Notesale: Turn your study into money

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Cheat Sheet
Chapter 1
Financial Statements (in order)
1
...
Net loss/income goes to retained earnings statement
2
...
Ending retained earnings goes to balance sheet
3
...
Cash goes to statement of cash flows
4
...

Basic Accounting Equation
Assets = Liabilities + Stockholder’s Equity
- Remember this equation relates to balance sheet as liabilities and stockholder’s equity
must equal assets to be balanced
• Assets: resources owned by a business
• Liabilities: amounts owed to creditors
• Stockholder’s equity: ownership claim on net assets
o Things that affect SE are common stock, retained earnings, dividends,
revenues, & expenses

Expanded equation
Assets = Liabilities + Stockholder’s Equity

Common Stock

Retained Earnings

Revenue – Expenses – Dividends
Business Organizations Advantages
▪

▪

▪

Sole Proprietorship
o Simple to establish
o Owner controlled
o Tax advantages
Partnership
o Simple to establish
o Shared control
o Broader skills & resources
o Tax advantages
Corportation
o Easier to transfer ownership
o Easier to raise funds
o No personal liability

Internal & External Users of Finanical Information
Internal Users
o
o
o
o

Management
Human Resources
Marketing
Finance

External Users
o
o
o
o

Taxing authorities
Creditors
Investors
Regulating Authorities

Elements of an Annual Report
✓ Finanical Statements
✓ Management discussion and analysis
o presents management’s view on the company’s ability to pay near-term
obligations, its ability to fund operations and expansion, and its results of
operations
...

✓ Auditor’s Report
o opinion as to the fairness of the presentation of the financial position and
results of operations and their conformance with generally accepted
accounting principles
...

➢ Assets
o Current Assets: Cash and other resources that companies reasonably expect to
convert to cash or use up within the operating cycle/year (whichever is longer)
▪ Examples: cash, debt investments, accts recev, inventory, supplies,
prepaid insurance, etc
o Long-term investments: Investments in stocks and bonds of other corporations
that companies hold for more than one year
...

▪ Examples: land, delivery vehicles, furniture, equipment, buildings,
accumulated depreciation—equipment
o Intangible Assets: Assets that do not have physical substance
...
e
...

▪ Example: Notes payable, accts payable, unearned sales revenue, salaries &
wages payable, interest payable, income tax payable
o Long-term liabilities: Obligations that a company expects to pay after one year
...
(common stock:investment of
assets into bus
...
use)

Earnings Per Share Equation (profibility ratio)
EPS = Net income – preferred dividends
____________________________
Weighted- Average Common Shares Outstanding
o A measure of the net income earned on each share of common stock
...
(the higher the better)
Worker’s Capital = Current Assets – Current Liabilities
Solvency Ratios
Solvency ratios measure the ability of a company to survive over a long period of time
...

Faithful Representation: Accounting information must be complete, neutral, and free
from error
Monetary Unit: An assumption that requires that only those things that can be expressed
in money are included in the accounting records
...

 Assets, liabilities, or stockholders’ equity items change as a result of some
economic event
...
(Debit & Credit)
 Each transaction must affect two or more accounts to keep the basic
accounting equation in balance
...
Remember debits are left and
credits are right
...

➢ D
...
A
...
Analyze business transactions
2
...
The procedure of entering transaction data in the journal
...

3
...
The procedure of transferring journal entry amounts to the ledger accounts
...

*

These three steps are also known as the Recording Process

Preparing and Analyzing Journal Entries
Analyzing Business Transactions

Preparining for Journal Entries

General Journal

What posting looks like

Trial Balances
❖ Trial Balance: A list of accounts and their balances at a given time
o Proves the mathematical equality of debits and credits after posting
o Accounts are listed in order in which they appear in the ledger
o May also uncover errors in journalizing and posting
o Is useful in the prepartion of financial statements

Other Vocabulary
Chart of Accounts: listing of accounts used by a company

Chapter 4
Principles
➢ Revenue Recognition Principle: Companies recognize revenue in the accounting period
in which the performance obligation is satisfied
...

➢ Periodicity Assumption: Economic life of business can be divided into artificial time
periods
...

IS DIFFERENT FROM CASH BASIS ACCOUNTING
Cash-Basis Accounting
► Revenues are recognized only when cash is received
...

► Not in accordance with generally accepted accounting principles (GAAP)
...

Are required every time a company prepares finanical statements
Includes one income statement account and one balance sheet account

Adjusting Journal Entries
•

Purposse is to record obligations & recognize expenses; An example of an Adjusting
Entries are Trial Balances

Examples
Sierra Corporation purchased supplies costing $2,500 on October 5
...
This account shows a balance of $2,500 in the
October 31 trial balance
...


For Prepaid Expenses
Adjusting entry results in an increase (to debit) to an expense account & a decrease (a
credit) to an asset account
For Unearned Revenues
Adjusting entry is made to record the revenue for services performed during the period
and to show the liability that remains
Adjusting entry results in a decrease (a debit) to a liability account and an increase (a
credit) to a revenue account

Depreciation
Depreciation: The process of allocating the cost of an asset to expense over its useful life
...


Adjusted Trial Balance
Adjusted Trial Balance: A list of accounts and their balances after all adjustments have been
made
...

▪
▪

Temporary accounts: all revenue accounts, expense accounts, & dividends
Permenant accounts: all assets accounts, liabilities accounts, & stockholders’ equity
accounts

+ In addition to updating Retained Earnings to its correct ending balance, closing entries produce
a zero balance in each temporary account

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