Accounting 201: Chapter 1
FASB
"Financial Accounting Standards Board" - They make the rules
GAAP
"General Accepted Accounting Principles" - The rules we follow in accounting
SEC
"Securities & Exchange Commission" - They enforce the rules
Changes include:
-Net income/loss -dividends *Short & Easiest statement
Ethics problems deal with these 3 steps:
1) Identify the ethical dilemma 2) Identify the Stakeholders (who is effected) 3) List possible responses (What can you do)
Stockholder's Equity
Amount of assets a company owns. ex. Company buys $40,000 car- paid cash $160,000 building- Signed a mortgage 200,000 = 160,000 + 40,000
Common Stock
Amounts paid in by investors for share of stocks purchased
Accounts Payable
Amounts we expect to pay for goods of services received
Accounts Receivable
Amounts we expect to receive from customers, for goods or services provided from the business.
Expanded Accounting Equation
Assets = Liabilities + Common Stock + Retained Earnings + Revenues - Expenses - Dividends (common stock - dividends: Stockholder's Equity)
Basic accounting equation
Assets = Liabilities + Stakeholders's Equity
Transactions
Business's economic events recorded by accountants -may be external or internal -not all activities represent transactions -each transaction has a dual effect on the accounting equation
Dividends
Classification: dividends effect of equity: decreases
Rent Expense
Classification: expense effect of equity: decreases
Salaries & Wages Expense
Classification: expense effect of equity: decreases
Service Revenue
Classification: revenue effect of equity: increases
What are the 3 principles that deal with GAAP?
Cost Principle, Economic Entity Assumption, and Monetary Unit Assumption
Expenses
Cost of assets used to generate revenue (Salary, advertisement)
Liabilities
Debts and obligations of the company ex. Accounts payable, and notes payable
Recent financial scandals
Enron, WorldCom, HealthSouth, AIG, and more
The historical cost principle dictates the companies record assets at their cost. In later periods, however, the fair value of the assets must be used if fair value is higher than its cost
False, Dictates that companies record assets at their cost. Under the historical cost principle, the company must also use cost in later periods.
Relevance means that financial information matches what really happened; the information is factual
False, Faithful representation means that financial information matches what really happened; the information is factual
Accountants prepare, but do not interpret, financial reports
False, analyze and interpret information in reports as part of the communication step
The two most common types of external users are investors and company officers
False, investors and creditors
Bookkeeping encompasses all steps in the accounting process
False, involves only the recording step
Proprietorship
General owned by one person. Advantages- receives all profits Disadvantages- suffers any losses, and has unlimited liability
Identification
Identify the economic events that are relevant to the business.
What are the 4 types of financial statements
Income Statements, Retained Earning Statement, Balance sheet, and Statement of cash flows
Retained Earnings
Income that you have to keep or re-invest in your company
Revenues
Increases in assets from earning income, typically from providing a service or selling a product
Internal Users
Individuals inside the company that wants to know about financial positions ex. Marketing, management, finance, human resources, and the CEO
External Users
Individuals or businesses outside of the company that want to know about the companies financial position ex. Creditors- parties to whom we owe money to, stockholders, and investors
Monetary Unit Assumption
Only records transactions that can be expressed in terms of money
Corporation
Organized under state law, and is divided into share of stocks. Advantages- limited liability *Separate legal entity between corporation and owners
Partnership
Owned by two or more people or businesses. Disadvantages- Sharing of profit, and unlimited liability
What are the 3 forms of Business Ownership?
Proprietorship, Partnership, and Corporation
Assets
RESOURCES a company has. ex. Cash, accounts receivable, land, equipment, and buildings
Cost Principle
Record and report assets at there cost
Recording
Record the economic event in the books
Economic Entity Assumption
Records of the business must be kept separate and distinct from those of other businesses and owners.
Ethics
The standards of conduct by which actions are judged as right or wrong, honest or dishonest, and fair or not fair
A business owner's personal expenses must be separates from expenses of the business to comply with accounting economic entity assumption.
True
Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the like hoods of future corporate scandals
True
Managerial accounting activities focus on report for internal users
True
The primary accounting standards-setting body in the United States is the Financial Accounts Standards Board (FASB)
True
The three steps in the accounting process are identification, recording, and communication
True
Which os the following financial statements is prepared as a specific date? a. balance Sheet b. income statement c. retained earnings statement d. statement of cash flows
a. balance sheet
IFRS is considered to be more: a. prinicple-based and less rules-based than GAAP b. rules-based and less principle-based than GAAP c. detailed than GAAP d. non of the above
a. principle-based and less rules-based than GAAP
Combining the activities of Kellogg and General Mills would violate that: a. cost principle b. economic entity assumption c. monetary entity assumption d. ethics principle
b. economic entity assumption
A business organized as separate legal entity under state law having ownership divided into shares of stock is a: a. proprietorship b. partnership c. corporation d. soe proprietorship
c. corporation
The Sarbanes-Oxley Act determines: a. international tax regulations b. internal control standards as enforced by the IASB c. internal control standards of the U. S. publicly traded companies d. U. S. tax regulations
c. internal control standards of the U. S. publicly traded companies
communication
communicate the economic events to interested users through the use of financial statements
Which of the following is NOT a reason why a single set of high-quality international accounting standards would be beneficial? a. mergers and acquisition activity b. financial markets c. multinational corporations d. GAAP is widely considered to be a superior reporting system
d. GAAP is widely considered to be superior reporting system
Ethics are the Standards of conduct by which one's actions are judged as: a. right or wrong b. honest or dishonest c. fair or not fair d. all of the above
d. all of the above
net income will result during a time period when: a. assets exceed liabilities b. assets exceed revenues c. expenses exceed revenues d. revenues exceed expenses
d. revenues exceed expenses
The company paid a dividend of $1,000 in cash to stockholders
decrease assets and decrease dividends
The company paid $850 for this months rent
decrease assets and decrease expenses
Expenses & Dividends
decrease stockholder's equity *you will always subtract these in the equation
Dividends
distribution of assets to investors (stockholders) or company *owner of the business is a stockholder
Accounting consists of 3 purposes
identities, recording, and communication
Stockholders purchased shares of stock for $25,000 cash
increase assets and increase common stock
The company purchased $7,000 of office equipment on credit
increase assets and increase liabilities
The company received $8,000 cash in exchange for services preformed
increase assets and increase revenue
If answer is positive
net income
If answer is negative
net loss
Sarbanes-Oxley Act (SOX)
reduced unethical corporate behavior and decreases the like hood of future corporate scandals
Income Statement
reports ONLY revenues and expenses to calculate net income or loss for the time period
Balance Sheet
reports assets, liabilities, and stock holder's equity for a specific date *purpose is to prove A = L + S/E
Statement of Cash flows
reports the in-flaws and out-flaws of cash over a time period
to calculate net income/loss take...
revenues-expenses
net
something being subtracted
Retained Earnings Statement
this reports changes in retained earnings account for the time period. (shows increases, decrease, and end point)
