acc 200 chapter 1 pt. 1

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Questions and Answers

Which of the following best describes the role of accounting as an information system?

  • It measures business activities, processes data into reports, and communicates results to decision-makers. (correct)
  • It solely focuses on preparing tax returns for businesses to comply with legal requirements.
  • It primarily aims to provide financial information to internal decision-makers for strategic planning.
  • It is limited to recording transactions and producing financial statements for external auditors.

What is the primary focus of financial accounting?

  • Ensuring compliance with tax regulations and minimizing tax liabilities.
  • Providing information to internal decision-makers, such as managers, for operational decisions.
  • Providing information to external decision-makers, such as investors and creditors. (correct)
  • Analyzing past performance to improve future strategies.

How does managerial accounting differ from financial accounting?

  • Managerial accounting is mandatory for all publicly traded companies, while financial accounting is optional.
  • Managerial accounting is governed by GAAP, while financial accounting is not.
  • Managerial accounting focuses on external reporting, while financial accounting focuses on internal reporting.
  • Managerial accounting provides information to internal decision makers; financial accounting provides information to external decision makers. (correct)

In the context of accounting, who are considered 'investors'?

<p>Individuals or entities who own a portion of the business and provide equity capital. (B)</p> Signup and view all the answers

Which capital providers are most likely to need accounting information during the early stages of a company (Incubator/Seed Accelerator)?

<p>Founders &amp; Angels (D)</p> Signup and view all the answers

Which organization has the authority to oversee the U.S. financial markets?

<p>SEC (Securities and Exchange Commission) (C)</p> Signup and view all the answers

What is the role of the Financial Accounting Standards Board (FASB)?

<p>To establish and improve Generally Accepted Accounting Principles (GAAP) within the United States. (D)</p> Signup and view all the answers

Which of the following statements best describes the accounting equation?

<p>Assets = Liabilities + Equity (B)</p> Signup and view all the answers

In the accounting equation, what do 'assets' represent?

<p>The economic resources owned by a company that are expected to provide future benefit. (D)</p> Signup and view all the answers

What is the definition of 'liabilities' in the context of the accounting equation?

<p>The obligations of a company to transfer assets or provide services to others in the future. (B)</p> Signup and view all the answers

Describe 'equity' in terms of the accounting equation.

<p>The residual interest in the assets of an entity that remains after deducting its liabilities. (B)</p> Signup and view all the answers

How do 'revenues' primarily affect the accounting equation?

<p>They increase assets and increase equity. (C)</p> Signup and view all the answers

What is the effect of expenses on the accounting equation?

<p>Expenses decrease assets and decrease equity. (B)</p> Signup and view all the answers

How are dividends treated in relation to the accounting equation and equity?

<p>Dividends decrease assets and decrease equity. (C)</p> Signup and view all the answers

A company starts with $50,000 in equity, has a net income of $30,000, and pays out $10,000 in dividends. What is the ending equity?

<p>$70,000 (A)</p> Signup and view all the answers

Which of the following activities is considered a 'transaction' in accounting terms?

<p>Buying equipment on credit. (D)</p> Signup and view all the answers

Smart Touch Learning received $30,000 cash from Sheena Bright in exchange for common stock. What is the effect on the accounting equation?

<p>Assets increase, equity increases. (C)</p> Signup and view all the answers

Smart Touch Learning purchases land for $20,000 cash. What is the impact on the accounting equation?

<p>One asset increases and another asset decreases, with no change to liabilities or equity. (C)</p> Signup and view all the answers

Smart Touch Learning buys office supplies on account for $500. Which accounts are affected and how?

<p>Assets increase and liabilities increase. (A)</p> Signup and view all the answers

Smart Touch Learning earns $5,500 in service revenue and collects it in cash. What is the effect on the accounting equation?

<p>Assets increase, and equity increases. (C)</p> Signup and view all the answers

Smart Touch Learning performs a service for clients on account for $3,000. What accounts are affected?

<p>Accounts Receivable increases and equity increases. (A)</p> Signup and view all the answers

Smart Touch Learning pays $3,200 in cash for office rent ($2,000) and employee salaries ($1,200). What is the impact on the accounting equation?

<p>Assets decrease, and equity decreases. (A)</p> Signup and view all the answers

Smart Touch Learning pays $300 to a supplier for office supplies previously purchased on account. What is the impact on the accounting equation?

<p>Assets decrease, and liabilities decrease. (D)</p> Signup and view all the answers

Smart Touch Learning collects $2,000 from a client for services previously billed on account. What is the effect on the accounting equation?

<p>There is no change in total assets. (A)</p> Signup and view all the answers

Smart Touch Learning distributes a $5,000 cash dividend to its stockholder. What is the effect on the company's accounting equation?

<p>Assets decrease and equity decreases. (A)</p> Signup and view all the answers

Which financial statement reports a company's financial performance over a specific period of time?

<p>Income Statement (B)</p> Signup and view all the answers

The income statement can be described by which equation?

<p>Revenues - Expenses = Net Income or Net Loss (B)</p> Signup and view all the answers

What information does the Statement of Retained Earnings provide?

<p>An analysis of how a company's retained earnings balance changed during a period. (B)</p> Signup and view all the answers

Which statement outlines the formula: Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings

<p>Statement of Retained Earnings (D)</p> Signup and view all the answers

Which financial statement reports a company's assets, liabilities, and equity at a specific point in time?

<p>Balance Sheet (C)</p> Signup and view all the answers

Which order are assets typically listed on a balance sheet?

<p>From most liquid to least liquid (D)</p> Signup and view all the answers

Which formula best describes a balance sheet?

<p>Assets = Liabilities + Stockholders' Equity (B)</p> Signup and view all the answers

Which financial statement reports a company's cash inflows and cash outflows during a specific period?

<p>Statement of Cash Flows (C)</p> Signup and view all the answers

Reports on a business’s cash receipts and cash payments for a period of time. Cash flows from operating activities, investing activities, and financing activities can be found on which statement?

<p>Statement of Cash Flows (C)</p> Signup and view all the answers

Which of the following is NOT a typical category of cash flows reported on the statement of cash flows?

<p>Cash flows from marketing activities (C)</p> Signup and view all the answers

Why are financial statements important for business decisions?

<p>They are used to communicate information needed to make business decisions. (B)</p> Signup and view all the answers

What is the correct order to prepare financial statements?

<p>Income Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows. (D)</p> Signup and view all the answers

How does the International Accounting Standards Board (IASB) primarily impact financial reporting on a global scale?

<p>By issuing International Financial Reporting Standards (IFRS). (D)</p> Signup and view all the answers

Which scenario best demonstrates the use of the accounting equation to analyze a business transaction?

<p>A company purchases office supplies on credit, increasing both assets and liabilities. (D)</p> Signup and view all the answers

A company's beginning retained earnings was $50,000. During the year, it had a net income of $20,000 and paid dividends of $10,000. What is the ending retained earnings?

<p>$60,000 (C)</p> Signup and view all the answers

What is the primary reason the statement of cash flows categorizes cash flows into operating, investing, and financing activities?

<p>To provide a clear picture of where a company's cash is coming from and how it is being used. (A)</p> Signup and view all the answers

A company's liabilities increased by $30,000 and equity increased by $20,000 during the year. What was the change in assets during the same period, according to the accounting equation?

<p>Assets increased by $50,000 (C)</p> Signup and view all the answers

Flashcards

Accounting

An information system that measures business activities, processes information into reports, and communicates results to decision-makers.

Financial Accounting

Provides information for external decision-makers, such as investors and creditors.

Investors

Individuals or entities who own a portion of a business, providing equity capital.

Creditors

Individuals or entities to whom the business owes money, providing debt capital.

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Managerial Accounting

Provides information to internal decision-makers (i.e., managers) for operating decisions and capital budgeting.

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SEC

Organization that oversees the U.S. financial markets.

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FASB

Organization that issues U.S. Generally Accepted Accounting Principles.

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GAAP

U.S. Generally Accepted Accounting Principles.

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IASB

Organization that issues International Financial Reporting Standards.

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IFRS

International Financial Reporting Standards.

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Accounting Equation

The basic tool of accounting, measuring the resources of the business and the claims to those resources.

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Assets

Economic resources that are expected to benefit the business in the future.

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Liabilities

Debts that are owned to outsiders.

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Equity

The owners' claims to the assets of the business.

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Contributed Capital

Owner's contributions of cash or other assets to the corporation in exchange for stock.

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Common Stock

Represents basic ownership in a corporation.

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Retained Earnings

Earnings from profitable operations that are not distributed to owners.

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Dividends

Distribution of a company's earnings to its stockholders.

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Net Income

When revenues are greater than expenses.

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Net Loss

When revenues are less than expenses.

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Transaction

Any event that affects the financial position of the business and can be measured with faithful representation.

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Income Statement

Provides information about a company's profitability over a specific period.

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Statement of Retained Earnings

Informs users about how much of the earnings were kept and reinvested in the company.

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Balances Sheet

Assets = Liabilities + Stockholders' Equity.

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Statement of Cash Flows

Reports the actual cash flowing into and out of a company during a time period.

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Study Notes

  • Accounting explains the importance of accounting and its users.
  • It describes the organizations and rules that govern accounting practices.
  • It includes the accounting equation and defines assets, liabilities, and equity.
  • It then uses the accounting equations to analyze transactions.
  • Students learn how to prepare financial statements.
  • It demonstrates how to use financial statements and return on assets (ROA) to evaluate business performance.

Financial Accounting vs. Managerial Accounting

  • Accounting is an information system, measuring business activities and processing them into reports for decision-makers.
  • Financial accounting provides data for external decision-makers such as investors and creditors.
  • Managerial accounting provides internal decision-makers like managers data for operating decisions and capital budgeting.

Capital Providers

  • Capital providers need accounting information at each stage of a company's life cycle.
  • This includes founders & angels, venture capital, private equity, and public markets.

Governing Organizations

  • The Securities and Exchange Commission (SEC) oversees U.S. financial markets.
  • The Financial Accounting Standards Board (FASB) issues U.S. Generally Accepted Accounting Principles (GAAP).
  • The International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).

The Accounting Equation

  • The accounting equation is a basic tool that measures a business's resources and claims to those resources.
  • Assets are resources, while liabilities are obligations.
  • Equity is considered residual or net worth.
  • The equation is: Assets = Liabilities + Equity.

Equity Sources

  • Equity consists of owners' claims to a business's assets.
  • Its sources include contributed capital.
  • Contributed capital represents owner's cash contributions or other contributions in exchange for stock.
  • Common stock represents basic ownership.
  • Retained earnings are earnings from profitable operations not distributed to owners.

Expanded Equation

  • The accounting equation can be expanded to Assets = Liabilities + Contributed Capital + Retained Earnings.
  • Equity portion of Apple's Balance Sheet as of December 26, 2020 ($ Millions, except per share amount):
    • Common stock and additional paid-in capital: $0.00001 par value: 50,400,000 shares authorized; 16,823,263 and 16,976,763 shares issued and outstanding, respectively valued at 51,744
    • Retained earnings are valued at 14,301.
    • Accumulated other comprehensive income/(loss) is 179.
    • Total shareholders' equity is 66,224.

Net Income and Loss

  • The accounting equation can be expanded further: Assets = Liabilities + (Common Stock - Dividends) + (Revenues - Expenses)
  • Net income occurs when revenues exceed expenses.
  • Net loss occurs when revenues are less than expenses.

Accounting Equation Balance

  • The accounting Equation should always balance.
  • The equation is:
    • Beginning Assets = Liabilities + Equity
    • During the Year: Δ Assets = Δ Liabilities + Δ Equity, where Δ represents change.
    • Ending Assets = Liabilities + Equity
  • The equation is:
    • During the Year: Δ Assets = Δ Liabilities + (Equity
      • Contributed capital
      • Dividends
      • Revenues
      • Expenses

Common Stock

  • Contributed capital increases with the issuance of common stock.
  • Earned capital, also known as retained earnings.
  • Earned revenues, expenses, and dividends occur within a certain period.
  • They are summarized into retained earnings at the close of this period.
  • Beginning RE + Net Income – Dividends = Ending RE

Transactions

  • A transaction is an event that affects the financial position of the business and can be measured with faithful representation.
  • The accounts affected.
  • They must affect at least two
  • Must either increase or decrease.
  • The equation must balance.

Financial Statements

  • Financial statements are business documents that communicate information for business decisions.
  • There is the income statement
  • Statement of retained earnings
  • Balance Sheet
  • Statement of cash flows
  • These are prepared in that order

The Income Statement

  • The income statement reports net income or net loss for a specific period.

Statement of Retained Earnings

  • The statement of retained earnings reports how retained earnings changed from the start to the end of a period.

The Balance Sheet

  • The balance sheet reports assets, liabilities, and stockholders' equity as of a specific date.

The Statement of Cash Flows

  • The statement of cash flows reports changes in cash during a period.

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