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Test 1 Study Guide (Chapters 1 and 2)

by: Callisa Ruschmeyer

Test 1 Study Guide (Chapters 1 and 2) ACCT 2110 - 002

Marketplace > Auburn University > Accounting > ACCT 2110 - 002 > Test 1 Study Guide Chapters 1 and 2
Callisa Ruschmeyer
GPA 4.0

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About this Document

Study guide for Chapters 1 and 2: 1- Accounting and the Financial Statements 2- The Accounting Information System
Principles of Financial Accounting
Elizabeth G Miller
Study Guide
Accounting and the Financial Statements; The Accounting Information System; Miller, financial accounting, auburn
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This 3 page Study Guide was uploaded by Callisa Ruschmeyer on Wednesday January 27, 2016. The Study Guide belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 91 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.

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Date Created: 01/27/16
Test 1 Study Guide Forms of Business Organization  Sole Proprietorship o Advantages: easily to form; control all operations; pay less taxes than corporations o Disadvantages: personally liable for any debt; life of business is only equal to the life of the owner  Partnership o Advantages: increased financial resources; more skills between two people; pay less taxes than corporations o Disadvantages: control of operations is shared; two owners liable for any debt; life of business is only equal to the life of the partners  Corporation o Advantages: raise large amounts of money; transferrable ownership (by stock); owners' only liable for the amount they invest in the business o Disadvantages: formation of business is complex; high taxes Financial Statement Time Periods  Balance sheet at beginning of period  Period-of-time Statements o Income statement o Retained earnings statement o Statement of cash flows  Balance sheet at end of period See other notes for details on the 4 Types of Financial Statements  Who uses this information? The government, investors, owners, and creditors  Balance sheet- assets, liabilities, and stockholders' equity (at a specific point in time)  Income statement- revenues, expenses, and net income/loss (over a period of time)  Retained earnings statement- retained earnings at the start, net income, and dividends (over a period of time)  Statement of cash flows- operating, investing, and financing activities (over a period of time) Some Useful Formulas  Stockholder's equity = common stock + retained earnings  Change in stockholders' equity = change in common stock = change in retained earnings  Change in retained earnings = net income - dividends  Change in stockholders' equity = change in common stock + net income - dividends Simple Accounting Vocabulary and Concepts  Revenue- assets from the sale of goods or services (increase)  Expense- assets consumed in the operation of a business (the costs)  Net income (loss)- revenues minus expenses  Dividend- distribution of earnings to stockholders  Asset- the resources of a company  Liability- resources of a company that are claimed by creditors  Stockholders' equity- owner's (stockholder's) claim on resources  Receivable- the right to collect from customers; an asset  GAAP- generally accepted accounting principles- rules and conventions of accounting  SEC- Securities and Exchange Commission- holds the power to set rules of accounting for publicly traded companies  Operating Cycle- company purchasing goods --> reselling the goods --> collecting the cash from the goods  Liquidity- the ability for a company to pay short-term debts on time (measured by working capital and the current ratio) Net Profit Margin  Net Income/Net Sales produces a percentage  Compare percentage to recent years or other markets of competitors to see how well the company is going Business Activities (Cash Flow)  Operating- any inflow or outflow directly relating to operations; what money is directly used in a business in order to earn a profit o Inflow- cash collections from customers, account receivables, cash sale (not sales on account), insurance settlement money o Outflow- payments on supplies, salaries, utilities, rent, advertising, accounts payable, inventory  Investing- relating to the acquisition or sale of investments (assets or equipment) that will later be used to generate revenues o Inflow- sale of long-term assets o Outflow- purchases of long-term assets  Financing- relating to getting capital of the company or getting the funds to start a business o Inflow- selling stock, borrowing money (loans) o Outflows- repaying loans, pay dividends to stockholders Items in the Annual Report and Professional Ethics  All four financial statements make up annual reports  Notes to the financial statements (footnotes)- clarify information in statements o The info can be numerical or qualitative  Management's discussion and analysis- management's explanation to expand on favorable and unfavorable trends o Also expand on any risks that the company may be facing (or soon to face)  Audit report- here is where the auditor's opinion is given o Best opinion- "unqualified" (basically everything looks good) o Okay opinion- "everything looks good except for _______" o Worst opinion- no opinion is given  Essentially this tells investors that the company has many issues and should steer clear of it Professional Ethics  Validity of financial statements comes from professional ethics  Ethics ensures that managers can trust their employees; investing public must trust accountants and ensure all formal codes are followed  Remember, all of the Financial Accounting PowerPoints can be found on Canvas  I also highly recommend looking at pages 26 and 29-31 in the textbook for quick reviews and summaries of the key points in this chapter!


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