10 02 2013 ACC Exam 1 Forms of business operations Sole proprietorship o Simple to establish o Owner controlled o Tax advantages Partnership o Simple to establish o Shared control o Broader skills and resources o Tax advantages o Easier to transfer ownership o Easier to raise funds o No personal liabilities Corporation Internal users External users Finance marketing HR management Investors creditors NOT result in Sarbanes Oxley Act Tax rates on corporations Sarbanes Oxley Act 2002 Independence for auditors increased Penalties for fraudulent activity increased Top management must now certify the accuracy of financial information internal control standards of U S publicly traded companies ALL BUSINESSNES INVOLVED IN financing investing and operating The accounting information system keeps track of the results of each of these business activities Net income will result during a time period when Revenues exceed expenses INCOME STATEMENT Reports revenues and expenses for a specific period of time o Net income revenues exceed expenses o Net loss expenses exceed revenues o Past net income provides information for predicting future net income o RETAINED EARRINGS STATEMENT Net income is needed to determine the ending balance in retained earnings Statement shows amounts and causes of changes in retained earnings during the period Time period is the same as that covered by the income statement Users can evaluate dividend payment practices o BALANCE SHEET Reports assets and claims to assets at a specific point in time Assets Liabilities Stockholders Equity Lists assets first followed by liabilities and stockholders equity Notes to the Financial Statements Clarify the financial statements Provide additional detail Notes are essential to understanding a company s operating performance and financial position Auditors Report Auditor s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles IFRS is considered to be more principles based and less rules based than GAAP Classified Balance Sheet Presents a snapshot at a point in time To improve understanding companies group similar assets and similar liabilities together Intangible Assests Assets that do not have physical substance Includes goodwill patents copyrights and trademarks or trade names The balance in retained earnings is not affected by issuance of common stock According to the FASB useful information should possess two fundamental qualities relevance and faithful representation Relevance o make a difference in a business decision Information is considered relevant if it provides information that has predictive value that is helps provide accurate expectations about the future and has confirmatory value o Materiality is a company specific aspect of relevance An item is material when its size makes it likely to influence the decision of an investor or creditor o Faithful representation means that information accurately depicts what really happened To provide a faithful representation information must be complete nothing important has been omitted is not neutral biased toward one position or another and free from error Representation What is the primary criterion by which accounting information can be judged Usefulness for decision making Periodicity periods Going Concern States that the life of a business can be divided into artificial time The business will remain in operation for the foreseeable future Full disclosure Have to report it what it equals Cant lie about something assets how much it actually cost All information about transactions must be on all financial statements and if not must be in notes Cost IFRS International financial reporting standards Over 115 countries GAAP rule based Common stock investment by stockholders Retained earning net income retained by business 10 02 2013 D EBITS INCREASE E xpenses A ssets D ividends C REDITS INCREASE L iabilities E quity R evenue normal balances and do opposite if not normal Analyzing Transactions Source document o Sales slip check bill document provide evidence Then analyzed and entered in the JOURNAL Then entry is transferred to the LEDGER o Comprised of the entire group of accounts maintained by Ledger company Posting Journal o Process of transferring J E s to ledger accounts Complete effects of a transaction Chronological record Prevent or locate errors Issued common stock for 10 000 cash Cash 10000 o Common stock 10000 Cash 10000 o common stock 10000 borrowed 5000 by signing a note cash 5000 o notes payable 5000 cash 5000 o notes payable 5000 bought equipment for 5000 equipment 5000 cash 5000 equipment 5000 o cash 5000 sotckholders invest 10000 cash in a company cash 10000 common stock 10000 borrows cash of 5000 by signing a 3 month 12 5000 note payable cash 10000 o common stock 10000 cash 5000 o notes payable 5000 1200 cash advance from a client for services that are expected to be completed in future cash 1200 o unearned service revenue 1200 got 10000 in cash from a company for guide services performed in oct cash 10000 o service revenue 10000 company paid office rent to October in cash 900 dollars paid 600 for 1 year insurance policy that expires next year purchased 3 months of supplies ON ACCOUNT from aero supply rent expense 900 o cash 900 prepaid insurance 600 o cash 600 supplies 2500 o accounts PAYABLE hired 4 employees to work on oct 15 weekly salary of 500 payable every 2 weeks first payment is oct 26th NO transaction has occurred Oct 20 company paid 500 cash dividend to stockholders Dividends 500 o Cash 500 Oct 26th company paid employee salary of 4 000 cash Salaries and wages expense 4000 o Cash 4000 Debits INCREASE assets and DECREASE liabilities Trial balance Lists accounts and their balances at a given time Order assets liabilities stk equ rev expenses Prove debit credit Error unintentional mistake Irregularity IS unethical because it is intentional Limiations but will balance anyway if o A transaction not journalized o Correct J E is not posted o Posted twice o Incorrect accounts are used in journalizing or posting o Offsetting errors are made in recording amount of a transaction Q Trial balance will NOT balance when A 100 cash dividend is debited to Dividend account ON ACCOUNT ACCT PAYABLE Should U S adopt IFRS Is IFRS developed and consistent in application Is it independent Is it established for the benefit of investors Which is correct about IFRS Uses