AC-210 Exam 1 Study Guide
AC-210 Exam 1 Study Guide AC 210
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This 6 page Study Guide was uploaded by Carter Cox on Wednesday September 21, 2016. The Study Guide belongs to AC 210 at University of Alabama - Tuscaloosa taught by Lisa McKinney in Fall 2016. Since its upload, it has received 420 views.
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Date Created: 09/21/16
AC-210 Exam 1 Study Guide Chapter 1 The Accounting System (Activities) - Operating – business of doing (buying, paying employee) - Investing – taking money from our business and invest back into the business - Financing – taking out a loan or sell stock to stockholder Accounting Reports - Financial o Evaluate the company o External Users (creditors, investors) o Most focused on - Managerial o Run the company o Internal users (managers, supervisors) Basic Accounting Equation - Assets = Liabilities + Stockholders Equity (Ownership) - (Resources owned by the company) = (Resources owed to creditors) + (Resources owed to stockholders) - Separate Entity Assumption o Financial reports of a business are assumed to include the results if only that business’s activities Assets - Economic 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 - Cash, Supplies, Furniture, Liabilities - Measurable amount that the company owes to creditors - I.O.U o Notes payable (long term), accounts payable (short term) Equity - Owners claim to the business resources o Common stock – equity paid in by stockholders Money we contribute o Retained Earnings- equity earned by the company Money you keep from your profits Money earned over time - Asserts = Liabilities + Equity (Common stock, Retained earning) Revenues, Expenses, and Net income - Revenues (how much we made) – Expenses (how much is cost to make) = net income o Revenue Sales of goods or services to customers, They are measured at the amount the business charges the customer o Expenses Costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities and supplies used Financial Statements (typically put into this order) - Incomes statement o Reports the amount of revenues less expenses for a period of time) (entire month) o Revenues Sales Revenue Service Revenue Total Revenues o Expenses Salaries and wages Rent Utilities Insurance Advertising Income Tax Total o Net Income - Statement of retained earnings o Beginning of month + Net income – Dividends Gives you end retained earnings - Balance Sheet o A = l + E o Reports at a point in time What a business owns What it owes to creditors What is left over for the owners of company’s stock o Assets Cash, accounts receivable, supplies, equipment, software o Liabilities Accounts payable Notes Payable o Equity Common stock Retained earnings - Statement of Cash Flows o Summarizes how a business operating, investing, and financing activities caused its cash balance to change over a particular time o How cash is affected by operating, investing, and financing o Inflow- cash flows into account o Outflow- Cash flows out of the account Chapter 2 Building a Balance Sheet - Asset = Liabilities + Stockholders Equity o L- Debt Financing Measurable amounts that the company owes to creditors o E- Equity Financing Owners claims to the business resources Financing and investing Activities - Exchange being taken place o What being documented - Company always receives something and gives something o Name what’s exchanged - Dollar amount associated with exchange o Analyze the financial effects Transactions and other Activities - External Exchanges o Transactions between us and outside parties o Involves liabilities and equity that you can see between a company and another person - Internal Event o Event occur within a company Using assets to create an inventory product Study the Accounting Methods - Analyze - Record - Summarize - Duality of effects o Every transaction has at least two effects on the basic accounting equation o 1 of 3 options - A=L+SE o Assets must equal liabilities plus stockholders equity for every accounting transaction - Transaction o Business activity that affects the basic accounting equation o Step 1: Analyze the Transaction - Name is given to each item exchanged this is referred to as account titles - Tailor to each companies business - An exchange of only promises is not a transaction o Therefore no impact on the accounting equation Step 2 and 3: Record and Summarize - One way to record would be to put everything into a spread sheet - Most companies use computerized accounting system o This can handle large number of transactions Debit/ Credit Framework - Keep balances correct - Whether or not it is decreasing or increasing - Assets o Normal balance (Cash equipment, software Debit balance = increase cash o Increase with Debit decrease credit - Liabilities o Normal Balance Credit - Stockholders Equity o Normal Balance Credit Current Ratio - Current Assets/ Current Liabilities Chapter 3 Cash Basis Accounting (not used in this class) - Accounting records revenue when cash is received and expenses when cash is paid - Revenue = get cash - Expenses = pay cash Accrual Basis Accounting ****** - Record 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 = Earned - Expenses = Incurred Revenues Recognition Principle - Revenues are recognized when they are earned Expenses Recognition Principle - Record expenses in the same period as the revenues with which they can be reasonably associated - Expenses and Revenues are always recorded in the same month Expenses are always debited Revenues are credited Net Profit Margin - (Net Income)/ (Revenue) Income Statement Limitations - NI doesn’t equal cash - NI doesn’t equal exact Review of Revenues - Cash received before revenue is earned o Cash = Debit o Unearned Revenue = credit - Cash at the same time as revenue o Cash = debit o Revenue = credit - Cash after revenue is earned o Accounts Receivable = debit o Revenue = credit Chapter 4 Why adjustments are Needed - Accounting systems are designed to record most recurring daily transactions, particularly any involving cash o Cash is not always received or paid in the period in which the company earns the related revenue or incurs - Income Statement o Revenues recorded when earned o Expenses are recorded in the same period as revenues to which they relate - Balance Sheet o Assets are reported at amounts representing the economic benefits that remain at the end of the period o Liabilities are reported at amounts owed at the end of the period Adjustments - Deferral o An expense or revenue has been deferred if we have postponed reporting it on the income statement until a late period o Example Cash paid for rent in advance Debit rent expense (100) Credit Prepaid rent (100) o Used to decrease balance sheet accounts and increase corresponding income statement accounts o Each adjustment involves one asset and one expense account or one liability and one revenue account o Depreciation is recorded for use of equipment Process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used Contra account Account that is an offset to or reduction of another account o Amortization is recorded for use of software - Accrual o 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 o Opposite of deferral
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