ACG2021 Financial Accounting Final Study Guide Midterm 1 Financial Statements Income Statement Measures a company s financial performance over a specific accounting period period of time 1 Revenues Gains 2 Expenses Losses Revenues Expenses Net Income Revenues Expenses Net Income will be positive Revenues Expenses Net Income will be negative Net Income will go to either Dividends pay stockholders Retained Earnings stay in company Prepared first Retained Earnings Represent the portion of the Net Income that the firm has kept as opposed to paying out in the form of dividends This amount will accumulate from year to year as the firm continues to retain a portion of net income ERE BRE NI DIV 1 Revenues 2 Expenses Revenues increase Retained Earnings increase Expenses increase Retained Earnings decrease 3 Dividends not an expense Dividends increase Retained Earnings decrease Prepared second after Income Statement We need NI from Income Statement Balance Sheet Reports the firm s Assets Liabilities and Equity at a specific point in time Assets Liabilities Equity Assets Economic resources sued to produce future benefits i e items the firm owns and uses in its business Arranged in order of liquidity from most liquid cash to least liquid 1 Current Assets Expected to convert to cash sold or consumed in the next year next business cycle whichever is longer Cash 2 Long Term Assets Will be held longer than one year Short term investments Accounts and notes receivable owed money Inventory what you sell and supplies what you use Prepaid expenses rent insurance Property Plant and Equipment Land Buildings Computers Equipment Intangibles Long term investments Liabilities Outsider claims and debts owed to others Arranged in order of maturity 1 Current Liabilities Obligations payable in the next year or within the next business cycles Accounts Payable you owe Notes Payable you owe bank Accrued Expenses Payable Unearned Revenue owe customer service good Equity 2 Long Term Liabilities Obligations payable more than one year from now Long term Notes Payable Bonds Payable Insider claims ownership by stockholders 1 Common Stock This represents amount of shareholders have invested 2 Retained Earnings Amount earned and kept by the business SE CS RE NI DIV REV EXP Prepared third after Income Statement Retained Earnings We need ending balance for Retained Earnings Statement of Cash Flows Records the amount of cash going into and out of the business covers period of time Operating Rev Exp Operations which is the selling of goods and services from interest and from receiving dividends Investing PPE Financing Borrow Purchase and sale of long term assets and from investing in other companies Borrowing money or paying back money that was borrowed and from paying dividends Prepared fourth after Income Statement Retained Earnings Balance Sheet We need cash balance from the Balance Sheet Transaction Analysis When the company or your customer buy i e the transaction occurs may not necessarily be the same day as when you or the customer pays Accrual Accounting Driven by the Matching Principle Records impact of transactions when they occur not if cash changes hands Required by GAAP Firm will record non cash transactions 1 Revenue Recognition Principle Recognizes revenue when it is earned services are provided goods are delivered not when cash is received Not when cash is exchanged 2 Matching Principle Match expenses to the revenues they help generate Cost of good sole expense Salaries wage expense Cash Basis Records a transaction only if cash is involved Ignored important information Results in incomplete financial statements Journal Entries Account to be Debited left Account to be Credited right T Accounts Account Title Debit Credit Assets Liabilities Equity Debits increase Expenses Assets Dividends Trial Balance Put a line on bottom of T Account Add up all the debits and credits for each account and determine balance Check to see that the sum of the debit balances equals the sum of the credit balances and A L E Accruals Represents Actions before Dollars Rev Exp recognition Receivable Payable Firm sells something will receive cash later Firm buys something will pay cash later 1 Accrued Revenue revenue first cash later Create a receivable an asset for the firm Revenue earned but not yet received Examples Accounts Receivable Interest Receivable Rent Receivable Firm makes an adjusting entry to record transaction Receivables Balance Sheet are debited A R Revenue Income Statement is credited Service Revenue When cash is received Cash Balance Sheet is debited Cash Receivables Income Statement is credited A R 2 Accrued Expenses expenses first cash later Creates a payable for the firm Expense that has been incurred but not yet paid Examples Interest Payable Wages Payable Utilities Payable Firm makes an adjusting entry to record transaction Expenses Income Statement are debited Salaries Expense Payables Balance Sheet are credited Salaries Payable When cash is received Payables Balance Sheet are debited Salaries Payable Cash Balance Sheet are credited Cash Deferrals Represents Dollars before Actions Unearned Prepaid Firm receives cash for goods or services it will deliver later Firm pays cash for goods services or supplies it will receive later 1 Deferred Revenue dollars first revenue later Creates Unearned Revenue a liability for the firm Cash has been received before performing services or delivering goods Examples Season Tickets Magazine Subscriptions Firm records the transaction Cash Balance Sheet is debited Unearned Revenue Liability on the Balance Sheet is credited Firm makes adjusting entry to record the revenue that has been earned Unearned Revenue Liability on the Balance Sheet is debited Revenue Income Statement is credited 2 Prepaid Expenses dollars first expenses later Create an asset for the firm Firm has paid for a good or service or supplies before it has been delivered received Examples Prepaid Insurance Prepaid Rent Firms record the transaction Prepaid Asset on the Balance Sheet are debited Prepaid Rent Cash Balance Sheet is credited Cash Firm makes adjusting entry to record the expenses that have incurred Expenses Income Statement are debited Rent Expense Prepaid Asset on the Balance Sheet are credited Prepaid Rent Match the expense of long term assets to the asset s useful life Rules resulting from matching principle Firm recognizes the expense of the machine over life of the asset not entirely up front when
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