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Study Guide for Test 1

by: Charles Miller

Study Guide for Test 1 COB 241

Marketplace > James Madison University > Business > COB 241 > Study Guide for Test 1
Charles Miller
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Covers the major topics that should be found on test 1.
Financial Accounting
Dr. Irving
Study Guide
financial accounting
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This 10 page Study Guide was uploaded by Charles Miller on Saturday September 17, 2016. The Study Guide belongs to COB 241 at James Madison University taught by Dr. Irving in Fall 2016. Since its upload, it has received 179 views. For similar materials see Financial Accounting in Business at James Madison University.


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Date Created: 09/17/16
COB 241 Study Guide Chapter 1 Test Financial Statements  Income Statement(IS): The most basic of the financial statements, the IS takes revenue  minus expenses to determine whether or not a company has made a net profit or loss for the year. This is classified as a flow statement. On it is the: o Revenue o Minus: Expenses o Equals: Net Income (Profit/loss)  Statement of Changes in Stockholder Equity (SOCE): This financial statements explains  the effect of a transaction on the stockholders’ equity during the accounting period. It is  also classified as a flow statement. On it is the: o Beginning Common Stock o Plus: Common Stock issued o Equals: Ending Common Stock o Beginning Retained Earnings (R/E) o Plus: Net Income o Minus: Dividends Paid o Equals: Ending R/E  Balance Sheet (BS): This financial statement gets it name from the accounting equation. Total assets balance with liabilities plus stockholders equity.The order in which the  assets on a balance sheet are shown is important. The most liquid assets are listed first  in descending order. This is classified as a stock statement o Assets  Cash  Land  Accounts Receivable  Prepaid Expense  Supplies/Inventory  Building  Equipment o Liabilities  Accounts Payable   Salaries Payable  Unearned Revenue  Notes Payable o Equity  Common Stock  Retained Earnings  Statement of Cash Flows (SOCF): This financial statement explains how a company  obtained and used cash during an accounting period. Receipts of cash are called cash  inflows and payments are cash outflows. These are broken down into 3 categories  (operating activities, investing activities, and financing activities). This is also classified  as a flow statement. o Operating Activities o Investing Activities o Financing Activities o Current Liabilities o Current Assets  Flow Statement­ Keeps a record of transactions over a time period, temporary account  Stock Statement­ Articulates all of the flow statements, is not a temporary account. Assets, Liabilities and Equity  Asset­ is a resource owned by a corporation that they expect to provide an economic  reward in the future  Liability­ future sacrifices of economic benefits that the entity is obliged to make to other  entities as a result of past transactions or other past events  Equity­ Economic unit for which accounting records are separately maintained; it is  distinct from its owners, creditors, managers, and employees  For examples of each definition see the Balance sheet section under the Financial  Statements heading Double Entry Accounting System  Definition: Record keeping system that provides checks and balances by recording two  sides for every transaction  Debit­ Entry on the left side of an account: increases asset accounts or decreases  liability and equity accounts. Includes dividends and and expenses.  Credit­ Entry on the right side of an account; increases liability and equity accounts or  decreases assets, also for revenue.  T­accounts­ Organizes financial transactions into debits and credits for specific accounts  Journal entries­ individual transactions are first recorded in a journal  Types of Transactions o Asset Source Transaction­ An asset source transaction increases an asset  account and a corresponding liability or stockholders equity account  For example; getting cash for the issue of common stock o Asset Exchange­ Asset exchange transactions involve trading one asset for  another asset  For example purchasing land with cash o Asset Use Transactions­ An asset use transaction decreases an asset account  and also decreases a liability or equity account  For example paying for a salaries expense with cash Types of Accounting Cash Basis Accounting­ Records only transactions when cash is paid and received Accrual Basis Accounting:  Record both cash and non­cash transactions  Revenues are recorded as they are earned  Expenses are “attached” to the revenues they help generate Accrual accounting is a better method of accounting because it is a more accurate picture of  what a company is actually worth. IA, FA, OA Investing Activities­ involve paying cash to purchase long­term assets or receiving cash from  selling long­term assets. Financing Activities­ include obtaining cash from owners or paying cash to owners in the form of a dividend. They also include borrowing money from creditors or paying cash towards an  outstanding note. Operating Activities­ involve receiving cash from revenue and paying cash for expenses. Cash  spent on supplies that will be used for less than a year is classified as an operating expense. Adjusting Journal Entries Deferrals: Adjust for an asset or liability at the end of reporting period t for which cash was paid  or received in advance Accruals: Record an expense/liability or asset/revenue at the end of reporting period t before  paying or receiving cash Depreciation: For a long term asset, an amount is charged to expense at a constant rate over  the asset’s life The Adjusting entry will never involve cash Blueprint for AJE  Deferrals (prepaid expenses, Unearned Expense, Supplies) o Original Cash entry that occurs during the reporting period t o Adjusting entry occurs at the end of reporting period t  Accruals (Accrued expense/revenue) o Adjusting entry occurs at the end of the reporting period  t o Subsequent cash entry occurs at the end of reporting period t  Depreciation o Original cash entry is made at the date of purchasing a long term asset in  reporting period t o Adjusting entry occurs at the end of reporting period t  Class Notes Week 1 and 2 Week 1  Sales=Revenue  o Which is synonymous with the equation transaction=events  Aggregate­ a combination of information  Types of Financial Statements   Income Statement  Statements of changes in equity  Balance Sheet  Cashflow Statement Stakeholders in a Company  Investors­ Owners of shares in a company  Creditors­ Banks, Credit Cards, Interest Charges  Government­ IRS, SEC (Regulates Capital Markets), PCAOB, FASB  Employees  Auditors­ PWC, EY, Deloitte, KPMG  Suppliers  Competitors  Customers  Analyst Dow Jones Industrial Average­ A compilation of stock prices from 30 Industry Leaders Accounting Equation Assets= Liabilities + Equity Assets­ Resources a business uses to generate revenues and make money Liability­ Obligation the business has to its creditors, such as its vendors, its bank and  its credit card company Equity­ business commitment to its stockholders ( the residual after all liabilities are paid off with assets)  Contributed Capital­ What investors put into a company  Retained Earnings­ The year over year profit of the company (accumulated  profits) Permanent Accounts­ Are also known as balance sheet accounts and do not reset at  the beginning of a new reporting period Land is always valued at the price it was last sold, not at a valuation  Historical Cost Principle (Conversationism)­ Not accounting for valuations in land prices, only last purchase price  COB 241 Week 2 Notes The Financial Statements A. Income Statement B. Statement of Changes in Equity C. Balance Sheet D. Statement of Cash Flow Flow Statement­ Keeps track of transactions over a time period, temporary accounts. Resets  after a certain period of time. Stock Statement­ Articulates all of the flow statements, does not reset every year. Statement of Change in Equity  Beginning Common stock  Common Stock Issued  Ending Common Stock  Beginning Retained Earnings  Net Income   Dividends Statement of Cash Flows  Operating activities  Income Statement  Current Liabilities  Current Assets Income Statement  Services Revenue  Interest Revenue  Interest Expense  Rent Expense  Salary Expense  Net Income Balance Sheet  Assets o Cash o Accounts Receivable o Prepaid Expense o Supplies/Inventory o Land o Building o Equipment  Liabilities o Accounts Payable o Salaries Payable o Unearned Revenue o Notes Payable  Equity o Contributed Capital  o Retained Earnings Double Entry Accounting System  Financial Transaction­ any event that affects the financial position of the company and  can be reliably recorded  T­Accounts­ Organizes financial transactions into debits and credits for specific accounts o Debits go on the left of a T­chart and Credits on the right  Journal Entries­ Individual transactions are first recorded in a journal Rules for Debits and Credits An account is debited if:  An asset increases  A liability decreases  Contributed Capital decreases  A dividend is paid An account is credited if:  An asset decreases  A liability increases   Contributed Capital increases Accrual Accounting­ An entry that doesn’t involve an exchange of cash Inventory­ Something you get in raw form and sell as a finished product


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