economic events of an organization to interested users A means of collecting information

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

Which of the following is the most appropriate definition of accounting information? A means of collecting information Electronic collection and organization of vast amounts of financial information The information system that identifies, records, and communicates the economic events of an organization to interested users The interconnected network of subsystems necessary to operate a business

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

Which of the following is the most appropriate definition of accounting information? A means of collecting information Electronic collection and organization of vast amounts of financial information The information system that identifies, records, and communicates the economic events of an organization to interested users The interconnected network of subsystems necessary to operate a business

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

Which of the following financial statements is divided into major categories of operating, investing, and financing activities? The balance sheet. The retained earnings statement. The statement of cash flows. The income statement.

The statement of cash flows.

Common Stock basically means

Who owns us

Liabilities are all ________

________ Payable

The primary purpose of the statement of cash flows is to report a company's investing transactions. a company's financing transactions. information about cash receipts and cash payments of a company. the net increase or decrease in cash.

information about cash receipts and cash payments of a company.

accounting information system

keeps track of the 3 business activites

Amounts owed are called

liabilities

Notes payable and bonds payable are different type of

liabilities

Debts and obligations of a business are referred to as assets. expenses. equities. liabilities.

liabilities.

Party to whom amounts are owed are

creditors

The best definition of assets is the collections of resources belonging to the company and the claims on these resources. owners' investment in the business. resources belonging to a company that have future benefit to the company. cash owned by the company.

resources belonging to a company that have future benefit to the company.

Retained earnings at the end of the period is equal to -net income. -assets plus liabilities. -retained earnings at the beginning of the period plus net income minus liabilities. -retained earnings at the beginning of the period plus net income minus dividends.

retained earnings at the beginning of the period plus net income minus dividends.

Net income will result during a time period when revenues exceed expenses. expenses exceed revenues. assets exceed liabilities. assets exceed revenues.

revenues exceed expenses.

All businesses are involved in three types of activity

financing, investing, operating.

The common characteristic possessed by all assets is tangible nature. future economic benefit. long life. great monetary value.

future economic benefit.

Notes to the financial statements are generally brief and few in number. help clarify information presented in the financial statements. need not be read in detail if an unqualified opinion accompanies the financial statements. are optional.

help clarify information presented in the financial statements.

Stockholders' equity is usually equal to cash on hand. includes retained earnings and common stock. is shown on the income statement. is equal to liabilities and retained earnings.

includes retained earnings and common stock.

Two primary sources of outside funds are

-Borrowing money -Issuing shares of stock for cash

The annual report always includes:

-Financial statements. -Notes to the financial statements. -Independent auditor's report. -Management discussion and analysis.

States that every economic entity can be separately identified and accounted for.

Economic Entity

Retained Earnings=

Equity

cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).

Expenses

borrowing of funds / issuance of stock to support the business

Financing Activities

Clarifies and expands upon in words information shown on the face of the financial statements when additional detail is need for the user.

Footnotes or Notes to the Financial Statements:

(GAAP)

Generally Accepted Accounting Principles

A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting

Generally Accepted Accounting Principles (GAAP)

The business will remain in operation for the foreseeable future.

Going Concern

Reports revenues and expenses for a specific period of time.

Income Statement

Reports revenues and expenses of a company for a specific period of time. Simple Step Income Statement: Revenues - Expenses = Net Income; Multiple Step = Net Sales - COGS = Gross Profit - Operating Exp. = Net Income

Income Statement:

In which of the following sequences are the financial statements usually prepared? Balance sheet, retained earnings statement, statement of cash flows, and income statement Balance sheet, statement of cash flows, income statement and retained earnings statement Income statement, balance sheet, retained earnings statement, and statement of cash flows Income statement, retained earnings statement, balance sheet, and statement of cash flows

Income statement, retained earnings statement, balance sheet, and statement of cash flows The financial statements must be prepared in the following order: income statement, retained earnings statement, balance sheet and statement of cash flows. This is because net income (from the income statement) is a required input for the retained earnings statement, ending retained earnings (from the retained earnings statement) is a required input for the balance sheet and the ending cash balance (from the balance sheet) is a required input for the statement of cash flows.

Goodwill, film library, patents are examples of what asset

Intangible

Goods available for sale to customers

Inventory

investing and/or proceeds in fixed assets or resources to run the business.

Investing Activities

examples of long term assets

Land, Buildings

arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.

Liabilities

the debts and obligations of a business; liabilities represent the amounts owed to a creditor or third party who lent you money or resources

Liabilities

On a balance sheet assets are listed in order of

Liquidity

investments convertible after 12 months of balance sheet

Long Term Investments

Debt that will take longer that 12 months to pay off

Long term liabilites

Which of the following would not be considered an external user of accounting data for the Julian Company? Creditors Management Internal Revenue Service agent Customers

Management

Requires that only those things that can be expressed in money are included in the accounting records.

Monetary Unit

Revenues-expenses=

Net Income (income statement)

when revenues exceed expenses.

Net income

Why should the income statement be prepared first? -The statement of cash flows should be prepared first because it determines the sources of cash. That information is then used in preparing the income statement. -The income statement does not have to be prepared first. Financial statements can be prepared in any order. -None of these answer choices are correct. -Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.

Net income from the income statement flows into the retained earnings statement. The ending retained earnings balance then flows into the balance sheet.

when expenses exceed revenues.

Net loss

normal revenue & expenses from operations of the business to generate a profit

Operating Activities

The liability created by a business when it purchases coffee beans and coffee cups on credit from suppliers is termed a(n) account payable. expense. account receivable. revenue.

account payable.

U.S. companies that are publicly traded must provide shareholders with an

annual report

Resources owned by a business are referred to as stockholders' equity. liabilities. assets. revenues.

assets.

Resources owned by a business are referred to as assets. liabilities. revenues. stockholders' equity.

assets.

Payments to stockholders are called

dividends