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This 8 page Class Notes was uploaded by Liliane Kunde on Saturday September 19, 2015. The Class Notes belongs to ACCT207 at University of Delaware taught by Staff in Fall. Since its upload, it has received 59 views. For similar materials see /class/207189/acct207-university-of-delaware in Accounting at University of Delaware.
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Date Created: 09/19/15
Forms of Business 1 Sole Proprietorship responsibility disadvantage tax advantage 2 Partnership dual skills taxesadvantage personally liable dis 3 Corporation taxes disadvantage legal entity advantage easily transferrable ownership User s of Financial Info 1 Internal managers who organize a business 2 External lnvestors Creditors Tax authorities Business Activities 1 Financing9 raising capital Ex s a Liabilities bank loans acct s payable b Stockholder s Equity selling stock 2 Investing purchasing resources Ex Land buildings vehicles computers equipment 3 Operating main activity Ex selling goods providing services paying utilities paying employees cost of sales advertising Financial Statements 1 Income Statement 0 Revenue Expenses 2 Retained Earnings Statement 0 Beginning Balance Net incomeloss DividendsCurrent Balance 3 Balance Sheet 0 AssetsLiabilities Stockholder s Equity 0 One specific date 4 Statement of Cash Flows 0 Cash from operating investing and financing activities in that order 0 Cash at end ofperiod should agree with Cash on Balance Sheet quot t to Financial t t 1 Manager s DiscussionAnalysis 0 Liquidity Capital Resources Operating Activities 2 Notes to Financial Statements 0 Explanatory notesclarification o Describes Accounting policies 0 Explaines uncertainties and contingencies 3 Auditor s Report 0 CPA s independent examination GAAPopinion of company Dividend or Save 0 If company has uses for cash that will increase Revenues ex building new centralized warehouse SAVE o More cash than valuable opportunities DIVIDEND w excess cash Issue wz Statement of Cash Flows 0 Cash by operating activities fails to take into account that company must invest in new property plant and equip To maintain current operating levels Formulas Profitability Ratio income or operating success for given period Current Ratio Current Assets EX 9081 144 Current Liabilities 6301 0 Interpretation s As 9 Current Assets are 144 of Current Liabilities As rate 9 Current Assets are 144 times as great as Liabilities As Prop 9 144 1 Liquidity Ratio short term ability to pay back liabilities Working Capital Current Assets Current Liabilities 0 When positive9 more likely to payback 0 When negative9 might not be able to payback short term crediots which could lead to bankruptcy Issue Composition of Assets9 could count old inventory as Current Asset even though it s not really selling Increase Asset Account 0 Company can payback debts with cash to appear more liquid Solvency Ratio Ability to pay interest when due Dept to TotalAsset Ratio Total Liabilities Total Assets Higher Risky Company and undesirable solvency Stable companies can support higher debt to total assets Ratio than cyclical companies who have uctuating earnings due to market EX Public water system vs market for Brita s Earnings Per Share EPS net income earned on each share of common stock Net IncomePreferred Stock Dividends Average Common Shares Outstanding 0 Useful for determining investment return 0 Comparing EPS of diff companies irrelevant due to diff sizesstocks Free Cash Flow describes cash remaining from operating activities after adjusting for capital expenditures and dividends payed Free Cash Flow Cash Provided by 0perations Capital Expenditures Cash Dividends NEquot equotJ 2quot Accounting Standards Generally Accepted Accounting Principles GAAP9 quotThe Rulesquot Securities and Exchange Commission SEC 9 quotEnforces the Rules Public Company Accounting Oversight Board PCAOB9 Auditing Standards Financial Accounting Standards Board FASB9 quotMakes the Rules International Accounting Standards Board IASB9uses IFRS standards and no longer must conform to US standards if they meet IFRS Characteristics of Accounting Information Relevance info must make difference in a business decision predict future events and provide feedback about prior expectations in a timely manner Reliabilitymust be verifiable a faithful representation factual and neutral ComparabilityCan use different methods but must disclose method used Consistency uses same principles year to year and company can only change methods used if management provides that other method gives more useful financial info AssumptionsZPrinciples of FASB Monetary Unit Assumptions accounting only uses expressed in Economic Entity Assumption every economic entity can be sep eratly identified and accounted for Time Period Assumption Accounting divides time into artificial periods Going Concern Assumption Assumes business will prosper Cost Principle Assets recorded at their costs 0 Why 9 Cost measure more easily identified and market value is subjective Full Disclosure Principle companies must disclose all circumstances amp events that would make a difference to f statement users Revenue Recognition Principle companies recognize revenue in accounting period when earned when service is performed Matching Principle expenses matched with Revenues in period when efforts made to generate revenues Accounting Constraints Materiality financial statements item s impact on a companies overall financial condition 0 Materialsize makes likely in uence on creditor o Immaterial too small to matter Conservatism company should choose a method that will least likely overstate assets ofincome Factors that Shape Accounting System Nature of business Types of transactions Size of company Volume of data Information demands of internal users Assets Liabilities Stockholder s Equity Common stock Retained Earnings Revenues Expenses Dividends Normal Balances Assets Liabilities Common Stock Dr CR Dr CR Dr Cr Dividends Retained Earnings Revenues Dr Cr Dr Cr Dr Cr Expenses Dr Cr Contributions of Recording Process 1 Discloses complete effect of transaction 2 Chronological Record of Transactions 3 Helps preventlocate errors Order of Trial Balance Assets Liabilities Stockholder s Equity Revenues Expenses Limitations of trial balance 1 2 Does not prove tat all transactions have been recorded Doesn t prove ledger is correct only that Dr Cr MW necessary cuz trial balances may not be up to date 1 Some things not recorded daily 2 Some costs are incurred over long time not daily 3 Misc items like utility bills recorded following period 0 Defferals Prepaid Expenses or Unearned Revenue 1 Prepaid Expenses 9 prior to Assets overstated Expenses understated Asset Ex ense Credit Adjusting Entry Debit Adjusting Entry l 2 Unearned Revenue prior Liabilities overstated Revenues understated Liability Revenue Debit Adjusting Entry Credit Adjusting Entry l 3 Depreciation Debit Depreciation ExpenseCredit Accumulated Depreciation Expense 4 Accrued Revenues rent services performed 9 prior Assets understated Revenues understated Asset Revenue Debit Adjusting Entry Credit Adusting Entry 5 Accrued Expenses prior expenses understated Liabilities understated Expense Liability Dr Credit Adjusting entry Adjusting entry Closing Entries Close Temporary accounts balance relative only to specific period 0 Revenues Expenses Dividends Carried Forward Permanent accounts 0 Assets Liabilities stock holder s equity ACCT Exam I Vocab Net income Revenue gt Expense Net loss Revenuelt Expense Current Assets assets expected to be used up or converted to cash within one year Long Term Investmentsstocks and bonds of other corporations which are normally held for many years or longterm assets landbuildings that aren t used in company s operation Vs Plant Property and Equipment assets with relatively long lives but USED in operation Intangible Assets noncurrent assets with no physical substance but have value because of exclusive rights they give to the company Depreciation Practice of allocating an asset s full purchase price to a number of years instead of expensing full cost in year ofpurchase Accumulated Depreciation Shows the total amount of depreciation that the company has expensed thus far in the asset s life Current Liabilities obligations supposed to be paid within the coming year LongTerm Liabilities debts expected to be paid after one year Liguidity ability to pay obligations expected to become due win next year of operating cycle The Accounting Information System system of collecting processing and communicating financial info Transactions economic events that require recording in financial statements internal or external Not all activities are transactions Transaction analysis process ofidentifying the specific effects of economic events on the Accounting equation Calendar year an 15L December 31st Vs Fiscal year Any 12 months of a year company follows for period AccrualBased Accounting transactions recorded in periods they occur revenues at time of service and expenses when incurred NOT when paid CashBasis Accounting record revenue when cash receivedexpenses when cash paid Prohibited by GAAP cuz doesn t follow matching or RR princplesmisleading Book value difference bw depreciation cost and accumulated depreciation Useful life of an asset period of service it s used in Summary ofAccounting Cycle Analyze Business Transactions Iournalize Post to ledger accounts Trial Balance Iournalize amp Post adjusting entries Adjusted Trial Balance Prepare financial statements Iournalize and post closing entries Prepare a postclosing trial balance 99 NU SJ39HFSNNH
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