Accounting Exam Preparation PDF

CHAPTER 1- 2 ACCOUNTING ACTIVITIES: Identification,recording and communication USER GROUPS: Internal and External Internal users : Managers, Marketing, Production (plan organize and run the business by managerial accounting) External users: Investors and Creditors ( who rely on the financial accoun...

CHAPTER 1- 2 ACCOUNTING ACTIVITIES: Identification,recording and communication USER GROUPS: Internal and External Internal users : Managers, Marketing, Production (plan organize and run the business by managerial accounting) External users: Investors and Creditors ( who rely on the financial accounting to make decision) In addition: taxing authorities, customers, labor unions and regulatory agencies Assets - resources a business owns expected to give future benefit Liabilities - creditorship claims on total assets ( obligations needed to be paid) Equity - ownership claim on total assets Basic accounting equation: A = L + E Expanded accounting equation: A = L + Share Capital-Ordinary + Revenues - Expenses - Dividends Share-Capital Ordinary is affected when a company issues new ordinary shares in exchange for cash. Revenues - are the gross increase in equity resulting from business activities for the purpose of earning income Expense- are the costs of assets consumed or services used in the process of earning revenue Dividends- payments the company makes to its shareholders Accounting standards: IFRS - International Financial Reporting Standards International Accounting Standards Board (IASB) Financial Accounting Standards Board (FASB) Historical cost principle (or cost principle): dictates that companies record assets at their cost (original price). This is true not only at the time the asset is purchased, but also over the time the asset is held. Fair value principle: states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability), value in use (present value of future cash flows), or current cost (replacement cost). Relevance means that financial information is capable of making a difference in a decision. Faithful representation means that the numbers and descriptions match what really existed or happened—they are factual. Monetary unit assumption: requires that companies include in the accounting records only transaction data that can be expressed in money terms. Economic Entity Assumption: requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Typical entity forms are proprietorship, partnership, corporation. The convergence of accounting standards refers to the goal of establishing a single set of accounting standards that will be used internationally, and in particular, the effort to reduce the differences between the GAAP, and the IFRS. - new info/ from the DO IT! 2 ACCOUNTING CYCLE - steps companies follow each period to record transactions and eventually prepare financial statements. Financial Statements 1. Income statement: presents the revenues and expenses and resulting net income or net loss for a specific period of time. Net Income: Occurs when total revenues exceed total expenses. Net Income= Total Revenues−Total Expense Net Loss: Occurs when total expenses exceed total revenues. Net Loss= Total Expenses−Total Revenues 2. Retained earnings statement: summarizes the changes in retained earnings for a specific period of time. Beginning retained earnings balance + net income (or subtracts (-) net loss), and - (deduct) dividends to calculate the ending retained earnings. BALANCE OF THE ENDING RETAINED EARNINGS!! 3. Statement of financial position: reports the assets, liabilities, and equity of a company at a specific date. (Sometimes referred to as a balance sheet.) The equity section includes the ending retained earnings from the retained earnings statement. 4. Statement of cash flows: summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. (Cash from the SFP) The statement of cash flows reports 1) the cash effects of a company’s operations during a period, 2) its investing activities, 3) its financing activities, 4) the net increase or decrease in cash during the period, and 5) the cash amount at the end of the period 5. Comprehensive income statement: presents other comprehensive income items that are not included in the determination of net income in income statement. The order of the financial statement prep: Income statement - Retained Earning Statement- Statement of Financial Position - Statement of cash flows - Comprehensive income statement Include AR when calculating Net income. No need to include dividends when calculating equity. CHAPTER 2 ACCOUNT - An account is an individual accounting record of increases and decreases in a specific asset, liability, or equity item. In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side (Dr.), and (3) a right or credit side (Cr.) Both sides of the basic equation (Assets = Liabilities + Equity) must be equal. Assets: Normal balance is a debit. Debits increase assets, and credits decrease them. Liabilities: Normal balance is a credit. Credits increase liabilities, and debits decrease them. Equity: Normal balance is a credit. Credits increase equity, and debits decrease it. Revenue: Normal balance is a credit. Credits increase revenue, and debits decrease it. Expenses: Normal balance is a debit. Debits increase expenses, and credits decrease them. JOURNAL Companies initially record transactions in chronological order. Thus, the journal is referred to as the book of original entry. The journal makes several significant contributions to the recording process: 1. It discloses in one place the complete effects of a transaction. 2. It provides a chronological record of transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared. Ledger: The entire group of accounts maintained by a company. Provides the balance in each of the accounts as well as keeps track of changes in these balances. Companies may use various kinds of ledgers, but every company has a general ledger. Posting in accounting is the process of transferring the information from the journal entries (which record transactions chronologically) to the general ledger (which organizes the information by account). The purpose of posting is to update the individual accounts in the ledger with the transaction details, making it easier to generate financial reports like the STF and income statement. Posting the entries to the general ledger to determine the ending balance of the cash DO NOT FORGET to include the beginning balance of the CASH. Chart of Accounts – Numbering Lists the accounts and the account numbers that identify their location in the ledger. Numbering system: Usually starts with the statement of financial position accounts and follows with the income statement accounts. Number of accounts: Depends on the amount of detail management desires. Companies leave gaps to permit the insertion of new accounts as needed during the life of the business. SALARIES AND WAGES EXPENSE PREPARING A TRIAL BALANCE (AT THE END OF THE ACCOUNTING PERIOD) A list of accounts and their balances in the appropriate debit or credit column making preparation of financial statement easier, Three steps of preparation: 1. List the account titles and their balances in the appropriate debit or credit column. 2. Total the debit and credit columns. 3. Verify the equality of the two columns. A trial balance may balance even when: 1 - a transaction not journalized. 2 - a correct journal entry not posted. 3 - a journal entry posted twice. 4 - Incorrect accounts used in journalizing or posting. 5 - Offsetting errors made in recording the amount of a transaction. IT DOES NOT PROVE THAT THE COMPANY HAS RECORDED ALL TRANSACTIONS OR THAT LEDGER IS CORRECT. The difference between the error and irregularity. Error: The result of an unintentional mistake - Neither ethical nor unethical Irregularity: - An intentional misstatement - Viewed as unethical Currency sign is shown only for the first item in the column and for the total column. NOT IN JOURNALS AND LEDGERS. ONLY TRIAL BALANCE AND FINANCIAL STATEMENT. Single line is placed under the column of figures to be added or subtracted, Total amounts are double-underlined.