ACCY 201 FINAL OLE MISS

steps in processing transactions

(1) Identify and analyze the transaction or event, including the source document(s) (2) apply double-entry accounting (3) record the transaction or event in a journal, and (4) post the journal entry to the ledger. These steps would be followed by preparation of a trial balance and then with the reporting of financial statements.

when faced with an ethical concern:

- recognize it as such - analyze all options (good and bad) - choose best option after weighing all consequences

revenue recognition principle

- recognize revenue when earned - proceeded need not be in cash - measure rev. by cash received plus cash value of items received

If a company paid 38,000 of its accounts payable in cash, what was the effect on the assets, liabilities, and equity?

Assets would decrease 38,000 liabilities would decrease by 38,000 equity would not change

Net Income

Dividends + Revenue - Expenses Net income increases equity. If expenses exceed revenues, the company has a net loss. Net loss decreases equity.

Financial statements are typically prepared in the following order:

Income statement, statement of retained earnings, balance sheet

Revenue Recognition principle

Provides guidance for managers + auditors - if rev. recognized too early then bus looks more profitable than it is - if rev. recognized too late then bus looks less profitable than it is

Revenue is properly recognized

Upon completion of the sale or when services have been performed and the business obtains the right to collect the sale price

specific principles

detailed rules used in reporting business transactions. arise from rulings by authoritative groups

The statement of retained earnings

explains the changes in equity from net income or loss, and from any dividends over a period of time.

three major business activities

financing, investing, and operating

The accrual basis of accounting

generally provides a better indication of company performance and financial condition than does the cash basis

revenue (sales)

he amount received from selling products and services

four basic financial statements

income statement, statement of retained earnings, balance sheet, and statement of cash flows

generally accepted accounting principles

intend to make information on the financial statement relevant, reliable, and comparable

general ledger

is a record containing all accounts used by the company

accounting constraints

materiality benefits exceed cost

Objectivity Concept

means that financial statement information is supported by independent, unbiased evidence other than someone's opinion or imagination. This concept increases the reliability and verifiability of financial statement information.

accounting principles

measurement (cost) principle Rev. recognition principle expense (matching) recognition principle full disclosure principle

a classified balance sheet

organizes assets and liabilities into important subgroups

equity

owner's claim on assets and is equal to assets minus liabilities

purpose of accounting

provided decision makers with relevant, reliable, comparable information

account

record of increases and decreases in a specific asset, liability, equity, revenue, or expense item

income statement

reports a company's revenues and expenses along with the resulting net income or loss over a period of time

statement of cash flows

reports on the cash inflows and outflows from a company's operating, investing, and financing activities

three basic forms of business organizations

sole proprietorship, partnership, or corporation

Double-entry accounting is an accounting system

that records the effects of transactions and other events in at least two accounts with equal debits and credits

the primary objective of financial accounting is

to provide financial statements to help external users analyze and interpret an organization's activities

debt ratio

total liabilities/total assets

notes payable

usually denoted by signing a promissory note to pay a future amount.

An approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues

Accrual Basis of Accounting

accounting assumptions

Going-concern assumption Monetary unit assumption Time-period assumption business entity assumption

Which of the following accounting principles dictates when expenses are recognized?

Matching Principle

balance sheet

describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time.

ome examples of business expenses

Rent expense, utilities expense, administrative expenses, advertising and promotion expenses, maintenance expense, and salaries and wages expenses

cash basis

Revenues are recognized when cash is received and expenses are recorded when cash is paid

accrual basis

Revenues are recognized when earned and expenses are recognized when incurred.

Return on assets

a profitability measure that is useful in evaluating management, analyzing and forecasting profits, and planning activities. It is computed as net income divided by the average total assets.

measurement (cost) principle

accy is based on actual cost. actual cost is considered objective

when closing entries are made

all temporary accounts are closed but permanent accounts are not closed

resources a company owns or controls that are expected to yield future benefit are called

assets

prepaid expenses are generally

assets that represent prepayments of future expenses

general principles

assumptions, concepts, guidelines of financial statements. stem from long-term accy practices

full disclosure principle

company is required to resort the details behind financial statement that would impact a user's decisions

(matching) expense recognition principle

company must record its expenses incurred to generate revenue reported

liabilities

creditors' claims on assets that reflect obligations to provide assets, products or services to others.