ACCT 200 Exam 1 Study Guide Lectures 1 10 Chapter 1 Assets things owned by a business that provide future value Liabilities amounts owed to someone Equity ownership of a company Revenues sales earned earned revenue Expenses incurred used up assets Dividends payments distributions of cash to stockholders NOT EXPENSES Assets Liability Owner s Equity Operating activities day to day activities less than one year Investing activities long term longer than one year Financing activities ways to initially acquire capital through stock or debt A business sells goods services to earn a profit 1 Service business provide services to customers 2 Merchandising buy finished goods from suppliers 3 Manufacturer buy inputs and convert them into a product Forms of Business 1 Proprietorship not separate legal entity full liability 2 Partnership proprietorship with partners separate legal entity from partners but each general partner is responsible for the other s actions 3 Corporation can issue stock separate legal entity from owner 4 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 future GAAP Generally Accepted Accounting Principles written by Financial Accounting Standards Board FASB these are a set of guidelines that apply to U S businesses only The 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 GAAP GAAP concepts 1 2 3 4 5 6 7 8 Business entity concept owners are separate from business Cost concept historical cost must be reflected as purchase price Going concern Matching concept match revenues with expenses Objectivity concept Unit of measure Accounting period concept items must be recorded in the correct period Adequate disclosure concept display enough info for banks creditors to make an accurate decision about the company s reliability Chapter 2 Controls 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 future Chapter 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 an expense recorded Matching 1 Match revenues with associated expenses 2 When revenue is earned increase an account Accrued Revenue Accounts Receivable 1 Earn the revenue first 2 Collect the cash revenue is recorded when earned NOT necessarily when the cash is received Deferred Revenue 1 Receive cash first 2 Earn and recognize the revenue Accrued Expenses 1 Incur the expense 2 Pay the cash Deferred Expense prepaid expense 1 Cash is paid 2 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 up When revenue is earned at the time cash is received this is neither accrued nor deferred End of Period Adjustments 1 2 3 4 Accrued revenue earned before cash received Deferred revenue earned after cash is received Accrued expense expense incurred before cash paid 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 off Depreciation 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 depreciate Current assets less than one year Long term asset more than one year Current liability have up to 1 year to pay off Long term liability more than 1 year to pay off Stockholders equity capital stock and Retained Earnings Current 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 1 Quick 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 investments Chapter 5 Internal controls put in place to keep people honest Fraud triangle opportunity pressure rationalization Objectives matching revenues and expenses safeguard assets keep cash and inventory secure avoid misappropriation of assets make sure that assets are used for business purposes Sarbanes Oxley Act applies to public companies and requires effective internal controls in order to avoid fraud Control 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 company Cash 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 made