Chapter 1 Flashcards
Define net worth.
The money that you own.
Differentiate between liability and equity.
Liabilities are what belongs to someone else, or something you owe. Equity is synonymous with net worth - it is what you own and what belongs to you.
What is the accounting equation?
Assets = Liabilities + Net Worth (Equity)
The accounting equation is the __________ of the company.
balance sheet
Resources that have future benefit over which we have control are ________.
assets
The accounting equation must always ________.
balance
T or F: If the item has no future benefit, then it must be an asset.
False - money, investments, or items are only considered assets if they have a future economic benefit to you.
What kind of cost is incurred when it has no future economic benefit?
An expense
An ___________ ________ is like a record of an entire year’s operations for a company.
income statement
What is an income statement?
The statement that captures all of the revenue and expenses of a company. It indicates how much you’ve earned.
A ________ ______ is like a picture of the company’s financial position of a specific date.
balance sheet
A balance sheet illustrates the ___________ _________.
accounting equation
What is the focus of financial accounting?
Provide info to external users for decision making.
What are some examples of assets?
Accounts receivable - amounts due to a company by customers
Inventory - products held for sale
Supplies - items held for use by the business
Cash, equipment, building, land, or investments.
_____________ are a company’s obligations to creditors, or what the company ______.
Liabilities
owes
List some examples of liabilities.
Accounts payable - amount due to suppliers
Salaries payable - salaries due to employees (salaries have worked but have not yet been paid)
Utilities payable - amt due to utility companies
Notes payable - amt due to banks or other lenders
Unearned revenue - obligation to provide goods or services to a customer who paid in advance.
__________ equity is the owner financing and reinvested earnings or the net worth of the company.
stockholder’s
What are the two main accounts of stockholder’s equity?
Common stock
Retained earnings
Explain what common stock is.
They are shares representing ownership of a corporation, such as contributions by owners/investors.
What are retained earnings?
Undistributed profits earned throughout the life of the company
What are payments to the company’s shareholders?
Dividends
What three things are also parts of the stockholder’s equity accounts which roll into retained earnings?
Revenues, expenses, and dividends.
Net income = revenue - expenses
Dividends would be subtracted from the net income.
The end result would be the stockholder’s equity.
Describe the dual effects concept.
Every accounting transaction has two or more effects - meaning the business generally receives something and gives something up.
__________ triggers an accounting event.
Performance
T or F: When changing the accounting equation, you could change only one side of the equation, such as increasing and decreasing your assets.
True, imagine spending the business’s cash on new supplies. Since cash is an asset and office supplies are also an asset, we would see only the asset’s side of the equation changing.
This is an example of an asset exchange transaction.
What is the name of the liability for loans from banks or lenders?
Notes payable
When a company generates ___________, it’s retained earnings _____________. The accounting equation’s assets and stockholder’s equity are increased as a result.
revenue
increase
As salaries expense increases, __________ decreases.
stockholders’ equity
What is GAAP and what does it stand for?
GAAP is an acronym for “generally accepted accounting principles. They are the established principles followed within the US.
Which organization establishes GAAP?
The Financial Accounting Standards Board (FASB)
Explain the purpose of a statement of cash flows.
To identify the cash receipts and payments that caused the cash account to change during an accounting period.
Which statement reports contributions from or payments to investors and the amount of income the company invested for future growth during an accounting period?
statement of stockholder’s equity
T or F: You can still see assets, liabilities or stockholder’s equity on an income statement.
False, you will only ever seen revenue, expenses and the net income or loss.
What concept tells us that we need to record the revenues and related expenses in the same accounting period?
the matching concept - a.k.a. the matching principle.
If a company is ____, their beginning retained earnings is $0. However, if the company has been operational, their beginning retained earnings is their ______ retained earnings from the prior year.
new
ending
T or F: If a business has a net loss for the accounting period, the net loss is reported on the statement of stockholder’s equity, and therefore, deducted from the stockholder’s equity.
True
Which financial statement reports the economic resources that a company owns and shows their sources of financing?
balance sheet
These activities come from cash earned from issuing stock, paying dividends to owners, and borrowing/paying cash from/to creditors or lenders.
financing activities
What are the three categories of the statement of cash flows?
(1) Financing Activities
(2) Investing Activities
(3) Operating Activities
Which activities involve buying or selling long-term assets such as a building or large equipment?
investing activities
These activities involve receiving cash from revenue or spending cash for expenses (salaries, rent, advertising etc). These types of activities are commonly repeated by a business.
operating activities
A financially healthy company should generate most of their cash from _________ activities.
operating
What item is pulled from the income statement and added to the statement of stockholder’s equity?
net income
When filling out your balance sheet, which financial statement do you look to for retained earnings?
statement of stockholder’s equity
Cash assets must match on the ___________ and the ____________.
statement of cash flows
balance sheet
What is earned from the major ongoing operations of the business?
revenue
T or F: Under GAAP, it does not matter if the customer has paid for the good or service for it to be considered revenue.
True, but the service must have provided.
__________ are costs incurred to generate revenues during a period.
expenses
T or F: Under GAAP, expenses are triggered by the consumption or utilization of resources, not by the payment of cash.
True
What is the matching principle?
Costs incurred to generate revenues should be recorded in the same period as the corresponding revenue.
