BA315 Exam 1 Study Guide PDF

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A study guide for the first exam in BA 315 filled out based off of what the professor provided...

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BA215 Exam 1 Reminders, Chapters 1-2-3-9 PartialReview Sheet · Purpose of businesses o Provide goods or services to make a profit § Obtain capital (money) § Add value § Sell to customers · Types of businesses o Service: provide services for money o Sales: buy goods and resale to other business (wholesale) or to final customers (retail) · Types of ownership: o Corporation: ownership is divided into shares. Owners of corporations are not personally liable for debts o Partnership: owned by two or more people. Each partner is personally liable for all business debts o Sole proprietor: business owned by one person who is solely reliable for all debts of the business · Users of accounting information o Management o Current or potential creditors o Current or potential investors o Tax authorities o Regulatory agencies o Economic planners o Labor unions o · GAAP, FASB, SEC, SOX, PCAOB o GAAP: Generally Accepted Accounting Principles; provide useful financial information to external users for decision making § Rules that most companies follow in preparing financial reports § Help insure consistency § Historically developed through common usage § US GAAP is detailed, technical, and rules based § International GAAP is more lenient o FASB: Financial Accounting Standards o SEC: Securities and Exchange Commission o SOX: Sarbanes-Oxley Act o PCAOB: Public Accounting Oversight Board

· CPA, audit o CPA: certified Public Accountant o Audit: CPA firm verifies/confirms financial records Financial Statements · The accounting equation o Assets= Liabilities + Shareholders’ Equity o Business transactions’ impacts on financial statements (see more below) · Four statements o 1) Income Statement o 2) Statement of Changes in Owners’ Equity o 3) Balance Sheet o 4) Statement of Cash flows o Interrelationships of the financial statements §Net income from income statement goes in to Statement of changes in owners’ equity §Retained earnings from statement of changes in owners’ equity goes in to balance sheet §Cash from balance sheet goes in to statement of cash flows · be able to prepare statements from a list of transactions. · Point in time vs. period of time o Point in time: Used for balance sheet; snapshot of the accounts at that specific time o Period of time: used for all other income statements; accounts over a month, quarter, year etc. · Temporary vs. permanent accounts. · Income statement (revenues and expenses) o Know accounts on income statement §Sales, service revenue, rent expense, advertising expense, interest expense, COGS, etc. o When and how to record revenues and expenses §Revenues are recorded when earned §Expenses are recorded in the same period as the revenues to which they relate to o Single step vs. multi-step §Single Step: groups all revenues together and deducts from total expenses §Multi step: requires an equation · Balance Sheet o Classified balance sheet: shows a sub-total for various classes of assets and liabilities including current and long term assets, liabilities, and shareholders’ equity §Assets, liabilities, equity

§ Current vs. long-term § Current assets: assets the company plans to turn in to cash or generate revenue from in the next fiscal year. Ex) AR, cash, inventory, supplies § Long-term assets: company holds on to for longer than a year. Ex) furniture, computers, machines, property § Current liabilities: Debt the company has to pay off within the year § Long-term liabilities: takes more than a year to settle § Know types of accounts § All assets, liabilities, and stockholders’ equity from list of transactions · Statement of Changes in Shareholders’ (or Owners’) Equity o Calculate ending retained earnings §Retained Earnings= Net/Total Income - Dividends

Accounting assumptions/concepts/principles: · Useful: relevant, reliable, comparable, consistent · Relevant: significant enough to influence business decisions. Timely and useful in predicting the future · Reliable: true, verifiable, unbiased. Verified by CPA/audit firm · Comparable: between similar companies, to industry average, and follow the same common set of rules · Consistent: same rules used year after year, allows for meaningful comparisons of a company’s performance at different points in time · Monetary unit: have to be consistent with currencies and can’t adjust previous statements for inflation · Separate entity: financial statements of a firm contain information only about that firm · Time period: life of a business is divided in to meaningful time periods for financial reporting · Going concern: a company will remain in business for the foreseeable future · Historical cost principle: assets are recorded at cost · Revenue principle (revenue recognition): revenue is recognized when its earned and collection is reasonably assured · Matching principle (Expense recognition): recognize expenses in the same period as the revenue they help generate · Full disclosure: company provides information about any circumstance and event that would make a difference to users of the financial statement · Materiality: refers to the size or significance of an item or transaction on the company’s financial statement o An item is material if its large or significant enough to influence investors decisions · Conservatism: when there is any question about how to account for a transaction, the accountant should select treatment that will be least likely to over-estimate income or

overstate assets, and least likely to understate liabilities or expenses. · Accrual accounting vs. cash accounting o Accrual: Records revenues when they are earned and expenses when they are incurred, regardless of cash, receipts, or timing payments o Cash: When a company only records transactions when cash changes hands. Not allowed under US GAAP

Business transactions’ impacts on financial statements · Impact on assets, liabilities, net income, etc. from a transaction. · Recording revenue and cost of goods sold · Adjusting entries o Why/when they are required §Sales made on account §Interest revenue §Purchases made on credit §Unearned revenue §Prepaid expenses o Deferrals: Cash payment first, action later. §Liability: Unearned revenue. Ex) subscriptions, gift cards, concert tickets §Asset: prepaid expenses. Ex) prepaid rent, prepaid insurance o Accruals: Action first, cash payment later §Ex) sales made on account, interest revenue, purchases made on credit, interest expense o Adjusting a prepaid expense: postpone recognizing the expense until the goods or services are actually used §Ex) insurance, rent, supplies o Adjusting for unearned revenue after it has been earned: revenue Is not recognized until the goods or services are delivered or preformed §Ex) magazine subscriptions; a whole year is paid for at the start, but only a portion of the cash earned can be recorded each month as revenue o Depreciation: Method the spread the cost of a long term asset; matching the cost of the asset to the revenue it generates §Depreciation expense: portion of the cost of an asset allocated to any one accounting period §Accumulated depreciation: total depreciation expense taken over the entire life of an asset § SUBTRACTED ON THE ASSET SHEET o Impact of adjusting entries on financial statements.

§For balance sheet: Accumulated depreciation adds up each year causing the account that depreciation is accumulating on to get smaller (example in notes) §Income statement shows just the depreciation expense, not accumulated depreciation, because that’s the amount of depreciation that occurred within that time frame o Impact on financial statements if an adjustment is notmade: the equipment keep the same “book value” as when it was brand new, causing assets to be overstated Statement of cash flows · Three sections, know what is in each: · Operations: cash transactions that related to the everyday, routing transactions needed to run a business §Sales revenue, operating expenses (supplies, insurance, rent) · Investments: transactions involving the sale and purchase of long-term assets used in the business §Purchase from investments in land, plants, machines, computers, hardware · Financing: transactions related to how a business is financed §cash from issuance (sale) of common stock, payment of dividends, cash from bank loans · Purpose and users o Where is it important to generate cash on an on-going basis? · Full disclosure of major non-cash transactions · Direct vs. Indirect method o For Operating activities only o Which is preferred by the FASB? o Which is most commonly used in the US? · Calculate cash flows given a number of transactions...