Bus Adm 201Exam # 1 Study Guide Lectures: 1 - 7Lecture 1 Intro to Financial AccountingBusiness Activities 3 types1. Financing ActivitiesBorrowing Creates Liabilities (Debts) owed to Creditors. These are called notes or Bonds Payable.(Another liability created in operating business is Accounts Payable)Issuing or selling stock creates Stockholders Equity (Dividends are distributions of profit to owners on stock)2. Investing ActivitiesObtaining resources or assets needed to run a business (Buildings, Equipment, etc.)Note: There are other types of assets needed in operating the business, ie: Cash, Inventory, Supplies not used up etc.3. Operating ActivitiesThe Day to Day of running the Business- Revenues are the increase in assets resulting from the sale of a product or service.- Expenses are the cost of assets consumed or service used in generating revenue. (Advertising, cost of goods, inventory sold, paying employees, etc.) - Other: Collect Cash on accounts receivable, buy and sell inventory, buy expenses with cash or an accounts payable.Four Reports Required by GAAP (called the Financial Statements)- Income Statement- Balance Sheet- Retained Earnings Statement - Statement of Cash Flow(Detailed Foot notes required)SEC required audited 10K annual report and 10Q quarterly reports be made available to the public.Income statement (Profit or Loss)- Reports operating success or failure for a time period- Net Income (Profit) if revenues>Expenses- Net Loss if expenses>revenues- Prepare this statement firstRetained Earnings Statement- Shows what a company did with net profit earned in prior periods. (reinvest in the company or pay out to owners)- Also see stockholders equity on balance sheet- Prepare this statement secondBalance Sheet- Specific Data (one point in time)- Reports assets owned and leans against assets by: Creditors (Liabilities) and Owners (Stock Investment + Retained Earnings = Stockholders Equity)- Formula of Balance Sheet: Assets = Liabilities + Stockholders Equity also known as the Accounting Equation- An equivalent common view is Net WorthStatement of Cash Flow- Provides information where a company gets cash and spends cash- Summarizes for a time period like an Income Statement- 3 Groups: cash from Operating, Investing, and Financing activitiesLecture 2 A Balance Sheet:1. Changes Constantly (every time an activity occurs)2. Shows assets, liabilities and equities as of a specific date. (prepare at least one per year)3. Uses original cost (historical cost principle) for most items. Current fair market value (FMV) used for some assets like marketability securities since daily price is readily available4. Only shows items that can be expressed in monetary units ($) Which assets or liabilities can’t be expressed in $$$?Current Assets:- Assets that are expected to be converted to cash or used in the business within a short period of time, usually one per year.- Current assets are listed in order of liquidity (convert them to cash)- Examples: Cash, Short term investments, receivables, inventories, supplies on hand, pre-paid expensesThe Classified Balance SheetGenerally contains the following standard classifications:- Current Assets- Long-Term Investments- Property, Plant, and Equipment- Intangible Assets- Current Liabilities- Long-Term Liabilities- Stockholders’ EquityLong-Term Investments- Assets whose conversion to cash is not expected - Assets not intended for use within the Business- Examples:-Investments of stocks, notes, and bonds of other corporations-Land held for speculation-Rental buildingsProperty, Plant, and Equipment (PP&E)- Assets with relatively long useful lives- Assets used in operating the business- Examples: land, buildings, machinery, delivery equipment, furniture and fixturesPP&E recording rules: - Record and keep on balance sheet the cost of the asset (not Value)- Expense a portion of asset cost over a number of years- Depreciation expense is recorded each year on most long lived assets used in a business- Accumulated Depreciation: appears on the balance sheet as a negative adjustment to PP&E it is the total amount of depreciation expense taken over the life of the assetIntangible Assets- Like PP&E usually have long useful life- Have no physical substance- Examples: patent, copyrights, trademarks or trade names, franchise, and goodwillCurrent Liabilities- Obligations that are supposed to be paid within the coming year- Examples: notes payable, accounts payable, wages payable, etc.Long-term (non-current) Liabilities- Debts expected to be paid after one year- Examples: bonds payable, long-term notes payable, etc.Stockholders’ Equity- Common Stock- investments in the business by the stockholders- Retained Earnings- earnings kept for use in the businessLecture 3Profitability Ratios: measures the success of a company’s ability to generate a profitRatio Discussed: Earnings Per Share (EPS)EPS = (Net Income – Preferred Dividends) / Average Common Shares OutstandingLiquidity Ratios: measures short-term ability of company to pay its debtsRatio Discussed: Working Capital Current RatioWorking Capital Equals: Current Assets – Current LiabilitiesLecture 4Accounting Information System- Accounting Transactions- Analyzing Transactions- Summary of TransactionsSteps in the Recording Process- The Journal- The Ledger- Chart of Accounts- Posting- The recording process illustrated The Account- Debits and Credits- Debit and Credit Procedures- Stockholders’ Equity relationships- Summary of Debit/Credit rulesThe Trial Balance- Limitations of a Trial Balance- Collects, organizes and processes transaction data- Transaction is an event that results in a change of a balance sheet item.- Typically it is an exchange. (Asset, liability, stock, revenue or expense for one another)Steps in transaction Analysis:Step 1: Accumulate factsStep 2: Determine effects on accounting equationNote: Algebra requires that you keep the equalityTransaction Analysis: is the process of identifying the specific effects of economic events on the accounting equation.- Two or more items will always be affected Account is…- Lowest level of detail in accounting- Records increases and decreases for a specific asset, liability, or stockholders’ equity item- Number of accounts used depends on facts and personal desires of the accountant and management -