Exam 1 Review - Exam 1 Review GAAPgenerally accepted...

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Exam 1 Review GAAP—generally accepted accounting principals General ledger—complete record of financial transactions over the life of a company. It holds account information that is needed to prepare financial statements, and includes accounts for assets, liabilities, owners’ equity, revenues, and expenses. Three primary financial statements: o Balance sheet (mother of all financial statements): assets (current and long- term), liabilities (current and long-term), and equity (earnings retained) o Income statement o Cash flow statement The balance sheet expresses the relationship that is basic to the double-entry accounting system: assets = liabilities + equity. o When you have debt (a long-term loan), the bank owns the business. Clauses of the loan agreement are called loan covenants. o When you have stock, stockholders own the business. Stockholders expect two types of return: 1) one is to share in the wealth in the form of dividends and 2) growth of the value of the stock. By financing your organization with stock, you might be taking on an obligation to pay dividends on a regular basis and you give up some control of your business. o When you have retained earnings, the business owns the business. Retained earnings are the earnings or profit that the company made that it holds and doesn’t pay out as dividends. This is the best way to finance your company. o A balance sheet tells you how an organization is running and its liquidity. o Equity is also called net worth. Working capital = current assets – current liabilities o Current assets: cash, accounts receivable, inventory Current liabilities: accounts payable o A small working capital balance indicates good management of resources. Current assets are within a year. o Working capital is the resources you have tied up in your business that are working for you. Liquid organizations have assets that can flow wherever the want them to go. Cash is the most liquid asset. Most liquid to least: cash, investments, accounts receivable, raw materials inventory, finished goods inventory, equipment, building, designs, names. Long-term operating capital: capital that you need to have invested in a business for a long time; bonds (borrow on long term basis) and sell stocks. Income statement focuses primarily on profitability and growth. Focuses on revenues and expenses. Also known as the earnings statement, the profit and loss statement, and the statement of earnings. Government calls it the statement of revenues and expenditures.
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