Study Guide 1 of Financial Accounting
Study Guide 1 of Financial Accounting ACC 2361.005
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This 8 page Study Guide was uploaded by Maricela Castro on Wednesday September 28, 2016. The Study Guide belongs to ACC 2361.005 at Texas State University taught by N. Victor Felan, MBA in Fall 2016. Since its upload, it has received 70 views. For similar materials see Intro to Financial Accounting in Accounting at Texas State University.
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Date Created: 09/28/16
ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 Chapter 1: Business Decisions and Financial Accounting Basic accounting equation- Assets = Liabilities + stockholders’ equity Separate entity assumption- financial reports are consisted of only business’s activities Assets-owned by the company: anything of value that is expected to benefit the company. Liabilities- amounts of money owed to creditors from the company- borrowing money from the bank is a Note Payable and borrowed on credit from another company is Account Payable. Money owed to workers is known as Wage Payable. Taxes to the govt. are known as Taxes Payable. If you went bankrupt, then you pay back liabilities before you give any money to the stockholders Stockholders’ Equity- anything that has to do with owners or stock. Owners claim on to the business they have stock in. Owners buy stock and that’s how much of the company they own, known as contributed capital. The amount of money the company keeps after expenses have been paid- retained earnings. Sole proprietorship-business organization owned by one person. They are responsible for all debt. Easy- you don’t have to do much legally besides set up a business account. Number one type of business in the states. If you want to raise money you have to take out loans for the most part Partnership- organization owned by 2+ people. All partners are liable for the debts and you have to sign a lot more paperwork. To raise funds, you have to take out loans. Corporation- a separate legal entity. Owners of corporations (stockholders) are not personally liable for debts. The shareholders are only partially liable. They get taxed twice as much. Easier to raise money because they can sell them stock and be more reliable than a partnership or sole proprietorship Organizational forms • Hybrid types: completely different from a normal corporation o Sub-chapter S Corporation § Pros • Limited liability, no personal liability, tax benefits (taxed once, pass through), easy to transfer ownership § Cons • Must file with state, must elect with the IRS, no foreign owners, limited owner types, Franchise Tax (in TX) o Limited Liability Companies- has a grey area § Pros • Tax Benefits (pass through), Control, no personal liability, easy to transfer ownership § Cons • Must file with state, must elect with the IRS, Franchise Tax (in TX), no uniform treatment, much more work with paper work that has to be filed in a specific way ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 Accounting is a system of analyzing, recording, summarizing, and reporting the results of a business’s activities Accounts are used to accumulates and report the effects of each different business activity. Financial Statements- personal use and for investors and IRS, can be prepared at any time a. Balance sheet— reports the financial position (assets, liabilities, and stockholders’ equity) of the business at a point in time. i. Assets=Liabilities + Stockholders’ Equity ii. How can I remember this?! Well think of “ALS ice bucket challenge,” A=LS J That’s what helps me. iii. Found on a balance sheet in chronological order!!!: cash, receivables, supplies, equipment, accounts payable, notes payable, common stock, and retained earnings. iv. The basic accounting equation!!! b. Income statement— reports the financial performance of the business during the current accounting period. i. Revenues—Expenses=Net Income ii. REN iii. Examples: sales revenue, wages expense, supplies expense, rent expense. iv. Reports revenues and expenses, are sometimes called the statement of operations. c. Statement of retained earnings— (to report) the accumulation of profits kept by the business during the current accounting period with that of prior periods. i. Beginning Retained Earnings + Net Income (this period) – Dividends (this period) = Ending Retained Earnings ii. Brianna Restocks Everything (and) Natty Ice (not) Doing (equal) Effort Results Explosions! iii. Order: Beg. Retained earnings, NI, Dividends, Ending Retained Earnings iv. Net income is from the income statement. Dividends are amounts distributed this period. d. Statement of cash flows— reports the operating, investing and financing activities effect on cash. i. +/- Operating Cash Flows +/- Investing Cash Flows +/- Financing Cash Flows = Change in Cash + Beginning Cash = Ending Cash ii. order of cash flows: operating, investing, financing (OIF) iii. Cash collected from customers, cash paid to suppliers, cash paid for equipment, cash borrowed from banks, cash received from issuing stock. 2) Sarbanes-Oxley Act (SOX): A set of laws established to strengthen corporate reporting in the United States. 3) Generally Accepted Accounting Principles (GAAP): rules of financial accounting created by the financial accounting standards board for use in the United States. 1) Notes Payable a. In accounting, Notes Payable is a general ledger account in which a company records the face amounts of the promissory notes that it has issued. The amounts ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 for the promissory notes (or simply notes) that have not been repaid are reported as part of the company's liabilities. 2) Retained Earnings a. Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet. Equity earned by the company. 3) Accounts Payable a. Accounts payable is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. 4) Expenses are always on the income statement! 5) Operating, Investing & Financing a. Operating—the activities that are directly related to running the business to earn profit. They include selling apps and services, paying employees’ wages, buying advertising, renting a building, obtaining insurance coverage, and so on. b. Investing—these activities involve buying and selling productive resources with long lives (such as buildings, land, equipment, and software), purchasing investments, and leading to others. c. Financing—any borrowing from banks, repaying bank loans, receiving cash from stock-holders for company stock, or paying dividends to stockholders is considered a financing activity. Managerial accounting reports are used by the company’s ____. d. Employees ü Accounting systems know what they are ü Corporation, sole proprietorship, liabilities, partnerships ü Who owes taxes— ü Who owes liabilities— ü Different users of financial statements (internal--b & external—management) ü Basic accounting question (ALS) ü Calculate net income ü Know debits and credits ü Understand statement of retained earnings and what it tells you o How much you have left after dividends ü Balance sheet ü Income statement Chapter 2: The Balance Sheet A snapshot at a certain time. Improve understanding, company’s groups similar assets and similar liabilities Assets: • Currents assets- can quickly be converted to cash or used up in one operating cycle (12 months or less), inventory, cash, receivables (accounts), prepaid expense, investments. They are Liquid. ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 • Long-term investments- keep them for over a year but not use it. Investments in stock and bonds in hopes to make money in the future. Land or building that the company is not currently using but they own them. Long-term notes receivable. • Property, plant, and equipment- long useful lives (over a year), currently being used in operations, physical substance. Ex: land, building, equipment, delivery vehicles, furniture. Depreciation- allocating the cost of assets to a number of years. Accumulated depreciation- total amount of depreciation put together over an amount of time • Intangible assets- long useful lives, currently used in operations, not tangible- can’t touch. Ex: plants, copyrights, goodwill, trademarks, trade names, slogans. Amortization- allocating the cost of assets to a number of years. Liabilities and Stockholder’s Equity • Current Liabilities- obligations that we expect to pay off in 12 months (operating cycle) o borrowing money from the bank is a Note Payable o borrowed on credit from another company is Account Payable. o Money owed to workers is known as Salaries and Wage Payable. o Taxes to the govt. are known as Taxes Payable. o Payments to long-term liabilities. o Unearned revenue- you owe someone a service they already gave you money to preform *might not be the right term • Long term Liabilities- obligations a company expects to pay off after one year. Ex: bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Long term debt, deferred income taxes • Stockholders equity- o contributed capital/common stock- investments of assets by stockholders. o Retained earnings- income retained/saved for business Transaction- a business activity that affects the basic accounting equation • Every transaction has at least two effects on the basic accounting equation • The equation must be balanced for EVERY transaction 1. Analyze transaction: If you have a large enough transaction that is a returning transaction then it can have its own separate account name a. Issue stock to owners: Cash in assets for the the stockholders’ equity in stock (contributed capital) b. Investment in Equipment: You pay for equipment but take it from the cash account. The equipment account benefits and the cash is being used. Both on the assets side, but it is still equal because the transaction was from two separate asset accounts c. Obtain Loan from the Bank: Cash assets go up but Note payable in Liabilities went up as well, you’re expected to pay that money as well d. Order supplies: its an exchange of promises-not a transaction, no impact. If we said ordered and paid, then we would record it or it we ordered and delivered it we would record it as well. e. Received supplies: we gain cookware assets-so add it to the necessary account that the cookware would go under, and we promise to pay later then liabilities are raised in accounts payable. Debit and Credit Procedures ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 • Double-entry system o Each transaction must affect two or more accounts to keep the basic accounting equation in balance o Recording done by debiting at least one account and crediting another o DEBITS must equal Credits • Debit accounts to increase them: o D.E.A.D. § Debit § Expenses § Assets § Dividend • Credit these accounts to increase them: o Retained Earnings o Contra Assets Accounts (Accumulated Depreciation) o Liabilities (all payables and unearned revenue) o Revenue Accounts o Common Stock ü Promissory note ü Stocks certificate ü Equipment ü Cash ü Accounts payable—short term ü Accounts receivable—current asset ü Notes payable—long term ü Know debits and credits ü Accounts & notes payable ü Debits and credits purchase supplies, issuing stock, ordering, utilities ü Expenses—debit ü Accounts payable—credit ü Current assets and current liabilities Chapter 3: Income Statement • Operating activities: buying goods and services from suppliers (paying them) and employees and selling goods and services to customers and then collecting cash from them. i.e. what they do to make a profit • Revenues-amounts charged- increase on debit, we earned revenue once we have earned the revenue • Expenses- the cost to make the revenue • This is where we can break down our finances whenever we want for as long as we want the time period to be: Time period assumption • Expanding the accounting equation. This doesn’t apply to the balance sheet: A=L+SE o Stockholders Equity § Contributed capital § Retained earning • Revenue ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 • Expenses • Dividends • Unadjusted trial balance- the un-finalized balance sheet to make sure everything is set correct and still has stuff to insert. Catching when our debits don’t match. It won’t catch if we input the wrong data if we input the same wrong data twice or if you put it in the wrong accounts. • GAAP/IFRS -> o Accrual Basis Accounting- Records revenues when they are earned and expenses in the same period as the revenues to which they relate, regardless of the timing of the cash receipts or payments § use when applying for loans § The expense recognition (matching) principle require that expenses be recognized in the same period as the related revenues • Cash basis accounting- No journal entry till they exchange money if it deals with accounts receivable or payable, and unearned revenue. o Only record if CASH IS EXCHANGED • Net profit margin= net income/ total revenue (sales revenue) o How much profit from each dollar of revenue o A higher ratio means better performance o You would want to invest in aa company with the net income ü Understand difference between borrowing money from bank, selling stock to stockholders, and selling merchandise ü Selling merchandise is revenue ü Know what things encompass operating activities o Revenues and expenses ü How to calculate Chapter 4: Adjustments, financial statements and financial results 1. Prepare the adjusting entries 2. Prepare an adjusted trial balance 3. Prepare the financial statements 4. Prepare the closing entries • Adjustments are made to the accounting records at the end of the period to state assets, liabilities, revenue, and expenses at appropriate amounts. IN ADJUSTMENTS THERE WILL NEVER BE CASH EXCHANGED. Dividends are not Expenses-Instead, they are reduction of the retained earnings. Adjusting entries always include one balance sheet and one income statement account • Revenue accounts need adjustments at the end because: o Payments received in advance and originally recorded as a liability should be reduced for any portion earned during the current period o Revenues earned at the end of the period that have not been billed to Accounts Receivable should be recorded as a revenue • Income statement: o Revenues are recorded when earned o Expenses are recorded in the same period as the revenues that they relate to ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 • Balance sheet o Assets are reported at amounts represent the economic benefits that remain at the end of the period o Liabilities are reported at amounts owed at the end of the period, and at the correct amount • Deferral Adjustments: an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period. Pre-paying for things in advance and also paid in advance for things. a. Deferral adjustments are used to decrease balance sheet accounts and increase corresponding income statement accounts b. Each deferral adjustment involves one asset and one expense account, or one liability and one revenue c. Pre-paid- expenses paid in cash and recorded as assets before they are used or consumed and unearned revenues cash received before service are performed d. Depreciation is the process of allocating the cost of buildings, vehicles, and equipment of the accounting period in which they are used i. Makes two accounts: 1. Depreciation expense-debit- income statement 2. Contra-account (accumulated depreciation) -credit. An account that is an offset to, or reduction of another account. Balance sheet. Also known as a contra-asset account. ii. As the balance in the accumulated depreciation increases, total assets decrease because accumulated depreciation is a contra-asset account • Accrual Adjustments- needed when a company has earned revenue or incurred an expense in the current period but HASN’T BEEN RECORDED it because the related cash will not be received or paid until a later period. e. Accrual adjustments are used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts f. For interest accrued on a note payable at the end of the period, if the interest will not be paid until the note is due: i. The adjustment is needed to accurately portray the interest liability of the company at least should be reported on the balance sheet ii. Even thought the interest will not be paid until a future period, the expense. Interest incurred during the current accounting period g. Each accrual adjustment involves one asset and one revenue account, or one liability and one expense account h. Accrued revenue-revenue for services performed but not yet receive in cash or recorded and Accrued expenses- expenses incurred but not yet paid in cash or recorded i. Adjustments are not made daily basis because it wouldn’t be nearly as efficient. That’s why we do it at the ending. • Adjusted trial balance • After all the adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts (adjusted Trial Balance) • Debits=credits 1. Income statement after the adjusted balance is made ACC 2361.005 Intro to Financial Accounting STUDY GUIDE 1 2. Statement of retained earnings 3. Balance sheet- use the new retained earnings from #2 a. For appreciated depreciation put it in (________) so it will subtract and not add b. Only has the permanent accounts • Closing Temporary Accounts (closing the books) o Revenue, dividends, expenses- limited period of time o Income statement accounts get closed out o Transfer net income (or loss) and dividends to retained earnings o Establish zero balances in all income statement and dividend accounts Debit revenue accounts and credit expense accounts. Debit or credit the difference to retained earnings o Never close unearned revenue***** o Only time these will ever happen because this only occurs when closing temporary accounts: 1. Debit revenue accounts and credit expense accounts. Debit or credit the difference to retained earnings 2. Credit dividends declared and debit retained earnings • Permanent accounts- assets, equity, liabilities-results from year to year o Balance sheet items stay • Post-Closing Trial Balance- don’t use for financial statements o Final Check that all debits still equal credits and that all temporary accounts have been closed o Contains balances for only permanent accounts o Last step of the accounting process • Adjusted financial Result o Adjustments help to ensure that all revenues and expenses are reported in the period in which they are earned and incurred o Without adjustments, the financial statements present an incomplete and misleading picture of the company’s financial performance. • Interest is defined as the cost of borrowing money, classified and an expense account under stockholder’s equity. ü Adjusting entries ü Deferral adjustment ü How we handle supplies ü Supply is an expense, debit ü Credit and how it works ü Accumulate depreciation o Contra asset o Credit balance ü Depreciation expense—debit ü What is a contra-asset? ü How dividends are handled and how they affect retained earnings ü Dividends are NOT an expense
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