Accounting Exam 1 Material
Key point of Accrued Expenses & Accrued Revenues: "Adjusting entries are needed when cash flows or obligations occur ____ the revenue or expense related activity (_______). Or, when cash flows occur ____ the revenue or expense related activity (________)."
"Adjusting entries are needed when cash flows or obligations occur before the revenue or expense related activity (Prepayment). Or, when cash flows occur after the revenue or expense related activity (accrual)."
"On November 1, the e-learning company received $30,000 cash from Sheena Bright, and the business issued common stock to her." - Determine which accounts were impacted by the transaction and determine if this resulted in a credit or a debit
$30,000 cash (asset) so it increases = Debit Issued common stock, common stock increase = Credit
Describe the two primary functions of financial accounting
Accounting is a system of maintaining records and
Define Temporary Accounts
Accounts that have a starting balance of zero, regardless of what the ending balance was the year before - Examples: Revenues, expenses, and dividends (this is because each of these accounts are transferred to retained earnings at the end of the year, leaving a balance of zero in them)
Define Account
An account is a detailed record of all increases and decreases that have occurred in an account during a specified period
Define Book Value
Book Value = original cost - accumulated depreciation It's the current value of the asset
In the balance sheet equipment is reported at its _____ ?
Book value
A company has a net income of 1200$ and decides to make a cash payment to stockholders in the amount of $200. This is called a ______
Dividend Cash payments to stockholders are dividends Dividends are NOT an expense
end of chapter 1, start of chapter 2
END OF CHAPTER 1 (FC 30)
True or false: A balance sheet is a list of all accounts and their balances showing that debits equals credits.
False. A trial balance is a list of all accounts and their balances showing debits equals credits. A balance sheet presents assets, liabilities, and stockholders' equity.
Define Permanent Accounts
If an account is a "Permanent Account," then its' balances are carried over from one period to the next (as opposed to starting at zero). - All accounts that appear in the balance sheet are permanent accounts - These include: Assets, liabilities, stockholder's equity, and all the things that make up those accounts (such as cash, deferred revenue, retained earnings, etc.)
Explain what purchasing something "on account" means
It means that you purchased something but don't pay cash right away for it but promise to pay in the future. Thus, you receive supplies (assets) in return for a liability. Similar to borrowing money. It's like a tab
If cash and accounts payable has a balance of $1000 at the end of the year, what's the balance at the beginning of the next year?
It's $1,000 since those are permanent accounts.
Define: Intangible Assets
Long-term assets with no physical substance but have long-term value to a company. Examples: Patents, copyrights, franchises, and trademarks.
The type of information included in an account includes . . . (select all that apply) a.) columns for debits and credits. b.) the account title. c.) a daily total. d.) a posting reference.
a & b (columns & account title)
Geo Corporation issues stock to investors for $100,000. Recording this transaction will include which of the following? (select all that apply) a.) Credit common stock b.) Debit to cash c.) Debit to retained earnings d.) Credit revenues
a & b (credit common stock & debit to cash)
What is a fiscal year
a 12 month year that may or not coincide with the calendar year
_____ are used to transfer the balance from temporary accounts to retained earnings
closing entries
Define Posting
the procedure of transferring journal entry amounts to the ledger accounts
PROCEED
FLIP CARDS BACK
End Chapter 2 Smartbook
Well done lad
FLIP CARDS
PROCEED
If a company receives cash (an asset), the balance of the cash account increases so we refer to the increase as a "_____ to cash."
"debit to cash" A decrease would be a "credit to cash"
There are 6 steps to measuring external transactions, describe the first step
1.) Use source documents to identify accounts affected by an external transaction This means you're gathering information about the transaction. Source documents are things like sales invoices, bills from suppliers, and signed contracts. These provide info on the external transaction. - Source documents identify the date & nature of the transaction, participating parties, and monetary terms
2 rules for adjusting entries, 1.) Adjusting entrees never involve the _____ account 2.) Adjusting entries either: a.) _____ a revenue account (_____ revenue) or, b.) _____ an expense account (______ expense)
1.) cash 2.) a.) Increase a revenue account (credit revenue) or, b.) Increase an expense account (debit expense)
T-Account
A basic form of an account. The left side of the T-Account is called the debit and the right side is called the a credit All accounts are summarized on the INCREASE side of the T-Account, called the normal balance. Ex: Assets increase with a debit, so the normal balance is a debit. Liabilities and equity increase with a credit, so the normal balance is a credit
Classified Balance Sheet
A classified balance sheet groups a company's asset and liability accounts into current and long term categories. 5 things to note: 1.) Total assets are divided into 2 categories, current and long-term assets 2.) Total liabilities are divided into 2 categories, current and long-term liabilities 3.) Total stockholder's equity includes common stock & retained earnings from the statement of stockholder's equity 4.) Total assets MUST equal total liabilities+stockholder's equity 5.) The balance sheet reports assets, liabilities, and stockholder's equity at a single point in time
Limited liability
A form of business ownership in which the owners are liable only up to the amount of their individual investments. Ex: If you invest $50 and the company fails the you lose only the 50$. They cannot come after you for the remaining money the company owes
General Ledger
A ledger is a record holding all the accounts of a business, the changes in those accounts, and their balances
For a Statement of Cash Flows list the 3 categories and describe them
A statement of cash flows is a financial statement that measures activities involving cash receipts and cash payments over a period of time 1.) Operating cash flows - Includes cash receipts and cash payments for transactions involving revenue and operating expenses during the period. 2.) Investing cash flows - Includes cash transactions for the purchase and sale of investments and long term assets. 3.) Financing cash flows - Includes cash transactions with lenders (such as borrowing money and repaying debt), with stockholders (such as issuing stock and paying dividends)
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. - Trial Balances also help in preparing adjusting entries (for internal transactions) - In every entree there should be an equal value for debit and credit (ex: Loan, $500 asset debit, $500 liability credit). Every transaction should be equal like this, so a trial balance is set up and the overall balances for debits and credits of all accounts are compared - if they're equal then everything was probably done correctly (unless you messed up the same value on both sides) The Trial Balance is ONLY for internal purposes
What is a Worksheet and what are its' 4 sections?
A worksheet is an internal document that helps summarize data for the preparation of the financial statements. It has 4 sections, 1.) Account names 2.) Unadjusted trial balance 3.) Adjustments 4.) Adjusted trial balance
What accounting system is most often used, accrual-basis or cash-basis?
All major companies use accrual-basis accounting
Accounts recievable
Amounts to be received in the future due to the sale of goods or services Ex: If someone buys a $10 apple from you then they owe you $10 and so you have $10 in accounts receivable
Define Contra-Account
An account with a balance that is opposite, or "contra," to that of its related account. Ex: An accumulated depreciation (asset) account has a credit for increases, which is opposite of normal assets despite the fact that accumulated depreciation is an asset.
Income Statement
An income statement displays expenses and revenues over a period of time. There are 4 parts to it, total revenues, total expenses, net income, and the interval of time.
In a financial statement, what do the following mean? An underlined value A value with a double underline
An underlined value in an income statement is a subtotal (ex: total expenses or total revenue). A double underline indicates a final total (ex: net income)
Accounting equation
Assets = Liabilities + Stockholders Equity or, Resources = claims to resources (same equation) For eagle soccer: 35,000 = 10,000 + 25,000
Who are auditors?
Auditors are independently hired accountants who assess the financial records of a company to ensure the GAAP has been properly applied by managers. They are NOT connected to or hired by the company that they audit.
Define Operating cycle
Average time it takes to provide a service to a customer and then collect that customer's cash. If the company sells products, an operating cycle would then include the time it takes to purchase or manufacture those products to the time the company collects cash from selling those products to customers (go from cash to cash)
Eagle borrowed $10,000 from the bank. They experience 12% annual interest rates, which is due in one year. But repayment of the $10,000 borrowed is not due for another 3 years. By the end of the first month, the loan has . . .? (find interest)
By the end of the first month the loan has accrued interest of $100 (Amount of note payable) x (Annual interest rate / 100) x (Fraction of the year) (10,000) (12/100) (1/12) = $100
a.) With cash-basis accounting Revenues and expenses are recorded ... ? b.) With accrual-basis accounting revenues and expenses are recorded ... ?
Cash-basis accounting - Revenues & expenses only recorded when cash is exchanged b.) Revenues can be recorded before, during, or after the company receives cash from customers. Revenue is recorded whenever goods/services are provided. Expenses can also be recorded before, during, or after the company pays cash. Expenses are recorded in the period that costs are presumed to have been used in operations. The difference between the 2 is simply when revenue and expenses are recorded
What is the most liquid asset?
Cash. So, it's listed first in current assets
Define: Closing Entries
Closing Entries transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of retained earnings account. In doing so, they reduce the balance of temporary accounts to zero (so closing entries serves these 2 functions) - For revenues: All revenue accounts have credit balances. The revenues are debited and the retained earnings are credited - For expenses: All expense accounts have debit balances. To transfer these balances to the retained earnings account, we credit each of these accounts for its balances and debit retained earnings for the total. - For dividends: The dividends account has a debit balance. So, we credit the dividend accounts and debit the retained earnings account for the same amount.
Who has the right to set accounting standards and who does set accounting standards?
Congress gave the SEC the power and responsibility to set accounting and reporting standards for publicly traded companies; however, the SEC has delegated that power to the private sector - currently to the FASB. Note: The SEC delegated the responsibility, not the power. The FASB can make any rules it wants but it comes down to the SEC to implement it. Thus, the SEC must agree with whatever rule the FASB decides on
Adjusted Trial Balance
Definition: An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries - Financial statements are prepared from the adjusted trial balance Why: In order to complete the measurement process, we have to update the balance of the assets, liabilities, revenues, and expenses for changes created by the adjusting entries. - An adjusted trial balance ensures that debits equal credits after adjusting entries - An adjusted trial balance also ensures the proper balances are recorded for all accounts Process: The changes from adjusted entries are taken and added to the balance of whatever account was changed to create an up-to-date balance. This is done within the general ledger (a list of all accounts). - Thus, all adjusted entries are posted to the general ledger
The normal balance goes on the side with the increase. This is a cash account, which is an asset. Assets increase on the left side (debit), so the balance goes on the left side
Explain why the balance is listed where it is
Financial statements
Financial statements communicate the business' activities to those outside the company. They're periodic reports published by the company for the purpose of providing information to external users. They tell people outside the companies how well it's being ran and based on that they can decide if they want to buy stock in the company 4 types, 1) Income statement 2) Statement of stockholders equity 3) Balance Sheet 4) Statement of cash flows
There are two parts of a company's annual report, the management discussion and analysis (MD&A) section and the note disclosures to the financial statements - describe their functions
MD&A - usually includes managements views on significant events, trends, and uncertainties pertaining to the company's operations and resources. Note disclosures offer additional information to explain what is presented in the financial statements or to provide information that was not included in the financial statements. Ex: Companies report total revenue in an income statement but report revenues in particular geographical regions in a note disclosure.
The main function of accounting is to measure and communicate - how?
Measuring is done by calculating and keeping record of the assets, liabilities, stockholders equity, revenues, expenses, and dividends. Communicating is done through financial statements.
What is the best indicator of stock market changes?
Net income A growing net income generally results in an increase in stock price, whereas a decrease in net income results in a decrease in stock price
If an individual pays your company in advance for 12 training sessions (for $600) is this revenue? Your company has not provided the goods (training)
No. According to the Revenue Recognition Principle revenue is recorded when the service/good is provided. Since the service has not been provided it cannot be recorded as revenue Thus, it is a deferred revenue (liability)
In transactions where cash is received at the same time that revenue is recorded, or, where cash is paid at the same time expenses are recognized, adjusting entries are . . . ?
Not needed
Retained Earnings
Retained Earnings = All net income - dividends So, if a company has $500 revenue and $300 expenses it has a net income of $200, then if it gives out $150 in dividends the retained earnings are 50$ Dividends are NOT expenses !!
What're the differences between the following: sole proprietorship, partnership, corporation
Sole proprietorship - owned/financed by one person. No limited liability. Partnership - owned by 2 people, no limited liability. Corporation - owned by multiple people who possess stock within a company. An advantage is the fact that they have limited liability. Double taxation - money is taxed that the company makes and then stockholders pay income tax on the money they get from the company
3. Cost restraint
Sometimes getting information takes more time and effort than the information is worth. Ex: if a friend asks you how your day was they want a general idea, not a full breakdown of what you did that day Cost restraint means that financial information is provided only when the benefits of doing so exceed the cost. Ex: Knowing the profit margin in each company for Nike is valuable information for investors; however, providing this information could give a market edge to Under Armour, potentially outweighing the benefits
FASB Framework
The FASB created a conceptual framework from which all later accounting rules for the GAAP are based. Think of it as the constitution
"On November 2, Smart Touch Learning paid $20,000 cash for land." - Determine which accounts were impacted by the transaction and determine if this resulted in a credit or a debit
The accounting equation and overall assets are unaffected; however, the individual land and cash accounts were impacted by this transaction Cash credit. $20,000 cash was lost = credit Land debit. Land was gained = debit
Debt Ratio
The debt ratio shows the proportion of assets financed with debt. It's used to show a company's ability to pay its' debts and to determine if the company has too much debt to be considered financially "healthy." Debt Ratio = Total liabilities / total assets
Smartbook questions
The ones I missed or struggled with
Define: Post-Closing Trial Balance
The post closing trial balance is a list of all accounts and their balances at a particular date after the adjusting entries are recorded in the ledger, and after the closing entries are performed (Transferring temporary accounts to retained earnings and reducing them to 0).
Define Residual Value in regards to depreciable assets
The residual value is the value of a depreciable asset after it has reached the end of its' useful life
Eagle Soccer buys one year of rent in advance, what is this? (liability, stockholders equity, asset, etc.)
This is an asset. This asset is called prepaid rent. Other examples of prepaid assets include prepaid insurance, prepaid advertising, and other prepaid services.
Deferred Revenue (Unearned Revenue)
This is when a company receives cash in advance from customers prior to performing any service. This results in a cash debit and a liability credit. When the service is an adjusting entry is needed to decrease the liability to the remaining amount owed and to recognize revenue
The important thing to remember for each journal entry is that . . . . must equal . . . ?
Total debits must equal total credits
Total liabilities = ___________
Total liabilities = total debt
What 2 types of transactions do you never prepare adjusting entries for? Why?
Transactions with owner's, they're 1.) Sale of common stock 2.) The issue of dividends Adjusting entries are not required for these transactions because they do not involve revenues or expenses
Define: a.) Current assets b.) Long-term assets
a.) Assets that will provide a benefit within the next year - Current assets are typically listed in order of liquidity - Examples include: cash, accounts receivable, prepaid rent, & supplies b.) Assets that will provide benefit for more than one year. These are long-term investments - Examples include: Property, plant, equipment, land, buildings, and machinery. - Another example is Intangible Assets
Define: a.) Curent Liabilities b.) Long-Term Liabilities
a.) Liabilities that are due within 1 year of the balance sheet date - Examples include: Accounts payable, deferred revenue, salaries payable, utilities payable, & interest payable. b.) Liabilities that're due in more than 1 year - Example: Taking out a loan that's due in 3 years. However, the amount of the loan due in the first year is included as current liabilities, while the amount for the remaining 2 years is recorded as long-term liabilities in the balance sheet
Accrued Liabilities
expenses that have been incurred but have not been paid at the end of the accounting period Ex: Taxes payable, rent payable, and salaries payable
A transaction is initially recorded in the journal, and then subsequently posted to the general _____
ledger
A debit is on the ______ side of the account. a.) Left b.) Right c.) A debit can be on either side of the account depending on the effect
left
Financial reporting should have 4 characteristics, what are these 4? (name only)
1. Fundamental qualitative characteristics 2. Enhancing qualitative characteristics 3. Cost restraint 4. Underlying assumptions
1.) Prepayments (prepaid expenses) / Deferrals
1.) Prepayments (prepaid expenses) / Deferrals - This is when cash is payed before (prepaid) the revenues and expenses are recorded. Ex: Prepaid expenses, such as when cash is paid for rent in advance, we record the prepaid rent as an asset. As the rent expires an adjusting entry is needed to decrease the amount recorded for prepaid rent. Ex: Another example is when cash is received from customers in advance of performing a service. Here, deferred revenue (liability) is recorded. When the services are recorded an adjusting entry is needed to decrease deferred revenue and to recognize service revenue Another example of a prepaid expense is when a company pays cash to acquire an asset that they don't use until a later period. Cash paid now, expense recognized later. Ex: purchasing building, supplies, equipment, or rent in advance. - In the period these assets are used, an adjusting entree is needed to decrease the assets value to whatever is remaining (ex: the remaining time left for the rent or remaining value left of supplies) and to recognize an expense for the cost of the asset used ---------------------------------------------------------- Above is deferred expenses; however, there are also Deferred Revenue (Unearned Revenue) - This is when a company receives cash in advance from customers prior to performing any service. This results in a cash debit and a liability credit. When the service is performed an adjusting entry is needed to decrease the liability to the remaining amount owed and to recognize revenue
The timing differences that create the need for Adjusting Entries are grouped into 2 categories, what are they? (list only)
1.) Prepayments / Deferrals 2.) Accruals
Transactions always involve at least ______ _________
2 accounts
Expense Recognition Principle (use example FedEx delivery)
Any costs used to help generate revenues are recorded as expenses in the same period as those revenues. Matching expenses with the revenue they helped generate provides a more useful measure of the companies performance - The recording of expenses is NOT related to the payment of cash. An expense can be recorded before, during, or after cash is paid. Ex: When FedEx delivers a package and recognizes revenue in 2021, the company would have incurred costs (expenses) in order to generate that revenue. Costs like gas, salaries, and supplies. These costs are included in the 2021 income statement along with the revenue they helped generate.
(Time Period Concept)
Assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.
Describe: Adjusting Entries
Because to the timing difference between expense recognition and cash outflow in accrual-basis accounting, account balance of assets, liabilities, revenues, and expenses don't get updated during the period. Before financial statements can be prepared, these account balances must be up to date. Thus, adjusting entries are used to record changes in assets and liabilities (and their related revenues and expenses) that have occurred during the period. - Adjusting entries also update asset & liability accounts - The two basic categories of adjusting entries are deferrals and accruals - Adjusting entries never involve the cash account - Are never used for the sale of common stock, or the issue of dividends (because there are no expenses or revenues) - Are never used when cash is received at the same time that revenue is recorded, or, when cash is paid at the same time that expenses are recognized
Debit vs. Credit
Debit means left and credit means right. On the left side of the equation (assets) debit means the account increases, while credit means it decreases However, on the right side of the equation (liabilities and stockholders equity) they're reversed; thus, debit means the account decreases, while credit means it increases.
Statement of Stockholder's Equity & Stockholders Equity Equation
Definition: Summarizes the changes in the balance in each stockholders' equity account over a period of time Stockholders Equity = Common Stock + Retained Earnings Where common stock represents the amount invested by stockholders when they purchase shares. Common stock is an external source of stockholders equity. Retained Earnings is an internal source of stockholders equity. It is all of the net income minus all dividends over the life of the company, (retained earnings = all net income - all dividends). Ex: When a company generates resources through its' operations the resources can either be paid out in dividends to stockholders or retained by the company for future use. The retained earnings is the income minus the money paid out in dividends - its what remains in the company after everyone takes their cut
Define Depreciable Assets
Depreciable Assets are when an asset loses value. For example, Eagle Soccer bought equipment for 24,000 cash with the expectation of using it for the next 5 years. 5 years = 60 months, 24000x(1/60)=400. Thus every month the equipment depreciates at a rate of $400. An adjusting entry is needed for this monthly expense. Depreciable assets are a form of prepaid/deferred expenses; however, they're recorded in Depreciation Expense account, under assets, but it's a Contra-Account (debit=dec., credit=inc.) - The depreciation expense account is listed immediately after the asset that's depreciating
Double-Entry System
Double-entry system means that the dual affects of each transaction is recorded. Ex: You spend $500 on equipment, that's a decrease (credit) in cash (asset) and an increase (debit) in equipment (asset). Although the overall value of assets is unchanged, the change in cash and change in equipment would be recorded as: +$500 - $500 At least two accounts are always affected. The changes to these two accounts must be recorded, even if it doesn't change the accounting equation
True or false: A ledger provides a chronological record of all transactions affecting the firm.
False. A journal provides a chronological record of the transactions of a firm
Define the following, Financing Activities Investing Activities Operating Activities
Financing Activities - Transactions the company has with investors and creditors Investing Activities - Transactions that involve the purchase and sale of resources that are expected to benefit the company for several years Operating Activities - Transactions that relate to the primary operations of the company
2.) Accruals
For accrued expenses, the expense is incurred (by performing a service/spending cash to operate) and the money is paid at a later time. Thus, the revenue (from the service) and expenses (Expense Recognition Principle) are recorded but cash is not paid until later. Consequently, an adjusting entree is needed to record the liability to be paid and recognize the cost as an expense Example of accrued salaries: You have an employee making $100 a day working for 1 month. As he works (performs a service) revenue is generated, thus the expenses associated with the revenue (his salary) is also present; both are recorded. The employee does not receive his paycheck (liability, salaries payable) until the end of the month, making this an accrued salary. Service is performed, revenue and expenses are recorded, but cash is paid later. (for adjusting entry - credit to a liability, debit to an expense) Example of accrued utilities cost: Eagle Soccer receives a utility bill for $900 for the month of December; however, Eagle soccer does not plan to pay this bill until January 6. The costs were used in December but the bill won't be paid until January. An adjusting entree is needed to record the Utilities payable (liabilities) and to recognize the expense (utilities expense) for December. In Deferrals the money is paid and the service is provided later. In Accruals the service is provided and the money is paid later. ---------------------------------------------------------- Above is accrued expenses; however, there are also Accrued Revenues. A company provides a product or performs a service but the customer doesn't pay until later; this creates an accounts receivable (asset). Because the company provides services an adjusting entry must be made to record an asset (accounts receivable) and to recognize revenue (since the service has been performed) - Accrued Revenues include things like an accounts receivable, being owed interest, providing things "on account," etc. Example, Interest Receivable - A bank loans Eagle Soccer $10,000 at an annual interest rate of 12% (1% per month). The interest for the month of December is $100, so, at the end of the month the bank needs an adjusting entry to record an asset for the amount expected to be received (interest receivable) from Eagle and to recognize revenue (interest revenue).
4. Underlying assumptions
Four basic assumptions have to be made to support the existence of the GAAP, 1. Economic Entity Assumption - This states that we can identify all economic events within a company. Ex: All business transactions involving Nike are reported in Nike's financial accounting 2. Monetary Unit Assumption - Instead of listing assets as "2 trucks, 1 building," they're listed monetarily - as a number in dollars 3. Periodicity Assumption - This relates to timeliness. Time is broken up into periods for financial reporting. Ex: Some statements are required quarterly and annually 4. Going Concern Assumption - States that it will be assumed that a company will operate indefinitely, unless there is information proving otherwise.
If Wallmart hires someone, how does this affect their financial position?
Hiring someone doesn't affect the company's assets, liabilities, or stockholder's equity. It has no impact on the company until he actually starts working (the act of hiring does nothing)
Period Costs
It can be difficult to relate some generated revenue to the expense that helped generate it. In these cases the expenses are recorded in the period that they occur in. Ex: if you paid $100,000 for advertising it's very difficult to know how much revenue that resulted in; thus, the $100,000 expense is recorded in the period that it was spent (when the advertising was paid for) Ex: If FedEx rents an office building for a year for $60,0000 it's hard to find the revenue generated. You would have to determine that the rent is $5,000 a month Instead of figuring out how much revenue was generated a month from the rent, the rent per month (60,000 / 12 = 5,000) is simply recorded as a $5,000 rent expense every month until the lease expires
A chronological record of all economic events affecting a firm are recorded in a(n) (Possible answers: Journal, balance sheet, trial balance, or ledger)
Journal is the correct answer (Notice it says economic events, not economic accounts) - A balance sheet has only 1 account - trial balance is a listing of accounts from the balance sheet (at a certain time) - the ledger contains all of the individual accounts from the company
Define: Order of Liquidity
Liquidity refers how quickly an asset can be converted to cash. Current assets are listed in order of liquidity (in order of which can be converted to cash first) - Cash is the most liquid asset so it's listed first - Accounts receivable is cash from customers owed to a company, so it's a highly liquid asset; it comes second
Which of the following accounts would appear in a company's income statement? a. Accounts payable b. Cash c. Dividends d. Rent Expense
Only rent expense would. The income statement is a financial statement that reports the company's revenues and expenses over an interval of time. Accounts Payable (liability) and Cash (asset) would appear in the balance sheet, and Dividends would appear in the statement of stockholders' equity
Revenue vs expenses vs net income
Revenue = money made Expenses = money lost net income = difference between the two. Ex: if you made $10 but lost 7$ your net income is 3$
Revenue Recognition Principle (ex: providing $2000 worth of soccer training)
Revenue is recorded at the point of sale/performing of service; regardless of if revenue has actually been delivered (the mere promise that it will be is enough to be recorded) Ex: If you provide soccer training for $2000 but they won't pay you until next week you still count that as immediate $2000 revenue. - The promise to pay you $2000 is also an accounts receivable, which makes it an asset - After the $2000 has been delivered the accounts receivable goes away and is replaced with $2000 worth of cash (another asset), keeping the equation balanced
Common Stock
Term used to describe the total amount paid in by stockholders for the shares they purchase. Ex: A stockholder pays $500 for stock so the company has $500 common stock
In terms of time, how is a balance sheet different from the income statement?
The balance sheet shows the companies assets, liabilities and stockholders' equity at a certain point in time - whereas an income statement displays revenue and expenses over a period of time
Public Company Accounting Oversight Board (PCAOB)
The group charged with determining auditing standards and reviewing the performance of auditing firms. Simply put, they "audit the auditors"
1. Fundamental qualitative characteristics
There are 2 fundamental qualitative characteristics, both are absolutely necessary for making a good decision. 1.) Relevance - To have relevance, accounting information must have confirmatory value and/or predictive value. Ex: Nike reports a positive net income, this confirms that the company is well managed. Thus, its net income has a confirmatory value. If Nike reports a steady growing net income over several years it has a predictive value (predicting that it will continue to do so) 2.) Faithful Representation - To be a faithful representation of business activities, accounting information must be complete (have all info), neutral, and have no errors. - Completeness: All information / items accurately reported - Neutrality: Unbiased - Freedom from error: Information reported must be the most accurate info available with no errors
2. Enhancing qualitative characteristics
There are 4 qualitative characteristics, 1.) Comparability - Refers to the ability of readers to see the similarities and differences between business activities. Ex: How does Nike's net income compare to Under Armour? Or, how does Nike's net income this year compare to its' net income last year? Comparability requires Consistency. The accounting procedure must be the same everywhere that is compared 2.) Verifiability - Implies a general agreement amongst different measures. Ex: If 5 people grade a test it should all come out to the same grade; however, if 5 people grade an essay the scores could be different - which is what you want to avoid 3.) Timeliness - This refers to information being available early enough for users to use it during the decision process. Ex: Information related to net income must be released in time for shareholders to decide if they want to sell their shares 4.) Understandability - Users must be able to understand the information within the context of the decision they're making. However, this is user specific because users vary in their ability to understand certain topics
Straight-line method
This method, which is represented by the equation below, calculates the yearly depreciation of an asset over its service life. Straight-Line Depreciation = (Cost - Residual Value) / Useful life
How do the following affect Stockholder's Equity? a.) An increase in revenue b.) An increase in expenses or dividends
a.) Increasing revenue increases the net income, which increases retained earnings, in turn increasing stockholder's equity. b.) An increase in expenses decreases net income, which decreases retained earnings - decreasing stockholders equity. - Increasing dividends also decreases retained earnings, decreasing stockholders equity All the values are related through an expanded accounting equation where any change in value travels up the chain
What do the following do: a.) Investors b.) Creditors c.) Customer d.) Suppliers c.) Managers e.) Employees f.) Competitors g.) Regulators h.) Tax authorities i.) Local communities
a.) Investors - decide whether to invest in stock b.) Creditors - decide whether to lend money c.) Customer - decide whether to purchase products d.) Suppliers - decide the customer's ability to pay for supplies c.) Managers - decide production and expansion e.) Employees - decide employment opportunities f.) Competitors - decided market share and profitability g.) Regulators - decide on social welfare h.) Tax authorities - decide on taxation policies i.) Local communities - Decide on environmental issues
Determine what the following are categorized as (ex: revenue, liabilities, assets, expenses, etc.) a.) Accounts receivable (also, are accounts receivable included in an income statement?) b.) Accounts payable (also, are accounts payable included in an income statement?)
a.) No accounts receivable are NOT included in the income statement. They're assets b.) Liability (NOT an expense!). Not included in the income statement since it's a liability and not an expense.
a.) If the left side (assets) of the accounting equation increases, how does this affect the other side of the equation? b.) If Wendy's spends $500 on new cash registers, how is the accounting equation impacted?
a.) The accounting equation must remain in balance (the left side always equals the right side), so the right side will increase to match the value of the left side. b.) It's not impacted. The cash (asset) was used to be cash registers (another asset) so no assets were lost, they just changed form. Thus, the right side is unaffected
When a company has an expense (buying something, e.g. equipment) that will provide an economic benefit (the equipment will earn the company more money) this is generally recorded as _______
an asset book: "When a company has a cost that benefits future periods, then we typically record an asset rather an expense"
Chart of Accounts (COA)
an ordered listing of accounts that comprise a company's general ledger
The purpose of a general ledger is to .... a.) record a chronological listing of the accounts used by a particular company. b.) record all transactions for a particular item. c.) provide in a single location the list of transactions affecting each account and the account's balance.
c.) provide in a single location the list of transactions affecting each account and the account's balance.
All transactions involving cash go in the ____ account. Ex: When a company receives cash it is recorded in the ____ account
cash account There is an account for everything and any changes to items in that account are recorded.
End of chapter 2, start of chapter 3
chapter 3 beyond this point
Long term assets
resources owned by a company that are thought to provide benefits for more than one year
