ACG 2021 Online Final Exam Review Spring 2015 Chapter 1 Introduction to Financial Statements 1 Describe the primary forms of business organization 2 Sole proprietorship simple to establish owner controlled tax advantages Partnership simple to establish shared control broader skills resources tax advantages Corporation easier to transfer ownership easier to transfer funds no personal liability Identify the users and uses of accounting information a Internal vs external users Internal users marketing management finance human resources External users investors and creditors b Ethics in financial reporting e g Sarbanes Oxley The Sarbanes Oxley Act 1 Top management must now certify the accuracy of financial information 2 Penalties for fraudulent activity was increased 3 4 Independence of auditors was increased Increased oversight by the board of directors must occur including the board s selection and supervision of the independent auditor 3 Explain the three principle types of business activity 4 Financing activities has two primary sources of outside funds borrowing money and issuing shares of stock for cash Investing activities purchase of resources a company needs to operate Operating activities items commonly affected by operations revenues inventory receivables expenses liabilities net income net loss Describe the content and purpose of each of the financial statements Income Statement used to predict future net income Net Income Revenues Expenses Retained Earnings Statement shows amount and causes of change in retained earnings users can evaluate dividend payment practices Beginning Equity Owner Contributions Net Income Dividends Ending Equity Balance Sheet reports assets and claims to assets at a specific point in time Statement of Cash Flows answers where did cash come from How was cash used What was the change in the cash balance Cash Inflows Cash Outflows Net Cash Flow 5 Explain the meaning of assets liabilities and stockholder s equity and state the basic accounting equation Assets resources owned by a business Liabilities arising from expenses and represent amounts owed to another party Stockholder s Equity the capital received from investors in exchange for stock denoted capital and retained earnings Key Topics Equations Journal Entries Examples The Accounting Equation Assets Liabilities Equity 6 Describe the components that supplement the financial statements in an annual report management discussion analysis notes to the financial statements auditor s report Chapter 2 A Further Look at Financial Statements 1 Identify the sections of a classified balance sheet Assets current assets long term investments property plant equipment intangible assets Liabilities Equity current liabilities long term liabilities stockholder s equity Identify tools for analyzing financial statements and compute ratios for analyzing a company s profitability Earnings per Share EPS Net Income Preferred Dividends 2 Average Common Shares Outstanding Measures the net income earned on each share of common stock 3 Explain the relationship between a retained earnings statement and a statement of stockholder s equity The statement of stockholder s equity accounts for common stock and retained earnings Most companies use a statement of stockholder s equity rather than a retained earnings statement so that they can report all changes in stockholder s equity accounts 4 Identify and compute ratios for analyzing a company s liquidity and solvency using a balance sheet Liquidity the ability to pay obligations expected to become due within the next year or operating cycle Liquidity ratios the short term ability to pay maturing obligations and to meet unexpected needs for cash Working Capital Current Assets Current Liabilities Solvency the ability to pay interest as it comes due and to repay the balance of a debt due at its maturity Solvency ratios measure the ability of the company to survive over a long period of time Debts to Assets Ratio Total Liabilities Total Assets 5 Use the statement of cash flows to evaluate solvency Free Cash Flow 6 Explain the meaning of generally accepted accounting principles Generally Accepted Accounting Principles GAAP a set of rules and practices having substantial authoritative support that the accounting profession recognizes as a general guide for financial reporting purposes Other Standard Setting Bodies SEC FASB IASB PCAOB Key Topics Equations Journal Entries Examples 7 Discuss financial reporting concepts a Useful comparability consistency timeliness understandability b Assumptions monetary unit economic entity periodicity going concern c Principles historical cost fair value full disclosure cost constraint Chapter 3 The Accounting Information System 1 Analyze the effect of business transactions on the basic accounting equation Transactions economic events that require recording in the financial statements Not all activities and economic events represent transactions Assets liabilities and equity items change as a result of some economic event Dual effect on the accounting equation 2 Explain what an account is and how it helps in the recording process Account record of increases and decreases in a specific asset liability equity revenue or expense item Helps to ensure balance and account for each transaction made 3 Define debits and credits and explain how they are used to record business transactions Double Entry System Each transaction must affect 2 or more accounts to keep the accounting equation in balance Recording done by debiting at least one account and crediting another for the same amount Debits must equal credits 4 Identify the basic steps in the recording process 1 Analyze each transaction 2 Enter transaction in a journal 3 Transfer journal information to ledger accounts 5 Explain what a journal is and how it helps in the recording process The Journal Book of original entry Recorded in chronological order Contributions discloses complete effects of a transaction provides chronological record helps to prevent or locate errors 6 Explain what a ledger is and how it helps in the recording process The Ledger comprised of the entire group of accounts maintained by a company Chart of Accounts listing of accounts used by a company to record transactions 7 Explain what posting is and how it helps in the recording process Posting the process of transferring journal entry amounts to ledger accounts 8 Explain the purposes of a trial balance 9 Classify cash activities as
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