Economics 200 EXAM 1 STUDY GUIDE
Economics 200 EXAM 1 STUDY GUIDE ACCT 200 007
Popular in Accounting 200 (ACCT 007 - Izabela Vandeest)
ACCT 200 007
verified elite notetaker
ACCT 200 007
verified elite notetaker
verified elite notetaker
MGMT 371 002
verified elite notetaker
verified elite notetaker
verified elite notetaker
Popular in Economic Sciences
This 9 page Study Guide was uploaded by Jacob on Friday September 23, 2016. The Study Guide belongs to ACCT 200 007 at University of Tennessee - Knoxville taught by Izabela Maja Vandeest (P) in Fall 2016. Since its upload, it has received 84 views. For similar materials see Accounting 200 (ACCT 007 - Izabela Vandeest) in Economic Sciences at University of Tennessee - Knoxville.
Reviews for Economics 200 EXAM 1 STUDY GUIDE
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 09/23/16
Accounting in business There are difference types of business such as service (provides service), merchandising (buys ﬁnished goods and sells them), and manufacturing (buys basic inputs and makes a ﬁnished good to sell to merchandisers) All three business types can be categorized into 4 forms. • Proprietorship (owned by one person that is 100% liable, owner pays individual tax) • Partnership (more than one owner that all are 100% liable, owners pay individual taxes) • Corporation (owned by stockholders or separate entities that are only liable for the amount they invest, pays taxes on business income and stockholders pay tax on dividends) • Limited Liability Company (Separate legal entity from members that are only liable for the amount invested, taxed just like a partnership) All of these business types and forms use accounting every day to conduct business operations. There are different types of accounting that provide information to both internal and external business stakeholders. Internal stakeholders are employees and managers that operate the business in hopes of a proﬁt External stakeholders are anyone associated with the business ﬁnancially that are not employed. There are 3 types of external stakeholders: • Capital market stakeholders: Lenders/creditors that lend money to business, Owners/stockholders that invest money into the business. • Product service market stakeholders: Suppliers and customers. • Government stakeholders: collect taxes Financial Accounting gives historical information to stakeholders about changes in ﬁnancial conditions using Income statements, Balance sheets, and Statement of cash ﬂows. It also provides ﬁnancial accounting at a single point in time by using the balance sheet. This type of account is what we will most focus on. Managerial Accounting gives forward-focused information to internal stakeholders with projected ﬁnancial statements and progress reports. In ﬁnancial account we use accounts to summarize the effects of business transactions. There are six account categories: Assets, Liabilities, Equity, Revenues, Expenses, Dividends All of the accounts appear on one of the four ﬁnancial statements. 1. Income statement (business proﬁt) : Revenue (Fees earned) - Expenses = Net Income 2. Statement of retained earnings: Beginning RE (previous year, if this is ﬁrst year of operation then beginning RE is 0) + Net income - Dividends = Ending RE 3. Balance sheet “The accounting equation”: Assets = Liabilities + equity If one side of the statement is affected, the other side must be equally offset ex: If you get a business loan for $1000, assets would increase by $1000 (cash) and liabilities would increase by $1000 (notes payable) 4. Statement of cashﬂows: Operating activities (cash received from operating transactions - cash paid for operating transactions) + Investing activities (cash received from sale of long-term assets - cash paid for purchase of long-term assets.) + Financing activities (cash received from the sale of capital stock or long-term debt - cash paid for dividend or longterm debt payback) = Change in cash for the period. In order for businesses to make a proﬁt they must set themselves apart from competitors. They can gain an advantage by offering a low-cost emphasis (acceptable quality, lower cost) or a premium-price emphasis (get what you pay for; unique & superior quality for higher prices. The business cycle is a circle of Finance —> Invest —> Operate Financing consists of debt ﬁnancing (borrowing money) and equity ﬁnancing (selling stock) Investing involves the business using cash to acquire other assets needed in operating. (PPE) Operating is comprised of the businesses day-to-day activities that generate revenues and expenses. Accounting practices are overseen by a range of boards and committees. FASB or Financial Accounting Standards Board writes GAAP (generally accepted accounting principles) which are the rules that determine the proper content and form of ﬁnancial statements. SEC (security and exchange commission) attempts to protect investors by overseeing private regulatory organization like the FASB IASB (Internal account standers board) To oversee business operating in a multi-national environment. The GAAP operates under 8 concepts ALL business transactions should be recorded based on these concepts. 1. Business entity concept - Record transactions of different entities separately. (owners separate from business) 2. Cost Concept - Record assets at their historical cost at time of purchase (not market value) 3. Going concern concept - business will continue indeﬁnitely unless otherwise stated 4. Matching concept - Record a period’s revenues on the periodic income statement with the expenses that helped generate those revenues. 5. Objectivity concept - Base accounting records data on objective evidence (receipts) 6. Unit of measure concept - Report all ﬁnancial statements in USD (in the U.S.) 7. Accounting period concept - Report data on ﬁnancial statements in separate time units (month by month, year by year) 8. Adequate disclosure concept - Report all relevant data that would help users understand the ﬁnancial condition and performance of the business. Accrual Accounting Concepts Recall deﬁnitions of: • Revenue: Amount earned by business. ( recorded in period it is earned, even if no cash is received. This increases equity through net income ) • Expenses: The cost of assets used or liabilities created in the process of generating revenue. ( recorded in period they are incurred whether cash is paid at the same time or not. These also decrease equity through net income. ) Expenses are recorded in the same period as the revenue they helped generate. When an expense is incurred, you should increase expense account and either: A. Decrease cash account, if cash is paid at the same time as the expense was incurred. B. Increase the liability accounts payable if cash will be paid in the future. This is an Accrued expense: ( you have incurred an expense and will pay for it later ) C. Decrease the asset prepaid expense account if cash was paid before the expense was incurred. This is a Deferred expense: ( you paid for an expense you have not incurred ) Revenue is earned in the same period as the expense that helped generate the revenue. When revenue is earned, you should increase revenue account and either: A. Increase the asset cash if cash will be received at the time you earn it. B. Increase the asset accounts receivable is clients will pay in the future. This is Accrued Revenue: ( you preformed a service/ sold a product and were promised to be paid later ) C. Decrease the liability Unearned revenue if cash was paid before you earned it. This is a Deferred revenue: ( You were paid prior to performing a service/ selling a product. ) Example: John prepaid owes 1000$ in rent per month. He has an asset of $5000 in prepaid rent. Now that this months bill is due, he loses $1000 of this asset. This is an example of a deferred expense. Assets = Liabilities + Equity Prepaid Rent no change no change $5000 -$1000 For more physical examples of this, I recommend referring to the powerpoint slides #5 - #12. At the end of an accounting period, the business adjusts accounts to assure that all revenue and all expenses during the period have been recorded. This is called End-of-Period (EOP) adjustments. This is important to do because: 1. Revenue can be earned before cash is received. (Have we earned any revenue for which we have not yet received cash?). Example: A painters company renders (performs) a service then charges for the job. 2. Revenue can be earned after cash is received. (Have we earned any revenue for which received cash earlier?) Example: Amazon receives payment for an item to ship before shipping it. 3. Expense can be incurred before cash is paid. (Have we incurred any expense for which we have not yet paid cash?) Example: Salaries payable. 4. Expense can be incurred after cash is paid. (Have we incurred any expense for which we paid cash earlier?) Example: Prepaid insurance. Depreciation is taken into account on the End-of-period adjustment. Depreciation DOES NOT reﬂect decline in market value of the asset and DOES NOT use cash. The EOP adjustment to record periodic asset depreciation is: + Depreciation expense (Income statement) and + total accumulated depreciation asset (balance sheet) Classiﬁed balance sheets are separated into: current assets (used to generate revenue within 1 year) ex: cash • • accounts receivable • prepaid expenses Fixed, long-term assets (longer than 1 year) ex: PPE • • Intangibles (pattens) • Investments current liabilities (will be satisﬁed within 1 year) ex: • Accounts payable • Unearned rent • Wages payable long-term liabilities (will be satisﬁed over longer than 1 year) ex: • Note payable stockholders equity (owners claim on assets) & (no current or long-term) ex: • Common stock • Retained earnings This information is used to determine current and quick ratios. Current ratio is calculated by: current assets ÷ current liabilities and this measures short term debt-paying ability. Quick ratio measures the company’s immediate solvency, or debt paying ability and is calculated by taking quick assets ÷ current liabilities. Quick assets are: • Cash Accounts receivable • • Short term investments (Prepaid Insurance, etc) SOX Act, Internal control, and accounting for the asset cash Internal controls are in place to prevent bad things from happening to the business. There are 3 objectives of these controls. 1. Ensure accurate & Reliable ﬁnancial reporting. ( no lying ) 2. Comply with all laws and regulations. ( not just accounting: GAAP, Taxes, and Environmental, Safety, and Financial regulations ) 3. Ensure effective and efﬁcient operations of business. There are 5 elements to maintaining good internal controls. 1. Control environment ( what is my business, what do I do ) 2. Risk assessment ( what kinds of risks are associated with my business ) 3. Control procedures ( Hiring competent employees, Rotating employee duties, Enforcing mandatory vacations, Separating responsibilities for related functions, and Proofs and Security measures ) 4. Monitoring both employee behavior and accounting system breakdowns 5. Information and communication ( feedback ) This helps deter potential events that could have adverse impacts to the business, such as fraud ( three types of fraud: Corruption, Asset misappropriation, and Fraudulent statements ) Three categories determine the risk of an event. • Opportunity ( No one checks this. ) • Pressure ( I need money. ) • Rationalization ( I deserve it. ) If all three exist this becomes a “high risk” event. Internal controls were forced into place by The ( SOX ) Sarbanes-Oxley Act in 2002 to regulate publicly-held companies. This was because of several multi-million dollar scandals from 1999-2002. This act: • Requires companies to maintain effective internal controls. • Requires companies to report effectiveness of these controls. Imposes criminal penalties for destroying records, tampering with • witnesses, or retaliating against whistle blowers. • Created a “watchdog” over auditors, The PCAOB ( Public Company Accounting Oversight Board ), to protect investors. Internal Controls over Cash Receipts are to protect cash inﬂow. To do this businesses should: • Separate duties when receiving cash ( handling cash and recording amount received ) • Use cash short and cash over accountings to highlight differences between recorded cash sales and actual cash in the drawer. This shows cash over ( other income ) and cash short ( misc. expense ) • Prepare a monthly bank reconciliation. This is to verify the company’s record of cash receipts against the bank’s record of cash receipts. Example: Sales recorded on cash register for the day totaled $1000. When the manager counted down the drawer, there was $990. $1000 expected - $990 actual = $10 missing, or short. When reporting this on record, the balance sheet would show +990$ to cash and +$990 to retained earnings. The missing $10 is categorized as a misc. expense. If the expected amount was $1000 and the actual amount was instead $1010, the additional $10 would be categorized as other income on the income statement and $1000 would be added to cash and retained earnings on the balance sheet. Internal controls over cash disbursements are to protect cash outﬂow. To do this businesses should: • Separate duties when paying cash. For example, making the payment and recording amount paid should be done by two different people. • Use a voucher system that gives written authority for every cash disbursement. • Use a petty cash fund for small purchases ( For example to buy small amounts of supplies needed now ) • Prepare a monthly bank reconciliation. ( To show/resolve differences between banks cash in/out record and company record ) When reporting cash remember cash consists of: Coins, currency, checks, money orders, and money on deposit immediately available. Cash Equivalents are extremely short term investments of cash in: Money market funds, US treasury bills, and money loaned to other corporations ( commercial paper ) Report these as a single ﬁgure in current assets.
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'