Chapter 1: Accounting in Action
Who are internal users?
The marketing team, management, finance team, Human Resources team
(+ or -) Revenue
+
(+ or -) Dividends
-
(+ or -) Expenses
-
The 4 type of financial statements are
1) balance sheet 2) income statement 3) retained earnings statement 4) statement of cash flow
What 3 basic activities does accounting consist of?
1) identifying 2) recording 3) communicating
In what order are the account titles on the balance sheet?
1st) assets 2nd) liabilities 3rd) S/H equity
Which of the following is NOT part of the accounting process? Select one: a. Financial decision making b. Communicating c. Identifying d. Recording
A
Define stakeholders
Anyone effected by the company's situation
As of December 31, 2013, Morley Company has liabilities of $5,000 and stockholders' equity of $7,000. It received revenues of $23,000 during the year ended December 31, 2013. What are the assets for Morley Company as of December 31, 2013? Select one: a. $25,000. b. $12,000. c. $2,000. d. $35,000.
B. $5,000 + $7,000 = $12,000, so assets must equal $12,000. The $23,000 of revenues is already included in the December 31, 2013 equity, so it isn't used in this calculation.
Morreale Beaver Company buys a $12,000 van on credit. This transaction will affect the: Select one: a. income statement, retained earnings statement, and balance sheet. b. balance sheet only. c. income statement only. d. income statement and retained earnings statement only.
B. Use the accounting equation to see the effect of this transaction.
Get common stock and retained earnings for Retained Earnings Statement
Balance Sheet
Balance in retained earnings is needed in preparing the
Balance sheet
Proves the balance in the accounting equation
Balance sheet
The only financial statement (out of the 4) that is for a specific date
Balance sheet
This statement includes assets, liabilities, and S/H Equity
Balance sheet
Usually a snapshot of month-end or year-end
Balance sheet
What is needed to prepare statement of cashflows?
Balance sheet and income statement
Provides the underlying framework for recording and summarizing economic events
Basic Accounting Equation
How to calculate Retained Earnings Statement
Beg RE, add: net income, less: dividends = End Retained Earnings
The accounting process includes what function?
Bookkeeping
Internal users of accounting data include: Select one: a. customers b. economic planners c. company officers d. investors
C
Can you assign a dollar value to customer/employee satisfaction?
No, because you can only IDENTIFY but not RECORD
Poindexter Co. pays a $500 dividend in cash. The effect on the specific items in the basic accounting equation is: Select one: a. an increase in Accounts Receivable and a decrease in Retained Earnings. b. an increase in Retained Earnings and a decrease in Cash. c. a decrease in Retained Earnings and a decrease in Cash. d. an increase in Salary Expense and a decrease in Cash.
C
The Relias Uptown Grill receives a bill of $400 from the Erml Advertising Agency. The owner, John Relias, is postponing payment of the bill until a later date. The effect on specific items in the basic accounting equation is: Select one: a. a decrease in Cash and an increase in Accounts Payable. b. a decrease in Cash and an increase in Retained Earnings. c. an increase in Accounts Payable and a decrease in Retained Earnings. d. a decrease in Accounts Payable and an increase in Retained Earnings.
C (advertising expense)
A company might carry on many activities that do NOT represent business transactions such as: Select one: a. using office supplies. b. borrowing money from the bank. c. placing an order for merchandise with a supplier. d. paying wages.
C *placing*
Preparing accounting reports (financial statements) and analyze/interpret for others
Communication
Who are external users?
Creditors, investors, IRS
A net loss will result during a time period when: Select one: a. assets exceed liabilities. b. assets exceed stockholders' equity. c. revenues exceed expenses. d. expenses exceed revenues.
D
The monetary unit assumption: Select one: a. is unimportant in applying the cost principle. b. is only used for financial statements of banks. c. provides that the unit of measure fluctuates over time. d. requires that only transaction data capable of being expressed in terms of money be included in the accounting records of the economic entity.
D
Which of the following would NOT appear on the DeFlippo Company's balance sheet? Select one: a. Wages payable. b. Retained earnings. c. Accounts receivable. d. Utilities expense.
D. The balance sheet shows assets, liabilities, and equity accounts.
The distribution of cash or other assets to stockholders
Dividends
What kind of effect do transactions have on the accounting equation
Dual
Assumption that requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities
Economic Entity Assumption
The cost of assets consumed/services used in the process of earning revenue
Expenses
What does FASB and the SEC do?
FASB makes rules and the SEC enforces them
The price received to sell an asset or settle a liability
Fair value
Measurement principle that states that assets and liabilities should be reported at the fair value
Fair value principle
T o F: Accountants prepare, but do not interpret, financial reports
False
T o F: Bookkeeping encompasses all steps in the accounting process
False
T o F: Relevance means that financial info matches what really happened; the information is factual.
False
T o F: The 2 most common types of external users are investors and company officers
False
FASB stands for
Financial Accounting Standards Board
Another word for: accounting reports
Financial statements
Developed standards that are generally accepted and universally practiced
GAAP
GAAP stands for
Generally Accepted Accounting Principles
Measurement principle that dictates that companies record assets at their costs (the price paid)
Historical Cost Principle
Which accounting activity does the statement represent: Select economic events (transaction)
Identification
Does NOT include investment and dividend transactions between the stockholders and the business
Income statement
Lists revenues first, followed by expenses
Income statement
Reports the profitability of business operations for a specific period of time
Income statement
Shows net income (or loss)
Income statement
Sometimes referred to as the statement of operations, earnings statement, or profit/loss statement
Income statement
Who uses accounting data?
Internal and external users
represent the total amount paid in by stockholders for the shares they purchase
Investments by stockholders
Debts and obligations to creditors. Ex: accounts payable and notes payable
Liabilities
Assumption that requires companies to include in the accounting record only transaction data that can be expressed in terms of money (can you assign a dollar value to it?)
Monetary Unit Assumption
Results when revenues exceed expenses
Net income
Why is ethics so important to accounting?
People rely heavily on financial statements
What are the 3 types of business ownership?
Proprietorship, partnership, corporation
Which accounting activity does the statement represent: Record, classify and summarize (with the bookkeeper)
Recording
Net income is needed to determine the ending balance in
Retained earnings
Reports the change in retained earnings for a specific period of time
Retained earnings statement
The information provided in this statement indicates the reasons why retained earnings increased or decreased during the period
Retained earnings statement
The time period is the same as that covered by the income statement
Retained earnings statement
Result from business activities entered for the purpose of earning income
Revenue
How to calculate Income Statement
Revenue - expenses = net income/loss
What do retained earnings consist of on the accounting equation?
Revenue, expenses, dividends
Congress passed the ______________ because regulators and lawmakers were concerned that the economy would suffer if investors lost confidence in corporate accounting
Sarbanes-Oxley Act
SEC stands for
Securities and Exchange Commission
Over a period of time, reports the in and out flows of cash, what is was used for, where it came from, and the change in cash balance
Statement of Cash Flows
Contains common stock and retained earnings. Also sometimes referred to as "residual equity"
Stockholder's equity
Another word for investors
Stockholders
A business's economic events recorded by accountants
Transactions
T o F: Dividends are NOT an expense
True
T o F: Managerial accounting activities focus on reports for internal users
True
T o F: Transactions may be external or internal
True
List some assets
cash, accounts receivable, equipment, supplies, inventory, prepaid expense
Define limited liability
the condition by which shareholders are legally responsible for the debts of a company only to the extent of the nominal value of their shares.
How to calculate the Balance Sheet
total assets = total liabilities + S/H equity
Claims of creditors (liabilities) must be paid before ownership claims (stockholder's equity) when the business is...
liquidated
Define unlimited liability
personally liable for ALL debts
What types of ownerships have UNLIMITED liability?
proprietorship, partnership
Ethics are the standards of conduct by which one's actions are judged as
right or wrong, honest or dishonest, fair or not fair
