ACCT 200Exam # 1 Study Guide Lectures: 1 - 10Chapter 1Assets—things owned by a business that provide future valueLiabilities—amounts owed to someoneEquity—ownership of a companyRevenues—sales earned (earnedrevenue)Expenses—incurred, used up assetsDividends—payments/distributions of cash to stockholders (*NOT EXPENSES)Assets=Liability + Owner’s EquityOperating activities day to day activities (less than one year)Investing activities long term, longer than one yearFinancing activitiesways to initially acquire capital through stock or debtA business sells goods/services to earn a profit1. Service business—provide services to customers2. Merchandising—buy finished goods from suppliers3. Manufacturer—buy inputs and convert them into a productForms of Business1. Proprietorship—not separate legal entity; full liability2. Partnership—proprietorship with partners; separate legal entity from partners but each general partner is responsible for the other’s actions3. Corporation—can issue stock, separate legal entity from owner4. Limited Liability Company—cannot issue stock but raise more money than proprietorship (like doctors, lawyers, etc)Wage Expense vs. Wage Payable- Expense—used up labor, pay now in cash- Payable—liability, will be paid in futureGAAP—Generally Accepted Accounting Principles—written by Financial Accounting Standards Board (FASB)—these are a set of guidelines that apply to U.S. businesses onlyThe Securities and Exchange Commission (SEC) enforces the GAAP for public companies (public means the company trades stock on NYSE)International Accounting Standards Board (IASB) is like the international version of GAAPGAAP concepts1. Business entity concept—owners are separate from business2. Cost concept—historical cost must be reflected as purchase price3. Going concern4. Matching concept—match revenues with expenses5. Objectivity concept6. Unit of measure7. Accounting period concept—items must be recorded in the correct period8. Adequate disclosure concept—display enough info for banks/creditors to make an accurate decision about the company’s reliabilityChapter 2Controls Net income must equal net effects of revenues and expenses**Every transaction goes on the balance sheet somewhere. We use double entry accounting, which means that every transaction will be placed on the balance sheet in two places. (two accounts affected)“payable”this means it is a liability, a company will be liable to pay it in the futureChapter 3 (the bulk of the test will cover chapter 3)Revenue—earned, recorded in period it was earned (the receipt of cash is irrelevant to when the revenue is recorded)Expenses—assets used up, recognized when incurred (payment of cash is irrelevant to having anexpense recorded)Matching1. Match revenues with associated expenses2. When revenue is earned, increase an accountAccrued Revenue (Accounts Receivable)1. Earn the revenue first2. Collect the cash**revenue is recorded when earned, NOT necessarily when the cash is receivedDeferred Revenue1. Receive cash first2. Earn and recognize the revenueAccrued Expenses1. Incur the expense2. Pay the cashDeferred Expense (prepaid expense)1. Cash is paid2. Incur expense when it has been used up (it is a former asset)*When there is a note payable for land, you should know that land is an ASSETon the test they will trick you by asking if land is an expense, but it isn’t because it doesn’t get used upWhen revenue is earned at the time cash is received, this is neither accrued nor deferred.End of Period Adjustments1. Accrued revenue—earned before cash received2. Deferred revenue—earned after cash is received3. Accrued expense—expense incurred before cash paid4. Deferred expense—expense incurred after cash paid*this is covered in 60% of exam*notice how each of these affect different accounts and throw your entire statement offDepreciation—using up fixed assets; deals with actual use of assets- Depreciation does not deal with cash, cash only goes out the door when we buy something- Increase in depreciation expense decreases retained earnings- Increase in accumulated depreciation on an asset decreases your assets- Example: if you buy a computer for $1000 cash, your assets go up $1000 and your cash goes down $1000- Any asset that lasts longer than one year will depreciateCurrent assets—less than one yearLong term asset—more than one yearCurrent liability—have up to 1 year to pay offLong term liability—more than 1 year to pay offStockholders’ equity—capital stock and Retained EarningsCurrent Ratio  Current Assets/Current Liabilities- *if current ratio falls from one year to the next, the company is less able to pay their short term debts- if current ratio rises, the company is more able to pay their short term debts- a healthy current ratio is above 1Quick Ratio= Quick Assets/Current Liabilities- quick assetscash or assets quickly and easily converted to cash- inventory is NOT a quick asset- quick assets include cash, accounts receivable, and short term investmentsChapter 5Internal controls—put in place to keep people honestFraud triangle—opportunity, pressure, rationalizationObjectives- matching revenues and expenses- safeguard assets, keep cash and inventory secure- avoid misappropriation of assets: make sure that assets are used for business purposesSarbanes-Oxley Actapplies to public companies and requires effective internal controls in order to avoid fraudControl Environment- risk assessment—knowing where fraud is likely to happen- control procedures—assess where fraud has actually happened- segregation of dutiesseparate duties in order to keep people from pocketing cash- collusion—two or more people collaborating on committing fraud- fraudulent statements—“cooking the books”- misappropriation of assets—stealing from your companyCash controls- handling cashsegregation of duties requires multiple people to deal with one transaction and record the amount received- cash short—having less than you should, miscellaneous expense- cash over—having more than you should, other revenue, stealing from customers- bank reconciliation—comparing bank balance of cash to the book balance of cash to ensure that they match (they should ALWAYS match after adjustments are