ACCT200Exam # 1 Study Guide Chapters 1-5Chapter 1-2- Forms of business organizationso Sole Proprietorship Advantages: easy to establish, owner control, lowers taxes (common fan) Disadvantages: higher personal liability, hard to transfer ownershipo Partnership Advantages: easy to establish, shared control, more skills/ resources, lowers tax Disadvantages: higher personal liability, hard to transfer ownershipo Corporation Advantages: easy to transfer ownership, lower legal liability Disadvantages: highers tax- Financial statements and the components and their interrelationshipso Income statement (I/S) Revenue and expenses- Time: revenue + expenses for a period of time- Net income: revenue > expenses- Net loss: expenses < revenue- Future: use for budgets- Revenue – expenses = NIo Revenue: sales, revenueo Expenses: wages expense, insurance expense, rent expense, etc.- No assets or liabilities on I/S o Statement of retained earnings (SORE) Retained earnings, net income, dividend- Statement shows changes to retained earnings- Time: revenue + expenses for a period of time- Users can evaluate dividend- No assets or liabilities on SORE- Beg RE + NI – Div = End REo Classified balance sheet (B/S) Defined as a snapshot at a point in time Assets- Current, long term investment, intangible assets Liability- Current, long term Stockholders equity (SE)- Stock, retained earnings Reports: A, L, SE at a point in time Equation: A = L + SE Order: A, L, SE Revenue, expenses, dividends NOT on balance sheeto Cash Flow Inflow outflow operating investmento Notes to financial statements and auditor’s report Financial Statements- Clarify the financial statements- Provide additional detail- Notes are essential to understand a company’s operating performance and financial position Auditor’s Report- Auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principlesExamples: Beg RE 100 What is ending retained earnings (ERE)?Rev 50 BRE 100Exp 20 +NI 30Div 10 -Div -10 120Asset 100 What is net income (NI)? Rev 50 rev – exp = NIExp 20 50 – 20 = 30Div 20CS 90Asset = Liability + Stockholders Equity Change in asset?50 (decrease) 20 (increase) 50- FASB ~ GAAP, IASB ~ IFRSo GAAP: generally accepted accounting principles A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposeso Standard-setting bodies determine these guidelines Securities and exchange commission (SEC) Financial accounting standards board (FASB)- Issues GAAP International accounting standards board (IASB)- Issues IFRS Public company accounting oversight board (PCAOB)- Objectives of financial reporting (useful and its friends- relevant/ reliable)o Primary = financial statements are usefulo According to FASB, useful information should possess two fundamental qualities, relevance and faithful representation Relevance- Predictive value- Confirmatory value- Makes a difference in a business decision- Materialityo Company-specific aspect of relevanceo When info size makes it likely to influence the decision of an investor or creditor Faithful Representation- Information accurately depicts what really happened- Information must beo Complete- nothing is omittedo Neutral- no biaso Free from error- accurateExamples:AssetsCurrent Assets: cash, prepaids, inventory, SI investments, supplies, A/RLT Asset: intangibles, LT investmentPPE Land 100 Net PPE Equip 50 100 Supplies 40 50 * Subtract accumulated deprecation Inventory 30 -25 A/D 25 125Chapter 3- Asset = liabilities + stockholders equity (balance sheet equation)o A = L + SE A: cash, A/R, inventory, PPE, A/D, supplies L: A/P, wages payable, taxes payable, interest payable SE: RE, CSSupplies Liability RE CS Rev Exp Div ^ | = | ^ |^ |^ |^ ^| ^|- Debits/ credits (know rules and effects on type of account)o Each transaction affects 2 or more accountso Accounting equation must remain in balanceo Recording done by debiting at least one account and crediting anothero Debits must equal credits (total dollar amount)o Debit = “left”, Credit = “right”o Relationship among the assets, liabilities, and stockholders’ equity of a business: Basic equation: Assets = liabilities + stockholders’ equity Expanded basic equation: asset (debits increase) = liabilities (credits increase) + common stock (credits increase) + retained earnings (credits increase) + dividends (debits increase) + revenue (credits increase) + expenses (debits increase)- These are normal balances increasing sides- Normal balance of accountso Debit >>> increasing + normal balanceo Debits increase: expense, asseto Debits decrease: liability, SE, REVo DEAD: Debit Expense Assets and Dividends- Analyze transactionso Economic event: must be recorded in financial statements o Asset, liability, or SE items change as a result of some economic event Examples: Purchase a computer? (yes) Discuss guided trip with customer? (no)- Preparing journal entrieso The journal records the debits and creditso Contributions to the recoding process: Discloses the complete effects of a transaction Provides a chronological record of transactions Helps to prevent or locate errors because the debit and credit amounts can be easily compared- Using T- accounts- Trial balanceo A list of accounts and their balances at a given timeo Accounts are listed in the order in which they appear in the ledgero Purpose is to prove that debits equal creditso May also uncover errors in journalizing and postingo Useful in the preparation of financial statementso Limitations: A transaction is not journalized A correct journal entry is not posted A journal entry is posted twice Incorrect accounts are used in journalizing or posting Offsetting errors are made in recording the amount of a transactiono ATB= adjusted trial balance After adjusting journal entries >>> Debits = credits- Distinguish difference from trial balance and financial statementsExamples:Trial BalanceNormal Debit CreditCash Debit 10 10Sales Credit 20 20Wages Exp
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