Intro To Financial Accounting Exam 1 Questions & Answers

Accounting consists of three basic activities - ANSWERSIdentifies, records, communicates Who uses Accounting Data - ANSWERSExternal Users: Creditors and Investors Recent Financial Scandals - ANSWERSEnron, WorldCom, HealthSouth, AIG Sarbanes-Oxley Act of (SOX). - ANSWERSAdded new criminal charges for accounting scandals Financial Statements - ANSWERSBalance Sheet Income Statement Statement of Stock Holder's Equity Statement of Cash Flows Note Disclosure Generally Accepted Accounting Principles (GAAP) - ANSWERSStandards generally accepted and universally practiced Standard Setting Bodies - ANSWERSFinancial Accounting Standards Board (FASB) (SEC) International Accounting Standards Board (IASB) Historical Cost Principle - ANSWERSdictates that companies record assets at their cost. Fair Value Principle - ANSWERSstates that assets and liabilities should be reported at a fair value Monetary Unit Assumption - ANSWERScompanies include in accounting records only transaction data expressed in money. Economic Entity Assumption - ANSWERSRequires that activities of the entity be kept separate and distinct from activities of the owner Combining activities of Kellogg and General Mills would violate? - ANSWERSEconomic Entity Assumption Corporation - ANSWERSOwnership divided into shares of stock Accounting Equation - ANSWERSAssets= Liabilities + Stockholder's Equity Assets - ANSWERSResources a business owns Provide future service or benefits Cash, Supplies, Equipment Liabilities - ANSWERSClaims against assets (Debts and Obligations) Creditors- Party to whom money is owed Accounts Payable, Notes Payable Stockholder's Equity - ANSWERSOwnership claim on total Assets Referred to as residual Equity Common Stock and Retained Earnings Dividends - ANSWERSdistribution of cash or other assets to stockholders. They reduce retained earnings but are not an expense. Expense - ANSWERSare the cost of assets consumed or services used in the process of earning revenue. Transactions - ANSWERSEconomic events recorded by accountants Income Statement - ANSWERSReports Profitability of the company List Revenues first, followed by expenses Shows net income or net loss Retained Earnings statement - ANSWERSReports changes in retained earnings for same period as income statement Balance Sheet - ANSWERSReports the assets, liabilities, and stockholders' equity at a specific date. Is a snapshot of the company's financial condition at a specific moment in time Statement or Cashflows - ANSWERSWhere did the cash come from What was it used for What was the change in balance The Account - ANSWERSRecord of increases and decreases in a specific asset, liability, equity, revenue, or expense Double Entry System - ANSWERSDebit one account, credit the other Debits must equal Credits Debits Credits - ANSWERSAccount will have a debit balance CreditsDebits - ANSWERSAccount will have a credit balance Recording Assets - ANSWERSDebits should exceed credits Recording Liablities - ANSWERSCredits should exceed debits Normal balance is - ANSWERSon the increase side Owner's investments and revenues - ANSWERSIncrease stock holders equity (Credit) Dividends and Expenses - ANSWERSdecrease stock holders equity (Debit) Expenses Decrease - ANSWERSstockholders equity Debits - ANSWERSIncrease assets and decrease liabilites Accounts that normally have debit balances are - ANSWERSAssets, dividends, and expenses The Journal - ANSWERSShows complete effects of transaction Chronological Order Helps prevent and locate errors Cash and Accounts Payable Transaction - ANSWERSDebit the total and Credit both transactions General Ledger - ANSWERScontains the entire group of accounts maintained by a company Limits of the Trial Balance - ANSWERSTransactions are not journalized Correct journal entry is not posted A jor Time Period Assumption - ANSWERSArtificial Time Points: Month, Quarter, Year Interim Periods - ANSWERSmonthly and quarterly periods Cash-Basis Accounting - ANSWERSRevenues recorded when cash is received. Expenses are recorded when cash is paid. Cash basis is not in accordance with GAAP Accrual-Basis Accounting - ANSWERSTransactions recorded when events ocurr Companies recognize revenues when they perform services (Rather than receiving cash) Expenses are recognized when incurred (Rather than when paid)