ACG2021 Exam 1

Common Stock and Retained Earnings

Stockholders Equity consists of 2 parts:

Generally Accepted Accounting Principles (GAAP)

a set of standards and rules that are recognized as a general guide for financial reporting.

Cash Inflow-Cash Outflow=Net Cash Flow

Statement of Cash Flows

Monetary Unit

include in the accounting records only those things that can be expressed in terms of money

debit

increase in asset

credit

increase in common stock/retained earnings

debit

increase in dividend

debits

increase in expenses

credit

increase in liability

credits

increase in revenue

Common Stock

investments of assets into the business by the stockholders

Revenue Accounts

keeps track of a company's earnings from sales, service, etc

Dividends Account

keeps track of the company's dividends issued

Expense Accounts

keeps track of the company's expenses

Partnership

owned by two or more persons, personally liable for debts of the business, tax advantages

Corporation

ownership in shares of stock, separate legal entity organized unter state corporation law, no personal liability, easier to raise funds

Full Disclosure Principle

requires that companies disclose all circumstances and events that would make a difference to financial statement users

Accounting Information System

steps in the recording process, the account, accounting transactions, and the trial balance

liquidity

the ability to pay obligations expected to become due within the next year or operating cycle

Time Period

the economic life of a business can be divided into artificial....

Going Concern

the enterprise will continue in operation long enough ot carry out its existing objectives

Retained Earnings

the income retained for use in business

Financial Accounting Standards Board (FASB)

the primary accounting standard-setting body in the United States

Double Entry System

the two-sided affect of each transaction is recorded in appropriate accounts

liability

unearned revenue is a

Conservatism

when preparing financial statements, a company should choose the accounting method that will be least likely to overstate assets or income

Beginning Retained Earnings+Net Income-Dividends=Ending Retained Earnings

Retained Earnings Statment

Operating Activities

Revenues, Inventory, Accounts Receivable, Expenses, Liabilities

Cost Principle

dictates that assets be recorded at their cost when purchased and over the time the assets are held

Comparability

different companies us similar accounting principles

Steps in Recording Process

1. Analyze each transaction 2. enter transaction in a journal 3. transfer journal information to ledger accounts

Financing Activities

1. Borrowing money 2. Issuing shares of stock for cash

Long-term Investments

1. investments in stocks and bonds of other corporations that are held for more than one year, and 2. long-term assets such as land or buildings that a company is not currently using in its operating activities

Reliability

1. is verifiable 2. is a faithful representation 3. is neutral

Relevance

1. provides a bassis for forecasts 2. confirms or corrects prior expectations 3. is timely

Cash-Basis Accounting

1. revenues are recognized when cash is recieved 2. expenses are recognized when cash is paid

Accrual-Basis Accounting

1. revenues are recognized when earned, rather than when cash is received 2. expenses are recognized when incurred, rather than when paid

financing, investing, operating

3 Types of Business Activity

Asset Accounts

Accounts: Equipment, Land, Supplies, Cash

Liability Accounts

Accounts: Interest Payable, Salaries Payable, Accounts Payable, Notes payable

Stockholder's Equity Accounts

Accounts: Salaries Expense, Service Revenue, Common Stock, Retained Earnings, Dividends

liabilities+retained earnings-dividends+revenues-expenses

Assets=

Assets= Liabilities+Stockholders Equity *specific time period

Balance Sheet

DEBIT means LEFT CREDIT means RIGHT

Debit/Credit Theory

Proprietorship, Partnership, and Corporation

Forms of Business Organizations

External Users

IRS, investors, labor unions, creditors, SEC, customers

Net Income= Revenues-Expenses

Income Statement

1. Income Statement 2. Retained Earnings Statement 3. Balance Sheet 4. Statement of Cash Flows

Order of Financial Statements

Investing Activities

Purchase of resources a company needs to operate

Notes to Financial Statements

The segment of a corporation's annual report that describes the corporation's accounting methods is the:

Auditor's Report

The segment of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the:

Materialty

a financial statement item's impact on a company's overall financial condition and operations; companies do not have to follow GAAP for small amounts

Auditor

an accounting professional who conducts an independent examination of a company's financial statements

Property, plant, and equipment

assets with relatively long useful lives that a company is currently using in operating the business- includes: land, builidings, machinery and equipment, depreciation

Correct Order of Current Assets

cash, accounts receivable, inventories, prepaid insurance.

Longevity

companies list current assets by

Revenue Recognition Principle

companies recognize revenue in the accounting period in which it is earned

Intagible Assets

companies that hace assets that do not have physical substance yet often are very valuable ex.) goodwill

Consistency

company uses same accounting methods from year to year

Standard Classifications of Assets

current assets, long-term assets, property/plant/equipment, intangible assets

credit

decrease in asset

debit

decrease in common stock/retained earnings

credit

decrease in dividend

credits

decrease in expenses

debit

decrease in liability

debits

decrease in revenue

Accounting Transactions

economic events that have changed the company's assets, liabilities, or stockholders' equity that requires them to record within the financial statements

Economic Entity

every economic entity can be separately identified and accounted for

Matching Principle

expenses matched with revenue in the period when efforts are expended to generate revenues

Trial Balance

lists accounts and their balances at a given time

Internal Users

marketing, finance, human resources, management

Order of Current Liabilities

notes payable, accounts payable, other items follow in the order of their magnitude

Long-term Liabilities

obligations that a company expects to pay after one year- includes: bonds payable, mortagages payable, long-term notes payable, lease liabilities, and pension liabilities

Current Liabilities

obligations that the company is to pay within the coming year or operating cycle, whichever is longer- includes: accounts payable, wages payable, interest payable

Certified Public Accountant

only accountants who meet this designation may perform audits

Proprietorship

owned by one person, small businesses, personally liable for debts of business, tax advantages