INTR FINANCIAL ACCT
INTR FINANCIAL ACCT ACCT 2001
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This 29 page Class Notes was uploaded by Modesto Williamson on Tuesday October 13, 2015. The Class Notes belongs to ACCT 2001 at Louisiana State University taught by L. Lafleur in Fall. Since its upload, it has received 52 views. For similar materials see /class/223057/acct-2001-louisiana-state-university in Accounting at Louisiana State University.
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Accounting 2001 Chapter 1 Class Notes Describe the primary forms of business organization Identify the users and uses of accounting information Explain the three principal types of business activity Describe the content and purpose of each of the financial statements Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation Describe the components that supplement the financial statements in an annual report UIhWNA an Forms of business organization NameDefinition Advantages Disadvantages 1 Proprietorship Simple to establish Personal Liability Generally owned by Owner controlled one Person Tax advantages 2 Partnership Personal Liability Shared control Broader skills and resources 3 Corporation No personal liability More taxations Easier to raise funds And transfer ownership Accounting is the information system that identifies records and communicates the economic events of an organization to interested users Users of accounting information two categories amp examples of each Type Examples 1 Internal Finance Marketing Management Human Resources Page 1 of 9 Accounting 2001 Chapter 1 Class Notes 2 External Taxing Authorities Customers Regulatory Agencies Labor Unions Creditors investors Effective financial reporting depends on sound Recent financial scandals led Congress to the pass the Sarbanes Oxley Act in 2002 Key Provisions Steps in Solving an Ethical Dilemma 1 Recognize an ethical situation and the eth 2 3 Three types of business activities and examples of each Financing Activities Two primary sources of outside funds are 1 Borrowing Money 0 Amounts owed are called Liabilities Accounts Salary un earned revenue bonds payable notes payable 0 Parties to whom amounts are owed are creditors 0 Notes payable and bonds payable are different type of liabilities 2 lssuing shares of stock for cash 0 Payments to stockholders are called Dividends Investing Activities Purchase of resources a company needs in order to operate 0 Computers delivery trucks furniture buildings etc Page 2 of 9 Accounting 2001 Chapter 1 Class Notes 0 Resources owned by a business are called Assets Cash Accounts Receivable inventory supplies furniture and xtures building automobiles Operating Activities Once a business has the assets it needs it can begin its operations 0 Revenues Amounts earned from the sale of products sales revenue service revenue and interest revenue 0 Inventory Goods available for sale to customers Accounts receivable Right to receive money from a customerin the future as the result of a sale 0 Expenses cost of assets consumed or services used cost of goods sold selling marketing administrative interest and income taxes expense Liabilities arising from expenses include accounts payable interest payable wages payable sales taxes payable and income taxes payable 0 Net Income when revenues exceed expenses 0 Net Loss when expenses exceed revenues ASSETS LIABILITIES Stock Holders Equity Common Stock Capital stock retained earnings revenues minus expenses minus dividends All balanced sheet cs re statement of returned earnings red income statement Companies prepare 4 financial statements to communicate financial information to users Name Definition Components Date Balanced Sheet Reports revenues for a period of time Income Statement Page 3 of 9 Accounting 2001 Chapter 1 Class Notes Retained Earnings Statement Statement of Cash Flow INCOME STATEMENT Illustration 14 SIERRA CORPORATION Income Statement For the Month Ended October 31 2012 Revenues Service revenue 10600 Expenses Salaries expense 5200 Supplies expense 1500 Rent expense 900 Insurance expense 50 Interest expense 50 Depreciation expense 40 Total expenses 7740 Net income 3 2860 Illustration 15 Page 4 of 9 Accounting 2001 Chapter 1 Class Notes SIERRA CORPORATION Retained Earnings Statement For the Month Ended October 31 2012 I Retained earnings October 1 0 Add Net income 2860 2860 Less Dividends 500 Retained earnings October 31 2360 Illustration 17 Page 5 of 9 Accounting 2001 Chapter1 Class Notes SIERRA CORPORATION Balance Sheet October 31 2012 Assets Cash 15 200 Accounts receivable 200 Supplies 1 000 Prepaid insurance 550 Equipment net 4960 Total assets 21910 Liabilities and Stockllolders39 Equity Liabilities Notes payable 5000 Accounts pa able 2 500 Salaries payable 1200 Unearned seivice revenue 800 Interest payable 50 Total liabilities 9550 Stocklioltlei s39 equity Common stock 10000 Retained earnings 2360 Total stockholders equity 12360 Total liabilities and stockholders39 equity 21910 Illustration 18 SIERRA CORPORATION latement oi Cash Flows For the Month Ended October 31 2012 Cash ows from operating activities Cuui receipts from operating uclh ilies 3H L200 Cnsll pm39menls I39m39 npemling u livilies 5500 Net cash I39UYiLlc LI by operating acli39iliegt 5700 Cash llim s rinui im39e ilclh ilies Purchased office equipment 5000 Net cash used h investing aclivilics 5000 Cash Haws lrum financing aclhitics Issuance of common stuck 0000 issued note payable 5000 qu39menl ol39dividcnd 500 Net cash prmiclccl l139 linancing aclivilies H500 Nel increase in cash 15200 Cash at he ning of PEI39lULl U Cash at encl 01 period Us companies that are publicallytraded must prove ancl annul report Page 6 of 9 Accounting 2001 Chamer1cmssNoms of the Annual Discussion and Financial statements report Class Problems BE12 a den my users Ufa ccountzng 1nf0r1na tron SQ 2i K Match each of the following types of evaluation with one of the listed users of accounting information Trying to determine whether the company complied with tax lawsE Trying to determine whether the company can pay its obligationsC Trying to determine whether a marketing proposal will be cost effectiveB Trying to determine whether the company39s net income will result in a stock price increaseA Trying to determine whether the company should employ debt or equity financingD P39Jel Nt Investors in common stock Marketing managers Creditors Chief Financial Officer Internal Revenue Service 9999 BE 16 Detern11ne proper fz39nan era Sta tenjent QC Y Eskimo Pie Corporation markets a broad range of frozen treats including its famous Eskimo Pie ice cream bars The following items were taken from a recent income statement and balance sheet In each case identify whether the item would appear on the balance sheet BS or income statement IS Income tax expense Inventories Accounts payable Retained earnings Property plant and equipment Net sales Cost ofgoods sold Common stock Receivables Interest expense P39P W rm 99 9 quot Page 7 of 9 P13B rquot Accounting 2001 Chapter 1 Class Notes 1 Prepare an income Sta temeut retained earnings Sta temeut and balance sheet discuss results 80 4 51 AP Special Delivery was started on May 1 with an investment of 45000 cash Following are the assets and liabilities of the company on May 31 2012 and the revenues and expenses for the month of May its first month of operations Accounts receivable 6200 Notes payable 28000 Service revenue 10400 Salaries and wages expense 2000 Advertising expense 800 Equipment 56000 Accounts payable 2400 Maintenance and repairs expense 2900 Cash 15800 Insurance expense 400 No additional common stock was issued in May but a dividend of 1700 in cash was paid Instructions 8 Prepare an income statement and a retained earnings statement for the month of May and a balance sheet at May 31 2012 b Brie y discuss whether the company39s first month of operations was a success c Discuss the company39s decision to distribute a dividend SPECIAL DELIVERY Income Statement Page 8 of 9 Accounting 2001 Chapter 1 Class Notes SPECIAL DELIVERY Retained Earnings Statement SPECIAL DELIVERY Balance Sheet On your own Do it Page 18 Comprehensive Do it Page 2324 SelfTest Questions Pages 2526 Page 9 of 9 Accounting Exam 1 Study Guide Chapter 1 Forms of Business Organization Sole Proprietorship A business owned by one person Simple to set up Gives you control TaX advantages Partnership A business owned by two or more persons Often formed because one individual is low on economic resources Simple to establish Shared control Broader skills and resources TaX advantages Corporation A separate legal entity owned by stockholders Easier to transfer ownership Easier to raise funds No personal liability Users of Accounting Internal Users Managers who plan organize and run a business This includes marketing managers production supervisors finance directors and company o icers Questions that must be answered Finance Is cash sufficient to pay dividends to stockholders Marketing What price for a product will maximize the company s net income Human Resources Can we afford to give our company employees pay raises this year Management Which product line is most profitable External Users Types Investors owners Use accounting information to make decisions to buy keep or sell stock Creditors suppliers and bankers Use accounting information to evaluate the risks of selling on credit or lending money TaXing Authorities IRS Use information to make sure that companies abide by taX laws Customers Use information to ensure that companies honor product warranties Labor Unions MLB Want to know whether or not owners have the ability to pay increased wages and benefits Regulatory Agencies FTC Ensure companies are operating within prescribed rules Fin SarbanesOXley Act 2002 Passed by Congress to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals Business Activities Financing Using money to make money borrowing money and selling stocks Investing Using cash raised through financing activities to make money Involves purchasing resources also known as assets Operating Using the assets needed to get started to operate and sell products Used to make revenue sales revenue service revenue and interest revenue Recording Statements Income Statement Reports the success or failure of the company s operating activities for a period of time I Revenues 2 Expenses 3 Net Income Provides investors with useful information for predicting future net income Creditors also use information to predict future earnings Amounts received from issuing stock are not revenues and the amounts paid out as dividends are not expenses Retained Earnings Statement Shows the amounts and causes of change in retained earnings during the period I Retained Earnings First Date ofMonth 2 Net Income 3 Dividends 4 Retained Earnings Last Date of Month Used by investors to see if the company has a history of paying high dividends Other investors use this to predict the growth of a company Lenders monitor their corporate customers dividend payments more money paid in dividends reduces a company s ability to repay debts Balance Sheet Reports assets and claims to assets at a speci cpoint in time Liabilities Claims of creditors Stockholders Equity Claims of owners I Assets 2 Liabilities and Stockholders Equity Used by creditors to determine the likelihood that they will be repaid Also used to ensure that a company has a satisfactory proportion of debt and common stock nancing Statement of Cash Flows Provide financial information about the cash receipts and cash payments of a business for a speci c period of time Answers Questions Where did cash come from during the period How was the cash used during the period What was the change in the cash balance during the period I Cash Flows From Operating Activities 2 Cash Flows From Investing Activities 3 Cash Flows From Financing Activities 4 Net Increase in Cash 5 Cash at Beginning of Period 6 Cash atEnd ofPeriod Fin Retained earnings statement depends on the results of the income statement Ending amount on retained ea1nings statement is the retained earning amount on the balance sheet Statement of cash ows shows how the cash account changed during the period Ending amount of cash shown on the statement of cash ows must agree with the amount on the balance sheet Chapter 2 Classi ed Balance Sheet Order Assets 1 Current Assets Assets expected to be converted to cash or used up within one year of its operating cycle EX Cash shortterm investments accounts receivable notes receivable inventory supplies prepaid insurance 2 Longterm Investments EX Investments 3 Property Plant and Equipment EX Land Equipment and Accumulated Depreciation subtract 4 Intangible Assets EX Goodwill Patents Copyrights and Trademarks Liabilities and Stockholders Equity 1 Current Liabilities EX Notes Payable Accounts Payable Salaries and Wages Payable Uneamed Service Revenue and Interest Payable 2 Longterm Liabilities EX Mortgages Payable and Notes Payable 3 Stockholders Equity EX Common Stock and Retained Earnings Fin Operating Cycle The time it takes to go from cash to cash in producing revenue Ratio Analysis Expresses the relationship among selected items of nancial statement data Pro tability Ratio Measures the operating success of a company for a given period of time Working Capital Current Assets 7 Current Liabilities when assets exceed liabilities working capital is positive higher chance of being able to pay creditors Current Ratio LiquidityCurrent AssetsCurrent Liabilities Does not take into account the composition of current assets Solvency The ability for a company to repay debt as it matures Solvency Ratios Measure survivability over a long period of time Securities and Exchange Commission SEC The agrency of the US government that oversees US nancial markets and accounting standardsetting bodies Financial Accounting Standards Board FASB The primary accounting standardsetting body in the US International Accounting Standards Board IASB Issues standards called International Financial Reporting Standards IFRS Public Company Accounting Oversight Board PCAOB Determine auditing standards and review the performance of auditing rms Relevance Does it make a difference in a business decision Faithful Representation Does the information accurately depict what happened Must be complete and neutral Assumptions in Financial Reponing Monetary UnitAssumption Requires that only things that can be expressed in money are included in the accounting records Economic EntityAssumption States that every economic entity can be separately identified and accounted for PeriodicityAssumption States that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for a business Going Concern Assumption States that the business will remain in operation for the foreseeable future Accrual Basis Transactions that change a company s financial statements are recorded in the periods in which the events occur Accounting Principles Cost Principle Dictates that companies record assets at their cost If the value of a purchased object uctuates the company still records the original cost Fair Value Principle Indicates that assets and liabilities should be reported at fair value the price received to sell an asset or liability Only applied where assets are actively traded Full Disclosure Requires that companies disclose all circumstances and events that would make a difference to financial statement users Constraints in Financial Reporting M ateriality Constraint A financial statement s impact on a company s overall financial condition and operations Cost Constraint Relates to the fact that providing information is costly Chapter 3 Accounting Information System The system of collecting and processing transaction data and communicating nancial information to decision makers Accounting Transactions Economic events that require recording in the nancial statements Dividends reduce stockholders equity but are not an expense Steps in Recording Process The Journal Where transactions are recorded in chronological order before they are transferred to the accounts Shows debit and credit e ects on specific amounts Every company has a general journal which discloses in one place the complete effect of a transaction provides a chronological record of transactions and helps to prevent or locate errors by comparing debit and credit amounts Journalizing The process of entering data in the journal Ledger The entire group of accounts maintained by a company Keeps in one place all the information about changes in specific account balances Every company has a general ledgerwhich contains all the assets liabilities and stockholders equity revenue and expense accounts Chart of Accounts Records accounts Posting The procedure of transferring journal entry amounts to ledger accounts Trial Balance Lists accounts and their balances at a given time Usually prepared at the end of an accounting period Can help uncover errors in journalizing and posting Chapter 4 Revenue Recognition Principle Requires companies to recognize revenue in the accounting period in which it is earned Accrual Versus Cash Basis of Accounting Accrual basis accounting Means that transactions that change a company s financial statements are recorded in the period in which the events occur Useful Life The life of assets such as buildings equipment and motor vehicles Depreciation Contra AssetAccount Accrued Revenues Revenues earned but not yet recorded Accrued Expenses Expenses incurred but not paid or recorded at the statement date Preparing Closing Entries Income Summary Used to close revenues and expenses Post closing Trial Balance Comes after a company journalizes and posts all closing entries Comes from the ledger Accounting 2001 Chapter 3 The Accounting Information System InClass Problems For each of the following situations indicate whether a debit or credit entry is required Situation Debit Credit a Increase a liability account x b Decrease retained earnings account x 0 Increase a revenue account x d Increase an expense account x e Decrease an asset account x f Decrease a liability account x 9 Increase a common stock account x h Increase an asset account x Indicate whether the type of transaction would require a debit or credit entry Transaction Type Debit Credit a Increase in cash x b Decrease in accounts payable x 0 Increase in sales revenue d Decrease in equipment e Decrease in accounts receivable f Increase in notes payable 9 Increase in Salaries Expense x h Increase in accumulated depreciation I Decrease in cash j Decrease in supplies k Increase in wages payable Increase dividends x gtltgtltgtltgtlt gtltgtltgtltgtlt Indicate the normal balance and financial statement reporting for each of the Accounts a Cash Accounts Sales revenue Common Stock Unearned Revenue Notes receivable Dividends Accumulated x Note Exercise adopted from Financial Accounting A Bridge to Decision Making 4m Edition Ingram amp Baldwin pp 170171 Page 1 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems Accounting Transactions On October 1 cash of10000 is invested in Sierra Corporation by investors in exchange for 10000 of common stock On October 1 Sierra borrowed 5000 from Castle Bank by signing a 3month 12 5000 note payable On October 2 Sierra purchased equipment by paying 5000 cash to Superior Equipment Sales Co On October 2 Sierra received a 1200 cash advance from R Knox a client On October 3 Sierra received 10000 in cash from Copa Company for guide services performed On October 3 Sierra Corporation paid its of ce rent forthe month of October in cash 900 On October 4 Sierra paid 600 for a oneyear insurance policy that will expire next year on September 30 On October 5 Sierra purchased supplies on account from Aero Supply for 2500 On October 20 Sierra paid a 500 dividend 0 Employees have worked two weeks earning 4000 in salaries which were paid on October 26 ASOQONQQPFDN Page 2 of 13 Accounting 2001 chapter 3 The Accounting Information System Inclass Problems ms manna mmquot EminedEaWE Rapid mes Mun warned fartm ampHm human u m mm M mmWwm Wm coon 5occ 39HZd Hacm f moc 16 lt 570 Pageaum Accounting 2001 Chapter 3 The Accounting Information System nClass Problems Sierra Corporation Journal Cash Common Stock Cash Cash Unearned Revenue Cash Salaries Cash Page 4 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems Jones Engineering completed the following transactions for the month of August a 039 v 8 O V 3amp38 Richard Jones invested 100000 cash office equipment with a value of 5000 and 60000 of drafting equipment to launch the business in exchange for common stock Purchased land worth 49000 for an office by paying 6300 cash and signing a longterm note payable for 42700 Purchased a portable building with 55000 cash and moved it onto the land acquired in b Paid 3000 cash for the premium on an 18month insurance policy Completed and delivered a set of plans for Tyler Inc and collected 6200 cash Purchased 20000 of additional drafting equipment by paying 9500 cash and signing a longterm note payable for 10500 Completed 14000 of engineering services for ABC Co on account Purchased 1150 of additional office equipment on credit Completed engineering services for 22000 on credit Received a bill for rent of equipment that was used on a recently completed job The 1500 rent must be paid within 30 days Collected 7000 cash in partial payment from ABC Co described in transaction 9 Paid 1200 cash for wages to drafting assistant Paid 1150 cash to settle the account payable created in transaction h Paid 925 cash for minor repairs to the drafting equipment Paid 9480 cash for dividends Paid 1200 cash for wages to a drafting assistant Paid 2500 cash for advertisements in the local newspaper during June Received 15000 deposit from PCS Co for engineering work to be performed over the next 3 months Page 5 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems Jones Engineering Solution 3 Cash Office Equipment Drafting Equipment Common Stock Land Cash Notes Payable Building Cash Prepaid Insurance Cash Cash Senice Revenue Drafting Equipment Cash Notes Payable Accounts Receivable Senice Revenue Office Equipment Accounts Payable Accounts Receivable Senice Revenue Rent Expense Accounts Payable Cash Accounts Receivable 55000 3000 6200 20000 14000 1150 22000 1500 7000 CR 165000 6300 42700 55000 3000 6200 9500 10500 14000 1150 22000 1500 7000 Page 6 of 13 Chapter 3 The Accounting Information System SalariesNVages Expense Cash Accounts Payable Cash Repairs Expense Cash Dividends Cash SalariesNVages Expense Cash Advertising Expense Cash Cash Unearned Revenue Accounting 2001 nClass Problems 1200 1150 925 9480 1200 2500 15000 1200 1150 925 9480 1200 2500 15000 Page 7 of 13 Exercise 3 2 Solution 1 2 3 4 5 6 7 8 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems Assets Liabilities Stockholders39 Equity Accounts Accounts Common Retained Earnings Cash Receivable Equipment Payable Stock Revenues Expenses 30000 30000 4000 44000 Rent Expense 12000 12000 5000 5000 Service Revenue 8000 aooo Utilities Expense 40000 S4OJJOO Issued Stack 40000 40000 1 300 Advertising Expense M M 9 31 M M J m V 33000 33000 Page 8 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems PROBLEM 3 4A Date Account Titles and Explanation Debit Credit Mar 1 Cash 50000 Common Stock 50000 Issued stock for cash 3 Land 23000 Buildings 9000 Equipment 6000 Cash 38000 Purchased Arnie s Golf Land 5 Advertising Expense 1200 Cash 1200 Paid for advertising 6 Prepaid Insurance 2400 Cash 2400 Paid for oneyear insurance policy 10 Equipment 5500 Accounts Payable 5500 Purchased equipment on account 18 Cash 1600 Service Revenue 1600 Received cash for revenue earned 19 Cash 100 X 25 2500 Unearned Service Revenue 2500 Received cash for coupon books sold 25 Dividends 500 Cash 500 Payment of cash dividend Page 9 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems PROBLEM 3 4A Continued Date Account Titles and Explanation Debit Credit Mar 30 Salaries and Wages Expense 800 Cash 800 Paid salaries expense 30 Accounts Payable 5500 Cash 5500 Paid creditor on account 31 Cash 900 Service Revenue 900 Received cash for revenue earned Page 10 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems PROBLEM 36A aampc Cash 101 Bal 8200 1015 1200 105 1300 1020 1900 1029 300 1031 400 Bal 5700 Accounts Receivable Common Stock 101Bal 15000 Bal 15000 Dividends 1029 300 Bal 300 Service Revenue 1010 5100 1017 600 Bal 5700 Salaries and Wages Expense 1015 1200 101Bal 2600 105 1300 1010 5100 Bal 6400 Supalies 101 Bal 2100 Bal 2100 Equipment 101 Bal 8000l Bal 8000l Accounts Payable 1020 1900 101 Bal 4800 Bal 2900 Unearned Service Revenue 1017 600 I 101 Bal 1000 IBaI 500 Bal 1200 Utilities Expense 1031 400 I Bal 400 Page 11 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems PROBLEM 36A Continued 390 Date Oct 5 10 15 17 20 29 31 Dividends Account Titles and Explanation Cash Accounts Receivable Received collections from customers on account Accounts Receivable Service Revenue Billed customers for services performed Salaries and Wages Expense Cash Paid employee salaries Unearned Service Revenue Service Revenue Performed services for customers who paid in advance Accounts Payable Cash Paid creditors on account Cash Payment of cash dividend Utilities Expense Cash Paid utilities Debit 1300 Credit 1300 5100 5100 1200 1200 600 600 1900 1900 300 300 400 400 Page 12 of 13 Accounting 2001 Chapter 3 The Accounting Information System nClass Problems PROBLEM 36A Continued d MIMOSA COMPANY Trial Balance October 31 2012 Debit Credit Cash 5700 Accounts Receivable 6400 Supplies 2100 Equipment 8000 Accounts Payable 2900 Unearned Service Revenue 500 Common Stock 15000 Dividends 300 Service Revenue 5700 Salaries and Wages Expense 1200 Utilities Expense 400 24100 24100 Page 13 of 13
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