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.