Accounting Basics Quiz

Introduction to Chapter 17

• The chapter focuses on understanding accounting and financial information.
• The course is BUS 100 - Introduction to Business.
• The instructor is Alaa Hamade.

The Role of Accounting Information

• Accounting: The recording, classifying, summarizing, and interpreting of financial events and transactions to provide information for good decision-making.
• Accounting system: The method used to record and summarize accounting data into reports.
• Stakeholders: Employees, owners, creditors, unions, investors, and the government all use a firm's accounting information.
• GAAP (Generally Accepted Accounting Principles): Principles that accounting follows.

The Accounting Cycle

• Accounting Cycle: A six-step procedure leading to the preparation and analysis of financial statements.
• Bookkeeping: The recording of business transactions.
• Bookkeepers: Divide transactions into meaningful categories and post them into a journal.
• Journal entries: Usually chronological.
• Double-entry bookkeeping: Writing every transaction in two places to check for accuracy.

Steps in the Accounting Cycle

• Analyze source documents: Analyze documents, like sales slips and travel records.
• Record transactions in journals: Records transactions in a journal.
• Transfer journal entries to ledger: Recording entries into a ledger.
• Take a trial balance: Checks the balances to ensure correctness.
• Prepare financial statements: Prepare financial reports.
• Analyze financial statements: Analyze the financial statements for further meaning.

Bookkeeper's Tools

• Ledger: A specialized book or computer program for accumulating information from accounting journals into specific categories and posting them.
• Trial balance: A summary of all financial data in ledgers, ensuring figures are correct and balanced.

Financial Statements

• Financial Statement: A summary of all the financial transactions within a particular time period.
• Key financial statements:
  • Income statement: Revenue compared to selling costs.
  • Balance sheet: Company assets, liabilities, and owners' equity at a specific time.
  • Statement of cash flows: Shows the difference between cash coming and going out of a business.

The Income Statement

• Income statement: A financial statement that shows a firm's profit after costs, expenses, and taxes are calculated; summarising the resources, expenses, and the net income/net loss.
• Net income or net loss: Revenue remaining after accounting for all costs, expenses (including taxes).
• Income statement formula: Revenue - cost of goods sold - operating expenses - taxes = net income/loss.

Revenue, Cost of Goods Sold, and Gross Profit

• Revenue: Monetary value of goods/services sold.
• Cost of Goods Sold (COGS): The cost of sales inventory/materials.
• Gross Profit: How much profit a firm earns through selling merchandise.

Operating Expenses

• Operating Expenses: Costs linked to running a business (e.g., rent, utilities, salaries).
• Selling expenses: Costs involved in marketing and distribution.
• General expenses: Costs linked to administrative work (e.g., office salaries, insurance).

Net Profit or Loss

• Net Profit or loss: Revenue minus business expenses and taxes over time.
• This is the ultimate profit of the business.

The Fundamental Accounting Equation

• Fundamental accounting equation: The basic equation for the balance sheet, showing that assets are equal to liabilities plus equity. (Assets = Liabilities + Equity).

The Balance Sheet

• Balance sheet: A statement of a company's financial position at a specific time, consisting of assets, liabilities, and owners' equity. Assets equal the sum total of liabilities and equity.
• Assets: Resources owned by a firm. Tangible or intangible.

Classifying Assets

• Assets: Economic resources (of value) owned by a firm.
• Liquidity: How easy an asset can be converted to cash.
• Three asset categories:
  • Current assets: Assets convertible to cash within a year (e.g., inventory).
  • Fixed assets: Long-term assets (e.g., land, buildings).
  • Intangible assets: Long-term assets with no physical form (e.g., patents).

Liabilities and Owners' Equity Accounts

• Liabilities: What a business owes to others.

• Common liability accounts:

  • Accounts payable: Current debts for purchases on credit.
  • Notes payable: Short or long-term debts with a due date.
  • Bonds payable: Long-term debts from borrowed money.

• Owners' equity: The amount owned by the owners minus liabilities.

• Retained earnings: Accumulated profits reinvested in the business (not paid out to shareholders as dividends).

The Statement of Cash Flows

• Statement of Cash Flows: Reports cash receipts and disbursements related to a firm's activities.
• Three major activities:
  • Operations: Running a business.
  • Investments: Firm's investment activities.
  • Financing: Using debt, equity, or cash to pay expenses, debts, or dividends.

The Need for Cash Flow Analysis

• Cash flow: The difference between cash coming into and out of a business. A critical factor in business operations.
• Importance of Cash Flow: Managing cash flow is crucial for any business operation.
• Potential problems: Buying things on credit can lead to issues when short-term debts become due, even when future cash inflows are promised.

Accounting Disciplines

• Financial accounting: Information for external parties.
• Outside user questions:
  • Is the organization profitable?
  • Can the organization pay its bills?
  • How much debt does it have?
• Managerial Accounting: Information for managers — for decision-making purposes.
  • Cost of production, marketing costs, budget preparation and controls, minimizing tax liabilities.
• Auditing: Assessing accuracy of financial statements. (Independent audits focus on unbiased evaluations.)
• Tax Accounting: Preparation of tax returns and developing tax strategies.
• Gov't & Not-for-profit Accounting: Handling accounting for non-profit/govt entities. These are not driven by profit but by fulfilling service obligations in accordance with budgets.