Midterm Study Guide

Question 1

What is accounting?

Answer 1

The process of measuring economic activity of a company in monetary terms and communicating the results to users

Question 2

What is in a 10-K and who is it filed with?

Answer 2

A 10-K includes financial statements, footnotes, management discussion & analysis, and audit report

Filed with the SEC

Question 3

Basic accounting equation

Answer 3

Assets = Liabilities + Equity

Question 4

Assets

Answer 4

The resources of the company

Question 5

Liabilities

Answer 5

The obligations of the company

Question 6

Stockholder’s equity

Answer 6

Ownership of the assets once liabilities have been settled

Question 7

T-accounts

Answer 7

Show the effect transactions have on an account. Starts with a beginning balance and includes all transactions and adjusting entries.

Debits are on the left, credits are on the right

Question 8

Trial balance

Answer 8

A listing of all the accounts from the general ledger with their ending debit or credit balance at the end of the period

Question 9

Which kind of trial balance is used to prepare the income statement, statement of stockholder’s equity, and balance sheet?

Answer 9

The adjusted trial balance

(not the unadjusted trial balance or the closing trial balance)

Question 10

Permanent vs. temporary accounts

Answer 10

Permanent accounts are accounts on the balance sheet (assets, liabilities, equity)

Temporary accounts are revenues, expenses, and dividends

Question 11

What impact does the closing process have on temporary accounts?

Answer 11

They are closed into retained earnings (which is a permanent account), and is done at the end of the year

Question 12

Balance sheet

Answer 12

Reports the company’s financial position at a point in time

Includes current assets, non current assets, current liabilities, long-term liabilities, and stockholder’s equity

Question 13

Current assets

Answer 13

Expected to be converted to cash or consumed within the company’s normal operating cycle or one year, whichever is longer

Listed in order of expected liquidity

Question 14

Non current assets

Answer 14

Assets the company does not expect to convert into cash during the normal operating cycle, or one year, whichever is longer

Question 15

Current liabilities

Answer 15

Obligations that must be settled within the normal operating cycle or
one year, whichever is longer

Listed in order of maturity

Question 16

Long-term liabilities

Answer 16

Obligations that are not due to be settled within the normal operating cycle or one year, whichever is less

Question 17

Stockholder’s equity

Answer 17

Contributed capital (common stock) and retained earnings

Question 18

Income statement

Answer 18

Reports the company’s revenues and expenses for a given period of time

Question 19

Statement of Stockholder’s Equity

Answer 19

Shows the events that led to increases/decreases in the company’s stockholder’s equity during a given period of time

Question 20

Retained earnings calculation

Answer 20

Beginning retained earnings + net income - dividends = ending retained earnings

Question 21

Statement of Cash Flows

Answer 21

Reports cash inflows and outflows for a period of time

Question 22

Operating

Answer 22

The day-to-day activities to produce/sell their product

Question 23

Investing

Answer 23

Purchasing long-term resources that help run your day-to-day (property, plant, and equipment) and the cash received when those resources are sold

Question 24

Financing

What are its two components?

Answer 24

Debt financing (borrowing money from the bank)

Equity financing (selling stock to investors)

Question 25

What is the relationship among financial statements?

Answer 25

Net income from the income statement is included in the statement of equity Ending common stock, retained earnings, and total equity from the statement of stockholder's equity is on the balance sheet The ending cash balance on the statement of cash flows is on the balance sheet

Question 26

Accrual basis of accounting

Answer 26

Revenue is recorded as it is earned and expenses are recognized as incurred The method required by US GAAP

Question 27

Revenue recognition

Answer 27

Revenue is recognized in the period it is earned

Question 28

Expense matching principle

Answer 28

Expenses incurred to generate revenues must be recognized in the same period as the revenue It is the recognition of revenue, and not the payment of cash, that determines when expenses are recognized

Question 29

Double entry accounting

Answer 29

Each accounting transaction affects at least two elements of the accounting equation (ensures the accounting equation stays in balance)

Question 30

What are the different types of transactions that would require adjusting journal entries?

Answer 30

Accrued expenses and revenues, prepaid expenses, and unearned revenues

Question 31

Accrued expenses

Answer 31

Recording expenses that have not yet been paid in cash (Liabilities increase and expense increases) ## Footnote An adjusting journal entry Ex. Rent payable, interest payable, salaries payable, utilities payable

Question 32

Accrued revenues ## Footnote What effect does this have on the accounting equation?

Answer 32

Recording revenues that cash has not yet been received ## Footnote An adjusting journal entry Asset (AR) increases and revenue increases

Question 33

Prepaid expenses

Answer 33

Allocating a previously recorded asset to expense (asset decreases and expense increases) ## Footnote An adjusting journal entry Ex. Booking one month’s worth of rent expense out of the prepaid rent account Ex. Booking depreciation expense for PPE (property, plant, and equipment)

Question 34

Unearned revenues ## Footnote What effect does this have on the accounting equation?

Answer 34

Allocating previously recorded unearned revenue to revenue (once you have completed the obligation) ## Footnote An adjusting journal entry Liability (unearned revenue) decreases and revenue increases

Question 35

What is an audit and what is its purpose?

Answer 35

An audit is where an independent party assesses if the financial statements are prepared correctly and show an accurate picture of how the company performed for the year

Question 36

Where do you take the retained earnings from for the balance sheet?

Answer 36

For the balance sheet, take retained earnings from the statement of stockholder’s equity, NOT the adjusted trial balance

Question 37

Accumulated depreciation

Answer 37

A contra account that has a credit normal balance BUT counts as an asset Credit this account rather than the asset being depreciated!