Exam 1 Study Guide
Exam 1 Study Guide MGMT 200
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This 4 page Study Guide was uploaded by Rachel Rozow on Saturday September 24, 2016. The Study Guide belongs to MGMT 200 at Purdue University taught by Frank T. Kane in Fall 2016. Since its upload, it has received 7 views. For similar materials see Introductory Accounting in Business at Purdue University.
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Date Created: 09/24/16
Accounting Study Guide: Exam 1 Business Entity: A company or business Events and Transactions: What takes place, the actions of the company Storage Units: Where information of the actions is placed Financial Statements: The reports constructed with the information of transactions after a prescribed period (30 days to one year), Monetary biographies The Financial Statements: 1) Balance Sheet 2) Income Statement 3) Statement of Changes in Equity 4) Statement of Cash flows The two primary functions of Financial Accounting are to measure business activities and to communicate said activities to external parties. In financial accounting, the users are external, the rules must follow GAAP (Generally Accepted Accounting Principles), the objective must be verifiable, and the emphasis is on the history of the company. The Accounting Equation Assets = Liabilities + Stockholders’ Equity Stockholders’ Equity = Revenues – Expenses – Dividends (or) Stockholders’ Equity = Profit – Dividends All profits/net income of a business entity are/is claimed by stockholders Business Structures Sole proprietorships: business owned by one person (most common in the US) Partnership: business is owned by two or more persons Corporations: business is legally separate from the owners, stockholders Limited liability of stockholders Financing activities: transactions the company has with investors and creditors Investing activities: transactions involving the purchase and sale of resources that provide benefit for several years Operating activities: transactions that relate to the primary operations of the company *I would suggest looking at the models of all the reports from the book Financial Statements: repots revenues and expenses over a period of time all accounts ending in “expense” or “revenue” should appear in an income statement Statement of Stockholders’ Equity: summarizes the changes in stockholders’ equity over time Change on Retained Earnings = Net Income – Dividends Balance Sheet: a point in time of the income statement “assets” and “resources” are interchangeable Statement of Cash Flows measures activities involving receipts and cash payments over time Operating cash flows: cash transactions involving revenues and expenses Investing cash flows: cash transactions involving longterm assets Financing cash flows: cash transactions involving lenders and stockholders Order of Preparation: Income Statement, Statement of Stockholders’ Equity, Balance Sheet, Statement of Cash Flows FASB Financial Accounting Standards Board governed by the SEC (Securities Exchange Commission) IASB International Accounting Standards Board Objectives of financial accounting: Financial information Useful for decision making by investors and auditors (hired by the board of directors to ensure financial reports are following the standards of the GAAP) Assists in the prediction of future cash flows Displays economic resources, claims to resources, and changes between the two The most important objective or one of them is predicting cash flows Account: summary of all transactions related to a particular event or item over a period of time Chart of Accounts: a list of all the account names each transaction will have a dual effect on the equation, so make sure to ask yourself: What is one account affected by the transaction? What is the second account affected by the transaction? Where do the credit and the debit apply? Transactions using the expanded equation: Provide a service, ship a product = change in revenue Promise to pay, payment = change in assets Salaries, wages, cost of materials = expenses Differed revenue is when revenue is recorded but not counted Debits and Credits: Liabilities and Equity Accounts increase in credit and decrease on debit Asset Accounts increase on debit and decrease on credit Assets(Dr) = Liabilities(Cr) + Equity(Cr) Expense recognition: anticipating the costs of an event and dealing with them before the event takes place these are not recorded until the revenue is generated from said event. These costs may include salaries of employees, purchase of supplies, and estimated costs involved with fuel The difference between accrualbasis and cashbasis accounting lies in the timing of when revenues and expenses are incurred and recorded: A company using and not paying accumulating an expense would be a good example of an accrual, whereas the payment of cash for something that is not used immediately would apply to cashbasis accounting Monthly financial statements in monthly, twomonth or threemonth, quarter, and year are expected from a business entity, complicating the process for accountants. They have to still prepare reports for the month alone in addition to any significant time period that may have passed. Ex end of the year will include the twelfth month, the final quarter, the end of year… Deferrals: Prepaid expenses pay cash to purchase an asset in the current period that will be recorded as an expense in a future period(s) Deferred Revenues receive cash in the current period that will be recorded as a revenue un a future period(s) Accruals: Accrued expenses record an expense in the current period that wull be paid in cash in a future period(s) Accrued revenues record a revenue in the current period that will be collected in cash in a future period(s) 1) Asset and Expense allocating recorded costs between two or more accounting periods 2) Expense and Liability recognizing unrecorded expenses 3) Revenue and Liability allocating recorded unearned revenues between two or more accounting periods 4) Revenue and Asset recognizing unrecorded earned revenues Post adjusting entries and prepare an adjusting trial balance: Adjusting trial balance lists all account balances after updating them for adjusting entries prepared after posting the adjusting determine the accounts requiring adjustment, using the unadjusted trial balance record the adjusting entries in the journal post the adjusting entries to the general ledger prepare an adjusted trial balance Once the adjusted trial is complete, financial statements can be made. Assets: current assets investments property, plant, and equipment intangible assets Liabilities: current liabilities longterm liabilities Stockholders’ Equity: contributed capital retained earnings The Closing Process: Closing entries to transfer the balances of all temporary accounts to the balance of retained earnings. With the accounting equation, we are going to take the temporary accounts revenues, expenses, dividends and close them so that the reset to zero. What was contained should be moved to retained earnings (the master account) as credit. The revenue accounts are ultimately debited. Postclosing trial balance The result is demonstrated balance in retained earnings, with no accounts for revenue and expenses.
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