ACCTG 211 1st Edition Exam 1 Study Guide Lectures 2 11 Accounting is a language based class For this reason this study guide is not broken up into lectures but in the most logical order that brings together everything we have learned given that each new piece of information we learn is based off what we have already learned II The Accounting Equation a Assets Liabilities Shareholders Equity b Assets are owned GAAP probable future benefit c Liabilities are owed GAAP probable future sacrifice of resources d Shareholders Equity is the residual or leftover amount when assets are used to pay off liabilities A L E i Can be things like dividends expenses retained earnings etc ii Each of these items will fall into the TWO categories of Shareholder s Equity 1 Contributed Capital common stock CS 2 Earned Capital retained earnings RE III Four Basic Financial Statements used in accounting a Income Statement b Statement of Changes in Shareholders Equity i I will shorten a bit to Statement of Shareholders Equity ii Sometimes called Statement of Stockholders Equity c Balance Sheet i Only financial statement that shows the current status AT a certain point in time rather than over a financial period d Statement of Cash Flows IV Income Statement a Revenues Expenses Net Income b If revenues expenses Net Income results c If revenues expenses Net Loss results d Net Income is the link between the income statement and the statement of changes in Shareholder s Equity V Statement of Shareholders Equity a Contributed Capital and Earned Capital Total Shareholders Equity b Beginning Contributed CapitaL New Contributed Capital Ending CC c Beginning Retained Earnings Net Income Dividends Ending Retained Earnings d Total Shareholders Equity is the link between the Statement of Shareholders Equity and the Balance Sheet VI Balance Sheet a Total Assets Total Liabilities Total Shareholders Equity b This is the Accounting Equation c Total Shareholders Equity comes from the Statement of Shareholders Equity VII Statement of Cash Flows a Total Cash from Operating Activities Income Statement Total Cash from Investing Activities Long Term Assets Total Cash from Financing Activities Long Term Liabilities and Equity Net Change in Cash Beginning Cash Ending Cash b Statement of Cash Flows is basically a way of adding up the different expenditures and money earned of a company to see how cash moves and get the ending cash balance VIII How to find the income statement a Revenue Expenses net income IX How to find the statement of changes in shareholder s equity a Beginning CC CS issued Total CC b Beginning RE net income dividends Ending RE c Total CC Ending RE Stockholder s Equity X How to calculate a balance sheet a Assign each transaction to the correct part of the balance sheet b With each transaction the balance sheet should remain EQUAL XI How to calculate cash flows a Starting Cash Net Change in Cash Ending Cash b Cash flows are divided into 3 types of activities i Operating 1 Cash from Operating Activities CFFO comes from Income Statement Activities 2 EX Cash from costumers paying for expenses ii Financing 1 Cash from Financing Activities CFFF comes from Long term Liability and Equity Activities 2 EX issuing common stock taking out a loan paying dividends iii Investing 1 Cash from Investing Activities CFFI comes from Long Term Asset Activities 2 EX computers land XII Short Term VS Long Term Accounting a Only assets and liabilities can be classified into short term or long term i Shareholder s Equity simply splits into the two separate parts of contributed capital and earned capital b Long Term i A liability or asset that will be in the company for more than one year c Short Term i A liability or asset that will be in the company for less than one year XIII Cash Basis Accounting a Treats incoming cash as revenues and outgoing cash as expenses b The IRS uses this method for incomes and taxation rules c However we will not be using cash basis accounting in this class and it is not approved by GAAP XIV Accrual Accounting a The time of when an expense or revenue is recognized is separate from when the cash is actually received or disbursed i Recognize means to include on the financial statements 1 Usually speaking about the income statement here ii Role Forward Approach is when people use prior data on assets and liabilities to start the next accounting period XV Revenue Recognition Principle a Revenue is only recognized when it is earned i To be earned means to do something to deserve it ii While you may not be immediately earning the cash you have done the task or delivered the item which you are going to get paid for XVI Expense Recognition Principle a Expenses are recognized when they are incurred b Once an item has been used than it has been incurred XVII Matching Principle a Expenses are matched to revenues in the period during which the expenses were incurred to generate the revenues b Helps businesses recognize how much they truly expended to earn the revenue during a certain period XVIII There are 5 types of adjustments a Accrued Revenue Think revenue now cash later b Accrued Expenses Think expense now cash later c Deferred Revenue Think cash now revenue later i Unearned Revenue d Deferred Expenses Think cash now expense later i Prepaid Expenses e Depreciation Think of this as a long term Deferred Expense adjustment i Depreciation is the transfer of a portion of the asset s cost from the balance sheet to the income statement during each year of the asset s life f INTEREST EXPENSE i I P x R x T 1 I interest 2 P Principal amount borrowed 3 R rate of interest 4 T Time borrowed for a X months currently borrowed for b Y months in total before you pay in full c T X Y ii When we sign a note note payable we need to adjust interest expense at the end of each accounting period g DEPRECIATION i Increase Depreciation Expense Expense ii Increase Accumulated Depreciation Contra Asset iii Accumulated Depreciation is a contra asset account iv The amount of depreciation expense formula 1 Asset Cost Residual Value Useful Life 2 Straight Line Depreciation Expense per period of Useful Life I II I Double Entry Accounting a The concept that each party in each transaction gives something and receives something in return Debits and Credits a A T account is a visual depiction of a particular ledger account and is a tool used to understand the effects of one or more transactions in the account b General Ledger the collection of the