Financial Accounting Chapter 1 Review

Transcription

1 Financial Accounting Chapter 1 Review Fall 2011

2 1. What are the Forms of Business Organization? Chapter 1: An Introduction to Accounting Sole Proprietorship a business owned by a individual; Advantages: easy to start, total control, taxes Disadvantages: personal liability, harder to transfer ownership Partnership a business owned by individuals; Advantages: easy to start, taxes Disadvantages: personal liability, harder to transfer ownership Corporation a business owned by ; Advantages: easy to transfer ownership (stocks), easy to raise money, no personal liability Disadvantages: tough to start (lots of paperwork), double taxation Examples: Walmart, Target, Microsoft, Apple, Bank of America, General Motors, Ford *We will focus on corporations in this class. 2. Who are the users of financial information? Internal Users ( accounting) people within the company managers and supervisors; External Users ( accounting) people outside the company shareholders, customers, creditors; 3. What is the Sarbanes-Oxley Act? The Sarbanes-Oxley Act was passed in 2002 to reduce the amount of fraud occurring in the financial sector. It required top management to certify financial statements and made punishment for misrepresentation more severe. It also increased the independence of auditors and oversight by regulators. ACG2021 Chapter 1 Review Fall

3 4. What are the three types of businesses and the three types of business activities? Types of Businesses Service haircuts, lawn maintenance and pool cleaner. Merchandising (sells shit) Bill s Bookstore, Walmart and Publix. Manufacturing (makes shit) Ford and Apple. *Many businesses are a combination. Types of Business Activities Financing money from creditors or issuing stock to stockholders; Who gets paid first in the event the corporation goes out of business? Investing purchasing resources (assets) in order to operate the company; examples of assets include property, plant and equipment. These purchases tend to be. *Investing in another company is also considered an investing activity. Operating activities that generate revenues or incur expenses during normal business operations; examples include selling goods and services or paying for employees/electricity. Net income is achieved when revenues exceed expenses. Net loss is achieved when expenses exceed revenues. ACG2021 Chapter 1 Review Fall

4 5. What is the fundamental accounting equation? Assets resources that are used to produce earnings (land, buildings, equipment) and some extra stuff; what we. Liabilities obligations of a business; what we. Stockholders Equity common stock and retained earnings; what we have left our net worth. Examples: Example 5.1: Snooki s Smoosh Smoosh Factory has $515,000 of assets, $200,000 of liabilities and $315,000 of common stock. What is the value of retained earnings? ACG2021 Chapter 1 Review Fall

5 6. What are asset source transactions? An asset source transaction is generating an asset from a liability or from stockholder s equity. Example 6.1: SSSF was formed on Jan. 1 when it acquired $150,000 by issuing common stock. Show how this event affects the fundamental accounting equation. Example 6.2: SSSF borrowed $200,000 from Bank of South Park. Show how this event affects the fundamental accounting equation. 7. What are asset exchange transactions? An asset exchange transaction is generating an asset from another asset. Example 7.1: SSSF paid $100,000 cash to invest in a Smoosh Smoosh Factory. Show how this event affects the fundamental accounting equation. ACG2021 Chapter 1 Review Fall

6 8. What are asset use transactions? An asset use transaction uses assets to decrease liabilities and stockholder s equity. Example 8.1: SSSF pays its employee Cartman (who provides smoosh smoosh to large individuals) $15,000 and Snooki $100,000 (who provides smoosh smoosh to gorillas). Show how this event affects the fundamental accounting equation. Example 8.2: SSSF pays its owners $20,000 cash dividends. Show how this event affects the fundamental accounting equation. 9. What are the four financial statements? Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows ACG2021 Chapter 1 Review Fall

7 10. What is the Income Statement? The income statement displays revenues and expenses (net income/loss) for a particular company over a specified time period. Revenues increases in assets from providing goods and services to customers during operations; Expenses decreases in assets due to using assets and services to generate revenue; Example 10.1: During the first year of operation, SSSF earned $250,000 from selling its famous muff cabbage. SSSF also earned $100,000 for sales of their cookbook Baggages of Muff Cabbages. SSSF paid employees $115,000 cash to provide smoosh smoosh and spent $50,000 to clean Snooki s dirty cabbage. A dividend was also paid to its owners in the amount of $20,000. What is the net income over the first year of operations? 11. What is the retained earnings statement? This statement shows changes in retained earnings. Example 11.1: Using the information in Example 10.1, what is the ending retained earnings of SSSF? ACG2021 Chapter 1 Review Fall

8 *What is the statement of Stockholder s Equity? This statement shows changes in retained earnings (above) and common stock (below). Example 11.2: SSSF was formed on Jan. 1 when Snooki acquired $150,000 by issuing common stock. Example: What is the total stockholder s equity? 12. What is the balance sheet? The balance sheet shows a of assets, liabilities and stockholders equity. Assets are listed in order of liquidity. What is liquidity? Do the other three financial statements provide a snapshot? Liabilities are claims of creditors. Stockholder s Equity are claims of investors. ACG2021 Chapter 1 Review Fall

9 Example 12.1: Assets Cash $415,000 Factory (PPE) $100,000 Liabilities Notes Payable $200,000 Stockholder s Equity Common Stock $150,000 Retained Earnings $165,000 Does this balance? ACG2021 Chapter 1 Review Fall

10 13. What is the statement of cash flows? The statement of cash flows describes the cash that was obtained and spent for a company during a specified period of time. There are three categories in the statement of cash flows: Cash flows from operating activities: Cash inflows from revenues, interest and dividends received SSSF had $350,000 of inflows from operating activities Cash outflows from expenses and interest SSSF had $165,000 of outflows from operating activities Cash flows from investing activities: Cash inflows from the sale of long-term assets (land, buildings, equipment) SSSF had $0 of inflows from investing activites Cash outflows from the purchase of long-term assets (land, buildings, equip.) SSSF had $100,000 of outflows from investing activities Cash flows from financing activities: Cash inflows from borrowing funds (loans) and issuing common stock. SSSF had $350,000 of inflows from financing activities Cash outflows from repaying borrowed funds and paying dividends SSSF had $20,000 of outflows from financing activites ACG2021 Chapter 1 Review Fall

11 14. What is the closing process? The closing process occurs when you transfer the balances of revenues, expenses and dividends to retained earnings at the end of an accounting period. Therefore, there will be a zero balance in revenues, expenses and dividends. Example: What is the balance in retained earnings at the end of this year? Example: What is the balance of retained earnings, revenues, expenses and dividends at the beginning of next year? 15. What is included in a company s annual report? Financial Statements Management Discussion and Analysis Section management comments on the performance of the company based on the current numbers and states its future outlook. Notes to the Financial Statements makes detailed explanations of anything and everything that could be open to interpretation in the actual financial statements. Independent Auditor s Report assesses the validity/accuracy of the statements; the auditor lets everyone know if the numbers make sense. *A passing grade is called an unqualified opinion. ACG2021 Chapter 1 Review Fall

12 16. Review Problem: How do the following activities affect the Income Statement, Balance Sheet and Statement of Cash Flows? Cartman s Gingervitis Enterprises sells umbrellas (to protect gingers from the sun) and red power-ade. During the year, a. Gingervitis Enterprises raises $100,000 by issuing common stock b. Gingervitis Enterprises earns $30,000 for the sale of 1000 umbrellas. c. Gingervitis Enterprises pays $20,000 in salaries. ACG2021 Chapter 1 Review Fall

13 d. Gingervitis Enterprises pays $10,000 in dividends. e. Gingervitis Enterprises sells one of its buildings for $50,000 that had cost them $50,000. Extra Practice: 1. Look over Pierno s Chapter 1 Notes. Try to understand everything. 2. Self-Study Questions #1-15 in your book. It is a great review of what we just covered. 3. Brief Exercises #1, 3-5, Try these practice problems: ACG2021 Chapter 1 Review Fall

14 Chapter 1 Practice Problems 1. What are the two primary sources of funds for companies? a) investors and creditors b) CPAs and CFOs c) banks and wall street d) family and friends e) IPOs and stocks 2. On which financial statement would you find revenues and expenses? a) Income Statement b) Statement of Retained Earnings c) Balance Sheet d) Statement of Cash Flows 3. On which financial statement would you find assets, liabilities and stockholders equity? a) Income Statement b) Statement of Retained Earnings c) Balance Sheet d) Statement of Cash Flows ACG2021 Chapter 1 Review Fall

15 4. On which financial statement would you find activities involving operating, investing and financing? a) Income Statement b) Statement of Retained Earnings c) Balance Sheet d) Statement of Cash Flows 5. Borrowing money from a bank would be considered a) an operating activity on the statement of cash flows b) an investing activity on the statement of cash flows c) a financing activity on the statement of cash flows d) an income statement activity, not a cash flow activity 6. How would issuing stock affect the financial statements? a) assets decrease b) cash increases c) common stock decreases d) all of the above ACG2021 Chapter 1 Review Fall

16 7. Which of the following statements is NOT impacted in the payment of dividends? a) Income Statement b) Statement of Retained Earnings c) Balance Sheet d) Statement of Cash Flows 8. What account affects the Statement of Retained Earnings but does not affect the Income Statement? a) Revenues b) Expenses c) Dividends d) All of the above 9. Which of the following are temporary accounts? a) Revenues b) Expenses c) Dividends d) All of the above ACG2021 Chapter 1 Review Fall

17 Chapter 1 Solutions 1. a The two main sources are creditors and investors. Assets are financed either through debt or by issuing stock. When companies issue debt, they are borrowing money from creditors. The money owed is a liability on the balance sheet. When companies issue stock, they are borrowing money from investors. In return for the money invested by investors, the company gives them shares of common stock. 2. a Revenues and Expenses are found on the Income Statement. Another way to think about this is that anything involving operating activities are found on the Income Statement. 3. c The fundamental accounting equation: Assets = Liabilities + Stockholders Equity is part of the Balance Sheet. 4. d The Statement of Cash Flows is separated into operating, investing and financing activities. 5. c Borrowing money is always considered a financing activity on the statement of cash flows. 6. b Issuing stock increases cash and increases common stock on the company s books. ACG2021 Chapter 1 Review Fall

18 7. a In the payment of dividends, cash decreases and dividends increases. The only statement that is not affected by this is the income statement. Remember that the income statement involves revenues and expenses and that dividends are NOT considered an expense. 8. c The Income Statement is comprised of Revenues and Expenses. The Retained Earnings Statement includes Net Income (Revenues Expenses) and Dividends. 9. d Temporary accounts will be closed at the end of the period. Temporary accounts include revenues, expenses and dividends. ACG2021 Chapter 1 Review Fall