EXAM 1 Flashcards
Purpose of financial information
Provide inputs for decision making
Accounting
Communication and recording of financial information (business transactions) to users of information to make decisions
Financial accounting
Communicates to EXTERNAL users
External users
People outside the business organization who use accounting information
banks, investors, customers, suppliers, general public
Managerial accounting
Communicates to INTERNAL users
Internal users
People within a business organization who use financial information
owners, managers, employees
Short-term assets
Expected to be converted to cash within a year
Long-term assets
Those NOT expected to be converted to cash within a year
What is included in a classified balance sheet?
Current assets
Long-term investments
PPE
Current liabilities
Long-term liabilities
Stockholder’s Equity
Order current assets in which they are expected to convert to cash (liquidity)
Cash
Investments
Receivables
Inventories
Prepaid Expenses
What is the order of financial reports?
- Income statement
- Stockholder’s Equity
- Balance sheet
- Statement of cash flows
What steps make up the accounting cycle?
During the year:
Record and post external transactions
End of year:
Record and post adjusting entries
Prepare financial statements
Record and post closing entries
Trial balance
List of all accounts and their balance at a particular rate
Revenue recognition principal
Revenues recorded when EARNED
Expense recognition principal
Expenses are recorded when INCURRED
Adjusting journal entries
Happen on the last day of the period
Each entry impacts at least one income statement account (a revenue or expense account) and one balance sheet account (an asset-liability account) but NEVER IMPACTS CASH
When is cash received or paid (deferral)?
BEFORE the revenue/expense is recognized or benefit is received
When do we recognize revenue? (deferred)
When we receive cash
When do we recognize expenses? (deferred)
When we give cash
4 types of adjustments
Deferred expense, deferred revenue, accrued expense, accrued revenue
Accrual
Cash LATER
Which accounts are permanent?
All accounts that appear on the balance sheet, including retained earnings
Which accounts are temporary?
Revenues, expenses, and dividends
What are the 3 types of accounts we close out at the end of the period?
Revenues, expenses, dividends
Liabilities
Creditors’ claims to a corporation’s resources
Balance sheet equation
Assets = Liabilities + Stockholders’ Equity
Net income/loss equation
Revenues - expenses
Receiving cash from an account receivable
Increases one asset and decreases another asset
Stockholder’s Equity
Common stock + retained earnings
Stockholder’s equity layout
Beg. balance
Issuance of C. stock
Add: Net income for the period
Less: Dividends
Ending balance
Liabilities
The amount owed to creditors
Balance sheet
Assets
Liabilities
Owner’s equity
Income statement
Revenues
Expenses
Net income/loss
Over a period of time
Net loss
Expenses > revenue
Net income
Revenue > expenses
Sole proprietorship
Simple to establish
Owner controlled
Tax advantages
Partnership
Simple to establish
Shared control
Broader skills and resources
Tax advantages
Corporation
Easier to transfer ownership
Easier to raise funds
No personal liability
Financing activities
Raising the funds to start the business
Investing activities
Buying resources (assets)
Operating activities
Generating income (profit) via sales and services
How does revenue and expense affect stockholder’s equity?
Revenues INCREASE
Expenses DECREASE
Dividends are NOT…
an expense
Financial statements provide information that…
is useful to investors and creditors in making decisions
helps predict cash flow
tells us about the company’s economic resources, the claims to its resources, and the changes in those resources and claims
Which statement is prepared as of a specific date?
Balance sheet
Accounting is…
the language of business
The rules of financial accounting are…
Generally Accepted Accounting Standards (GAAP)
Who is GAAP established by?
Financial Accounting Standard Board (FASB)
Which financial statement is for the CURRENT PERIOD?
Income statement
Which financial statement is for a SPECIFIC POINT IN TIME?
Balance sheet
When expenses increase…
Retained earnings decrease
Net income decreases
When dividends increases…
Retained earnings decreases
Asset exchange transaction
Asset: no change
Liability: no change
Stockholder’s Equity: no change
Prepaid expense normally carries a ____ balance and is reported in the ____.
Debit; Balance sheet
“Prepaid”
Asset
Unearned revenue
Liability
Accounts receivable
Asset
Investments + Securities
Asset
Research + Development
Expense
When revenue increases…
Retained earnings increases
Net income increases
Which accounts are listed in a post-closing trial balance?
Assets, liabilities, equity
The balance of retained earnings in the adjusted trial balance…
Equals the balance of retained earning at the beginning of the accounting period
Financial statements are prepared from which trial balance?
Adjusted trial balance
Adjusting entries
Allows for proper application of the revenue recognition principle (revenues) or expense recognition
Is equipment a current or non-current asset?
Non-current asset
When do we recognize revenue? (accrual)
When we provide a service or sell a product
When do we recognize expense? (accrual)
When we use up a resource
Deferral
Cash FIRST
