ACTG 211 Midterm 1 Study Guide
Chapter 1: Financial Accounting
∙ Importance of Accounting
o Accounting is a system that identifies, records, & communicates information that is relevant, reliable, & comparable about an organization’s business activities.
∙ Generally Accepted Accounting Principles
o Financial accounting is governed by concepts & rules
Relevant info affects decisions of users
Reliable info trusted by users
Comparable info used in comparisons across years & companies ∙ Setting Accounting Principles
o In US, Securities Exchange Commission (gov. agency) has legal authority to establish reporting requirements
∙ Principles of Accounting
o Measurement principle – accounting info is based on actual cost o Revenue recognition principle – provides guidance when a company must recognize revenue
o Matching principle – prescribes company must record its expenses incurred for revenue
o Full disclosure principle – requires company to report details behind financial statements that would impact users’ decisions
∙ Business Entity Forms
o Sole proprietorship = single person owns company
o Partnership = group owns
o Corporation = huge # of people owns We also discuss several other topics like How is a public opinion being measure?
∙ Accounting Equation
o Assets = Liabilities + Equity
Assets – resources owned or controlled by company
Liabilities – creditors’ claims on assets
Taxes payable We also discuss several other topics like Where and when did clay pots become popular?
Equity – owner’s claim on assets
o Income Statement – describes company’s revenues & expenses along w/ resulting net income or loss over period of time
o Balance Sheet – describes a company’s financial position @ a point in time
Chapter 2: Accounting Systems & Financial Statements ∙ Recording Process
o External transactions – occur between organization & outside party (ex. invoices)
o Internal transactions – occur within organization (ex. Salary)
∙ Examples of Source Documents
o Checks Don't forget about the age old question of What causes population to change?
o Bills from suppliers
o Purchase orders
o Bank statements
o Sales tickets
o Earnings records
∙ General ledger = record containing all accounts used by company ∙ Expanded Assets Equation Assets = Liabilities + (Common Stock – Dividends + Revenues – Expenses)
∙ Chart of accounts = list of all accounts & includes an identifying # for each account
∙ Debits & Credits
o T account that represents a ledger account & is a tool used to understand effects of 1+ transactions
∙ Stockholder’s equity
____________________________________________________________________________ Chapter 3: Adjusting Accounts for Financial Statements ∙ Accounting Periods Don't forget about the age old question of Who painted "the last judgment"?
o Annually (12 mo)
o Semiannually (6 mo)
o Quarterly (3 mo)
o Monthly (1 mo)
∙ Accrual Basis vs. Cash Basis
o Revenue recognized when earned & expenses recognized when expense occurs instead of when cash is paid
∙ Book Value = net of accumulated depreciation
∙ Unearned (deferred) revenue = cash received in advance of providing product / services (ex. Sports games)
∙ Temporary accounts = accumulate data related to one accounting period ∙ Permanent accounts = report activities related to 1+ future accounting periods
∙ Retained Earnings – money put back into the company
o Net Income – Dividends
∙ Return on Assets – profitability measure
∙ Debt Ratio – relationship between liabilities & assets If you want to learn more check out How do we reconstruct what happened during the k/t event?
∙ Depreciation – process of allocating costs of plant assets over their expected useful lives Don't forget about the age old question of What is the formula of a slope?
∙ Profit Margin – measures company’s net income to net sales oNet Income
∙ Current Ratio – measures the company’s ability to pay its short-term obligations