Accounting, Exam 1, Chapter 1
Statement of owner's equity
A summary of the changes in owner's equity that have occurred during a specific period of time.
Accounting Equation (basic accounting equation)
Assets = Liabilities + Equity
Williams Travel Service pays $100 cash for salaries expense. How would this transaction affect the accounting equation?
Assets decrease and Equity decreases
Smith Decorating Services pays $200 cash for rent expense. How would this transaction affect the accounting equation?
Assets decrease and Equity decreases.
Pack Company had the following data: Service Revenue = $10,000 Cash = $12,000 Accounts Receivable = $3,000 Office Supplies = $4,000 Rent Expense = $2,000 Salaries Expense = $1,200 Utilities Expense = $800 Accounts Payable = $3,200 What is the amount of total Assets to report on the Balance Sheet for Pack Company?
Assets for this company are Cash, Accounts Receivable, and Office Supplies. $12,000 + $3,000 + $4,000 = $19,000 in total assets.
Williams Travel Service purchased land for cash. How would this transaction affect the accounting equation?
Assets increase and Assets decrease.
Williams Travel Service performed travel booking services for a customer on account for $1,200. How would this transaction affect the accounting equation?
Assets increase and Equity increases.
Williams Travel Service purchased office supplies on account for $300. How would this transaction affect the accounting equation?
Assets increase and Liabilities increase
Williams Travel Service purchased office supplies on account for $300. How would this transaction affect the accounting equation?
Assets increase and Liabilities increase.
Assets = Liabilities + Equity
Assets: what a company ownes Liability: what a company owes to others Equity: difference between assets and liabilites
Equity Equation
Beginning Capital + Owner contribution (or minus Owner withdrawal) + Net income (or minus Net loss) = Ending Capital
Affects on Accounting Equation
Buy asset (computer) on credit: Asset (equipment) increases & Liability increases Buy inventory (bats) on credit: Asset (inventory) increases & Liability increases Pay Rent: Asset (cash) decreases & Equity decrease Pay a credit card (creditor): Asset (cash) decreases & Liability decreases Sell services for cash: Asset (cash) increases & Equity increases Sell services on account: Assets increase & Equity Increases
Donler Tax Service performed services on account for $10,200 and paid expenses totaling $5,400. What is Donler's Net Income or Net Loss?
Rev - expenses = net income / $10,400 - $5,400 = $4,800
The following are types of business organizations EXCEPT:
Sole Proprietorship, Partnerships, Corporations, and Limited Liability Companies are all ways a business can be organized. Stockholders are owners of a corporation and NOT a type of business
Pack Company had the following data: Service Revenue = $10,000 Cash =$12,000 Accounts Receivable =$3,000 Office Supplies = $4,000 Rent Expense = $2,000 Salaries Expense =$1,200 Utilities Expense = $800 Accounts Payable = $3,200 What is the amount of total Liabilities to report on the Balance Sheet for Pack Company?
The only liability listed is Accounts Payable with a balance of $3,200
Awesome Sweets sells different kinds of cookies, candies, and other sweets. Awesome Sweets has a return on assets (ROA) of 6.9% . How does Awesome Sweets know if the 6.9% ROA is a good return to attract possible investors?
The return on assets (ROA) would have to be compared to the ROA's of competing businesses that sell the same type of products. If 6.9% is higher than the ROA of other companies in the same type of business, then it would be a good investment.
Assets DON'T include
notes payable, accounts payable, salaries payable, owner's equity
Average Total Assets
(Beginning Total Assets + Ending Total Assets) / 2
4 Financial Statements in order
1. Income Statement 2. Statement of Owner's Equity 3. Balance Sheet 4. Statement of Cash Flows
Sole Proprietorship
A business owned by one person
Corporation
A business owned by stockholders who share in its profits and designed to limit personal liability exposure of owners to entity's debts
Income Statement
A financial statement showing the revenue and expenses for a fiscal period.
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Cost principle
A principle that states that acquired assets and services should be recorded at their actual cost (not fair market)
Asset
An economic resource that is expected to be of benefit in the future - Cash, office furniture, land, inventories, building, accts receivables, equipment, office supplies
Audit
An examination of a company's financial statements and records
Revenue
An increase in owner's equity resulting from the operation of a business (sale of goods and or services)
Liability
Debts that are owed to creditors - Money borrowed from lenders, wages payable, notes, purchases on credit cards
Affects on Equity
Decrease in Equity: - Bills (utilities, salary, rent, advertising etc) - Owner withdraw: Increase in Equity: - Service and goods revenue - Owner contribution
The field of accounting that focuses on providing information for external decision makers is:
Financial Accounting
FASB
Financial Accounting Standards Board
The guidelines for accounting information are called:
Generally Accepted Accounting Principles (GAAP)
Where do you find the net income or loss for a company?
Income Statement
IFRS
International Financial Reporting Standards Set of global accounting guidelines, formulated by the IASB
Return on Investment (ROI)
Net Income / Average total Assets
Net Income
Net Income = Revenues - Expenses Amount by which revenues exceed expenses
Net Loss
Net Loss = Expenses - Revenues The amount by which expenses exceed revenues.
Tanger Company had the following data: Service Revenue = $10,000 Rent Expense = $2,000 Salaries Expense = $1,200 Utilities Expense = $800 What is the Net Income for Tanger Company?
Net income is revenue less expenses. So $10,000 - $2,000 - $1,200 - $800 = $6,000 in net income.
Owner Capital increases when
Owner contributes and/or there is net income.
Owner Capital decreases when
Owner withdraws money and/or there is a net loss
Creditors
People who lend money
Jones Company had net income of $10,000 for the year. Beginning total assets were $150,000 and ending assets were $200,000. What is Jones Company's return on assets (ROA) for the year?
ROA = net income / average total assets $10,000 / [($150,000 + 200,000)/2 $10,000/$175,000 = .057 = 5.7%
Assets for Jones Company are $60,000. Equity is $20,000. How much are Liabilities for Jones Company?
Rearrange the equation: Assets = Liabilities + Equity to Assets - Equity = Liabilties $60,000 - $20,000 = $40,000
Assets for Smith Company are $30,000. Liabilities are $20,000. What is the Equity for Smith Company?
Rearrange the equation: Assets = Liabilities + Equity to Assets - Liabilities = Equity $30,000 - $20,000 = $10,000
Statement of Cash flows
Reports on a business's cash receipts and cash payments during a period
Income Statement
Reports the Net Income or Net Loss of a company during a fiscal period
SEC (Securities and Exchange Commission)
U.S. governmental agency that oversees the U.S. financial markets
Graff Company had the following data for the month of November: Graff, Capital, November 1 = $10,000 Net Income = $2,000 Graff, withdrawals = $1,200 What is the amount of Graff, Capital account as of November 30th?
When preparing the Statement of Owner's Equity, Net Income is added to the beginning account balance and withdrawals are subtracted. $10,000+$2,000-$1,200 = $10,800
Partnership
a business owned by two or more people
Which financial statement is prepared first?
income statement
Faithful Representation
information that is complete, neutral, and free from error
A field of accounting that focuses on providing information for internal decision makers is:
managerial accounting