ACG2021 Exam 1
Common Stock and Retained Earnings
Stockholders Equity consists of 2 parts:
Generally Accepted Accounting Principles (GAAP)
a set of standards and rules that are recognized as a general guide for financial reporting.
Cash Inflow-Cash Outflow=Net Cash Flow
Statement of Cash Flows
Monetary Unit
include in the accounting records only those things that can be expressed in terms of money
debit
increase in asset
credit
increase in common stock/retained earnings
debit
increase in dividend
debits
increase in expenses
credit
increase in liability
credits
increase in revenue
Common Stock
investments of assets into the business by the stockholders
Revenue Accounts
keeps track of a company's earnings from sales, service, etc
Dividends Account
keeps track of the company's dividends issued
Expense Accounts
keeps track of the company's expenses
Partnership
owned by two or more persons, personally liable for debts of the business, tax advantages
Corporation
ownership in shares of stock, separate legal entity organized unter state corporation law, no personal liability, easier to raise funds
Full Disclosure Principle
requires that companies disclose all circumstances and events that would make a difference to financial statement users
Accounting Information System
steps in the recording process, the account, accounting transactions, and the trial balance
liquidity
the ability to pay obligations expected to become due within the next year or operating cycle
Time Period
the economic life of a business can be divided into artificial....
Going Concern
the enterprise will continue in operation long enough ot carry out its existing objectives
Retained Earnings
the income retained for use in business
Financial Accounting Standards Board (FASB)
the primary accounting standard-setting body in the United States
Double Entry System
the two-sided affect of each transaction is recorded in appropriate accounts
liability
unearned revenue is a
Conservatism
when preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets or income
Beginning Retained Earnings+Net Income-Dividends=Ending Retained Earnings
Retained Earnings Statment
Operating Activities
Revenues, Inventory, Accounts Receivable, Expenses, Liabilities
Cost Principle
dictates that assets be recorded at their cost when purchased and over the time the assets are held
Comparability
different companies us similar accounting principles
Steps in Recording Process
1. Analyze each transaction 2. enter transaction in a journal 3. transfer journal information to ledger accounts
Financing Activities
1. Borrowing money 2. Issuing shares of stock for cash
Long-term Investments
1. investments in stocks and bonds of other corporations that are held for more than one year, and 2. long-term assets such as land or buildings that a company is not currently using in its operating activities
Reliability
1. is verifiable 2. is a faithful representation 3. is neutral
Relevance
1. provides a bassis for forecasts 2. confirms or corrects prior expectations 3. is timely
Cash-Basis Accounting
1. revenues are recognized when cash is recieved 2. expenses are recognized when cash is paid
Accrual-Basis Accounting
1. revenues are recognized when earned, rather than when cash is received 2. expenses are recognized when incurred, rather than when paid
financing, investing, operating
3 Types of Business Activity
Asset Accounts
Accounts: Equipment, Land, Supplies, Cash
Liability Accounts
Accounts: Interest Payable, Salaries Payable, Accounts Payable, Notes payable
Stockholder's Equity Accounts
Accounts: Salaries Expense, Service Revenue, Common Stock, Retained Earnings, Dividends
liabilities+retained earnings-dividends+revenues-expenses
Assets=
Assets= Liabilities+Stockholders Equity *specific time period
Balance Sheet
DEBIT means LEFT CREDIT means RIGHT
Debit/Credit Theory
Proprietorship, Partnership, and Corporation
Forms of Business Organizations
External Users
IRS, investors, labor unions, creditors, SEC, customers
Net Income= Revenues-Expenses
Income Statement
1. Income Statement 2. Retained Earnings Statement 3. Balance Sheet 4. Statement of Cash Flows
Order of Financial Statements
Investing Activities
Purchase of resources a company needs to operate
Notes to Financial Statements
The segment of a corporation's annual report that describes the corporation's accounting methods is the:
Auditor's Report
The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the:
Materialty
a financial statement item's impact on a company's overall financial condition and operations; companies do not have to follow GAAP for small amounts
Auditor
an accounting professional who conducts an independent examination of a company's financial statements
Property, plant, and equipment
assets with relatively long useful lives that a company is currently using in operating the business- includes: land, builidings, machinery and equipment, depreciation
Correct Order of Current Assets
cash, accounts receivable, inventories, prepaid insurance.
Longevity
companies list current assets by
Revenue Recognition Principle
companies recognize revenue in the accounting period in which it is earned
Intagible Assets
companies that hace assets that do not have physical substance yet often are very valuable ex.) goodwill
Consistency
company uses same accounting methods from year to year
Standard Classifications of Assets
current assets, long-term assets, property/plant/equipment, intangible assets
credit
decrease in asset
debit
decrease in common stock/retained earnings
credit
decrease in dividend
credits
decrease in expenses
debit
decrease in liability
debits
decrease in revenue
Accounting Transactions
economic events that have changed the company's assets, liabilities, or stockholders' equity that requires them to record within the financial statements
Economic Entity
every economic entity can be separately identified and accounted for
Matching Principle
expenses matched with revenue in the period when efforts are expended to generate revenues
Trial Balance
lists accounts and their balances at a given time
Internal Users
marketing, finance, human resources, management
Order of Current Liabilities
notes payable, accounts payable, other items follow in the order of their magnitude
Long-term Liabilities
obligations that a company expects to pay after one year- includes: bonds payable, mortagages payable, long-term notes payable, lease liabilities, and pension liabilities
Current Liabilities
obligations that the company is to pay within the coming year or operating cycle, whichever is longer- includes: accounts payable, wages payable, interest payable
Certified Public Accountant
only accountants who meet this designation may perform audits
Proprietorship
owned by one person, small businesses, personally liable for debts of business, tax advantages