ACG3101 Exam 1 Study Guide Chapters 1 4 Chapter 1 Environment and theoretical structure of financial accounting Primary focus of financial accounting is on the information needs of investors and creditors to help them predict future cash flows Corporations acquire capital from investors in exchange for ownership and creditors by borrowing Cash receipts must cash disbursements to provide a return to investors and creditors Shareholders receive cash from dividends and sales of stock Creditors receive cash from interest payments and repayment of principle loans Cash basis revenues and expenses are recognized when cash is received and paid can show how much cash a company has at a time but may not be accurate predictor of future operating cash flows o This is why for the accrual method they have the SCF Accrual accounting NI is considered a better indicator of future operating Congress sets standards for accounting but has always delegated to cash flows accounting profession The SEC had the authority to set accounting standards for publicly traded companies Financial accounting standards board FASB sets the rules for accounting standards GAAP Auditors serve as independent intermediaries to help ensure that management has appropriately applied U S GAAP in preparing companies financial statements Goal of Sarbanes Oxley restore credibility in financial reporting process The overriding objective of fundamental qualitative characteristics of accounting info is DECISION USEFULNESS o Useful information relevance faithful representation o Relevance predictive value confirmatory value materiality o Faithful representation completeness neutrality free from error o Enhancing qualities comparability verifiability timeliness understandability o Key constraint cost effectiveness cost vs benefits An item should be recognized in the financial statements when it meets four criteria o Definition o Measurability o Relevance o Reliability Revenue realization principle revenue should be recognized only after the earnings process is complete or virtually complete and should be recognized as earned in period earned critical event usually DELIVERY point of sale Matching principle has four approached 1 Based on exact cause and effect relationships COGS 2 Associating expenses with the revenues recognized in a specific time period monthly salary payments to employees 3 A systematic and rational allocation to specific time periods straight 4 line depreciation In the period incurred without regards to revenues admin expenses advertising expenses Chapter 2 review of the accounting process Internal transactions do not involve an exchange transaction but do affect the financial position of the company adjusting entries nothing else is happening just recognizing different things Acquire assets either by borrowing or provided by own cash When assets go up either have to increase liabilities or increase S E Net income either gets disbursed as dividends or kept as retained earnings Dividends are NOT an expense but debit credit wise get treats like one when you pay out dividends debit dividends and credit cash Steps of the accounting process cycle 1 Obtain information about external transactions form source documents always need paper trail 2 Analyze transactions 3 Record the transactions in a journal 4 Post from the journal to the general ledger t accounts 5 Prepare an unadjusted trial balance tests if debits credits 6 Record adjusting entries and post to the general ledger accounts 7 Prepare an adjusted trial balance tests if debits credits 8 Prepare financial statements I S RE B S SCF 9 Close the temporary accounts to retained earnings rev income summary income summary expense income summary retained earnings retained earnings dividends income summary is a made up account 10 Prepare a post closing trial balance On the post closing trial balance at year end ONLY it is only permanent balance sheet accounting because revenues and expenses were closed zerod out When preparing financial statements there s no way to get from the income statement to the balance sheet without finding retained earnings don t forget to include RE in SE to find total L SE o Beginning RE Net Income Dividends Ending RE The statement of shareholders equity presents changes in various PERMANENT shareholders equity accounts that occurred during the period from investments by owners distributions to owners net income and other comprehensive income Conversion from CASH BASIS to ACCRUAL BASIS o Add increases in an asset Deduct decreases in assets An increase in accounts receivable means that the company earned more revenue than cash collected requiring the addition to cash basis income o Add decreases in accrued liabilities Deduct increases in accrued liabilities A decrease in interest payable means that the company incurred less interest expense than the cash interest it paid requiring the addition to cash basis income Cash income is just an inflow and outflow of cash not actual revenues and expenses Make journal entries for the increases decreases in accounts If a revenue would have been recognized through the accrual method add that amount to cash basis income because revenue increases accrual income If an expense would have been recognized through the accrual method subtract that from cash basis income because an expense decreases accrual income Since a decrease in cash in the accrual method isn t considered an expense like the cash basis you have to add cash decreases back into accrual income if you decrease your cash Since an increase in cash increases the cash basis income but wouldn t be considered revenue in the accrual method if cash increases it needs to be subtracted from cash based income fuck this conceptually memorize table ASSETS LIABILITIES INCREASES add deduct DECREASES deduct add Chapter 3 The Balance Sheet and Financial Disclosures Balance sheet usefulness and limitations o Reports a company s financial position on a particular date o Described many of the resources a company has for generating future cash flows o Provides liquidity information useful in assessing a company s ability to pay its CURRENT obligations liabilities o Provides long term solvency information relating to the riskiness of a company with regard to the amount of liabilities in its capital structure o The drawbacks of a balance sheet include It does not portray the market value of the entity as a going concern nor its liquidation value Resources such as