ACTG 211 Midterm 1 Study Guide

What is the importance of accounting?

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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

What is the business entity forms?

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

In accounting systems & financial statements, what are the examples of source documents?

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

 Cash

 Notes receivable

 Land

 Buildings

 Equipment

 Store supplies

 Vehicles

 Accounts receivable

 Liabilities – creditors’ claims on assets

 Notes payable

 Wages payable

 Taxes payable We also discuss several other topics like Where and when did clay pots become popular?

 Accounts payable

 Equity – owner’s claim on assets

 Retained earnings

 Dividends

 Contributed capital

∙ Sheets

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

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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

 Debit

∙ Dividends

∙ Expenses

∙ Assets

∙ losses

 Credit

∙ Gains

∙ Income

∙ Revenues

∙ Liabilities

∙ 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

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Equations

∙ Retained Earnings – money put back into the company

o Net Income – Dividends

∙ Return on Assets – profitability measure

oNet Income

AverageTotal Assets

∙ 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?

oTotal Liabilities

Total Assets

∙ 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?

oAssetCost−SalvageValue

Useful Life

∙ Profit Margin – measures company’s net income to net sales oNet Income

Net Sales

∙ Current Ratio – measures the company’s ability to pay its short-term  obligations

ocurrent assets

currentliabilities