ACG2021: Intro to Financial Accounting Final Exam Study GuideChapter 1- Proprietorship: owned by 1 persono Pro: Tax advantageso Pro: Simple to set upo Con: Personally liable for debts- Partnership: owned by 2 or moreo Pro: Tax advantageso Pro: Unique skills from both peopleo Con: Personally Liable for debts- Corporation: owned by manyo Pro: No personal liabilityo Pro: Easier to raise fundso Pro: Easier to sell- Internal Users: plan, run, and organize a businesso Marketing managers, management, human resources, financeso Just think of it as people with inside knowledge!- External Users: Investors and creditorso “On the outside looking in”- Preparing an Income statemento List revenueso List expenseso Subtract expenses from revenues: this number is recorded as NET INCOME- Preparing a Retained Earnings Statemento List beginning retained earningso Add net incomeo Subtract dividendso The total is recorded as ENDING RETAINED EARNINGS- Preparing a Balance Sheeto List assetso List liabilities and Stockholders equity, and add togethero Show that Assets equal Liabilities plus Stockholders Equityo IF THEY DON’T EQUAL, YOU MADE A MISTAKE- Financing Activities: borrowing money or issuing stocks for cash- Investing Activities: Purchases of resources necessary for operationo Ex: equipment- Operating Activities: Activities caused directly by operationo Ex: inventory, salaries- Preparing a Statement of Cash Flowso List cash flow from operatingo List cash flow from investingo List cash flow from financingo Add the three together—net increase in casho Add amount of cash at beginning of periodo This equals the ending cash balance!- The Accounting Equation: Assets=Liabilities + Stockholders Equity (Common stock + Retained Earnings)- Which financial statement if for a specific date, rather than covering a period of time?o Balance sheetChapter 2- Classified Balance Sheet: The same as a balance sheet, but you group similar assets and liabilities together- Asset Classifications: o Current assets: convert to cash within 1 year/operating cycleo Long term investments: stocks and bonds held over 1 year AND long term assets not being usedo Property, Plant Equipment: assets with long useful liveso Intangible Assets: Goodwill, Patents, etc. - Liability Classifications:o Current Liabilities: obligations that have to be paid off in the next year/operating cycleo Long Term Liabilities: Expected to pay after 1 year - Stockholder’s Equity Classifications:o Common Stocko Retained Earnings- Working Capital: current assets-current liabilities- Current Ratio: current assets/current liabilitieso WEAKNESS: it doesn’t disclose the composition of the assets- Solvency: a company’s ability to pay due interests and debts- Free Cash Flow: Cash by operations-Capital expenditures-Cash dividends- 4 characteristics of useful [financial] info: relevance, reliability, comparability(to other companies), consistency (using consistent methods)- Monetary Unit Assumption: on financial statements, only include things that can be expressed in terms of money- Economic Entity Assumption: Every separate entity can be identified and accounted for- Time Period Assumption: The economic life of a business can be divided into artificial time periods- Going Concern Assumption: The enterprise will continue long enough to fufillobjectives- Cost Principle: Record assets at cost- Full Disclosure Principle: Disclose circumstances that make a difference to financial statement users- 2 Accounting Constraints:o Materiality: Companies don’t have to follow GAAP (Generally Accepted Accounting Principles) for small amountso Conservatism: when in doubt, choose solution that will least likely overstate assets and income- Accrural vs Cash-basis counting: accrural records statement when even occurs, as opposed to cash-basis, which is when cash is received for it (or paid)- Matching Principle: Expenses matched with revenues in the period when effortt are expended to generate the revenuesChapter 3- Steps of recording process: o Analyze transactiono Enter transaction in journalo Transfer journal info to ledger accounts- DEBITS: LEFT, CREDITS: RIGHT!!!- Ledger: Contains entire group of accounts maintained by a company- Asset: Debit for an increase, Credit for a decrease- Liabilities: Debit for a decrease, Credit for an increase- Common Stock AND Retained Earnings: Debit for a decrease, Credit for an increase- Revenue: Debit for a decrease, Credit for an increase- Expense: Debit for an increase, Credit for a decrease- Trial Balance: o Lists accounts and their debits or credit balanceo Add all the debits and all the creditso DEBITS MUST EQUAL CREDITSChapter 4- Adjusting Entries: Made at the end of the period to ensure revenue recognition and matching principles are followed- Deferral adjusting entries: o Prepaid expense: gets usedo Unearned revenue: gets earned- Accrural adjusting entries: o Revenue: earned, but not yet received in cash or recordedo Expense: incurred, but not yet paid in cash or recorded- Prepaid Expense AdjustmentSo and so Expense XXPrepaid so and so XX- Used supplies adjustment:Supplies expense XXSupplies XX- Purpose of depreciation is cost allocation NOT VALUE!!!***Depreciation and Value shouldn’t be used in the same sentence!***- Accumulated Depreciation AdjustmentDepreciation Expense XXEquipment XX- Unearned Revenue Adjustment:Unearned Revenue XXService Revenue XX- Accrued Revenue Adjustment:Accounts receivable XXRevenue XX- Finding Interest Expense: Face Value ×Interest Rate ×Time in terms of 1 yro Ex: 1/12=1 month- Adjusted Trial balance: 2nd trial balance, to be prepared following adjusting entries- How to calculate salary expense: amount made per day×days worked- Cost-Accumulated depreciation=Book Value***Book Value and Market Value ARE NOT the same thing!***- Temporary accounts: Revenues, Expenses, and Dividends- Closing entries1. Service Revenue XXIncome Summary XX2. Income Summary XXAll Expenses XX3. Income Summary XXRetained Earnings XX4. Retained Earnings XXDividends XX- The purpose of the post-closing trial balance is to prove the equality of the permanent account balancesChapter 5- Gross Profit (AKA Gross Margin)=Sales Revenue (Net Sales)-Cost of Goods Sold- The only expense that ISN’T an operating expense is interest expense!!!- Goods Available for Sale=Beginning Inventory+ Net purchases- Costs of Goods Sold:o Total cost of merchandise that has been sold during a specific periodo Goods
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