AFM 123 MIDTERM VERIFIED STUDY GUIDE
Chapter 1: Intro to Financial Accounting
Financial Accounting - Answers - Focuses on external reporting and meeting the needs
of external users.
Private Enterprise (PE) - Answers - A corporation that does not sell its shares publicly
Publicly Accountable Enterprise (PAE) - Answers - corporation that does sell its shares
publicly
Income Statement - Answers - - Describes how well a business is doing by summarizing
revenues less expenses over a certain period of time.
- When revenues are greater than expenses the difference is called net income, or
profit.
- Net income from the income statement is transferred to the statement of changes in
equity.
Statement of Changes in Equity - Answers - - Provides info about how the balances in
Share Capital and retained earnings changed during the period.
- The totals of these are transferred to the balance sheet.
Share Capital - Answers - Is a heading in the shareholders' equity section of the
balance sheet and represents how much shareholders have invested.
Retained Earnings - Answers - The sum of all net incomes earned by a corp over its life,
minus any distributions of these net incomes to shareholders.
Dividends - Answers - Distributions of net incomes to shareholders
Assets - Answers - Economic resources that provide benefit to the company.
E.g. cash + accounts receivable + prepaid insurance + equipment + truck
The Balance Sheet - Answers - Shows a business's assets, liabilities, and equity at a
point in time.
Accounts Receivable - Answers - Amounts to be collected in cash in the future for
goods and services sold on credit.
Liability - Answers - An obligation to pay an asset in the future.
E.g. Bank loan + accounts payable + unearned revenue
, Accounts payable - Answers - Obligations to pay a creditor for goods purchased or
services rendered
Creditor - Answers - Owns the right to receive payment from an individual or business
Unearned Revenue - Answers - An advance payment of cash from a customer for
goods or services to be provided in the future. I.e. kind of like a deposit
Equity - Answers - Represents the net assets owned by the owners (the shareholders).
E.g. share capital + retained earnings
Net assets - Answers - Assets minus Liabilities
Chapter 2: The Accounting Process - Answers -
T-accounts - Answers - teaching /learning tool to show decreases and increases in an
account
Ledger - Answers - "The Books", where the accounts are maintained.
Double entry accounting - Answers - Each transaction is recorded in at least two
accounts where the total debits is ALWAYS equal to the total credits.
Trial Balance - Answers - An internal document to list all the account balances at a point
in time.
THE ORDER YOU HAVE TO PREPARE YOUR FINANCIAL STATEMENTS ARE: -
Answers - 1) Trial balance is #1
2) 2nd step is the Income Statement
3) Step 3: Statement of Changes in Equity
4) 4th step: Balance Sheet
5) 5th step: Cash Flows
Chapter 3: The Operating Cycle - Answers -
The Operating Cycle - Answers - The cash to cash sequence of transactions
Accrual Accounting - Answers - The process of recognizing revenues when earned and
expenses when incurred regardless of when cash is exchanged; it forms the basis of
GAAP.
The Matching Principle - Answers - Expenses reported in the same period as the
revenues they helped generate. Expenses are reported on the income statement a)
when related revenue is recognized or b) during the appropriate time period, regardless
of when cash is paid.
Chapter 1: Intro to Financial Accounting
Financial Accounting - Answers - Focuses on external reporting and meeting the needs
of external users.
Private Enterprise (PE) - Answers - A corporation that does not sell its shares publicly
Publicly Accountable Enterprise (PAE) - Answers - corporation that does sell its shares
publicly
Income Statement - Answers - - Describes how well a business is doing by summarizing
revenues less expenses over a certain period of time.
- When revenues are greater than expenses the difference is called net income, or
profit.
- Net income from the income statement is transferred to the statement of changes in
equity.
Statement of Changes in Equity - Answers - - Provides info about how the balances in
Share Capital and retained earnings changed during the period.
- The totals of these are transferred to the balance sheet.
Share Capital - Answers - Is a heading in the shareholders' equity section of the
balance sheet and represents how much shareholders have invested.
Retained Earnings - Answers - The sum of all net incomes earned by a corp over its life,
minus any distributions of these net incomes to shareholders.
Dividends - Answers - Distributions of net incomes to shareholders
Assets - Answers - Economic resources that provide benefit to the company.
E.g. cash + accounts receivable + prepaid insurance + equipment + truck
The Balance Sheet - Answers - Shows a business's assets, liabilities, and equity at a
point in time.
Accounts Receivable - Answers - Amounts to be collected in cash in the future for
goods and services sold on credit.
Liability - Answers - An obligation to pay an asset in the future.
E.g. Bank loan + accounts payable + unearned revenue
, Accounts payable - Answers - Obligations to pay a creditor for goods purchased or
services rendered
Creditor - Answers - Owns the right to receive payment from an individual or business
Unearned Revenue - Answers - An advance payment of cash from a customer for
goods or services to be provided in the future. I.e. kind of like a deposit
Equity - Answers - Represents the net assets owned by the owners (the shareholders).
E.g. share capital + retained earnings
Net assets - Answers - Assets minus Liabilities
Chapter 2: The Accounting Process - Answers -
T-accounts - Answers - teaching /learning tool to show decreases and increases in an
account
Ledger - Answers - "The Books", where the accounts are maintained.
Double entry accounting - Answers - Each transaction is recorded in at least two
accounts where the total debits is ALWAYS equal to the total credits.
Trial Balance - Answers - An internal document to list all the account balances at a point
in time.
THE ORDER YOU HAVE TO PREPARE YOUR FINANCIAL STATEMENTS ARE: -
Answers - 1) Trial balance is #1
2) 2nd step is the Income Statement
3) Step 3: Statement of Changes in Equity
4) 4th step: Balance Sheet
5) 5th step: Cash Flows
Chapter 3: The Operating Cycle - Answers -
The Operating Cycle - Answers - The cash to cash sequence of transactions
Accrual Accounting - Answers - The process of recognizing revenues when earned and
expenses when incurred regardless of when cash is exchanged; it forms the basis of
GAAP.
The Matching Principle - Answers - Expenses reported in the same period as the
revenues they helped generate. Expenses are reported on the income statement a)
when related revenue is recognized or b) during the appropriate time period, regardless
of when cash is paid.
