Accounting Final Study GuideChapter 1- Sarbanes-Oxley Act intends to reduce unethical accounting decisions by requiring the certification of the accuracy of financial information. It also increases the independence of outside auditors and increase role of board of directors.- FASB- financial accounting standards board- GAAP is American accounting standards and IFRS is international standardso Convergence between two to make similar- Two measurement principleso Use relevance and faithful representation to decide whicho Cost Principle- companies record assets at their costo Fair Value- Assets and liabilities should be reported at fair value- Assumptionso Monetary Unit Assumption- requires companies include in the accounting records only transaction data that can be expressed in money terms; used to quantify economic eventso Economic Entity Assumption- the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities; particular unit of accountability- Proprietorship- owner receives any profits, suffers any losses, and is personally liable for all of the business. No legal distinction between businessand owner.- Partnership- proprietorship with two owners- Corporation- Stockholders have limited liability; ease of transferring ownership; unlimited life.- Assets = Liabilities + Owner’s Equity- Revenues, expenses and dividends determine retained earnings.o Retained Earnings = Net Income – DividendsChapter 2- Account Balanceso Assets: Debit Increase Credit Decreaseo Liabilities: Debit Decrease Credit Increaseo Common Stock: Debit Decrease and Credit Increaseo Retained Earnings: Debit Decrease Credit Increaseo Dividends: Debit Increase Credit Decreaseo Revenues: Debit Decrease Credit Increaseo Expenses: Debit Increase Credit Decrease- Trial Balance: Proves debits equal credits at any given timeo Doesn’t prove company has recorded all transactions or ledger is correcto Transposition error- reversing the order of numbersChapter 3- Time Period Assumption- accountants divide the economic life of a business into artificial time periods- Accrual-Basis Accounting- companies record transactions that change a company’s financial statements in the periods in which the events occur- Cash-Basis Accounting- companies record revenue when the receive the cash- Revenue Recognition Principle- companies recognize revenues in the accounting period in which the performance obligation is satisfied- Expense Recognition Principle (Matching Principle)- Match expenses with revenues in the period when the company makes efforts to generate those revenues- Adjusting Entry Typeso Ensure that revenue and expenses recognition principles are followedo Deferrals Prepaid Expenses Unearned Revenueso Accruals Accrued Revenues Accrued ExpensesAppendix 3BQualities of Useful Information- Relevanceo Needs a predictive value and has confirmatory value- Faithful Representationo Must be complete and neutral- Enhancers:o Comparability, consistency, verifiability, timeliness, and understandability Assumptions- Monetary Unit Assumption – only things that can be expressed in money are included in the accounting records- Economic Entity Assumption – activities of the owner must be kept separate from business activities- Time Period (Periodicity) Assumption – life of a business can be divided into artificial time periods- Going Concern Assumption – businesses will remain in operation for the foreseeable future- Accrual-Basis Assumption – transactions that change a company’s financial statement are recorded in the time period in which they occurPrinciples- Measurement Principleso Cost Principle- record assets at costo Fair Value Principle – record assets and liabilities at a fair, current value- Revenue Recognition Principleo Companies recognize revenue in the accounting period in which the performance obligation is satisfied- Expense Recognition Principle (Matching)o Expenses must be matched with revenues.- Full Disclosure Principleo Companies must disclose all circumstances and events that would make a difference to financial statement usersConstraints- Materiality Constraint- a company must apply the rules of GAAP if an item is material enough to make an impact on a company’s overall financial conditions and operations- Cost Constraint- Accounting standard setters weigh the cost in providing certain financial statements and information when requiring companies to do so Chapter 4Income Summary: temporary account used to record Net IncomeClosing Entries1. Close Revenues into Income Summary2. Close Expenses into Income Summary3. Close Net Income into Retained Earnings4. Close Dividends into Retained EarningsAccounting Cycle1. Analyze Transactions2. Journalize Transactions3. Post to ledger accounts4. Prepare a trial balance (worksheet)5. Journalize and post adjusting entries6. Prepare an adjusted trial balance (finish worksheet)7. Prepare Financial Statements8. Journalize and post closing entries9. Prepare post closing trial balance10. Reversing entries if necessaryChapter 9Plant Assets: resources that have a physical substance, used in operations of a business, and are not intended for sale to customers-Land: debit account all costs incurred to make land read for its intended use-Land Improvements: structural additions made to land-Buildings: when a building is purchased, sots include purchase price, closing fees and broker commission. When a new building is constructed, costs include contract price, any architect fees, permits and excavation costs.-Equipment: include assets used in operationsDepreciation: process of allocating to expense the cost of a plant asset over its usefulservice life in a rational and systematic mannerFactors in Computing Depreciation:1. Cost2. Useful life – estimate of the expected productive life3. Salvage Value – estimate of the asset’s value at the end of its useful lifeDepreciation Methods:1. Straight Line2. Units of activity3. Declining balanceStraight Line-Companies expense the same amount of depreciation each year of the assets useful lifeDepreciable Cost = Cost – Salvage ValueAnnual Depreciation Expense = (Cost – Salvage Value) / Useful Life (years)*Or use an annual rate of depreciation.Units of Activity-Useful life is expressed in terms of the total units of production or use expected from the assetDepreciable Cost / Total Units of Activity = Depreciable Cost Per UnitDepreciable Cost per Unit x