concept summary for exam 1

Question 1

what are GAAP

Answer 1

measurement, revenue recognition, expense recognition, and full disclosure

Question 2

the accounting equaiton is

Answer 2

asset = liability + equity

Question 3

if you change one part of the accounting eq, what must happen to keep accounting eq in balance

Answer 3

change the other parts, so both sides equal each other

Question 4

what are the two priamry pieces of owners equity

Answer 4

common stock and dividends

Question 5

equity is

Answer 5

owners claim on assets and is = to assets minus liabiltiies

Question 6

how does corporation calculate retained earnings

Answer 6

statement of retained earnings

Question 7

retained earnings process

Answer 7

-inc net income
-dec by dividends and net loss
-put on statment of retained earnings

Question 8

what are four financial statements

Answer 8

balance sheet, profit + loss statement, statement of change in equity, cash flow statement

Question 9

what are differences and similarities between sole propieterships, partnerships (and LLCs), and corporations

Answer 9

-sole propietership: non incorporated, hard to sell
LLC: things can go wrong with more than one person. set agreement about distributions
General partnership: default. if sued you or partner can be attacked (risky). get around it with LLC. complicated to sell
Corporations: limited liability, transferability is easy ie buying/selling stoock

Question 10

different corporation types

Answer 10

C-corporation and S corporations

Question 11

c corpoation

Answer 11

taxed separately from their owners. can issue both common and preferred stock

Question 12

s corporation

Answer 12

These are pass-through entities that file an informational return and pay taxes at the individual level. limited to offering one class of stock

Question 13

how do you calculate return on assets ratio

Answer 13

net income/average total assets

Question 14

how do you interpret return on assets ratio

Answer 14

if competition is risky, you want a higher %. compare to other companies, which will influence the decision

Question 15

what are the common accounts you will find in assets, liabilities, and equity

Answer 15

assets: cash, receivable, equipment, prepaid expenses
liabilities: payables
equity: common stock, retained earnings

Question 16

what is a debit

Answer 16

on left side of t account
-though of as inc in asset accounts
-dec in liability and equity accounts

Question 17

what is credit

Answer 17

on right side of T account
-devreases in asset accounts
-inc in liability and equity accounts

Question 18

how is a journal entry written

Answer 18

date, enter titles and amounts (first in debit)

Question 19

can you make journal entries from common transactions

Answer 19

yes

Question 20

can you create income statement, the statement of changes in equity, and the balance sheet if you have year-end balances in T accounts

Answer 20

yes

Question 21

what is debts to asset ratio

Answer 21

total liabilities/total assets (liability + equity)

Question 22

what do you do after you add up each account at end of accounting period

Answer 22

summarize in trial balance
-prepare financial statements
-closing entries to bring nominal accounts back to zero

Question 23

how do you interpret the debt to assets ratio

Answer 23

if you have higher return on asset w/out knowinh anything else, it means choose the highest return on assets. but have to see what others are to decide if good or bad

Question 24

what is cash method of accounting

Answer 24

-records revnues when they are collected
-records expenses when they are paid

Question 25

what is accrual method of accounting

Answer 25

-records revenues when they are earned - whether collected or not
-records expenses when they are used - whether paid or not

Question 26

do example on chapter three slides

Answer 26

ok

Question 27

practice writing adjusting journal entries

Answer 27

ok

Question 28

what is the current ratio

Answer 28

current assets/current liabilities

Question 29

when do you recognize revenue

Answer 29

-for services it is when service is performed
-for sale of property, it is when title transfers to buyer

Question 30

what is SEC guideline of recognizing revene

Answer 30

for when did these occur:
-an agreement
-product delivered or service performed
-price is set
-collectivilty is reasonable certain

Question 31

net profit margin

Answer 31

net income/net sales revenue

Question 32

how do you interpret current ratio

Answer 32

A higher current ratio indicates that a company has a stronger liquidity position and can more easily pay off its short-term debts. A current ratio of less than one means the company doesn’t have enough current assets to cover its current liabilities.