Acct Chapter 1 Study Guide PDF

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Summary

Course is taught by Janice Holmes as an introductory course into financial accounting, required to be take by all Business majors....

Description

Chapter 1: Introduction to Financial Statements Study Guide (Note: This worksheet is intended as an optional study guide. Do not submit to the instructor.) Learning Objectives: 1. Describe the primary forms of business organization. 2. Identify the users and uses of accounting information. 3. Explain the three principal types of business activity. 4. Describe the content and purpose of each of the financial statements. 5. Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation. 6. Describe the components that supplement the financial statements in an annual report. LO 1

1. Main Forms of Business Organization Type

LO 2

Description/Features

1. Sole Proprietorship

A business owned by one person

2. Partnership

A business owned by two or more persons associated as partners

3. Corporation

A business organized as a separate legal entity owned by stockholders

2. The purpose of financial information is to provide inputs for decision making. Accounting is the _information system_ that _identifies_, _records_, and _communicates_ the economic events of an organization to interest users. 3. Users of accounting information (two categories & examples of each) Users

Examples

How use financial information:

1. Internal Users

Marketing managers, production supervisors, finance directors, etc.

To answer many important questions relevant to their job (Ex: Is cash sufficient to pay dividends to our stockholders?)

2. External Users

Investors, creditors, etc.

To make buy, hold, or sell decisions on stock; evaluate risks of lending money; etc.

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4. Ethics in Financial Reporting Sarbanes-Oxley Act (SOX) Reason passed: US regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of the unethical financial reporting in recent scandals such as Enron, WorldCom, and HealthSouth. Congress passed SOX to reduce unethical corporate behavior and decrease the likelihood of future scandals. Key Provisions: 1. Top management must now certify the accuracy of financial information 2. Penalties for fraudulent financial activity are much more severe 3. Increased the independence of the outside auditors who review the accuracy of corporate financial statements 4. Increased the oversight role of boards of directors Effective financial reporting depends on sound _ethical behavior_. LO 3

5. Three types of business activities and examples of each: Business activity

Definition

Examples

1. Financing

It takes money to make money ~ acquiring outside funds to be used in the company

Borrowing money and issuing shares of stock in exchange for cash

2. Investing

Involves the purchase of resources a company needs in order to operate

Computers, delivery trucks, furniture, buildings, and other assets

3. Operating

Business begins operating

Revenues, expenses

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LO 4

6. Name and define the 4 financial statements: Name

Definition

Components

Date

1. Income Statement

Reports company’s revenues Revenues, expenses, net income and expenses and resulting net income for a specific time period

For the Month Ended October 31, 2014

2. Retained Earnings Statement

Summarizes the amounts and causes of changes in retained earnings for a specific time period

Beginning retained earnings, net income, dividends, ending retained earnings

For the Month Ended October 31, 2014

3. Balance Sheet

Reports the assets and claims to those assets at a specific point in time

Assets, Liabilities and Stockholders’ Equity

October 31, 2014

4. Statement of Cash Flows

Provides financial information about the cash receipts and cash payments of a business for a specific period of time

Cash flows from operating activities, Cash flows from investing activities, Cash flows from financing activities

For the Month Ended October 31, 2014

7. Interrelationships of Financial Statements:

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LO 5

7. Define the following (LO 3 pages 9 to 11): Definition

Examples

Asset

Resources owned by a business Computers, delivery trucks, furniture, buildings

Liabilities

Amounts owed to creditors in the form of debts and other obligations

Stockholders’ Equity

The owners’ claim to assets

Note payable, bond payable, account payable 1. Common Stock 2. Retained Earnings

Common Stock

Term used to describe the total amount paid in by stockholders for the shares they purchase

Dividends

Payments of cash from a corporation to its stockholders

Retained Earnings

The amount of net income retained in the corporation

Revenues

The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business

Sales revenue, service revenue, interest revenue

Expenses

The cost of assets consumed or services used in the process of generating revenues

Cost of goods sold, selling expenses, marketing expenses

Net Income

The amount by which revenues exceed expenses

Net Loss

The amount by which expenses exceed revenues

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8. State the basic accounting equation: Assets = Liabilities + Stockholders’ Equity

LO 6

9. Components of the Annual Report Component

LO 4

Definition

1. Annual Report

A report prepared by corporate management that presents financial information including financial statement, a management discussion and analysis section, notes, and an independent auditor’s report

2. Management Discussion and Analysis (MD&A)

A section of the annual report that presents management’s views on the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations

3. Notes to the Financial Statement

Notes clarify information presented in the financial statements and provide additional detail

4. Auditor’s Report

A report prepared by an independent outside auditor stating the auditor’s opinion as to the fairness of the presentation of the financial position and results of operation and their conformance with generally accepted accounting principles

Financial statements should be prepared in the following order: 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 10. Other Definitions: Account Name

Classification/Type

Financial Statement

Notes Payable

Current/Long-Term Liability

Balance Sheet

Bonds Payable

Long-Term Liability

Balance Sheet

Investments

Current Asset

Balance Sheet

Supplies

Current Asset

Balance Sheet

Inventory

Current Asset

Balance Sheet

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Accounts Receivable

Current Asset

Balance Sheet

Cost of Goods Sold

Cost of Goods Sold

Income Statement

Selling Expenses

Operating Expense

Income Statement

Marketing Expenses

Operating Expense

Income Statement

Administrative expenses

Operating Expense

Income Statement

Interest expense

Other Expense

Income Statement

Income tax expense

Income Tax Expense

Income Statement

Accounts payable

Current Liability

Balance Sheet

Interest payable

Current Liability

Balance Sheet

Wages payable

Current Liability

Balance Sheet

Sales taxes payable

Current Liability

Balance Sheet

Property taxes payable

Current Liability

Balance Sheet

Income taxes payable

Current Liability

Balance Sheet

12. Know the definitions listed in the Glossary at the end of the chapter.

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