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AC 210 Test 1 Review

by: Thomas Kelly

AC 210 Test 1 Review 210

Marketplace > University of Alabama - Tuscaloosa > AC > 210 > AC 210 Test 1 Review
Thomas Kelly

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Test 1 review
Class Notes
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This 8 page Class Notes was uploaded by Thomas Kelly on Tuesday September 13, 2016. The Class Notes belongs to 210 at University of Alabama - Tuscaloosa taught by in Fall 2015. Since its upload, it has received 4 views. For similar materials see Accounting in AC at University of Alabama - Tuscaloosa.


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Date Created: 09/13/16
AC 210 Test 1 Review Ch. 1 Organizational Forms  Sole Proprietorship – form of business owned (and usually operated) by 1 individual  Partnership – profits, taxes, and legal liability are the responsibility of 2 or more owners  Corporation – is a separate entity from both legal and accounting perspectives. A corporation, not its owners, is legally responsible for taxes and debts.  LLC – Legal Liability Corporation Accounting for Business Decisions  Accounting – a system of analyzing, recording, and summarizing the results of a business’s activities and then reporting the results to decision makers  Private accountant – an accountant that is hired to work for a company  Public accountant – an accountant who is contracted to work for a company  Managerial accounting reports – detailed financial plans and continually updated reports about the operating performance of a company  Financial statements – financial accounting reports that summarize the financial results of operating, investing, and financial activities  4 main groups of external users o Creditors – contract  Can the company pay its liabilities? o Investors – value  What is the company’s stock worth? o Directors – govern  Is the company using its resources wisely? o Government – regulate  Is it following the rules? The Basic Accounting equation  What a company owns must equal what a company owes to its creditors and stockholders  Basic accounting equation – A = L + SE o Assets = Liabilities + Stockholders Equity o Assets – an economic resource owned by the company, has a measurable value, expected to benefit company by producing cash inflows or cash outflows in the future  The order in which assets are reported on the balance sheet is based on when the asset is expected to be turned into cash or consumed o Liabilities – are measurable amounts that the company owes to creditors o Stockholders Equity – Represents the owners claims on the business  Claims on the amount that contributed and the amount the company has profited (retained earnings)  By generating net income, a company increases its stockholders equity  Common Stock – equity paid in by stockholders  Retained Earnings – equity earned by the company  Profits that have accumulated in the company’s over time  Revenues – Expenses = Net Income (profit generated by company)  Dividends – profit distributed  Separate Entity Assumption – The financial reports of a business are assumed to include the results of only that business’s activities Financial Statements – 4 accounting reports, prepared in the following order  Income Statement – reports the amount of revenues less expenses for a period of time o Uses Revenues – Expenses = Net Income  Statement of Retained Earnings – reports the way that net income and the distribution of dividends affected the financial position of the company o Beginning retained earnings, add net income, subtract dividends = end retained earnings  Balance Sheet – reports the amount of assets, liabilities, and stockholders equity of a business at a point in time o Uses A = L + SE o Assets, Liabilities, Stockholders equity o Assets  Cash  Accounts receivable  Supplies  Equipment  Software o Liabilities  Accounts payable  Note payable  Long term note payable o Stockholders equity  Common stock  Retained earnings  Statement of Cash Flows – reports the operating, investing, and financial activities that caused increases and decreases in cash during the period o Operating – activities that relate to running a business  Services, wages, rent, insurance, o Investing – buying and selling productive resources  Buying equipment, land, buildings, investments, lending to others o Financing – borrowing from banks, repaying loans, receiving cash from stockholders, paying dividends, stocks  Cost principle – assets are initially reported on the balance sheet based on their original cost to the company  Net Income, from the income statement, is a component in determining ending Retained earnings on the statement of retained earnings  Ending retained earnings from the statement of retained earnings is then reported on the balance sheet  Cash on the balance sheet is equal to the ending cash on the statement of cash flows Ch. 2 Balance sheet  A = L + SE  Assets = Liabilities + Stockholders Equity  Assets - resources presently owned by a business that generate future economic benefits  Liabilities - amounts presently owed by a business  Stockholders equity – the amount invested and reinvested in a company by stockholders  Transaction – an event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders equity of a business The Accounting Cycle  Analyze -> Record -> Summarize  Chart of accounts – a summary of all account names (and corresponding account numbers) used to record financial results of the accounting system  The accounting equation must always “balance” (be equal) for each transaction  An exchange of only promises is not a transaction  Journals – used to record the effects of each days transactions; organized by date o Shows entries in chronological order  Ledger – used to summarize the effects of journal entries on each account; organized by account o Shows increases and decreases in individual accounts as well as ending balances The Debit/ Credit Framework  Accounts increase on the same side as they appear in A=L+SE o Assets increase (+) on the left side decrease (-) on the right side o Liabilities decrease (-) on the left side (+) increase on the right side o Stockholders Equity decrease (-) on the left side (+) increase on the right side  Left is Debit (dr) right is Credit (cr) o Use debits for increase in assets (and for a decrease in liabilities and stockholders equity) o Use credits for increase in stockholders equity and liabilities (and for a decrease in assets)  The normal balance for an account is the side on which it increases  The double entry system requires debits = credits  T - Account – a simplified version of a ledger account used for summarizing the effects of journal entries o Shows increases and decreases in individual accounts as well as ending balances Preparing a trial balance and balance sheet  Trial balance – an internal report that lists all accounts and their balances to check on the equality of total recorded debits and total recorded credits o Checks to see if debits = credits  Classified balance sheet – a balance sheet that shows a subtotal for current assets and current liabilities  Current assets- to be used up or converted into cash within 12 months of the balance sheet date  Current liabilities- debts and obligations that will be paid, settled, or fulfilled within 12 months of balance sheet date  Noncurrent (or long-term) – assets and liabilities that do not meet the definition of current Accounting decision tools  Current ratio – tells us if current assets are sufficient to pay current liabilities o A higher ratio means a better ability to pay o Current assets/ current liabilities = current ratio Accounting Cycle  1 record journal entry  2 summarize in the ledger (t-accounts)  3 prepare an unadjusted trial balance  4 adjust the accounts  5 prepare financial statements  6 close the books Ch. 3 Operating activities  Include buying goods and services from suppliers and employees and selling goods and services to customers from collecting cash from them. The period from buying goods through to collecting cash from customers is known as the operating cycle  Operating activities are the primary source of revenues and expenses  Revenues – are the amounts a business charges its customers when it provides goods or services  Expenses - are costs of operating the business, incurred to generate revenues  Net Income – is calculated by subtracting expenses from revenues  Time period assumption – the long life of a company is divided into shorter periods, such as months, quarters, and years  Balance sheet accounts are considered permanent  Income statement accounts are considered temporary Cash Basis Accounting  Cash basis accounting – reports revenues when cash is received and expenses when cash is paid o Not allowed under GAAP Accrual Basis Accounting  Accrual basis accounting – reports revenues when they are earned and expenses when they are incurred, regardless of the timing of cash receipts or payments o Required under GAAP  Revenue recognition principle – the requirement under accrual basis accounting to record revenues when they are earned, not necessarily when cash is received for them  Unearned revenue – a liability representing a company’s obligation to provide goods or services to customers in the future  Expense recognition principle (matching) – the practice under accrual basis accounting to record expenses in the same time period as the revenues they generate, not necessarily the period in which cash is paid for them The expanded accounting equation  A = L + SE  Stockholders equity o 1. Common stock – given to stockholders when they contribute capital to the company o 2. Retained earnings – generated by the company itself through profitable operations  Retained earnings is the part that expands to include revenues and expenses  Revenues and expenses are originally reported in the income statement, at the end of each accounting year, the separate revenue and expense accounts are transferred to (or “closed”) into retained earnings  Revenues are recorded on the right (credit)  Expenses are recorded on the left (debit)  Unadjusted trial balance – an internal report, prepared before end-of-period adjustments, listing the unadjusted balances of each account to check the equality of total debits and credits  Net profit margin – indicates how much profit is earned from each dollar of revenue o Net income / revenues o Higher ratio means better performance Ch. 4 Adjustments  Adjustments – entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts o Adjustments involve both income statement and balance sheet o Deferral adjustments – A deferral involves a past exchange of cash that has initially been recorded on the balance sheet rather than on the net income statement.  Deferral means to postpone something  Are used to decrease balance sheet accounts and increase corresponding income statement accounts  Each deferral involves one asset and one expense account or one liability and one revenue account  Example: o Supplies (BS) -> Supplies Expense (IS) o Prepaid rent (BS) -> Rent Expense (IS) o Unearned revenue (BS) -> Sales Revenue (IS) o Accrual Adjustments – are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period  Example:  Interest rec. (BS) -> Interest revenue (IS)  Rent rec. (BS) -> Rent revenue (IS)  Income tax pay. (BS) -> Income tax expense (IS)  Wages pay. (BS) -> Wages expense (IS)  Accrual adjustments are used to record rev. or exp. When they occur prior to receiving cash and to adjust corresponding balance sheet accounts  Each accrual involves one asset and one rev. account and one liability and one exp. Account o Adjusting journal entries (AJEs) – record the effects of each periods adjustments in a debits equal credits format  Never involve cash o Carry value – the amount at which an asset or liability is reported (“carried”) in the financial statements.  Known as “net book value” or “book value” o Depreciation – the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used  Accumulated depreciation is a balance sheet account and depreciation expense is an income statement account  By recording depreciation in accumulated depreciation, distinct form the equipment account, you can report both the original cost and a running total of the amount that has been depreciated  The amount of depreciation depends on the method used for determining it  Amortization is not reported for long term assets that have an unlimited period of usefulness o Contra-account – an account that is an offset to, or reduction of, another account  The normal balance in a contra-account is always opposite of the account it offsets o Adjusted trial balance – a list of all accounts and their adjusted balances, which is used to check on the equality of recorded debits and credits  The amount coming from the adjusted trial balance is the beginning of year balance for retained earnings o Permanent accounts – accounts that track financial results form year to year by carrying their ending balances into the next year o Temporary accounts – accounts that track financial results for a limited period of time by having their balances zeroed out at the end of each accounting year o The closing process serves two purposes:  Transfer net income (or Loss) and dividends to retained earnings  Establish zero balances in all income statement and dividend accounts  The amount credited to retained earnings should equal net income on the income statement o Post closing trial balance – an internal report prepared to check that debits = credits and all temp accounts have been closed


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