NEW Exam 1 Flashcards
The Accounting Cycle
- Record data necessary to do our accounting
- Determine whether we need to record a transaction
- Journalize it
- Summarize into t-accounts/ledger
- Create unadjusted trial balance
- Post adjusting entries
- Adjusted Trial Balance
- Create financial statements
- Post closing entries
- Post-close Trial Balance
Assets
Resources of the firm
Liabilities
Future sacrifice of assets
Stockholder’s Equity
Everything else (Assets - Liabilities)
Defer
Payment for a good or service that has not yet been delivered
Not immediately reported
Accrual
The good/service was performed but the money hasn’t come yet
Two Primary Principles that apply to accrual accounting
Revenue Recognition and Expense Recognition
Revenue Recognition
Revenues are recorded when earned, not necessarily when cash is received
Expense Recognition
Expenses are recorded in the same period as the revenue to which they relate.
What is the income statement and what does it involve
Measures of profitability
Operating versus non-operating
What is the statement of stockholders’ equity and why is it a thing
Transactions that affected the equity accounts during the year
Difficult for investors/ creditors to understand why equity amounts change
What is a balance sheet and what does it involve
Fundamental Accounting Equation (A = L + SE)
Current and non-current assets and liabilities
Assess liquidity and solvency
Purpose of the statement of cash flows
Organize cash in-flows and out-flows into operating, investing, and financing
Provides context that helps investors/ creditors understand the other financial statements - > accruals are subject to manipulation
What do you do in Step 9 of the accounting equation
Reset temporary accounts to zero to get ready for the next accounting period
Financial Accounting
summarizing economic transactions (of a firm) to create useful
information, external parties: investors and creditors
2 Fundamental Characteristics of Useful Information
Relevance and Faithful Representation
Relevance (Def. and includes)
capable of making a difference in a user’s decision Predictive or Confirmatory Material
(Predictive, Confirmatory, Material)
Faithful Representation (Def. and includes)
summarizing economic phenomena in words and numbers
(Neutrality, Completeness, Free from error)
Predictive
Information is useful in predicting the future
Confirmatory
Provides feedback on prior evaluations/predictions
Material
Important enough to matter
Neutrality
Without bias
Completeness
All necessary information is depicted
Free from error
There are no errors or omissions in the description of the phenomenon
4 Enhancing Characteristics
1) Timeliness
2) Comparability
3) Verifiability
4) Understandability
Timeliness
Having information available to be capable of influencing their decisions
Comparability
Information is comparable if it helps evaluate information across firms or over time
Verifiability
Different, knowledgeable observers would reach similar conclusions
Understandability
Information can be understood when diligently reviewed by reasonably informed users
4 Financial Reporting Assumptions
1) Economic Entity
2) Going concern
3) Monetary Unit
4) Periodicity
Economic Entity
Entities are separate from their owners
Going Concern
Firm is expected to continue operating/not go bankrupt
Monetary Unit
Economic activities reported in dollars
Periodicity
Time is cut into reportable units
4 Accounting Principles
1) Revenue Recognition
2) Expense Recognition
3) Measurement Principles
4) Full Disclosure
Measurement principles
Historical Cost
Fair Value – Investments
Full Disclosure
All relevant and necessary information for the understanding of a company’s financial statements must be included in public company filings.
Things that are debited
Assets
Expenses
Dividends
Expenses occur when
A company pays a 3rd party for a service
Dividends occur when
A business distributes cash to its owners
Things that are credited
Equity
Liabilities
Revenue
Easy way to remember accounting equation
DEA LER
Revenue is
Money generated from normal business operations
Adjusting entries are necessary under
Accrual Accounting
Accrued interest=
Face Value * interest rate * Length of time (X/12)
Expense accounts are
Contra Equity
Accumulated Depreciation is a
Contra Asset
Allowance for doubtful accounts is a
Contra Asset
Money that won’t be collected
Cost Constraint
Costs to report information are justified by the benefits of reporting that information
Income Statement Format
Sales Revenue
-Cost of goods sold
—————————–
(Gross Profit)
(Total Operating Expenses)
(Operating Income (GP-TOE))
[Other Revenues & Gains]
[Other Expenses & Losses]
(Income Before Taxes (OI + OR&G - OE&L))
-Income Tax Expense
—————————–
Net Income
Ending Retained Earnings Formula
Beginning Retained Earnings + Net Income - Dividends
Statement of Stockholders’ Equity Format
Beginning Balance
Net Income
Dividends
Issuance of Common Stock
—————————–
Ending Balance
Net Income increases
Retained Earnings
Dividends decrease
Retained Earnings
Balance Sheet format
-Current Assets
-Long-term assets
-Current Liabilities
-Long-term Liabilities
-Equity
Operating
“normal” things to do in our business
Investing
Inflows or outflows related to investments, generally long-term in nature
Financing
Raising capital for our firm, issuing or repaying debt or common stock
3 Types of Activities
Operating, Investing, Financing
3 Step process to perform closing entries
Close Revenues
Close Expenses
Close Dividends
How to close revenues
Debit Revenue
Credit Retained Earnings
How to close Expenses
Debit Retained Earnings
Credit Expenses
How to close dividends
Debit Retained Earnings
Credit Dividends
Cost of goods sold is an
Expense
