Chapter 1
Who are the two users of accounting information? Give an example of each.
1) Internal users (ex. Marketing, HR, Finance, Management)
2) External users (ex. Investors, Creditors)
Assets that have no physical substance. An example is goodwill.
Intangible Assets
The _______ shows debit and credit effects on specific accounts for each transaction.
journal
Adjusting entries can be classified as either _______ or ________.
deferrals, accruals
This type of business activity involves raising money from outside sources.
Financing activities
Give me an example of an asset, liability, and stockholders' equity.
Asset- Cash, Accounts Receivable, Inventory, PPE (land, buildings, equipment), notes receivable, etc.
Liability- notes payable, accounts payable, salaries and wages payable, interest payable, etc.
SE- common stock, retained earnings
The process of transferring journal entries to the ledger accounts
Posting
What are the two principles used as guidelines in accrual basis accounting? What do they mean?
The revenue recognition principle requires that revenue be recognized in the accounting period in which the performance obligation is satisfied
The expense recognition principle requires that expenses be matched with revenues.
Assets = Liabilities + _________
Stockholders' Equity
Define solvency. How is it computed? Is it better if it is higher or lower?
Solvency is the ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
Debt to Assets Ratio = total debt(liabilities) / total assets
The lower the ratio the better. A high percentage indicates a risky company.
What accounts have a normal debit balance? What accounts have a normal credit balance?
Normal debit balance is Expenses, Assets, and Dividends
Normal credit balance is Liabilities, Common Stock, Retained Earnings
What is the difference between Cash basis accounting and Accrual basis accounting? Which one are we learning in this class?
Accrual basis accounting- transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged **what we are learning
Cash basis accounting- revenue is recognized (recorded) only when cash is received and expenses are recognized (recorded) only when cash is paid.
What is the correct order in which you prepare the financial statements?
Income Statement, Retained Earnings Statement, Balance Sheet, and Statement of Cash Flows
What is the set of rules and practices that provide answers to the following questions.
1) How does a company decide on the type of financial information to disclose?
2) What format should a company use?
3) How should a company measure assets, liabilities, revenues, and expenses?
Who is the U.S. standard-setting body that establishes these and similar principles.
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board (FASB) established these principles
On October 2, Sierra received a $1,200 cash advance from R. Knox, a client, for guide services for multi-day trips that are expected to be completed in the future.
Dr. Cash 1,200
Cr. Unearned Ser. Rev. 1,200
What is the difference between temporary and permanent accounts? What are the accounts that get zeroed out at the end of the month?
Temporary accounts are the accounts that get zeroed out at the end of the month, they get closed. These include all revenue accounts, all expense accounts, and dividends.
Permanent accounts don't get closed. These include balance sheet accounts (assets, liabilities, SE)
Give me an example of one of the three components that supplements the financial statements in an annual report.
MD&A (Management Discussion and Analysis), Notes to Financial Statements, or Auditor's Report
Define and explain one of the principles used in financial reporting.
Measurement principles - GAAP generally uses one of two measurement principles: the cost principle or the fair value principle
Historial cost principle - requires assets to be recorded and reported at original cost because that amount is verifiable
Fair value principle - requires that some assets and liabilities should be reported at fair value (the price received to sell an asset)
Full Disclosure Principle - requires that all circumstances and events that would make a difference to financial statement users should be disclosed
What is the purpose of a trial balance? If the debits equal the credits in the trial balance, will the financial statements necessarily be error-free? Why or why not?
The primary purpose of the trial balance is to prove the mathematical equality of debits and credits after posting.
It may balance but not uncover all errors such as: a transaction that should have been journalized but was not recorded, a journal entry posted twice, or incorrect accounts used in journalizing or posting.
What would the adjusting entry be for this transaction:
Insurance expires at the rate of $450 per month.
Dr. Insurance expense 450
Cr. Prepaid insurance 450