Financial Accounting Test #1, Chapters 1-3

Accounting

an information system that measures business activities, processes that information into reports for decision makers.

What do we call the branch of accounting that provides information to external users ?

Financial Accounting.

What do we call the branch of accounting that provides information to internal users ?

Managerial Accounting

List the four common types of business organizations and indicate which of these types are required to pay tax on their income.

1. Sole Proprietorship = no income tax
2. Partnership = no income tax
3. Limited Liability Company = no income tax
4. Corporation = pays tax on its income

List the four common types of business organizations and indicate which of these types of businesses the owners of the business are personally liable for the liabilities of the business entity.

1. Sole Proprietorship = personally liable
2. Partnership = personally liable
3. Limited Liability Company = not liable
4. Corporation = not liable

What types of accounts compromise and make up Net Income ?

Revenues and Expenses

What types of accounts appear on the balance sheet ?

Assets, liabilities, and stockholder's equity

Revenue

inflows of resources that increase retained earnings

Expenses

outflows of resources that decrease retained earnings.

Financial statements

the business documents that companies use to report the results of their activities.

Assets

economic resources expected to produce a benefit in the future. ex. Corporation's cash, merchandise inventory, equipment, buildings

Liabilities

Debts you must pay to outsiders or creditors. ex. account payables, note payables.

Owner's Equity

Equity means ownership. A companie's stockholder's equity is the stockholder's interest in the assets of the company.

Assets = ???

0

Paid in capital

the amount the stockholders have invested in the corporation

Retained Earnings

the amount earned by income producing activities and kept or "retained" for use in the business.

Dividends

distributions of cash to stockholders. Dividends are not expenses, they don't affect net income. Dividends are direct reductions from retained earnings.

Income Statement

a financial statement listing an entity's revenues, expenses, and net income for a specific time period. ex. "for year ending December 31st, 2011

Statement of Retained Earnings

Retained Earnings + net income - dividends = current retained earnings"for the year ending December 31st, 2003

Balance Sheet

measures financial position by reporting assets, liabilities, and stockholder's equity. "As of March 17th, 2013

What's the difference between current assets and long term assets ?

Current assets are expected to be converted to cash, sold, or consumed within a year.
Long term assets are things like property and equipment and also intangible things like patents, trademarks, and goodwill.

What's the difference between current liabilties and long term liabilities ?

Current liabilities are debts payable within a year.
Long term liabilities are bigger payables that you won't pay back in a year.

The statement of cash flows

measures cash receipts and payments. Only times when cash is exchanged. "Payments on account are not recorded here

Unearned revenue is a...
A. Asset
B. Liability
C. Owner's equity

B. Liability
It's on the right side of the balance sheet along with service revenue.

A prepaid expense is a...
A. Asset
B. Liability
C. Owner's equity

A. asset

Which is a better predictor for future operations ?
Net income or current cash flows ?

Net income.

Is service revenue on the right or left side of the balance sheet ? Why ?

Right side along with unearned revenue.
REVENUE IS ON THE RIGHT SIDE.

Revenues, by the way, are credits (where we got the money) and expenses are debits (what we did with the money.)

main lesson

Left side of the balance sheet increases with _____ and the right side of the balance sheet increases with _____ .

Debits, credits

Net income + retained earnings = ??

owner's equity

Explain what a journal entry is and how one is made.

A journal records all transactions. The first line in a single transaction is always the debit. The second line of the same transaction is the credit.

Net income flows into _______

Retained Earnings.

In what order must you produce these 3 reports ?
-statement of retained earnings
-balance sheet
-income statement

1. Income statement
2. Statement of retained earnings
3. Balance sheet.
net income you get from 1, you plug it into 2, and then you use retained earnings from 2 to calculate 3.

Current ratio

current assets/current liabilities

Debt Ratio

Liabilities/Assets.

What are the 3 types of activities presented on the Statement of Cash Flows ?

Financial, operational, and investment activities

The time period concept

Accounting information is reported at regular intervals