Introduction Flashcards
What are financial statements?
a means of whereby the effects of lots of transactions are summarized and reported in a manner that is useful to users of financial statements.
What are the three major financial statements?
Balance Sheet
Income Statement
Statement of Cash Flows
What is the fundamental financial statement?
Balance Sheet
What three items are summarized on the Balance Sheet?
Assets (cash, land, inventory..)
Liabilities and Equities (where did company get money to buy assets.)
What are assets?
Assets are valuable resources that provide a benefit in the future.
What are liabilities?
Liabilities are obligations to repay money or to provide a service in the future.
What are two methods of financing to buy assets?
Liability financing
Owner’s Equity
How can owners finance buying assets?
investing in company
retaining earnings
What is the formula for the income statement?
Revenues - Expenses = Net income
What is revenue?
the amount of assets generated in doing business.
What are the three primary financial statements?
Balance Sheet
Income Statement
Statement of Cash Flows
What are the three categories of cash flow on the Statement of Cash Flows?
Operating Activities
Investing Activities
Financing Activities
What does the Statement of Cash Flows do?
It summarizes the in flow and out flow of cash for a given time.
What are operating activities?
What companies do: collect cash from customers, pay employees, pay rent, pay for advertising, they do research and development.
What are investing activities?
Investing in the productive capacity of the business: buying land, buying machines…Operating activities occur every day. Investing occurs occasionally.
What are investing activities?
obtaining the capital to buy assets
What is a cash cow?
Operations generate enough cash to pay for all operating, investing and financing activity
A company’s resources can be financed in what two ways?
Creditors
or
Owners
When does the accounting equation not balance?
When you’ve done something wrong.
What is an account?
An account is a specific accounting record that provides an efficient way to categorize similar transactions.
What are examples of asset accounts?
cash, inventory and equipment
What are examples of liability accounts?
accounts payable and notes payable
What are examples of Equity accounts?
capital stock, paid in capital and retained earnings
Why are pluses and minuses separated into two columns?
To limit the opportunity for mistakes of pluses and minuses in one column. The plus column and the minus column are added and the results compared.
What is double entry bookkeeping.
entering credits and debits in a T account
In a T account how are the left and right side identified?
The left side is debit (dr) and the right side is credit (cr).
Typically an asset account will have what kind of balance?
a debit balance
Typically a liability for owner’s equity account will have what kind of balance?
a credit balance
How is a cash account decreased?
It is credited.
Debits should always equal ______?
Credits
What three basic facts important to double entry bookkeeping?
Debits are added to the left column and credits are added to the right column.
For every transaction there must be a one debit and one credit.
Debits are always equal to credits.
What do revenues represent?
resource inflows
What do expenses represent?
resource outflows
What are expenses?
They are costs incurred in generating revenues.
Revenues and expenses can be thought of as temporary subdivisions of what?
Owner’s equity
Owner’s equity accounts are increased with revenue and with ______?
Credits
Owner’s equity accounts are decreased with expenses and with ______?
Debits
Revenues increase _______ and increase with _____?
Owner’s equity
Credits
Expenses decrease ______ and decrease with _____?
Debits
As expenses go up, what temporarily goes down?
Owner’s equity
In accounting debit means ______?
left
The affects of revenues and expenses on owners’ equity is indicated with _______ for each transaction.
brackets
Cash increases with a debit or credit?
debit
What are receivables?
Allowing certain customers to pay at a later date.
When receivables are collected, the asset is _______ and cash is ______?
reduced
increased
When accounts receivable decrease, it is shown with a credit or debit
credit
What is the effect on the accounting equation of an expense?
It decreases assets and decreases owner’s equity.
You pay $50 for gasoline. How is this reflected in the accounting equation?
Expense account is debited for $50. (decrease in owner’s equity). Cash is credited to show cash went down.
You collect a receivable. How is this shown in the accounting equation?
When receivable is collected, the asset is reduced and cash is increased. Cash increases with a debit and the asset, accounts receivable, decrease with a credit.
Is revenue involved in collecting accounts receivable?
No
With accounts receivable, when is the revenue recorded?
When the sale is transacted.
Why is cash collection on an account receivable not revenue?
It involves exchanging one asset for another.
When you pay a receivable, how does it effect the accounting equation?
Cash is paid, therefore cash will go down, and being an asset, it will go down with a credit.
Our liability is being paid and liabilities decrease with debits.
A loan repayment requires a compound entry because?
A portion of payment reflects paying off principal,a liability, and a portion reflects paying interest an expense .
In loan repayment, principal, a liability, is paid with cash. Liabilities decrease with _____?
debit
$25,000 is borrowed from the bank. What two accounts are involved for the borrower?
‘Cash’
and
‘Notes payable’
In the $25,000 bank loan, Cash increased. In the accounting equation Cash is considered an _____?
Asset
In the $25,000 bank loan, Assets increase with a _____?
Debit
In the $25,000 bank loan Notes Payable increased, the accounting equation considers the loan to be a ______?
Liability
In the $25,000 bank loan, the liability increased with a ______
Credit
Inventory costing $60,000 is sold for $70,000. What accounts are involved?
Accounts Receivable (Asset)
Inventory (Asset)
Cost of Goods Sold (an expense, part of Owner’s Equity)
Sales Revenue (Owners Equity)
What is an account?
A record to categorize like items.
What do accounts show?
Transaction dates
Increases
decreases
balances
What is posting?
Sorting all journal entry amounts by account and copying those amounts to the appropriate account.
What is a Chart of Accounts?
The list of accounts used by a company.
What is the difference between the General Journal and the General Ledger?
Thus, the general journal is where those transactions are first recorded that are not being stored in a subject-specific journal, while the general ledger stores the summary-level information from each of the journals.
What is the General Ledger?
A general ledger is the master set of accounts that summarize all transactions occurring within an entity.
What is the General Journal?
When an event occurs that must be recorded, it is called a transaction, and may be recorded in a specialty journal or in the general journal.
Are Trial Balances shown to the public.
No
