Midterm Study Guide Flashcards
What is accounting?
The process of measuring economic activity of a company in monetary terms and communicating the results to users
What is in a 10-K and who is it filed with?
A 10-K includes financial statements, footnotes, management discussion & analysis, and audit report
Filed with the SEC
Basic accounting equation
Assets = Liabilities + Equity
Assets
The resources of the company
Liabilities
The obligations of the company
Stockholder’s equity
Ownership of the assets once liabilities have been settled
T-accounts
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
Trial balance
A listing of all the accounts from the general ledger with their ending debit or credit balance at the end of the period
Which kind of trial balance is used to prepare the income statement, statement of stockholder’s equity, and balance sheet?
The adjusted trial balance
(not the unadjusted trial balance or the closing trial balance)
Permanent vs. temporary accounts
Permanent accounts are accounts on the balance sheet (assets, liabilities, equity)
Temporary accounts are revenues, expenses, and dividends
What impact does the closing process have on temporary accounts?
They are closed into retained earnings (which is a permanent account), and is done at the end of the year
Balance sheet
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
Current assets
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
Non current assets
Assets the company does not expect to convert into cash during the normal operating cycle, or one year, whichever is longer
Current liabilities
Obligations that must be settled within the normal operating cycle or
one year, whichever is longer
Listed in order of maturity
Long-term liabilities
Obligations that are not due to be settled within the normal operating cycle or one year, whichever is less
Stockholder’s equity
Contributed capital (common stock) and retained earnings
Income statement
Reports the company’s revenues and expenses for a given period of time
Statement of Stockholder’s Equity
Shows the events that led to increases/decreases in the company’s stockholder’s equity during a given period of time
Retained earnings calculation
Beginning retained earnings + net income - dividends = ending retained earnings
Statement of Cash Flows
Reports cash inflows and outflows for a period of time
Operating
The day-to-day activities to produce/sell their product
Investing
Purchasing long-term resources that help run your day-to-day (property, plant, and equipment) and the cash received when those resources are sold
Financing
What are its two components?
Debt financing (borrowing money from the bank)
Equity financing (selling stock to investors)
What is the relationship among financial statements?
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
Accrual basis of accounting
Revenue is recorded as it is earned and expenses are recognized as incurred
The method required by US GAAP
Revenue recognition
Revenue is recognized in the period it is earned
Expense matching principle
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
Double entry accounting
Each accounting transaction affects at least two elements of the accounting equation (ensures the accounting equation stays in balance)
What are the different types of transactions that would require adjusting journal entries?
Accrued expenses and revenues, prepaid expenses, and unearned revenues
Accrued expenses
Recording expenses that have not yet been paid in cash (Liabilities
increase and expense increases)
An adjusting journal entry
Ex. Rent payable, interest payable, salaries payable, utilities payable
Accrued revenues
What effect does this have on the accounting equation?
Recording revenues that cash has not yet been received
An adjusting journal entry
Asset (AR) increases and revenue increases
Prepaid expenses
Allocating a previously recorded asset to expense (asset decreases and expense increases)
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)
Unearned revenues
What effect does this have on the accounting equation?
Allocating previously recorded unearned revenue to revenue (once you have completed the obligation)
An adjusting journal entry
Liability (unearned revenue) decreases and revenue increases
What is an audit and what is its purpose?
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
Where do you take the retained earnings from for the balance sheet?
For the balance sheet, take retained earnings from the statement of stockholder’s equity, NOT the adjusted trial balance
Accumulated depreciation
A contra account that has a credit normal balance BUT counts as an asset
Credit this account rather than the asset being depreciated!
