ACCT 209 1nd EditionExam # 1 Study Guide Lectures: 1 - 4Note: This study guide is organized by topicIntro to Accounting and Business (Lecture August 27)Equations needed: NoneWhat is Accounting?Accounting is the process of analyzing, recording, and classifying business transactions and communicating that information to decision makers.Compare accounting and bookkeepingBookkeeping is a subset of accounting. It is the recording part of accountingWhat is accounting needed for?Business external decision-making (People outside day to day management; Also Financial Accounting), Business internal decision-making (Management accounting), and other decision-makingWhat is a business and what are the different functions and forms?A business is an organization that uses resources to provide goods and services to earn a profit.Functions: Service (Provide a service), merchandising business (Purchase good for resale), and manufacturing. Forms: Proprietorship (1 owner with unlimited liability), Partnership (2 or more owners with unlimited liability), Corporation(Business is an entity with limited liability), and Limited Liability Company (pass-through entity with limited liability). What are the generally accepted accounting principles(GAAP)?SEC – Securities and Exchange Commission. Created in 1930’s by congress after stock market crash. Have authority over accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the publicFASB – Financial Accounting standards board. Primary responsibility for developing account principles. Created by SEC.IASB/IFRS – Internal accounting standards board/ international financial reporting standards. PCAOB – Public Company Accounting oversight board. Created with the Sarbane-Oxley Act.What is the Primary objective of accounting information?Provide information useful for decision makingWhat are the four financial statements?Income Statement, Statement of Retained earnings, balance sheet, and statement of cash flows.Note on homework over this topic: On balance sheet always record assets as price purchased at,Even if the value of assets goes down or up. Analyzing Transaction and the Financial Statements (Lecture September 3 and 10) Equations needed:Income StatementRevenue(Expenses)Net incomeIncome Statement for Retail industrySales Gross Profit (Cost of goods sold) (Operating costs)Gross profit Net incomeStatement of Retained EarningsBeginning Retained Earnings Net Income (Dividends)End retained earningsStatement of Stockholders equityCommon StockRetained EarningsStock holder equityBalance SheetAssets = Liabilities + Stock holder EquityStock Holders Equity equationBeginning Stockholders EquityStock IssuancesNet Income (Dividends)End Stockholders EquityNote: Add if not in parenthesis, subtract if in parenthesis Note: Arrows show how statements are connectedAssets:CashLandBuildingEquipmentFurnitureCashMarketable SecuritiesAccounts Receivable Notes ReceivableInventorySuppliesPrepaid expensesLiabilities:Accounts payableNotes PayableWages PayableInterest payableRent PayableTaxes PayableUnearned RevenueStockholder Equity:Common StockRetained EarningsProblem 1:The accountant for Basic Corporation prepared the following list of the company's accounts withtheir balances as of December 31, 20X1:Accounts payable $ 22Accounts receivable 14Advertising expense 53Capital stock 17Cash 32Dividends 3Equipment 42Income tax expense 18Land 22Notes payable 20Retained earnings ?Revenue 168Salaries expense 44Utilities expense 40A) What is the amount of total liabilities that will appear on the company's December 31, 20X1 balance sheet?Liabilities: Accounts payable and Notes payable22 + 20 = 42B) What is the amount of Net income that the company will report for 20X1?Revenue 168(Expenses) (53 + 18 + 44 + 40)Net income XSolve for X, X = 13C) What amount of Retained earnings will appear on the company's December 31, X1 balance sheet?Assets = Liabilities + Stock holder Equity => (14 + 32 + 42 + 22) = 42 + XSolving for X, X= 68 Stock Holder Equity = Capital Stock + Retained Earnings => 68 = 17 + XSolving for X, X = 51Lane Company has been in business for five years. As of December 31, 2012, Lane had assets of $75,000 and liabilities of $25,500. After a successful year of business in 2013, the company’s assets had increased by $13,500, and liabilities had increased by $6,900. A new investment of $3,600 was made into the business during 2013, and a dividend of $1,500 was paid to the owners. Based on this information, determine Lane Company’s net income for the year 2013.Assets = Liabilities + Stockholders Equity 75,000 = 25,500 + XSolving for X, X= 49,500 This is beginning Stockholders EquityAssets = Liabilities + Stockholders Equity 88,500 = 32,400 + XSolving for X, X= 56,100 This is end Stockholders EquityBeginning Stockholders Equity 50,000Stock Issuances 3,600Net Income X(Dividends) (1,500)End Stockholders Equity 56,100Solving for X, X=4,500Recording Business Transactions and Adjusting EntriesWhat are the rules of Debit/Credit?Debit is left while right is credit.Only Expenses, Assets, and Dividends increase on the debit side. Easy way to remember:Debits increaseExpensesAssetsDividendsLiabilities, Stock, Retained Earnings, and Revenue increase on the credit side.What is the difference between the Journal and the Ledger?They both contain the same information but have a different format. The journal is organized bytransactions and the ledger is organized by account.What is the Difference between the trial balance and the balance sheet?The balance sheet shows assets = liabilities + stockholders equity while the trial balance shows that debits = credits.What is accrual basis accounting?Transactions are recorded based on Revenue recognition (Record revenue when earned), the matching principle (Record expenses in the same period as the revenue), and requires adjusting entries.What are the rules of adjusting entries?They are dated at the end of the accounting period, they always affect 1 income statement account and 1 balance sheet account, and they don’t affect