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D196 Study Guide answers! Unit 2 Accounting Info {module 1} 1. What is the role and purpose of accounting? 

analyze transactions,

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handle routine bookkeeping tasks, and

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structure information so it can be used to evaluate the performance a nd health of the business.

2. Who uses accounting info and why? o Lenders and investors {everyone}. 3. What are the important influences on accounting? o Three particularly important factors that influence the environment in which accounting operates are the development of “generally accepted accounting principles” (GAAP), international business, and ethical considerations. 4. What is the role of ethics in accounting? Because accountants are the scorekeepers so they have to remain unbiased. Maintaining high ethical standards is important in accounting because accounting decisions often impact real-world economic decisions. Accountants have a moral and an economic incentive to be ethical and to conduct themselves ethically.

Managerial accounting is internal decision making such as product costs, break even analysis, budgeting, performance evaluation, outsource production. Financial accounting is external decision making such as investors and creditors. Credit analysis estimate the value of a company. 

The balance sheet. Reports the resources of a company (the assets), the company’s obligations (the liabilities), and the owners’ equity, which represents the difference between what is owned (assets) and what is owed (liabilities).

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The income statement. Reports the amount of net income earned by a company during a period. Revenue-expenses=net income.

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The statement of cash flows. Reports the amount of cash collected

and paid out by a company in the following three types of activities: operating, investing, and financing. In the United States, accounting standards for publicly listed companies are set by the Financial Accounting Standards Board (FASB). Not a government agency, no legal authority.

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To balance these opposing forces, the FASB seeks consensus by requesting written comments and sponsoring public hearings on all its proposed standards. The end result of this public process is a set of accounting rules described as generally accepted accounting principles (GAAP). Another organization called the Governmental Accounting Standards Board (GASB) sets the accounting and financial reporting standards for state and local governments following GAAP. Like the FASB, it is a private, nongovernmental organization that seeks to improve accounting practices and procedures. In an attempt to harmonize conflicting national standards, the International Accounting Standards Board (IASB) was formed in 1973 to develop international accounting standards.

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The rules governing financial accounting are called generally accepted accounting principles (GAAP).

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In the United States, GAAP is set by a private, nongovernmental group called the Financial Accounting Standards Board (FASB).

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Worldwide GAAP is set by the International Accounting Standards Board (IASB) based in London.

The accounting cycle {Module 2} 1. What is the accounting cycle and how does it work? 

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How are millions of transactions summarized and eventually reported as useful information in the primary financial statements? This transformation process is called the accounting cycle, or the bookkeeping part of accounting. The process of capturing financial information from transactions is the purpose of th e financial accounting cycle— The purpose of the financial accounting cycle is to help you see how the accounting process (including the recording) turns transactions into financial statements. The purpose of the accounting cycle is to help you see how the accoun ting process eventually turns transactions into financial statements, th ereby making financial data into useful information for decisionmaking by managers.

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The four steps in the accounting cycle are as follows: i. Analyze transactions. ii. Record the effects of transactions. iii. Summarize the effects of transactions. iv. Prepare reports.

2. What is the accounting equation?  Explain basic accounting equation and the impact of debits and credits to assets, liabilities, and equity? Assets = liabilities + owners equity. An arm’s-length transaction is a transaction in which a buyer and seller with equal bargaining power act independently to get the best possible deal. 

Revenues increase owners’ equity, and expenses and dividends decrease owners’ equity.

 The accounting equation must always balance after a transaction has been accounted for. 

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How do revenues and expenses fit into the accounting equation? Remember that revenues minus expenses equals net income; and net income is a major source of change in owners’ equity from one accounting period to the next. Revenues and expenses, then, may be thought of as temporary subdivisions of owners’ equity. Revenues increase owners’ equity. Expenses reduce owners’ equity. One other temporary account affects owners’ equity. It is the account that shows distributions of net income (earnings) to owners. For a corporation, this account is called dividends. Because dividends reflect payments to the owners, a transaction involving dividends paid reduces owners’ equity.

Unit 3: Financial Statement Overview 1. What are the four financial statements covered in this module? a. Balance sheet, income statement, statement of cash flows, statement of retained earnings. b. Can you define and explain the purpose of the Income statement? The balance sheet (or statement of financial position) reports the resources of a company (assets), the company’s obligations (liabilities), and the difference between what is owned (assets) and what is owed (liabilities), called owners’ equity. The balance sheet is a summary of the financial position of a company as of right now.

The income statement (or statement of earnings) reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common. The income statement represents the accountant’s best effort at measuring the economic performance of a company. How much did you make last month, quarter, year? The income statement is used to assess a company’s profitability The statement of cash flows reports the amount of cash collected and paid out by a company in operating, investing, and financing activities. The

statement of cash flows is for the same period of time as the income statement, again with annual and quarterly statements of cash flows being the most common. The statement of cash flows represents the accountant’s best efforts at showing the change in cash during a period of time. Three

cash flow categories: operating, investing, and financing. Operating activities are those activities that are part of the day-to-day business of a company. Major operating cash inflow results from selling goods or providing services, while major operating cash outflows include payments to purchase inventory and to pay wages, taxes, interest, utilities, rent, and similar expenses. Investing activities are those activities associated with buying and selling long-term assets—primarily the purchase and sale of land, buildings, and equipment. Investing is the productive capacity of the business. Financing activities are those activities whereby cash is obtained from or repaid to owners and creditors. For example, cash received from owners’ investments, cash proceeds from a loan, or cash payments to repay loans would all be financing activities. Obtaining the capital, or financing, that a business needs to buy the resources that it needs. The statement of cash flows shows the cash inflows (receipts) and cash outflows (payments) of an entity during a period of time. In other words, it is the result of the sources and uses of cash flows over a period of time. As shown in Figure 3.2, companies receive cash primarily by 

selling goods or providing services,

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selling other assets,

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borrowing, and

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receiving cash from investments by owners.

Companies use cash to 

pay current operating expenses such as wages, utilities, and taxes;

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purchase additional buildings, land, and otherwise expand operations;

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repay loans

 How the Financial Statements Tie Together 

Although the primary financial statements have been introduced as if they were independent of one another, they are interrelated and tie together. In accounting language, they articulate. Articulation refers to the relationship between an operating statement (the income statement or the statement of cash flows) and comparative balance sheets, whereby an item on the operating statement helps explain the change in an item on the balance sheet from one period to the next.

Another financial statement called the statement of retained earnings shows the accumulated profits or losses of a business since the business started. Although this is not one of the three primary financial statements, it is important because it links the income statement and balance sheet together. The statement of retained earnings is exactly that—a statement of the earnings that have been retained in the business. Earnings that are not retained in the business are called dividends. As you learned earlier in the module, dividends are payments made to owners and are a return on their owner investment. The difference between earnings for the period and dividends for the period reflects the increase (or decrease) in retained earnings for the period. In addition to an income statement, corporations sometimes prepare a statement of retained earnings. This statement identifies the changes in accumulated investments by owners and earnings or profits since day one. The statement of retained earnings therefore displays the changes in retained earnings from one accounting period to the next. A statement of retained earnings portrays the accumulated profits or losses of a company at a point in time.

2. Explain the important Notes to the Financial statements and what is included in these notes? a. The notes to the financial statements are critical to be able to properly interpret the information contained in the financial statements. The notes contain such information as the assumptions made in computing certain numbers. Before you can evaluate the number, you need to evaluate the assumptions made in computing that number. b. In addition, the notes contain information relating to details that are important in evaluating the summary totals that are contained in the financial statements. Also, the notes contain

qualitative information that cannot be summarized and included in the financial statements themselves. c. The notes are an important part of reading and interpreting the financial statements. In a typical annual report, the notes go on for 30 pages or more, whereas the primary financial statements fill only three pages.

-10k a company’s annual filing with the SEC. 10 q is quarterly. For a corporation, the amount of accumulated earnings of the business that have not been distributed to owners is called retained earnings. The portion of owners’ equity contributed by owners in exchange for shares of stock is called capital stock. The amount of retained earnings plus the amount of capital stock equals the corporation’s total owners’ equity. If the business is a corporation, distributions to the owners (stockholders) are called dividends. A balance sheet that distinguishes between current and long-term assets is called a classified balance sheet.

d. Book value = assets- liabilities Students often confuse retained earnings and cash as being the same thing. They are not. Cash is cash, and retained earnings are earnings that have been retained and reinvested in the business. By the way, earnings that have not been retained in the business are called dividends. Dividends are paid to shareholders and are a return on their investments.

The income statement: revenues-expenses=net income. The income statement shows the results of a company’s operations for a period of time (a month, a quarter, or a year)

Revenue- the amount of assets created from the sale of goods. Revenue can also be generated by satisfying liabilities. Revenues are not assets, only one source of an asset! Expenses-the amount of liabilities created/consumed in doing business or the amount of assets consumed. Expenses are also caused when liabilities are created in generating revenues. Expenses are the costs incurred in normal business operations to generate revenues. Employee salaries and utilities used during a period are two common examples of expenses. Expenses are not liabilities! One use of an asset, one way to create liability. Net income, sometimes called earnings or profit, is an overall measure of a company’s performance. Net income reflects the company’s accomplishments (revenues) in relation to its efforts (expenses) during a particular period of time. Net assets in creating business. If revenues exceed expenses, the result is called

net income. If expenses exceed revenues, the difference is called net loss. Because net income results in an increase in resources from operations, owner’s equity is also increased; a net loss decreases owner’s equity. oth concepts represent an increase in the net assets (assets − liabilities) of a firm. However, revenues represent total resource increases; expenses are subtracted from revenues to derive net income or net loss. In contrast to the balance sheet, which is “as of” a particular date, the income statement refers to the “year ended.” Remember, the income statement covers a period of time; the balance sheet is a report at a point in time. You will also see on this income statement two terms that are often confused— operating income and net income. Operating income reports the results of what a company does on a daily basis, or its operations. It is calculated as sales minus cost of goods sold minus operating expenses. For example, Walmart buys inventory wholesale and sells it at retail. Walmart also incurs other costs on a daily basis, like wages and advertising. Net income reports the results from both day-to-day operations and also other items that are unrelated to daily operations but are still important to a business. Net income is operating income minus interest expense and taxes. Expenses are sometimes divided into operating and non-operating categories. The primary non-operating expenses are interest and income taxes. These expenses are called non-operating because they have no connection with the specific nature of the operation of the business. Two other items that frequently appear in the income statement are gains and losses. Gains and losses refer to money made or lost on activities outside the normal business of a company. For example, when Walmart receives cash for selling groceries, it is called revenue. But when Walmart makes money by selling an old delivery truck, the amount is called a gain, not revenue, because Walmart is not in the business of selling trucks. One final bit of information required on the income statements of corporations is earnings (loss) per share (EPS). This EPS amount is computed by dividing the net income (earnings or loss) for the current period by the number of shares of stock outstanding during the period:

Net Income divided by Outstanding Number of Shares of Stock=Earnings (Loss) per Share

Sales−Cost of Goods Sold=Gross Profit (Gross Margin) The three primary financial statements are the balance sheet, the income statement, and the statement of cash flows. The balance sheet provides a listing of a company’s assets and how those assets were financed at a moment in time. The income statement summarizes a company’s revenues and expenses over a period of time. The statement of cash flows summarizes a company’s cash inflows and cash outflows partitioned by activities—operating, investing, and financing—over a period of time. In addition, companies often include a statement of retained earnings with the three primary financial statements.

Horizontal Analysis of Financial Statements To collect and present this information in a simple, functional way, common-size financial statements should be considered. Common-size analysis is an accounting tool that focuses on the line items on financial statements as a percentage of a selected (or common) figure. Creating common-size financial statements makes it easier to analyze a company over time and to compare the financial statements of one company to another company. Comparing percentages over time for the same company. Year 2 minus Year 1 / year 1= the % change from year to year. =(c4-f4)/f4 is horizontal analysis. =c4/c$4 is vertical analysis. **The quickest and easiest solution to this comparability problem is to divide all income statement numbers for a given year by sales (or revenues) for the year. The resulting financial statements are called common-size financial statements, with all amounts for a given year being shown as a percentage of sales (or revenues) for that year.** 

A common-size income statement is generated by dividing all financial statement amounts for a given year by sales for that year.

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For the balance sheet, common-size financial statements are generated by dividing each balance sheet item by total assets for that year.

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A common-size income statement reveals the number of pennies of each expense for each dollar of sales.

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Examining trends across time (horizontal analysis) allows us to

determine how expenses are changing relative to sales on the income statement. Comparing data across time for the same company (horizontal analysis) is valuable in that it allows you to see how a company’s financial performance is changing over time. Comparing companies in the same industry at the same point in time (vertical analysis) allows you to quickly see how a company compares to others in its industry.

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In short, financial statement analysis usually does not tell you the final answers, but it does suggest which questions you should be asking and where you should look to find the answers. For vertical analysis. As you learned, you need to find the percentage of sales that each line item represents in order to conduct vertical analysis. For example, the percentage of sales is calculated as follows:  Percentage of Sales=Income Statement/ AmountSales instead of typing in =C5/C5, type =C5/C$5 in cell D5. By including the dollar sign in front of the row reference, you lock in the row reference while keeping the column reference relative. The primary financial statements that are produced by the accounting system are the balance sheet, the income statement, and the statement of cash flows. Each of these financial statements tells users different things about a company. The balance sheet lists a company’s resources and claims on those resources. An income statement informs a user as to how well a company does in its day-to-day operations. A statement of cash flows details where cash comes from and where it goes and breaks these cash flows down into three major activities—operating, investing, and financing.

Unit 4: Budgeting Cash flow 

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Knowledge of the amounts and timing of cash flows is critical to a business. Many times a firm is successful in producing and selling its product but fails because it is unable to match its cash inflows with th...