Financial Accounting Midterm 1 Chapter 1-3

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Income Statement Formula
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Revenues – Expenses = Net Income
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Statement of Retained Earnings Formula
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Beginning Retained Earnings + Net Income – Dividends Declared = Ending Retained Earnings
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Balance Sheet Formula
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Assets = Liabilities + Stockholders’ Equity
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Statement of Cash Flows Formula
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Operating Cash Flows + Investing Cash Flows + Financing Cash Flows = Increase (Decrease) in Cash
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Order in which Financial Statements are prepared
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1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows
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Chart of Accounts
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a listing of the names of the accounts that a company has identified and made available for recording transactions in its general ledger.
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Retained Earnings
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the portion of net income the company has kept over a period of years
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Current Assets
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Expected to be or converted to cash, sold, or consumed during the next 12 months ex)Cash & Cash equivalents Account Rec. – allowance of uncollectible accts Inventory Prepaid Exp (supplies, prepaid rent, prepaid insurance) Short-term inv. Property, plant, & equipment less accumulated dep. (land, equipment, buildings, vehices, office equipment, etc) Other assets: intangibles (goodwill franchises, patents etc.)
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Long Term Assets
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Include property and equipment and other investments that are expected to benefit the company for long periods of time or certain types of intangible assets
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Current Liabilities
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Debts generally payable within one year ex) Accounts Payable Sales Taxes Payable Income taxes payable FICA taxes payable Unearned Rev Utilities Payable Long-term liabilites some notes payable bonds payable – discount on bonds payable or plus premium on bonds payable mortgage payable
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Long Term Liabilities
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Payable after one year, interest
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Stockholder’s Equity
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-common stock: face amount >> how much did they invest -additional paid-in capital -retained earnings -treasury stock -accumulated other comprehensive income (loss)
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Income Statment
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reports revenues and expenses for the period -revenues & gains -expenses & losses net income = total revenues and gains – total expenses and losses
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Balance Sheet
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reports assets, liabilities, stockholders’ equity -moment in time, not a period of time
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Proprietorship
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-one owner -proprietor is personally liable and responsible for all debt
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Partnership
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-two or more owners -general partners are liable; limited partners are not
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Limited-Liability Company
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-members -members are not personally liable -business is liable
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Corporation
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-stockholders >> generally many -stockholders not personally liable >> double taxed -formed under state law -legally distinct from owners -board of directors >> declare dividends
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Historical Cost Principle
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assets should be recorded at their actual cost
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Entity
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Any organization or person that stands apart as a separate economic unit
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Matching Principle
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-identify all expenses incurred during the accounting period; recognize them in the same period in which any related revenues were earned
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Depreciation
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allocates cost of a plant asset to expense over the asset’s useful life -long term assets lose value over time
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Book Value
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net amount of a plant asset, or carrying amount >> decreases over time
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Accrual Basis Accounting
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records impact of a business transaction as it occurs; records cash and non cash transactions >>even if no cash is received/paid
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Cash Basis Accounting
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only cash transactions -receipts >> revenues -payments >> expenses
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GAAP
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General Accepted Accounting Principles -rules of accounting
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Consistency in Accounting
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once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods
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Journal Entry for Depreciation Expense
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Debit Depreciation Expense Credit Accumulated Depreciation
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Flow of Accounting Data
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Transaction >>ANALYZE>> journal >>POST>> ledger >>T-ACCOUNTS>> trial balance >> financial statements
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Accounting Equation
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Assets = Liabilities + Stockholders’ Equity
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Closing the books
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1. Debit each revenue account for the amount of its credit balance. 2. Credit Retained Earnings for the sum of the revenues (Increasing Retained Earnings) 3. Credit each expense account of it debit balance 4. Debit Retained Earnings for the sum of the expenses 5. Credit the dividends of its debit balance
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Unearned Revenue
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LIABILITY created from some businesses collecting cash from customers before earning the revenue for example: rent, airline tickets
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Deferrals
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-cash is changing hands -some assets are used up and become expenses -end of period, adjustment needed to decrease the supplies account for the supplies that have been used up
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Accruals
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-opposite of a deferral -accrued expense: records expense before paying cash -accrued revenue: records expense before collecting cash -debits a receivable and credits a revenue
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The Revenue Principle
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1. When to record (recognize) revenue -record revenue AFTER it has been earned 2. What amount of revenue to record -record the cash value of the goods and services transferred to the customer
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Operating Activities
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Cash inflow: sale of good or service, interest received and div. received Cash outflow: suppliers for inventory, employees for service, government for taxes, lender for interest, other for expenses.
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Investing Activities
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Cash inflows: sale of property and equipment, sale of investment in debt or equity securities of other entities, from collection of principal on loans to other entities Cash outflows: purchase property, plant, and equipment, purchase investments in debt or equity securities of other entities, make loans to other entities.
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Financing Activities
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Cash inflow: sale of common stock, issuance of long-term debt (bonds and notes) Cash outflows: stockholders as dividends, redeem long-term debt or reacquire capital stock (treasury stock)

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