Accounting 201
an account is...
An account summarizes all transactions related to a particular item over a period of time. For instance, asset accounts include Cash, Supplies, and Equipment.
we refer to owners claims to resources as _______ ?
stockholders' equity
timeliness is to ensure?
that information is provided early enough for it to be useful in the decision process
comparability is?
the ability to see similarities and differences between companies. Comparability is CONSISTENCY
what are the objectives of financial accounting? or in other words: financial accounting should provide info that.... ?
*this is outlined as the FASB's conceptual framework 1. is useful to investors and creditors in making decisions 2. helps predict cash flows 3. tells about economic resources, claims to resources, and changes in resources and claims
what does public accounting mainly focus on?
-auditing -tax preparation/planning -business consulting
what are two important components of annual reports?
1) management's discussion and analysis 2) note disclosures to the financial statements
what are the qualitative characteristics??
1. comparability 2. verifiability 3. timeliness 4. understandability
steps to measuring external transactions
1. identify accounts affected 2. how does it impact the accounting equation 3. debit or credit? 4. record in journal 5. post to general ledger 6. trial balance
what are the underlying assumptions?
1. the economic entity assumption 2. the monetary unit assumption 3. the periodicity assumption 4. the going concern assumption
what is a debit to an expense do to retained earnings?
A debit to an expense is essentially a debit to Retained Earnings, decreasing the account.
what is a journal?
A journal provides a chronological record of all transactions affecting a firm. Prior to the widespread use of computers, companies recorded their transactions in paper-based journals. Thus, the term journal entry was used to describe the format for recording a transaction.
what is the trial balance?
A trial balance is a list of all accounts and their balances at a particular date, showing that total debits equal total credits.
how do expenses affect retained earnings?
Expenses reduce net income and therefore reduce the amount of retained earnings
what does FASB stand for and what does it do?
Financial Accounting Standard Board -they establish the standards for accounting IN the United States (not all countries follow the same standards)
what must all journal entries do
For each journal entry, total debits must always equal total credits
financial statements are a key component to which report?
the annual report
what is the IASB and what do they do?
International Accounting Standards Board -their purpose is to eliminate differences in accounting standards across the world
who is responsible for keeping the auditors in check?
PCAOB Public Company Accounting Oversight Board
what is PCAOB and what do they do?
Public Company Accounting Oversight Board -their role is to ensure that auditors follow a strict set of guidelines when conducting their audits of public companies' financial statements. They basically audit the auditors
what is the SEC and what do they do?
Securities and Exchange Commission -created by the gov. in 1934, Their purpose was to require companies that publicly trade stock to prepare periodic financial statements for distributions to investors and creditors
what does the GAAP stand for and what does it do?
The GAAP stands for the General Accepted Accounting Principles. They help investors to accurately COMPARE financial information among companies when they are making decisions about where to invest or lend their resources
what is the general ledger?
The general ledger provides in a single location the list of transactions affecting each account and the account's balance.
common stock
an external source of stockholders' equity, it represents amounts invested by stockholders retained earnings
how does revenue affect stockholders' equity?
We add revenues to calculate retained earnings. That's because revenues increase net income, and net income increases stockholders' claims to resources. Therefore, an increase in revenues has the effect of increasing stockholders' equity in the basic accounting equation.
costs that are used in the future
When a company has a cost that benefits future periods, then we typically record an asset rather than an expense
what is the statement of cash flows?
a financial statement that measures activities involving cash receipts and cash payments over an interval of time. We can classify these transactions into three corresponding categories: operating cash flows, investing cash flows, financing cash flows
income statement
a financial statement that reports the company's revenues and expenses over an interval of time
statement of stockerholders' equity
a financial statement that summarizes the changes in stockholders' equity over an interval of time
the financial position of a company is summarized by the _________
accounting equation
retained earnings
an internal source of stockholders' equity, represents the cumulative amount of net income earned over the life of the company that has been kept retained in the business NOT dividends because they are distributed to stockholders'
resources of the company are referred to as ______ ?
assets
why do auditors play such an important role in accounting?
because they can add credibility to a company's financial statements which largely impacts decisions made by investors' and creditors'
statement of SE has what?
beginning balance (w/ date) issuance of common stock add: net income for the period less: dividends ending balance (w/ date)
order of the statement of cash flows
cash flows from operating activities cash inflows: + from customers cash outflows: (-) for rent (in parenthesis) for salaries Net cash flows from operating: subtract + from - numbers cash flows from investing purchase equipment (-) Cash flows from financing issue common stock + borrow from bank + dividends (-) net cash flows from financing Net increase in cash cash at beginning of the period (0 if it is a new company) cash at the end
what are the two main components of stockholders' equity?
common stock and retained earnings
information that provides feedback on past activities is?
confirmatory value
liabilities and stockholders' equity increase
credit
common stock increases
credits
retained earnings increases
credits
revenues increase
credits
assets increase _______ , which has the opposite effect on liabilities and SE
debits
dividends increase
debits
expenses increase
debits
internal trasactions
events that affect the financial position of the company but do not include an exchange with a separate company or individual. Such as: using supplies already purchased and earning revenues after having received cash in advance from a customer
what single piece of company information best explains a companies' stock price performance?
financial accounting NET INCOME
In addition to the four basic assumptions that underlie GAAP are four principles:
historical cost, full disclosure, realization, and matching
what is the monetary unit assumption?
in order to measure, we need a unit or scale of measurement--in this case the US dollar, this can change if we are talking about different currency
what are investing activities?
include transactions involving the purchase and sale of resources that are expected to benefit the company for several years, such as the purchase of equipment. with the necessary resources in place, the company is ready to begin operations
links among fiancial statements
income has net income as add:income in SE ending balance of total SE goes in balance sheet under liabilities Cash from balance sheet goes to statement of cash flows under cash at the end of the year (very bottom of this statement)
to sum it up, SOX was created to do what?
increased pressure on lawmakers to pass measures to restore credibility and investor confidence in the financial reporting process basically created to make penalties for unethical accounting
the accounting equation illustrates what?
it illustrates a fundamental model of business valuation
verifiability does what?
it implies a consensus among different measures. EX:different graders arrive at the same exam score for a multiple choice test but are likely to score differently for an essay question exam. in this case multiple choice is highly varifiable
what does the balance sheet show?
it is a financial statement that represents the financial position of the company on a particular date or even an interval of time
what does it mean to have neutrality?
it means to be unbiased- this is related to the establishment of accounting standards
what does the income statement show?
it shows whether the company ws able to generate enough revenue to cover the expenses of running the business. If revenues exceed expenses then the company reports net income
constant constraint suggests?
it suggests that financial accounting information is provided only when the benefits of doing so exceed the costs
debit means
left
amounts owed to the creditors are _______ ?
liabilities
the management discussion and analysis typically includes...?
management's views on significant events, trends, and uncertainties pertaining to the company's operations and resources
the nature or amount of an item has the ability to affect decisions.. this is?
materiality
what does completeness mean?
means to include all information necessary for faithful representation of business activity
what is the Sarbanes-Oxley Act (SOX)
named for two congressmen who sponsored the bill 1) this provides for the regulation of auditors and the types of services they furnish to clients 2) increases accountability of corporate executives 3) addresses conflicts of interest for securities analysts 4) provides for stiff criminal penalties for violators
The process of transferring debit and credit information from the general journal to the general ledger is known as:
posting
what is posting?
posting is the process of transferring the debit and credit information from the journal to individual accounts in the general ledger.
what is private accounting?
private accounting simply means providing accounting services to the company that employs you.
what is the periodicity assumption?
related to timeliness-- external users need periodic information to make decisions ex: making quarterly and annually reports
what are two fundamental decision-specific qualitative characteristics that make accounting useful?
relevance- to have confirmatory or predictive value faithful representation- to be complete, neutral, and free from error
income statement shows
revenue expenses net income
what is the revenue recognition principle?
revenue recognition principle, states that companies record revenue at the time they provide goods and services to customers.
what are revenues?
revenues are the amounts recorded when the company sells products or provides services to customers
credit means
right
what is the economic entity assumption?
states that we can identify all economic events with a particular economic entity. ONLY the company's assets should be reported, not the information about financial activities of the owners
how does a balance sheet affect assets and liabilities?
the balance sheet shows the company's assets that will be used to pay liabilities (the amounts due to creditors) as they become due
how is the change in retained earnings shown on the statement of SE
the change in retained earnings equals net income less dividends for the period
confirmatory/predictive value is?
the company's ability to provide information that shows their efficiency and effectiveness of using the company's resources, over several years this information will provide predictive value
freedom from error means that?
the reported amounts reflect the best available information
what are operating activities?
these include transactions that relate to the primary operations of the company, such as providing products and services to customers and the associated costs of doing so, like rent, salaries, utilities, taxes, and advertising
what are financing activities?
these include transactions the company has with investors and creditors, such as issuing stock and borrowing money from a local bank
where are the dividends shown on the statement of stockholders' equity?
they are shown on the statement under retained earnings as net income
in addition to providing information to investors and creditors that they need about a company, financial statements often report....?
they often report items that the company has not yet encountered
what is it called when management does not apply GAAP when communicating information to investors and creditors through financial statements?
this is referred to as "cooking the books"
what is the going concern assumption?
this states that in the absence of information to the contrary, a business entity will continue to operate indefinitely --If we knew an enterprise was going to cease operations in the near future, we would measure assets and liabilities not at their original costs but at their current liquidation values.
the purpose of auditors?
to ensure that companies apply GAAP, the SEC requires independent outside verification of the financial statements of publicly traded companies. this independent examination is done by AUDITORS -they are not employees of the company , hired by an independent party
what are expenses?
to operate a business, these are the costs you will encounter. These are the costs of providing products and services; such as rent, salaries, supplies, and utilities.
what are external transactions?
transactions that are separate from the business. Such as: selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, borrowing money from a bank
how to actually balance the balance sheet?
you add all of the assets and total that then you add the total liabilities to the total SE (common stock+retained earnings) and that should equal the amount of assets
