ACCT200 Exam 1 Study Guide Chapters 1 5 Chapter 1 2 Forms of business organizations o Sole Proprietorship Advantages easy to establish owner control lowers taxes common fan Disadvantages higher personal liability hard to transfer ownership o Partnership Advantages easy to establish shared control more skills resources lowers tax Disadvantages higher personal liability hard to transfer ownership o Corporation Advantages easy to transfer ownership lower legal liability Disadvantages highers tax Financial statements and the components and their interrelationships o 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 NI o Revenue sales revenue o 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 RE o 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 sheet o Cash Flow Inflow outflow operating investment o 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 principles Examples Beg RE 100 Rev 50 Exp 20 Div 10 What is ending retained earnings ERE BRE 100 NI 30 Div 10 120 Asset Rev Exp Div CS What is net income NI rev exp NI 50 20 30 100 50 20 20 90 Asset Liability Stockholders Equity 50 decrease 20 increase Change in asset 50 FASB GAAP IASB IFRS o 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 purposes o 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 useful o 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 Materiality o Company specific aspect of relevance o 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 be o Complete nothing is omitted o Neutral no bias o Free from error accurate Examples Assets Current Assets cash prepaids inventory SI investments supplies A R LT Asset intangibles LT investment PPE Land Equip Supplies Inventory A D 100 50 40 30 25 Net PPE 100 50 25 125 Subtract accumulated deprecation Chapter 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 CS Supplies Liability RE CS Rev Exp Div Debits credits know rules and effects on type of account o Each transaction affects 2 or more accounts o Accounting equation must remain in balance o Recording done by debiting at least one account and crediting another o 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 accounts o Debit increasing normal balance o Debits increase expense asset o Debits decrease liability SE REV o DEAD Debit Expense Assets and Dividends Analyze transactions o 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 entries o The journal records the debits and credits o 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 balance o A list of accounts and their balances at a given time o Accounts are listed in the order in which they appear in the ledger o Purpose is to prove that debits equal credits o May also uncover errors in journalizing and posting o Useful in the preparation of financial statements o 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 transaction o ATB adjusted trial balance After adjusting journal entries Debits credits Distinguish difference from trial balance and financial statements Examples Normal Cash Debit Sales Credit Wages Exp Debit A R Debit A P Credit Unearned Rev Credit RE Credit CS Credit PPRent Debit Div Debit N P Credit 10 20 30 40 50 60 70 80 90 100 110 Trial Balance Debit Credit 10 20 30 40 50 60 70 80 90 100 110 Total Make list of accounts make the debit or credit make TB total Journal Entry Perform Service on account A R 100 Service Rev Perform service for cash Cash 100 Rev Buy supplies on account Supplies 100 A P Buy supplies for cash Supplies 100 Cash Pay off A P balance A P 100 A L SE 100 A L SE 100 A L SE 100 A L SE 100 A L SE Cash Cash Paid Wages Cash Sales Paid Rent Interest Inc 100 100 2000 150 50 1 Wages exp 100 Cash 2 Cash 2000 Sales Rev 3 Rent exp 150 Cash 4