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Fundamentals of Financial Accounting - Exam 1

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stlwalk's version from 2016-09-16 04:38

Chapter 1

Question Answer
Sole proprietorshipBusiness organization owned by one person. The owner is personally liable for all debts of the business. Most common.
PartnershipBusiness organization owned by two or more people. Each partner is personally liable for all debts of the business.
CorporationA separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation.
AccountingAccounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities.
Financial accountingEvaluate the company; they're normally external users (creditors, investors)
Managerial accountingRun the company; internal users (managers, supervisors)
Separate entity assumptionThe financial reports of a business are assumed to include the results of only that business’s activities.
AssetsEconomic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future (ex: supplies, cash, furniture, equipment)
LiabilitiesMeasurable amounts that the company owes to creditors (accounts payable, notes payable)
Stockholder's EquityOwners’ claim to the business resources.(common stock, retained earnings)
RevenuesSales of goods or services to customers. They are measured at the amount the business charges the customer.
ExpensesThe costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities, and supplies used in the office.
Income = ??Revenues minus expenses
DividendsDistributions of a company’s earnings to its stockholders as a return on their investment. (not an expense)
Order of preparing financial statementsIncome Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows
Unit of measure assumptionstates that results of business activities should be reported in an appropriate monetary unitSt
Statement of Retained EarningsReports the way that net income and the distribution of dividends affected the financial position of the company during the period.
Income StatementMonthly (Revenues minus expenses to get net income)
Balance sheetReports at a point in time: What a business owns (assets). What it owes to creditors (liabilities). What is left over for the owners of the company’s stock (stockholders’ equity).
Statement of Cash FlowsSummarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time.
OIFOperating: activities directly related to running a business (day-to-day). Investing: buying and selling product with long-term value. Financing: bank loans, common stock, dividends.
GAAPGenerally Accepted Accounting Procedures: U.S. accounting set of rules
IFRSInternational Financial Reporting Standards: widely used accounting standards around the world
memorize

Chapter 2

Question Answer
FinancingA company can use Debt Financing (Liabilites) or Equity Financing (Common Stock) to invest in Assets.
Activities to account forDocument all activities, document what is received and given, and document dollar amount.
External exchangesExchanges involving assets, liabilities, and stockholders’ equity that you can see between the company and someone else.
Internal eventsEvents occurring within the company, for example, using some assets to create an inventory product.
Duality of EffectsEvery transaction has at least two effects on the basic accounting equation.
TransactionBusiness activity that affects the classic accounting equation (A=L+SE); Assets must equal liabilities plus stockholders’ equity for every accounting transaction.
Accounting cycleAnalyze (determine financial effects of transactions), Record (all transactions in journal), and Summarize (in ledge/T-accounts)...then trial balance and financial statements/closing entries
Trial balanceaccounting report to determine if the total debits equal the total credits
Current assetsused up or turned into cash within 12 months
Current liabilitesdebts and other obligations that will be fulfilled within 12 months
Current ratio = ??Current assets divided by Current liabilities -1.0 to 2.0- (the higher it is the better your ability to pay off debts...too high means you're not using your money for anything)
Balance sheet conceptRecord at original price and only record decreases in asset value
memorize

Chapter 3

Question Answer
Time period assumptiondividing the company’s long life into shorter chunks of time such as months, quarters, and years.
Cash Basis Accountingrecords revenues when cash is received and expenses when cash is paidAc
Accrual Basis Accounting (GAAP & IFRS)Records revenues when they are earned and expenses in the same period as the revenues to which they relate, regardless of the timing of cash receipts or payments.
Revenue Recognition PrincipleRevenues are recognized when they are earned.
Expense Recognition Principle
Net Income is not:doesn't equal cash, isn't source of value for company, and it is not exact
OperatingOperating activities are the primary source of revenues and expenses.
Net profit marginNet income divided by Revenues
memorize

Chapter 4

Question Answer
Deferral AdjustmentsAn expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period. Deferral adjustments are used to decrease balance sheet accounts and increase corresponding income statement accounts. Each deferral adjustment involves one asset and one expense account, or one liability and one revenue account.
Accrual AdjustmentsAccrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period. Accrual adjustments are used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts.
Depreciationprocess of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used
contra-accountan account that is an offset to, or reduction of, another account; ex: Accumulated Depreciation (Asset account)
Adjusting entriesAdjusting journal entries never involve cash. Adjusting entries always include one balance sheet and one income statement account.
Closing temporary accountsTransfer net income (or loss) and dividends to Retained Earnings. Establish zero balances in all income statement and dividend accounts.
Temporary vs. PermanentTemporary accounts track financial results for a limited period of time. Permanent accounts track financial results from year to year.
Closing temporary accounts (2 steps)Debit Revenue accounts and credit Expense accounts. Debit or credit the difference to Retained Earnings. Credit Dividends Declared and debit Retained Earnings. After posting these closing entries, all the income statement accounts and the dividend account will have a zero balance.
Post-Closing Trial BalanceFinal check that all debits still equal credits and that all temporary accounts have been closed.
memorize

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