Accounting - Ch 1
Sheldon Company had beginning retained earnings of $1,000, net income of $5,000, and dividends of $250. The ending balance in the retained earnings account is
$5,750 - $1,000 beginning balance + $5,000 net income - $250 dividends = $5,750
FASB (Financial Accounting Standards Board)
- sets GAAP the private board that establishes the generally accepted accounting principles used in the practice of financial accounting
order in which a company prepares financial statements.
1) Income statement 2) statement of retained earnings 3) balance sheet
Business Entity Assumption
A business is accounted for separately from other business entities, including its owner.
Expense recognition principle (matching principle)
A company records its expenses incurred to generate the revenue reported.
Full Disclosure Principle
A company reports details behind financial statements that would impact users' decisions.
conceptual framework
A written framework to guide the development, preparation, and interpretation of financial accounting information.
Materiality Constraint
Ability of information to influence decisions of a user need to be disclosed
Measurement/ Cost Principle
Accounting principle that prescribes financial statement information to be based on actual costs incurred in business transactions.
When recording transactions into the accounting equation, which of the following statements are correct? Multiple select question.
After recording the transaction, assets will always equal liabilities plus equity. The accounting equation must always remain in balance.
International Accounting Standards Board (IASB)
An international accounting standard-setting body responsible for the convergence of accounting standards worldwide.
expanded accounting equation
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Which list of accounts below, identifies only accounts that would appear on a balance sheet.
Common Stock, Equipment, Accounts Payable
Which of the following shows a correct date line for a Balance Sheet:
December 31, 20xx
Given the list of accounts below, identify which of them would appear on a balance sheet.
Equipment Supplies Retained earnings, 12/31 Cash Accounts Payable
Which of the following statements represent(s) how expenses affect equity?
If expenses increase, then total equity decreases. Higher expenses result in lower total equity.
Jack Pickle decided to start a small business as a corporation. His initial investment was $4,000 cash in exchange for common stock. Demonstrate how to record this transaction in the accounting equation.
Increase Cash by $4,000; Increase Common Stock by $4,000.
cost-benefit constraint
Information disclosed must have benefits to the user greater than the cost of providing it.
External Users
Persons using accounting information who are not directly involved in running the organization.
Given the accounts below, choose all of the ones that affect equity.
Revenues Expenses Common Stock Dividends
Which of the following statements are true regarding the effect of revenues on the equity of a business?
Revenues that increase equity have many forms, such as consulting services and commissions from services. Revenues cause equity to increase.
Johna's Plant Nursery Company pays the salaries of its two employees. How will this transaction affect the accounting equation?
Salaries expense will be increased. Equity will be decreased.
Income Statement
The __ is the first financial statement to be prepared.
Which of the following statements explain(s) how the accounting equation applies to businesses? (Check all that apply.)
The equation applies to all transactions and events. The relation of assets, liabilities and equity is reflected in the equation. The equation states that Assets = Liabilities + Equity. The equation reflects that the total of what a business owns at any point in time will equal the total of what it owes creditors and owners.
Which of the following statements explain(s) how the accounting equation applies to businesses? Check all that apply. Multiple select question.
The equation applies to all transactions. The equation reflects that the total of what a business owns at any point in time will equal the total of what it owes creditors and owners. The relation of assets, liabilities and equity is reflected in the equation. The equation states that Assets = Liabilities + Equity.
GAAP (Generally Accepted Accounting Principles)
The standards and rules that accountants follow while recording and reporting financial activities.
The statement of retained earnings explains changes in equity from net income (or loss) and from any Blank______ over a period of time.
The statement of retained earnings explains changes in equity from net income (or loss) and from any Blank______ over a period of time.
The correct definition of a balance sheet includes which of the following statements? Multiple select question.
The statement reports the financial position of a company at a point in time. The statement reports the equality of the accounting equation at any point in time. The statement reports assets, liabilities and equity at a point in time.
Which of the following statements best represents the accounting equation? Multiple choice question.
The total of everything owned by a business must always equal the total of what the business owes to creditors and owners.
Monetary Unit Assumption
Transactions and events are expressed in monetary, or money, units.
SEC
U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.
Identify which of the following statements is correct as to why accounting is important.
We live in an information age whereby accounting information impacts everyone.
Balance Sheet
a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.
conservatism and industry practices
are sometimes included as a constraint, also
Sally Smith decided to start a sea shell business organized as a corporation. Her initial investment in the business consisted of $10,000 in cash in exchange for common stock. Record this transaction in the accounting equation of the new business by:
increasing Cash; increasing Common Stock
Jackson's Catering Company provided cookies worth $3,000 to the local college. The college paid immediately. Record this transaction in Jackson's accounting equation by:
increasing Cash; increasing Revenues
Return on Assets (ROA)
net income/average total assets
Fraud Triangle
opportunity, pressure, rationalization
Revenue Recognition Principle
recognize revenue when goods or services are provided to customers and at an amount expected to be received from the customer
Generally accepted accounting principles (GAAP) wants information to have:
relevance faithful representation
Equity is composed of contributed capital and
retained earnings
retained earnings
the amount of net income retained in the corporation
Going Concern Assumption
the business is presumed to continue operating instead of being closed or sold
Time Period Assumption
the life of a company can be divided into time periods, such as months and years
