ACG 2021 Pierno Chapter 1 Exam 1 Study Guide Forms of business 1 Sole proprietorship single owner Advantages easy to start total control taxes Disadvantages personally liable 2 Partnership two or more owners Disadvantages personally liable 3 Corporation owned by shareholders Advantages easy to start taxes lot of control added skills Advantages easy to transfer ownership no personal liability Disadvantages control belongs to shareholders Internal Users vs External Users Internal people within the company o Ex marketing management finance human resource External people outside the company o Ex shareholders customers creditors Sarbanes Oxley Act SOX 4 Financial Statements 1 Income Statement Passed in 2002 to reduce the amount of fraud by requiring management to certify financial statements Net Income Loss Revenues Expenses i Revenue Increases in cash during normal business operations 1 Ex Sales revenue service revenue interest revenue etc ii Expenses Decreases in cash to generate revenue 1 Ex Cost of goods sold interest expense utility expense etc 2 Balance Sheet Assets Liabilities Stockholders Equity Only statement that covers ONE day i Assets What we have or what we are owed by others customers owe us cash 1 Ex Cash Accounts Receivable Supplies PPE etc a PPE Property Plant and Equipment ii Liabilities What we owe to others 1 Ex Anything with Payable notes payable accounts payable iii Stockholders Equity 1 Ex Common Stock Retained Earnings a Retained Earnings Revenue Expenses Dividends Net Income Dividends Equation must be balanced 3 Retained Earnings Statement End Retained Earnings Beginning Retained Earnings Net Income Dividends i If a company is new beginning retained earnings will be 0 4 Statement of Cash Flows Where cash came from should match cash balance on the balance sheet i Operating ii Investing 1 Inflow Revenues 2 Outflow Expenses Inflow Selling PPE 1 2 Outflow Buying PPE iii Financing Inflow Borrowing funds 1 2 Outflow Repaying loans dividends Fundamental Accounting Equation Assets Liabilities Stockholders Equity Common stock Retained Earnings Net Income Dividends Revenues Expenses Chapter 2 Classified Balance Sheet Accounting Rules Generally Accepted Accounting Principles GAAP o Accrual accounting o Only used in the U S International Financial Reporting Standards IFRS o Used by most of the world Accrual Accounting vs Cash Basis Accounting Accrual o Revenues o Expenses are recognized when earned are recognized when incurred Cash Basis not in accordance with GAAP Current Assets assets that a company expects to convert to cash or use up within one year or the operating cycle whichever is longer o Ex Cash Investments Receivables Inventories and Prepaid Expenses Current Liabilities obligations the company is to pay within the next year or operating cycle whichever is longer o Ex Accounts Payable Notes Payable Salaries and Wages Payable and Interest Payable Equations o Working Capital Current Assets Current Liabilities o Current Ratio Current Assets Current Liabilities o Revenues o Expenses are recognized when received are recognized when paid Revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned Matching Principle Expenses and revenues are recognized in the same period Financial Reports Concepts Characteristics of Useful Information Assumptions in Financial Reporting o Relevance o Reliability o Comparability o Consistency o Monetary unit o Economic entity o Time period o Going concern o Cost o Full disclosure o Materiality o Conservatism Principles of Financial Reporting Constraints in Financial Reporting Chapter 3 The Recording Process Analyze each transaction Enter transaction in a journal Transfer journal information to ledger accounts o Individual Asset Accounts Equipment Land Supplies Cash o Individual Liability Accounts Interest Payable Salaries Payable Accounts Payable Notes Payable o Individual Stockholders Equity Accounts Salaries Expense Service Revenue Common Stock Retained Earnings Dividends The Account Debit Left Credit Right They must equal Helpful hint o Each transaction affects 2 or more accounts keeping the accounting equation balanced o Recording done by debiting one account and crediting another o DEAD accounts that increase debits Debit Expenses Assets Dividends Credit Liabilities Equity Revenues o CLEqR Clear accounts that increase credits o DEBIT balance INCREASE DEBIT and DECREASE CREDIT o CREDIT balance INCREASE CREDIT and DECREASE DEBIT Chapter 4 The Accounting Cycle Journalize the transactions 1 Analyze business transactions 2 3 Post to ledger accounts 4 Prepare a trial balance 5 6 Prepare an adjusted trial balance 7 Prepare financial statements 8 9 Prepare a post closing trial balance Journalize and post adjusting entities Journalize and post the closing entries Adjusting Entries Ensures that the correct amounts are on the balance sheet and income statement Must be made every time a company prepares financial statements Includes one income statement account and one balance sheet account Two categories o Accruals o Deferrals Accruing Interest Expense When money is borrowed interest is charged for the use of that money by using it over time Interest Principal x Rate decimal x Time in years Depreciation An asset that is used in the business for more than a year must be expensed over the accounting periods that the asset will be used according to GAAP The portion of the cost allocated to any one accounting period is depreciation expense Depreciation Expense straight line method Cost Salvage Value Useful Life Accumulated Depreciation total depreciation expense taken to date Contra Asset opposite of an asset Balance sheet will show original cost of asset less accumulated depreciation aka book value o Book value Cost of Asset Accumulated Depreciation Adjusted Trial Balance Prepared after all adjusted entries are journalized and posted Proves the equality of debit and credit balances in the ledger Proves the equality of the permanent account balances that the company carries forward into the next accounting period Post Closing Trial Balance Closing the Books After financial statements are prepared companies prepare closing entries Serves two primary purposes 1 Update the Retained Earnings account 2 Close the temporary accounts Closing Entries Revenue is debited reducing it to zero Revenues increase with Credit o Account of income summary is credited increasing its balance Expenses is credited reducing
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