ACG2021 – Financial Accounting Final Study GuideMidterm 1Financial StatementsIncome Statement-Measures a company’s financial performance over a specific accounting period (period of time).1. Revenues & Gains2. Expenses & LossesRevenues – 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 firstRetained 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 – DIV1. Revenues-Revenues increase, Retained Earnings increase2. Expenses-Expenses increase, Retained Earnings decrease3. 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-Short-term investments-Accounts and notes receivable (owed money)-Inventory (what you sell) and supplies (what you use)-Prepaid expenses (rent/insurance)2. Long-Term Assets-Will be held longer than one year-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)2. Long-Term Liabilities-Obligations payable more than one year from now.-Long-term Notes Payable-Bonds Payable -Equity-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.SECS 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)-Purchase and sale of long-term assets and from investing in other companies.-Financing (Borrow)-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 EntriesAccount to be Debited (left)Account to be Credited (right)T–AccountsAccount TitleDebit | CreditAssets = Liabilities+Equity| | |-Debits (increase)-Expenses-Assets-DividendsTrial 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-Firm sells something, will receive cash later-Payable-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-Firm receives cash for goods or services it will deliver later.-Prepaid-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
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