FSU ACG2021 test 1 Flashcards

Terms Definitions
Purpose of Accounting:
To provide public information to people who can use it to make decisions
Purpose of financial accounting:
For the public; external use
Purpose of managerial accounting:
For private use, for the management of the company; internal use
Why would the public need information and why would one ask questions before making an investment decision?
To assess risk and return of the investment
Lender
(A.K.A. Creditor)
Debt investment (you are borrowing money to the company, who is obligated to pay you back, usually with fixed interest rate) 
Characteristics of a lendor:
Obligated to repay the principal
Guaranteed a fixed rate of interest
Does not share in the profits/losses of the company
Company is legally obligated to make payments and to make them on time 
Owner;
Characteristics of an owner
Equity Investment (you are investing your money into the company)
The company is not obligated to repay the amount invested
No guarantee of interest

Does share in the profits/losses of company
Hopefully...
Net income (profit) INCREASES -->
Value of company INCREASES -->
Value of investment INCREASES 
"Principal"
Amount borrowed, ("P")
The three forms of ownership:
1) Sole Proprietorship;
2) Partnership;
3) Corporation 
Sole Proprietorship:
A type of general form of ownership;
ONE owner, quite easily formed
Partnership:
A type of general form of ownership;
TWO or MORE owners. They share in the profits/losses of company,
fairly easily formed 
Corporation:
A type of general form of ownership;
ONE OR MORE owners;
Very difficult to start; Paperwork, formal requirements, meetings, etc 
 ((i.e. AAPL, GE, IBM, etc))
"One 'share' of stock"
One unit of ownership.
(If you own 10 of all 20 total shares being sold, you are a 50% owner & are entitled to 50% of all profits/losses)
Assume you are the lender, what is your main concern?
Interest, Principal (both = cash)***Information about cash!
Assume you are an owner, what is your primary concern?
Profit (A.K.A. "net income") INCREASES -->
Value of company INCREASES -->
Value of your investment INCREASES 
The four financial statements;
And # of yrs required on the statements 
Balance Sheet (2 years)
Income Statement (3 years)
Statement of Changed in Owners' Equity (3)
Statement of Cash Flows (3)
All publically traded companies are required US government to...
Issue all four financial statements to the public each year
The Balance Sheet
One of the four financial statements;
Shows the financial status of a company at a particular point in time 
The balance sheet consists of two lists:
Economic resources (aka Assets) of the company
Claims against the economic resources (sources of the resources) 
Economic Resources:
A.K.A. "assets";
Items a company uses that are expected to benefit future operations (help business make money in the future)
 
"Inventory"
Items to be sold to consumers
Service Co.: NO inventory
Merchandising Co.: inventory 
Hypothetical Balance Sheet for Lawnatics Corporation
On a particular date........
List: Economic Resources 
(A.K.A. ASSETS!)
Equipment

Employees (NOT on business sheet)
Supplies (trucks as well)
Land,
Building,
CASH,
Prepaid...advertising, insurance, rent;
Accounts Receivable ("A/R") 
"Accounts Receivable"
Money customers owe to the business
Claims against the assets
Liabilities = obligations
Notes Payable (N/P)
Loans
Accounts Payable (A/P)
When you  "put it on your account," purchase on credit, and do not pay it right away
Difference between N/P and A/P?
Notes Payable is more formal, and Accounts Payable is more informal
Interest Payable (I/P)
When you borrow money--
the interest starts the next day 
Unearned Revenue
When someone pays us in advance
Difference between A/R and A/P
A/R = Assets
A/P = Liability (Obligation) 
Hypothetical Balance Sheet for Lawnatics Corporation
On a particular date........
List: Claims against the Assets- by CREDITORS:
Loans = Notes Payable = N/P
Wages / Salaries Payable
Accounts Payable = A/P
Interest Payable
Taxes Payable
Unearned Revenue 
Claims against the economic resoureces (i.e., claims against the assets)
Two different groups of people who have claims against the assets:
 
1. Creditors (Lendors)
2. Owners 
 
Claims against the assets by Creditors-
Remember, who are the creditors?
Someone to whom the company is in debt to and is obligated to repay
Claims against the assets by OWNERS-
Remember, who are the owners?
Contributed cash to company in exchange for stock (ownership interest)
--They do share in the profits/losses of the company
 
Profits INC -> value of investment INC -> Sell for profit 
What are the two ways an owner can acquire equity (claims against the assets) in a company: 
1) Contribute cash to comany in exchange for STOCK
2) From PROFIT 
The equity section is, therefore, divided into two major sections to represent the two sources of equity: 
1) Contributed Capital
2) Retained Earnings 
Contributed Capital:
Represents claims against the assets by the owners contributing cash to company in exchange for stock
 
Capital = Stock! 
Retained Earnings:
Represents claims against the assets by the owners from profits 
On a hypothetical Balance Sheet, explain what would happen to the following transaction:
 An owner invests $10,000 cash in the business in exchange for stock
An owner invests $10,000 cash in the business in exchange for stock;
 
1) Since it is cash, you add $10k to "cash" under ASSETS
2) You would add $10k to C.C. of EQUITY of LIABILITIES
On a hypothetical Balance Sheet, explain what would happen to the following transaction: The business purchases equipment for $2k on credit
 The business purchases equipment for $2k on credit
 
1) Equipment is not inventory, and you add $2k to "cash" under ASSETS
2) Add $2k to "A/P" under LIABILITIES 
On a hypothetical Balance Sheet, explain what would happen to the following transaction: The business purchases equipment for $5k with cash
 The business purchases equipment for $5k with cash
 
1) Subtract $5k from "cash" under ASSETS
2) Add $5k to "equipment" under ASSETS 
On a hypothetical Balance Sheet, explain what would happen to the following transaction:
The business borrows $3k cash from a bank 
The business borrows $3k cash from a bank
 
1) Add $3k to "cash" under ASSETS
2) Add $3k to N/P under LIABILITIES 
On a hypothetical Balance Sheet, explain what would happen to the following transaction:
The business purchases $1k of inventory on credit 
The business purchases $1k of inventory on credit
 
1) On credit equals cash; add $1k to "inventory" under ASSETS
2) Add $1k to "A/P" under ASSETS 
On a hypothetical Balance Sheet, explain what would happen to the following transaction:
The business pays for the $1k worth of inventory bought in the other transaction 
The business pays for the $1k worth of inventory bought in the other transaction
 
1) Subtract $1k from "cash" under ASSETS
2) subtract $1k from "A/P" under LIABILITIES 
The Income Statement
One of the four financial statements:
Provides a measure of the firm's accomplishments (profit) for a specified period of time
Theoretically there are two wasy one can measure the firm's accomplishments 
1) Net Operating Cash Flow
2) Net Income (N/I) 
Net Operating Cash Flow
Cash receipts from providing goods/services to customers
- Cash disbursements from providing goods/services to customers
Net operating cash flow (cash from operations) 
 
This way recognizes accomplishments according to change in cash. 
Net Income (N/I)
Revenue
- Expenses
Net Income 
 
Cash is irrelevant in measuring accomplishments 
"Revenue" :
Revenue are EARNINGS;
 
Earned when the service is provided
-or-
When sale/delivery of inventory has taken place (whether cash is received is irrelevant) 
 
This is called the "Revenue Recognition Principle" 
"Expenses" :
COST of making the revenue;
 
Costs are dedeucted from the income statement and becomes expenses in the period of which they help to generate revenue.
 
This is called "The Matching Principle" 
Which method (net income or net operating cash flow) is a better way to explain a business' operations?
Net income is the better way; it is used on 3/4 financial statements
"Revenue Recognition Principle";
"Matching Principle"
"Revenue Recognition Principle" is when to recognize revenue;
 
"Matching Principle" is when to recognize expenses (cash is not important)
"Accrual Accounting"
Measuring accomplishments per "Revenue Recognition Principle" & "Matching Principle"
This is a better way to measure a company's actions, it appears on the B/S, I/S and Change in Equity  financial statements
"Cash Accounting"
Appears on Cash Flows Statement
Point in time vs. Period of time description;
Balance and Income Statement use which type? 
B/S is what we call a Point-in-time description
(B/S is prepared on the last day of the acctg period); 
I/S is what we call a Period-of-time description 
The Statement of Changes in [Owners'] Equity
 
Shows the change in owners' equity of the company for a specified period of time
Changes in Contributed Capital
Beginning Contributed Capital (from last yr)
+ Stock Issued
Ending Contributed Capital 
Changes in Retained Earnings
Beginning Retained Earnings (from last yr)
+ Net Income
- Dividends
Ending Retained Earnings
 
Ending R.E. goes onto the Balance Sheet 
"Dividends"
Distributions of accumulated profits that are paid to the owners (usually in the form of cash), as a return on their investment
Not on Income Stmt
Not an expense (does not increase revenue)
No obligation to pay dividends (some companies choose to) 
Statement of Cash Flows
Explains the change in cash from one balance sheet date to the next balance sheet date by showing all sources and uses of cash for the company over the specified period of time
EX: Comparative Balance Sheet
Year 2    Year 1
Cash:        $15k     $10k              
The Statement of Cash Flows is Divided into 3 major sections:
Cash flows from operating activities
Cash flow from investing activities
Cash flow from financing activities 
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