Midterm Flashcards
Characteristic of most Preferred Stock
Preference as to dividends
Preference as to assets in the event of liquidation
No voting power
Assume an accounted closed the Dividends account by debiting Income Summary and crediting Dividends. What is the effect on net income and retained earnings?
Net income is understated and the balance in Retained Earnings is correct NEEDS EXPLANATION
How do Sales, expenses, and dividends get closed in Income summary?
Credit sales, Debit expenses, and dividends are not closed to income summary
Net Income end of month adjustment
Subtract expenses, even accrued expenses like interest, add revenues - even if they are unearned
A revenue transaction results in all of the following
An increase in assets
An increase in owners equity
A positive cash flow at any time
A debit balance in the income summary indicates
Net Loss
A credit balance in the income summary indicates
Net Profit
What happens to shareholder equity during a stock split?
NOTHING
Number of shares used to calculate EPS
Yearly Weighted Average of COMMON Stock Shares
Equation for EPS
(Net Income - Monies owed and attributed to Preferred Stockholders) / Weighted Average of Common Stock
When do Dividends become a liability?
On the date of declaration
Percentage change in Net Income
Current year net income / Previous year net income
Current Ratio
Current Assets / Current Liabilities
Working Capital
Current Assets - Current Liabilities
From the Adjusted Trial Balance we can prepare (in order)
Income Statement
Statement of Retained Earnings
Balance Sheet
The Income Statement compares these 2 categories
Revenue and Expenses (Revenue - Expenses = Net Income)
Statement of Retained Earnings Equation
Retained Earnings at beginning of the period + Net Income (from Income Statement) - Dividends = Retained Earnings at the end of the period
Dividends reduce these two categories
Assets and Owners Equity (Not an expense!)
Statement of Retained Earnings does …
Summarizes the changes in retained earnings resulting from business operations during the period
Balance Sheet lists…
Assets, Liabilities, and Stockholder Equity
A classified balance sheet…
Groups the accounts into sub categories
Current Assets are…
Assets that can be converted to cash within a short time
Current Liabilities are…
Debt that a company is expected to satisfy soon
Temporary (Nominal) accounts…
Only 1 accounting period
balance of beginning of next period should be 0
balances are transferred to retained earnings at end of period
includes revenues, expenses, and dividend accounts
Permanent (real) accounts
Continue to exist in the next accounting period
Includes assets, liabilities, and equity accounts
Closing is the process of…
Transferring the balance of nominal accounts into the Retained Earnings account through closing entries
This account is what Revenue and Expenses are closed out to at the end of the accounting period
Income Summary
Income Summary gets closed to this account
Retained Earnings
Closing Entries in Order
- Close rev accounts to Income Summary
- Close expense accounts to Income summary
- Close Income summary to Retained Earnings
- Close dividends to Retained earnings
How to close a revenue account to Income Summary
Debit the revenue account and credit income summary
How to close an expense account to Income Summary
Credit the expense account and debit Income summary
Assuming a positive net income, how to close Income Summary to retained earnings
Debit Income Summary and Credit Retained Earnings
Assuming a negative net income, how to close Income Summary to retained earnings
Credit Income Summary and Debit Retained Earnings
How to close dividends to Retained earnings
Credit dividends and debit retained earnings
Net Income % = …
Net Income / Total Revenues
Return on Equity = …
Net Income / Average Stockholders Equity
Financial Accounting info is for…
external parties who have an interest in a company
Managerial Account info is for…
internal use by Management
primary objective of accounting
provide info that is useful in making decisions
Information Systems can consist of
personnel, procedures, technology, and records to develop and communicate information
Internal control is a process that…
provides reasonable assurance that the organization is producing reliable financial reports
5 components of internal control
- Control environment
- Risk assesment
- control activities
- Information and communication
- Monitoring Activites
Sarbanes-Oxley Act of 2002
securities law designed to improve the effectiveness of corporate financial reporting through enhanced accountability
External users of accounting information
Owners
creditors
investors
labor unions
Objectives of External Financial Reporting
Cash Flow prospects
Return OF investment
Return ON investment
Objectives of Financial Reporting
Provide info useful in making investment decisions
assessing amount, timing, and uncertainty of future cash flows
info about enterprises resources, claims to resources, and how both change over time
Financial Statement is…
monetary declaration of what is believed to be treu
Balance Sheet is…
shows where company stands in financial terms (Assets, Liabilities, and Equity)
Income Statement is…
Shows details of the companies profit related activities (Revenues - Expenses)
Statement of Cash flows is…
shows details of cash related activites
These orgs establish accounting principles
SEC, Financial Accounting Standards Board (FASB), and International Accounting Standards Board (IASB)
Professional Organizations
AICPA, IMA, IIA, AAA, COSO
Assets
Economic resources that are owned and used by a firm and are expected to benefit future operations
Cost Principal
We record the original amount the business entity paid to acquire the asset, not the market value. Example: Land
Going-Concern Assumption
Assumption the buisness will operate in the forseeable future
Objectivity Principle
describes an assets evaluation that are factual and verifiable
Stable-Dollar Assumption
money is stable over time
Liabilities
financial obligation or debts. Negative cash flow
Owner’s Equity
Owner’s claim on the assets of the business
Owner’s Equity Increases when
More investment
Earnings from profit
OE Decreases when
Dividends
Net Loss
Accounting Equation
Assets = Liabilities + Owner’s Equity
Types of Firms
Sole Proprietorship
Partnership
Corporation
This type of account is increased by debits
Assets and Expenses
This type of account is increased by credits
Liability, Owners Equity, Capital Stock, Retained Earnings, and Revenues
Double Entry Accounting
Every transaction affects at least 2 accounts, with an equal dollar amount of debits and credits
Revenue is…
Price of goods sold and services rendered
Realization Principle
Revenue should be recognized at the time goods are sold or services rendered
Expenses are…
cost of the goods and services used up in the process of earning revenue
Accrual Accounting
Revenue is recognized in the period in which it is earned
Cash Based Accounting
Revenue is recognized when cash is collected
Steps when revenue is earned
Debit Cash, Credit Revenue
Steps when wages are paid
Debit Wages Expense, Credit Cash
Steps when utilities are paid
Debit Utilities Expense, Credit Cash
Steps when advertising is paid
Debit Advertising Expense, Credit Cash
Steps when expense is taken on credit
Debit Expense, Credit Accounts Payable
Supplies that will be used are paid
Debit Supplies, Credit Cash
Revenue is earned, but will be paid over time
Debit Accounts Receivable, Credit Revenue
Transaction for declaring and paying dividends
Debit Dividends, Credit Cash
Elements of a trial balance
lists assets, liabilities, retained earnings, income statement accounts, revenue and expese accounts. DEBITS = CREDITS
Outcome of converting assets to expenses
Increase Expenses - Decrease net Income
Decrease Assets - Decrease Owners’ Equity
Outcome of converting liabilities to revenue
Increase Revenue - Increase Net Income
Decrease Liabilities - Increase Owner’s Equity
Outcome of Accruing Unpaid Expenses
Increase Expenses - Decrease Net Income
Increase Liabilities - Decrease Owners Equity
Outcome of Accruing Uncollected Revenue
Increase Revenue - Increase Net Income
Increase Assets - Increase Owner’s Equity
Using Supplies
Debit Supplies Expense, Credit Supplies
Purchasing pre-paid asset
debit unexpired asset, credit cash
Depreciation Expense Equation
Cost of Asset / Estimated Useful life
Contra account
separate but related account that offsets or is a deduction from a companion account (Has a balance opposite of companion account)
Depreciation Expense steps
Debit Depreciation Expense, Credit Accumulated Depreciation
Depreciation and Balance Sheet
Subtract the accumulated depreciation from the assets value in the balance sheet
Unearned Revenue
When receiving contract:
Debit Cash, Credit Unearned Revenue
As time passes:
Debit Unearned Revenue, Credit Earned Revenue
Unpaid Expenses (Example Wages)
For accrual period:
Debit Wages Expense, credit Wages Payable
When the bill comes due:
Debit Wages Expense, Debit Wages Payable, Credit Cash
Interest Equation
Interest = Principle * Interest Rate * Fraction of a Year
Interest that is paid is a(n) _______, Interest that is received is a(n) ______.
Expense, Revenue
Income Taxes
Accruing:
Debit Income Taxes Expense, Credit Income Taxes Payable
Steps in accounting cycle
- Journalize transactions
- Post to ledger
- Prepare a Trial Balance
- Make period ending adjustments
- Prepare a trail balance
- Prepare financial statements
- Journalize and post closing entries
- Prepare after closing trial balance
An after closing trial balance shows…
Assets, Liabilities, and Owners Equity after the closing process. Only reflects permanent accounts. WILL NOT SHOW RETAINED EARNINGS OR DIVIDENDS
True or False: Comparative financial statements refers to a presentation whereby the financial statement amounts for more than one accounting period appear side by side in vertical columns.
True
