F i n a l E x a m S t u d y G u i d e PART 1 ACG 2021 Pierno April 2012 Compiled by Tony DeFelice This study guide comes from notes and from the book I got a 100 and a 92 on the first two exams respectively CHAPTER ONE UNDERSTAND that there are three ways to organize a business Sole Proprietorship simple to establish owner controlled tax advantages Partnership simple to establish shared control broader skills and resources tax adv Corporation easier to transfer ownership easier to raise funds no personal liability UNDERSTAND that there are two types of users external auditors investors creditors and internal management finance directors etc KNOW the three types of business activities which will come in handy when we work with the Statement of Cash Flows Financing issuing stock issuing notes bonds payable paying out dividends Investing purchase of property plant and equipment investments Operating revenue expenses payables KNOW the following financial statements the order in which we prepare them what goes on them and what does not Let s start with the Income Statement Q What is the income statement A The income statement reports Revenues Expenses and eventually the Income Net Income or the Loss Net Loss for a specific period of time ex For Month Ended 3 31 2012 Income Statement Setup condensed onto one page Cole Air Income Statement FPE For Period Ended 3 31 2012 Service Revenue Advertising Revenue 10 600 400 Total Revenues 11 000 REVENUES EXPENSES Salaries Expense Rent Expense Depreciation Expense Total Expenses 400 300 1 000 Net Income Net Loss 1 700 9 300 1 The Income Statement is essentially Revenues minus Expenses equals Net Income Net Loss KNOW that amounts received from issuing stock are not revenues and dividends paid out are not expenses therefore they do not appear on the income statement Next we have the Retained Earnings Statement or the net income retained within the corporation over a certain period usually the same period as the income statement Retained Earnings Statement Setup Cole Air Statement of Retained Earnings FPE 3 31 2012 Retained Earnings 3 01 2012 Add Net Income Less Dividends Retained Earnings 3 31 2012 100 450 550 0 550 Retained Earnings for a given period is simply The Retained Earnings from the start of the period plus the net income minus the net loss less any dividends paid out which equals the Retained Earnings at the end of the period Note dividends go on THIS statement The Balance Sheet is the next financial statement it reports assets liabilities and stockholder s equity this is the basic accounting equation KNOW that ASSETS LIABILITIES STOCKHOLDERS EQUITY The equation simply means that claims to assets are subdivided into two categories claims by creditors Liabilities and claims by owners SE Balance Sheet Setup 2 Cole Air Balance Sheet March 31st 2012 Assets Liabilities and SE 2400 1000 1400 2400 Total Assets Liabilities SE Total Liabilities Total SE Total Liabilities and SE The balance sheet is in effect the Accounting Equation A L SE The last financial statement which is unrelated to the other three in a sense of relatedness is the statement of cash flows which lists the cash effects from operating investing and financing activities Statement of Cash Flows set up Cole Air Statement of Cash flows FPE 3 31 2012 Cash Flows from Operating Activities Cash received and cash paid for operating activities Cash Flows from Investing Activities Cash used to buy assets buy stock Cash flows from Financing Activities Cash received by stock purchases or payment of dividends 5 700 4 000 10 000 Net Increase decrease In Cash Cash at Beginning of the Period Ending Cash balance 11 700 32 300 44 000 The statement of cash flows is the financial statement equivalent of updating the cash account KNOW how these financial statements inter relate 1 We complete the INCOME STATEMENT first because the bottom line 2 We Then complete the STATEMENT OF RETAINED EARNINGS of the income statement is Net Income which we need to know before we can complete the STATEMENT OF RETAINED EARNINGS because the bottom line shows the updated statement of retained earnings which we then but on the BALANCE SHEET in the stockholders equity section 3 3 The Balance Sheet is then prepared and finally the Statement of Cash Flows is prepared The ENDING BALANCE OF CASH on the Statement of Cash Flows MUST equal the Cash account on the Balance Sheet AND THIS IS ALL YOU NEED TO KNOW FOR CHAPTER 1 CHAPTER TWO Chapter Two expands on Chapter One topics and is of importance but don t spend too much time here UNDERSTAND how the Balance Sheet can be segregated into Current and Long Term This is called the Classified Balance Sheet Here is a breakdown of ASSETS on the CLASSIFIED BALANCE SHEET Accumulated Depreciation is a contra account to PP E accounts Assets Current Assets Cash A R Inventories etc Long Term Investments investments in other companies Property Plant and Equipment PP E Land Equipment machinery Intangible Assets goodwill etc Likewise Liabilities can be broken down too Liabilities Current Liabilities obligations we ll pay within a year N P A P Taxes Long Term Liabilities obligations not coming up within a year Stockholder s Equity does not change The Ratios in Chapter 2 are not that important to understanding Accounting What you should UNDERSTAND are some of the concepts GAAP Generally Accepted Accounting Principles standards which accountants follow so that financial statements and reporting are uniform The following words relate to different concepts and are good to keep in mind Reliability from one set of statements to the next Comparability same standard used so we can compare different periods Consistency using the same standard so that our financial statements are reliable year after year You must KNOW The Cost Principle which says that assets are recorded at their cost at all times 4 And that s all for Chapter Two Chapter Three Chapter 3 is the basis for financial transactions much like Chapter 1 was the basis for financial statements Let s do it Business economic events are called Accounting Transactions easy enough An accounting transaction occurs when assets liabilities or SE Stockholders Equity items change as a result of some business economic event What are business economic events the purchase of a truck selling wine paying rent purchasing land etc You should already KNOW the accounting equation A L SE or Assets Liabilities Stockholders Equity THIS EQUATION like the balance
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