Chapter and Exam/Final Exam Comprehensive notes
Chapter and Exam/Final Exam Comprehensive notes ACC 131
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This 6 page Class Notes was uploaded by Austin Adams on Sunday August 30, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Fall 2015. Since its upload, it has received 8 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 08/30/15
Accounting 131 notes Chapter 1 Accounting and the Financial Statements The Demand for Accounting Information and Typical Questions 0 Managers How affective was the last advertising campaign 0 Employees Will I get a raise this year 1 Investors Will the company earn enough income to provide a satisfactory return 0 Creditors should I lend money to this business 1 Governments How much in taxes does this company owe Businesses Forms and Activities 0 Sole Proprietorship o Easily formed 0 Tax advantages 0 Controlled by owner 0 Unlimited Liability personal liability 0 Limited life 0 Partnership 0 Access to the resources and skills of partners 0 Tax advantages 0 Shared control 0 Can be unlimited liability 0 Limited life 0 Corporation 0 Easier to raise money Easier to transfer ownership Limited Liability Complex to organize Higher taxes 0000 Business Activities 0 Investing activities 0 Buying assets used to generate revenue 0 Financing Activities 0 Obtaining funds to start the business 0 Operating Activities 0 Operating the business for pro t Communication of Accounting Information 0 To communicate a company s activities to decisionmakers detailed transactions are summarized and reported in reports called nancial statements Financial Statements 0 Companies prepare four basic nancial statements 0 The Balance Sheet reports the sources assets owned by a company and the claims against those resources liabilities and stockholder s equity at a speci c point in time o The income statement reports how well a company has performed its operations revenues expenses and net income over a period of time o The retained earnings statement reports how much of the company s income was retained in the business and how much was distributed to owners over a period of time o The statement of cash ows reports the sources and uses of a company s cash over a period of time Timing of Financial Statements i 7 I PHEHDF El39nme Etatemegnri39s i 1313 m a RetainEd interment mienIE Earnings of E EaiEn39llEI l39l SEEKEmE i flash F is Fundamental Accounting equation 0 The fundamental Accounting Equation captures two basic features of any company o It shows what a company owns its assets must always be equal to what it owes its liabilities and stockholders equity 0 Assets Liabilities Owners equity The right side of the amounting Th3 39E 5mg Eh wg WE equation intimate5 wh has a eieirrl EE EEE39 Dr 39E m mi 411quot on the Germany39s assets resources or a company Ereditr claims eieirrle irl illire form 39 are liabilities stockholdersquot equity I J E if Assets iiebililes l Sli39ockheilers Eluil y The Classi ed Balance Sheet 0 The purpose of the balance sheet is to report the nancial position of a company its assets liabilities and stockholders equity at a speci c point in time o The balance sheet is organized or classi ed to help users identify the economic similarities and differences between the various items within the balance sheet dil tempany get it 1 due 5 than E ml aw n LIMIU39II39I EE ElemEm i5IIiiilile Eramg etaemits F ul liu nL1IriIfmpII5ILIIIILaj Lungterm liabilities n3 Haiti5 payable bends payable t l a Current asse1 lienE cash mount Hceh39ebEEint1nm esfl Lemma n lineartwins PrepayElf Flam rainr rqliqzlxmmlj 1195 land cquiprnemtfl Iniaraajble inset PE patents gap ights TFDEHI HQLEEEEE39 EQUITY E 39l39l 39lilquot med IliiLiiiJ liegrrmmmenwsmek Hulnirm earnings Current Assets 0 1 year line to decide if it is current or noncurrent items 0 Will be converted to cash or used up within one year 0 Operating Cycle The time it takes to use up a good Consist of cash and other assets that are expected to be converted into cash within one year or one operating cycle whichever is longer 0 Current assets are listed on the balance sheet in order of liquidity or nearest to cash 0 Common types of current assets are 0 Cash 0 Short term investments or marketable securities investments in the debt and stock of other companies as well as government securities 0 Accounts receivable the right to collect an amount due from customers Inventories good or product held for resale to customers 0 Other current assets a catch allquot category that includes items such as prepaid expenses and supplies 0 Working Capital 0 Working capital is a measure of liquidity computed as 0 Working Capital Current Assets Current Liabilities Working capital signals that a company has adequate funds pay its current obligations Current Ratio 0 The current ratio is a measure of liquidity that allows comparisons to be made between different companies and is computed as 0 Current Ratio Current Assets Current Liabilities Elements of the Income Statement 0 The income statement consists of two major elements revenues and expenses 0 Revenues are the increase in assets that result from the sale of products or services 0 They Include o SalesFees revenue 0 Interest revenue from investments 0 Expenses are the cost of resources during a period They include 0 Cost of goods sold or cost of sales the cost to the seller of all goods sold 0 Selling and general administrative expenses expenses to manage the company that are not direct product or service costs 0 Research and development expense the cost of developing new products Income Statement formats 0 Companies prepare their income statements in one of two different formats 0 SingleStep income statements o MultipleStep income statements 0 The multiplestep income statement provides classi cations of revenues and expenses that nancial statement users nd useful with three important subtotals 0 Gross margin Gross pro t Net Sales Cost of goods sold 0 Income from operations Gross margin Operating Expenses 0 Net Income Income from operations nonoperating revenues expenses Using income statement information 0 A company s ability to generate current income is useful in predicting its ability to generate future income 0 Sometimes called return on sales net pro t margin shows the percentage of pro t in each dollar of sales computed as 0 Net pro t margin Net incomeSales revenue Retained earnings statement 0 The owners of a company contribute capital in one of two ways 0 Directly through purchases of common stock from the company 0 Indirectly by the company retaining some or all of the net income earned each year rather than paying it out in dividends The income earned by the company but not paid out as dividends is called retained earnings 0 The retained earnings statement summarizes and explains the changes in retained earnings Use of the retained earnings statement 0 The retained earnings statement is used to monitor and evaluate a company s dividend payouts to its shareholders 1 Creditors are interested in a company s dividend payouts Statement of cash ows and its Elements 0 Statement of cash ows describes the company s cash receipts cash in ows and cash payments cash out ows for a period of time 0 Cash ows from operating activities Cash ows from operating activitiesany cash ows directly related to earning income 0 Cash ows from investing activities any cash ow related to the acquisition or sale of investments and longterm assets such as property plant and equipment 0 Cash ows from nancing activities any cash ow related to obtaining capital of the company 0 A company with Healthy cash ow particularly it comes form operating activities is in good position to repay debts as they come due and is usually a lowrisk borrower o Stockholders are also interested in the adequacy of cash ows as an indictor of the company s ability to pay dividends and to expand its business Relationship Among the Statements Beginning the Period 1 E ll M the Perinatal Hl l liml39 III lnmmn Sumant Form fan39de at 112111 Fl w numse 513M Ei39pEE EEIEE mm Netincurnu S j a i 39 Highwaf lrn Hullmt Im hhlun il lt t Hahnan Elma Mra pi i IIIIiLj39iP 111113 Antics Hiahnw m Mutt F h 7 5 1539 l Mind EWEbmt ih V 51 Urhcr EHEM 3 hint F m inquot undid af rm UTth sum triadquot Feniancu V334 33996 TataJ 15mm 339 lm Miliiijizm T tal liabilities Hil tl ii39PiEH i elll a llihgi 1 ES 14m TatJllh JIties swam ShudtlsuFdIarquot equity MN inmmte iv Heist al S nikhulltlmn39 equity Clint ltzui rmls IiiMEI Let rir Dllfi l39eiii l i lii l Cu ii39n39iuu 5mm quot1 31573 Ritmmmmmingt E d 39 quot lR 39lln li turning 113339 in l r n I Flaunt21 warnings Ell mm finial liabilities a Final liabilities amp tm linlm ngrhullry I13 MPHTi Ho lt ld s39 equity EliJEr 39 Ill lglmmrlm amnt f ashl m For the tearmam 31 m1 Hal mush P m39l ifl lmnl ih m animus 34 Duel rush39uwd b r intrmrntg Atriume5 H Nil cam pmuidad mn39i nancing mlh39lfiilll lglitlll Mr 311an in EJ l 5 4m Lash u q39t 39luw Luau Cash TEL39Iiig39 39i 15M 7 W H 7 I Guidelines in Ethical Decision making A m r I 39 Um ur arsenal E u x H y li banalt m written the EthicLa 7 V Fm Gamer tilt Emit a tich nmI Idluct magmatic lhl r 7 ll ERIE Fm guiltelanee L pmhlmt h I Consider the fh t a quot 3 t t iI E I s 5 E ii I39IEIITI m i a AnEllFIEE 1391 DELIF 139le an the 7 Is 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