94 Cards in this Set
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Net income/loss is found by:
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Net sales - Expenses
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4 basic financial statements include:
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income statement
statement of retained earnings
balance sheet
statement of cash flow
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How do individuals use accounting
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Manage bank accounts
decide whether to rent or buy
budgeting
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How do investors and creditors use accounting information
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Investors want to know how much they can earn
Creditors want to know how much they will get paid back
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2 types of accounting
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Financial accounting
managerial accounting
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Financial accounting used for:
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Outside company use:
investors
creditors
Government agencies
public
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Managerial accounting used for:
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Internal business use
budgets
forecasts
projections
decision making
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Proprietorship:
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single owner, usually small retail stores. Proprietor or owner is responsible for all business debts
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Partnership:
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2 or more co-owners. Incomes and losses depend upon agreed % owned in the business.
Owners pay taxes but the business itself is not taxed. General partners are liable, limited partners are not
ex. real estate
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Limited- liability company (LLC):
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Business (not the owner) is liable for companies dept. owner = member
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Corperation:
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Business owned by stockholders or shareholders who own stock; usually larger companies.
Corporations must pay taxes
stockholders elect board of directors such as CEO
Stockholders are not personally liable. You only lose what you invest
Double taxation
Moving company over seas = lower…
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Real estate investment trust (REIT):
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only pay tax once rather than corporations who have to pay taxes twice
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Which type of business organization transacts the most business and is the largest in terms of assets, income, and number of employees?
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Corporation
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Which of the following entities pays federal income tax?
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corporation
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An entity's equity consists of 2 accounts, Amy Jones, capital, and Mandy Lenz, capital, This entity is a(n):
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Partnership
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Advantages of corporations include:
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Limited liability of stockholders for corporation's depts
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Process of verifying accounting information in financial statements is undertaken by:
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Internal/ external tax auditors
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Generally accepted accounting principles (GAAP)
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the most common professional framework for measurement of financial information
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Financial accounting standards board (FASB)
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formulates the GAAP generally accepted accounting principles
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To be useful accounting information, it must be RELEVANT which means:
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must be capable of making a difference to decision makers
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to be useful accounting information, it must be FAITHFUL REPRESENTATION which means:
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reliable
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To be useful accounting information, it must be COMPARABLE which means:
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Capable of being compare to other company's information and consistant
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To be useful accounting information, it must be VERIFIABLE which means:
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Information must be capable of being checked for accuracy, completeness, and reliability
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To be useful accounting information, it must be TIMELY, which mean:
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Must be made available early enough to help them make their decisions
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Entity:
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Any organization (or person) that stands apart as a separate economic unit. Ex) CEO: personal cars/ homes are separate entities than business inventory/ computers
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Continuity (going-concern) assumption:
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we assume that the entity will operate long enough to sell inventories and convert receivables to cash
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Historical cost principle:
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Assets should be recorded at the actually cost that you purchased them for
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stable monetary unit assumption
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accountants assume that the dollar's purchasing power is stable over time (although inflation could alter that)
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CEO owns vacation home in Hawaii, company owns a factory in Detroit (HQ). What is considered asset of business
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Only the factory in Detroit
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Construction company pays 80k for equipment. The list price is 90k, fair value = 83k. What amount is reported on the companies balance sheet
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80k (how much you actually paid)
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Accounting equation:
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Assets = Liability + Stockholder's equity
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Assets:
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Economic resources that are expected to produce a benefit in the future
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Liabilities:
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Debts payable to creditors
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Owner's equity same as:
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Capital and stockholder's equity
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Paid-in capital:
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amount stockholders invested (common stock)
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Retained earnings:
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Amount earned by income producing activities kept for use in business (STOCKHOLDER'S EQUITY)
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Dividends:
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Distributions to stockholders of cash - generated by net income
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Blue corp.
assets = 360 mil
Property, plant, and equipment = 600 mil
other assets = 220 mil
current liabilities = 210 mil
Long term liabilities = 560 mil
Accounting equation?
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Assets = Liabilities + Owner's Equity
360 210 =(1180-70) 410
600 560
220 =770
1180
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Another way to write the accounting equation:
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Assets = Liabilities + Paid-in capital + Retained earnings
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Which item is an asset?
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Accounts receivable (future benefit to be received)
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Portion of net income that company has kept over a period of time and not used for dividends:
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Retained earnings
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If total liabilities decreased by 75k and total assets decreased by 90k during the same period, what happened to the total owner's equity during this period?
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15k decrease (90k-75k)
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Revenues were 150k, expenses were 140k, and cash dividends declared and paid = 5k. What was the net income and changed in retained earnings for the period?
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Net income = 10k (income - expenses)
Retained earnings = 5k (net income - dividends + income)
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How do you find retained earnings?
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beginning retained earnings
+ net income during period
- Dividends
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At the end of the period, account balances are as follows:
cash = 25k
accounts receivable = 40k
common stock =18k
retained earnings =14k
Liabilities = ???
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+ Cash (25k)
+ receivable (40k)
- Stock (18k)
- Retained earnings (14k)
= 33k liabilities
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Retained earnings fall into what part of accounting equation?
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Stockholder's equity
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Information reported in financial statements:
How well did the company preform that year? found in:
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income statement (statement of operations)
net income/ loss = revenues - expenses
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Information reported in financial statements:
Why did company's retained earnings change during the year? Found in:
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statement of retained earnings
Beginning retained earnings + net income (or - net loss) - dividends declared = ending retained earnings
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Information reported in financial statements:
What is the company's financial position at the end of the year? Found in:
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Balance sheet
Assets = liabilities + owner's equity
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Information reported in financial statements:
How much cash generated and spent during the year? Found in:
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Statement of cash flow
operating cash flows +/- investing cash flows +/- financial cash flow = increase/decrease in cash
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Order of financial statements
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Income statement
Statement of retained earnings
balance sheet
statement of cash flow
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Income Statements (aka statements of operations report) reports:
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measure operating performance
reports revenues and expenses for period
reports net income for the period
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which financial statement measures operating performance
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income statement
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which financial statement reports revenues, expenses, and net income
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income statement
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Retained earnings reports:
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portion of net income reinvested in business
net income increases retained earnings
net loss decreases retained earnings
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Which financial statement shows the portion of net income reinvested in the business?
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Retained earnings report
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Balance sheet reports:
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(Statement of financial position)
Reports
Assets
Liabilities
Stockholder's equity
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Current vs. Long-term assets
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Current assets: expected to be converted to cash flow within the next 12 months
Long term assets: benefit for long periods of time
including property and equipment and long term investments
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Property and equipment fit into which part of the accounting equation?
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Assets
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Stockholder's equity includes:
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ownership in business
common stock
paid in capital
retained earnings
treasury stock
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Paid in capital fits into which part of the accounting equation?
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Owner's equity
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In which financial statement can you find revenue
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income statement
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In which financial statement can you find dividends
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statement of retained earnings/ cash flow
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In which financial statement can you find current liabilities
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balance sheet
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In which financial statement can you find total assets
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balance sheet
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In which financial statement can you find selling, general, administrative expenses
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income statement
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In which financial statement can you find ending cash balance
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balance sheet/ statement of cash flow
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In which financial statement can you find cash spend buying a building
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statement of cash flow
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In which financial statement can you find net income
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income statement, statement of retained earnings, statement of cash flow
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In which financial statement can you find income tax expense
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income statement
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In which financial statement can you find common stock
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balance sheet
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In which financial statement can you find income tax payable
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balance sheet
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In which financial statement can you find long-term dept
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balance sheet
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In which financial statement can you find adjustments to reconcile net income to net cash provided by operations
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statement of cash flow
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which financial statement answers the question: what is the company's operating performance over the past year
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income statement
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which financial statement answers the question: what is the company's financial position?
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balance sheet
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Which financial statement reports the net income and dividends
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statement of retained earnings
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which financial statement reports revenues and expenses?
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income statement
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Which financial statement reports cash payments and cash receipts over a period of time
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statement of cash flow
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examples of liabilities include:
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accounts payable and notes payable
Anything with payable or dept
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cost of goods sold is:
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the direct cost of the product sold
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What is not an expense?
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dividends
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A company reports the purchase of equipment for 1 million in cash on a statement of cash flow, this is an example of:
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cash outflow from investing activity
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A company issues common stock for 100k on a statement of cash flow, this is reported as:
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financing cash flow
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all of the following would be considered investing activities on the statement of cash flow expect for:
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the payment of cash dividends
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What is the most important financial statement?
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income statement
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What does the income statement report?
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revenues and expenses
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*The ____ factor recognizes that while certain actions might be both legal and economically profitable, they still may not be right
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ethical
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What drives stock prices
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Earnings
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Transaction:
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any event that has a financial impact on the business and can be measured reliably
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*Which of the following is NOT a business transaction?
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A company fired 10% of employees due to poor sales
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Account:
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Record of all changes in a particular asset, liability, or stock holder's equity during a period
basic summary device
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Account Payable/receivable vs notes payable/receivable
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Account - promise to pay
notes - signed agreement with interest
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*A record of all changes in a particular asset during a period of time is a(n)
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account
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ACCT 201: Exam 1