ACCTG 211 1st EditionExam # 1 Study Guide Lectures: 2 – 11Accounting 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 Equationa. Assets = Liabilities + Shareholders’ Equityb. 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 Equity1. Contributed Capital (common stock: CS)2. Earned Capital (retained earnings: RE) III. Four Basic Financial Statements used in accountinga. Income Statementb. Statement of Changes in Shareholders’ Equityi. I will shorten a bit to “Statement of Shareholders’ Equity”ii. Sometimes called “Statement of Stockholders’ Equity”c. Balance Sheeti. Only financial statement that shows the current status AT a certain point in time rather than over a financial periodd. Statement of Cash FlowsIV. Income Statementa. Revenues – Expenses= Net Incomeb. If revenues > expenses, Net Income resultsc. If revenues < expenses, Net Loss resultsd. Net Income is the link between the income statement and the statement of changes in Shareholder’s EquityV. Statement of Shareholders’ Equitya. Contributed Capital and Earned Capital = Total Shareholders’ Equityb. Beginning Contributed CapitaL+ New Contributed Capital = Ending CCc. Beginning Retained Earnings + Net Income– Dividends = Ending Retained Earningsd. Total Shareholders’ Equity is the link between the Statement of Shareholders’ Equity and the Balance SheetVI. Balance Sheeta. Total Assets = Total Liabilities + Total Shareholders’ Equityb. This is the Accounting Equationc. Total Shareholders’ Equity comes from the Statement of Shareholders’ Equity.VII. Statement of Cash Flowsa. 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 Cashb. 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 statementa. Revenue-Expenses = net incomeIX. How to find the statement of changes in shareholder’s equitya. Beginning CC + CS issued = Total CCb. Beginning RE + net income – dividends = Ending REc. Total CC + Ending RE = Stockholder’s Equity X. How to calculate a balance sheeta. Assign each transaction to the correct part of the balance sheetb. With each transaction the balance sheet should remain EQUALXI. How to calculate cash flows a. Starting Cash + Net Change in Cash = Ending Cashb. Cash flows are divided into 3 types of activitiesi. Operating1. Cash from Operating Activities: “CFFO” comes from Income Statement Activities2. EX: Cash from costumers, paying for expensesii. Financing 1. Cash from Financing Activities : “CFFF” comes from Long term Liability and Equity Activities2. EX: issuing common stock, taking out a loan, paying dividendsiii. Investing1. Cash from Investing Activities: “CFFI” comes from Long-Term AssetActivities2. EX: computers, landXII. Short Term VS Long Term Accounting a. Only assets and liabilities can be classified into short term or long termi. Shareholder’s Equity simply splits into the two separate parts of contributed capital and earned capital.b. Long Termi. A liability or asset that will be in the company for more than one yearc. Short Termi. A liability or asset that will be in the company for less than one yearXIII. 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 hereii. Role Forward Approach: is when people use prior data on assets and liabilities to start the next accounting period. XV. Revenue Recognition Principlea. Revenue is only recognized when it is earned. i. To be earned means to do something to deserve itii. 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 Principlea. 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 adjustmentsa. 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 Revenued. Deferred Expenses. Think “cash now, expense later.”i. Prepaid Expensese. 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 EXPENSEi. I = P x R x T1. I = interest2. P = Principal (amount borrowed)3. R= rate of interest4. T= Time borrowed for. a. X = months currently borrowed forb. Y = months in total before you pay in full c. T = X/Yii. When we sign a note (note payable), we need to adjust interest expense at the end of each accounting periodg. DEPRECIATIONi. Increase Depreciation Expense (Expense)ii. Increase Accumulated Depreciation (Contra-Asset)iii. Accumulated Depreciation is a “contra-asset” accountiv. The amount of depreciation expense formula:1. (Asset Cost – Residual Value) / Useful Life 2. “Straight-Line” Depreciation Expense per period of