Chapter 1
What are the 4 financial statements and list them in the order in which they should be prepared?
1. Income Statement
2. Retained Earnings Statement
3. Balance Sheet
4. Cash flow Statement
List the 4 subcategories on the assets section of the classified balance sheet?
1. Current Assets
2. Long term investments
3. Property, plant and equipment
4. Intangible assets
What does the basic accounting equation state?
Assets=liabilities + equity
Which method of accounting is accepted under GAAP?
Accrual accounting
What is the equation for ending retained earnings?
Beginning retained earnings + net income- dividends=ending retained earnings
Describe liquidity and provide 2 examples of liquidity ratios?
measure short term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
1. Current ratio
2. working capital
If you pay your monthly rent expense of $850, what would the journal entry be?
Debit to rent expense and credit to cash
What is the main distinction between cash and accrual accounting?
Cash accounting- record transaction only when cash is received or paid
Accrual accounting- record transaction when revenue in earned or expense is incurred, accepted under GAAP
List 2 advantages and 2 disadvantages of corporations?
Advantages:
1. easy to transfer ownership
2. easy to raise funds
Disadvantages:
1. Double taxation
2. Subject to more government regulation
1. Relevance
2. Faithful Representation
Which accounts have a normal debit balance?
Dividends, expenses, and assets
What does the periodicity assumption state?
accountants divide the economic life of a business into artificial time periods
Provide 1 example of a financing activity and 1 example of an investing activity?
Financing:
Issuing stocks
Investing:
Purchasing a truck
What is the formula for earnings per share and what does it measure?
net income-preferred dividends/(average common shares outstanding); measures profitability
If ABC company receives cash for services performed, what would the journal entry look like?
Debit to cash and credit to service revenue
What are the most important characteristics needed for adjusting entries?
1. Never include cash
2. must include one balance sheet and one income statement account
3. ensure revenue and expense recognition principles are followed
List the 4 opinions that can be issued with an auditors report in order of best to worst opinion?
1. Unqualified
2. Qualified
3. Disclaimer
4. Adverse
How are the income statement, retained earnings statement, and balance sheet interrelated?
Net income derived from income statement is needed to determine ending retained earnings which is then needed to determine part of the stockholders equity section on the balance sheet
What are the 3 steps in the recording process?
1. Analyze the transaction
2. Enter the transaction in the journal
3. Transfer the journal entry to the ledger account through posting
What is the difference between a deferral and an accrual?
Deferral- dollars are received before the action is performed ex.) Prepaid expenses, unearned revenues
Accrual- action occurs before the dollar amount is received ex.) accrued revenues and expenses