Exam 1 Flashcards
Accounting equation
Assets=Liabilities+Equity
Expanded accounting equation
Assets=Liabilities+Contributed Capital +Retained Earnings
Assets=Liabilities+Common Stock-Dividends+Revenue-Expenses
Return on assets
ROA=net income/average total assets
Profit margin
PM=net income/net sales
Debt ratio
DR=Total liabilities/total assets
Current ratio
CR=current assets/current liabilities
Identify internal users
Managers
Identify external users
Shareholders, lenders, external auditors, nonmanagerial employees, regulators
Sarbanes-Oxley Act
Requires managers and auditors of companies whose stock is traded on an exchange to document and verify internal controls
Characteristics of a Corporation & LLC
Corporation: 1 or more shareholders, additional corporate income tax, limited liability, separate entity, indefinite business life
LLC: 1 or more members, no additional business income tax, rest same as corp
Measurement Principle (Cost Principle)
Accounting information is based on actual cost. Actual cost is considered objective.
Revenue Recognition Principle
- Recognize revenue when goods or services are provided to customers and
- at an amount expected to be received from the customer.
Expense Recognition Principle (Matching Principle)
A company records its expenses incurred to generate the revenue reported.
Full Disclosure Principle
A company reports the details behind financial statements that would impact users’ decisions in the notes to the financial statements.
Going-Concern Assumption
The business is presumed to continue operating instead of being closed or sold.
Monetary Unit Assumption
Transactions and events are expressed in monetary, or money, units.
Time Period Assumption
The life of a company
can be divided into time periods, such as months and years.
Business Entity Assumption
A business is accounted for separately from other business entities, including its owner.
3 types of business activities
Operating, investing, and financing
Calculate Net income and Net Loss
On income statement, subtract expenses from revenues and get either net income or net loss, which you put into retained earnings
Source documents
Source documents identify and describe transactions entering the accounting system.
Examples:
• Bills from suppliers
• Sales receipts
• Checks
• Purchase orders
• Payroll records
• Bank statements
Chart of accounts
A list of all ledger accounts with an ID number assigned to each account
9 steps in the accounting cycle
- Analyze transactions
- Journalize
- Post to ledger
- Prepare unadjusted trial balance
- Adjusting entries and post
- Prepare adjusted trial balance
- Prepare financial statements
- Close accounts
- Prepare post-closing trial balance
Normal balance
Increase debit for assets, expenses, and dividends
Increase credit for liabilities, capital stock, retained earnings, and revenue accounts
Account balance
The difference between the increases and decreases in an account (difference between debits and credits)
T-account
Represents a ledger account and is used to show the effects of transactions
Posting process
- Identify transactions and source documents
- Analyze the transaction using the accounting equation
- Record the journal entry
- Post the entry to general ledger
3 types of trial balances
Unadjusted, adjusted, and post-closing
Which trial balance do we prepare financial statements for?
Adjusted trial balance
Order of financial statement preparation
- Income statement- net income
- Statement of retained earnings- retained earnings+net income-dividends
- Balance sheet- assets, liabilities, common stock and retained earnings
- Statement of cash flows
Income statement
Add up all revenues and expenses from trial balance and subtract them to get net income/net loss
Statement of Retained Earnings
Retained earnings from start of period + net income/- net loss - dividends= retained earnings end of period
Balance sheet
Total assets= total liabilities and equity (common stock+retained earnings)
Statement of Cash Flows
+- operating CF
+- investing CF
+- financing CF
= change in cash
Fraud triangle
Opportunity- envisions a way to do without getting caught
Rationalization- fails to see criminal nature or justifies action
Pressure- mush have some pressure to do it
Unearned revenue
Cash received in advance of providing products and services.
Debit liability and credit revenue
Deferrals
Paid or received cash before recognized
Accruals
Paid or received cash after recognized
Deferral of expense
Prepaid
Adjusting entry:
Debit expense (increase)- understated
Credit asset (decrease)- overstated
Deferral of revenue
Unearned revenue
Adjusting entry:
Debit liability (decrease)- overstated
Credit revenue (increase)- understated
Accrued expense
Salaries/interest expense
Adjusting entry:
Debit expense (increase)- understated
Credit liability (increase)- understated
Accrued revenue
Accounts receivable
Adjusting entry:
Debit asset (increase)- understated
Credit revenue (increase)- understated
What happens if you don’t post specific adjusting entry?
If you forget to credit revenue, it’s understated, which makes net income understated, which makes equity understated, etc
Calculate interest
Principal amount owed x Annual interest rate x days/360
Straight line depreciation
Asset cost-salvage value/useful life
Asset
Resource a company owns or controls
Liability
Creditor’s claims on assets
Equity
Owner’s claim on assets
3 most common accounts:
Cash, amounts payable, amounts receivable
Closing process
Resets revenue, expenses, and dividends to zero
Identify accounts for closing, record and post closing entries, and prepare post-closing trial balance
Temporary accounts
Revenues, expenses, dividends, income summary
Permanent accounts
Assets, liabilities, common stock, retained earnings
Classified Balance Sheet Assets
Current assets, long-term investments, plant assets, and intangible assets
Classified Balance Sheet Liabilities and Equity
Current liabilities, long-term liabilities, and equity (common stock and retained earnings)
Closing Entries
- Close revenue accounts (debit revenues and credit income summary)
- Close expense accounts (debit income summary and credit expenses)
- Close income summary account (debit income summary and credit retained earnings)
- Close dividends account (debit retained earnings and credit dividends)
