Accounting Basics- exam 1

Accounting equation - answer-Assets = Liabilities + Shareholders' equity (alternative way is Total Assets -Total Liabilities = Total Equity) What are assets - answer-Assets are things of value owned or controlled by a business. When a business has an asset, someone has the rights, or claims, to that asset. There is a claim on every asset in a business. Cash and equipment are common assets. There are two groups who might have claims to a company's assets - creditors and owners. OWN (cash, property, inventory) Liabilities - answer-Liabilities are the claims of creditors. Liabilities are the amounts the business owes to others outside the business. For example, a loan is a type of liability. An increase in liability means a decrease cash (under assets) OWE (Loans, note payables) *Assets- Shareholder Equity= Liabilities* Shareholders equity - answer-are the claims of the owner(s). Shareholders' equity is also called net assets Shareholders' equity is made up of two parts: 1. Contributed capital is the contributions by owners. 2. Retained earnings is the equity that results from doing business and keeping the earnings in the business. Revenues increase retained earnings, while expenses decrease retained earnings. R/E Retained earnings - answer-Retained earnings is the equity that results from doing business and keeping the earnings in the business. Revenues increase retained earnings, while expenses decrease retained earnings. Getting and receiving money with income, rent, revenue-expense= net income, GAAP* - answer-Generally Accepted Accounting Principles 2 types of owners claims (shareholders) - answer-Contributed: common stock (c/s) Earned: retained earnings (R/E) Equity - answer-the value of shares issued by a company Four basic financial statements - answer-1- Income statements 2- statement of shareholders (equity) 3- balance sheet 4-statement of cash flows Income statement Summarizes revenues and expenses for a period of time. When revenues exceed expenses, the company earned net income for the period and when expenses exceed revenue the company incurred a net loss. - answer-revenue- expense= net income Ex. Revenueexpenses=net income results Revenueexpenses=net loss results Revenue (the earnings of the company) -Expenses (costs incurred to generate revenue ) =Net Income (the amount left after all expenses are deducted from all revenues) Statement of Shareholders Contributed Capital (CC)+ Earned Capital (Retained Earnings)= Total Shareholders' Equity (Equity) - answer-Details the change in owners' equity over an accounting period Note 1: Beginning Contributed capital+ New Common stock issued= Ending Contributed capital Note 2:Beginning Retained Earnings+ Net Income (Income Statement)-Dividends = Ending Retained Earnings Note 3: Total Shareholders' Equity is the link between the Statement of Shareholders' Equity and the Balance Sheet9 Contributed Capital- only use when you use stock (issuing or buying back) - answer-Retained Earnings- Income and expenses Balanced the balance sheet ex. Patrick contributed $ 18500 of personal savings in exchange for stock to start the business. - answer-Assets: $18500 cash Contributed Capital: $18500 common stock Calculate the ending retained earnings balance - answer-*Beginning balance+ Revenues- Cost of inventory sold= Ending balance* Recall that when we sell inventory we record two transactions. One to record the revenue earned, and one to record the cost of the inventory sold and no longer in possession of the business. Balanced the balance sheet ex. The company purchased $ 8500 of inventory (plants and shrubs) from a gardening wholesaler in Kansas. - answer-Assets: $8500 inventory -$8500 cash Balanced the balance sheet ex. The company purchased three riding lawn mowers at a cost of $ 2500 each. (multiply by 3 mowers) - answer-Assets: $7500 equipment -$7500 cash Balanced the balance sheet ex. The company paid rent expense of $600 the first month. - answer-Assets: -$600 cash R/E: -$600 rent exp. Balanced the balance sheet ex. The company earned service revenue of $ 10,000 and sold the entire $ 8500 of inventory it had purchased to customers for $ 12600 cash. - answer-Service Revenue Portion Assets: $10000 cash R/E: $10000 revenue Sale of Inventory Assets: $12600 cash R/E: $12600 revenue COGS Assets: -$8000 inventory R/E: -$8000 COGS Balanced the balance sheet ex. Beautiful Landscaping paid $ 1800 of a $ 6500 note payable to creditors. - answer-Assets: -$1800 cash Liabilities: -$1800 note payable Dividend - answer-The portion of corporate profits paid out to stockholders Balanced the balance sheet ex. The business paid $2100 in dividends. - answer-Assets: -$2100 cash R/E: -$2100 dividends Note Receivable - answer-a written promise of a customer to pay the business a sum of money at a future date Balanced the balance sheet ex. Beautiful Landscaping loaned $ 3000 cash to another company. - answer-Assets: -$3000 cash $3000 note receivable Family Games, Inc., started business on April 1, 2011, with $ 11000 cash contribution from its owners in exchange for common stock. The company used $3000 of the cash for equipment for the new shop and $1700 on games for its inventory. During the month, the company earned $ 6400 of revenue in cash from the sale of the entire inventory. On April 30, 2011 the owners then spent $ 3100 cash on more games for the inventory. What is the retained earnings balance on April 30, 2011? How much cash does the company have on hand on April 30, 2011? - answer-What is the retained earnings balance on April 30, 2011? $6400-$1700= $4700 How much cash does the company have on hand on April 30, 2011? ($11000-$3000)-$1700)+6400-$3100= $9600 Income Statement Gross profit formula to solve for cost of goods sold - answer-*Sales- Gross profit= Cost of goods sold* A balance sheet has three parts: - answer-Assets - things of value owned or controlled by a business. When a business has an asset, someone has the rights, or claims, to that asset. There is a claim on every asset in a business. Cash and equipment are common assets. Liabilities - the claims of creditors. Liabilities are the amounts the business owes to others outside the business. For example, a loan is a type of liability. Shareholders' equity - the claims of the owner(s). Shareholders' equity is made up of two parts: 1.Contributed capital is the contributions by owners. 2.Retained earnings is the equity that results from doing business and keeping the earnings in the business. Revenues increase retained earnings, while expenses decrease retained earnings. Income Statement Determining operating income - answer-*Gross profit on sales- administrative expenses= operating income* Income Statement Determining net income - answer-*Operating income- interest expense- income tax expense= net income* Note payable - answer-a written promise to pay a creditor a certain amount in the future Solving for gaps in the balance sheet - answer-Add up remaining #s and subtract it by the total Total is the same on both sides Accounts Payable - answer-Amounts to be paid in the future for goods or services already acquired Balanced the balance sheet ex. William started the pub by contributing $ 21000 in exchange for common stock, and the business borrowed $ 12000 from the bank. - answer-Assets: $33,000 cash (12000+21000) Liabilities: $12000 loan payable CC: $21000 common stock Net income - answer-also called profit, is equal to a company's total revenue minus all of its costs, such as the cost of goods sold, taxes, depreciation and interest. *Revenue-Expenses= Net income* Balance sheet (determining net income): add up R/E column Balanced the balance sheet ex. The pub hired a bartender to assist William and help run the new company. For this service, the pub paid $ 120 each day for 30 days. (120x30) - answer-Asset: -$3600 cash R/E: -$3600 salary exp. Balanced the balance sheet ex. The pub was popular with the local college and sold half of its inventory for total cash revenues of $ 7500. Previous question- The pub purchased $ 3000 worth of beer and other items (its inventory) with cash. - answer-The Revenue Portion Asset: $7500 cash R/E: $7500 revenue COGS (divide 3000 by half) Asset: -$1500 inventory R/E: -$1500 COGS Balanced the balance sheet ex. The pub repaid $ 3000 of the bank loan along with $ 30 of interest for the first month. - answer-Asset: -$3030 cash Liabilities: -$3000 loan payable R/E: -$30 interest exp. Determining total assets on a balance sheet - answer-Add up the entire asset column Determining Transaction Categories 1. Tommy started the pub by contributing $17,000 in exchange for common stock, and the business borrowed $12,750 from the bank. 2. The pub purchased $4,000 worth of beer and other items (its inventory) with cash. 3. The pub hired a bartender to assist Tommy and help run the new company. For this service, the pub paid $100 each day for 30 days. 4.The pub was popular with the local college and sold half of its inventory for total cash revenues of $8,500. 5. The pub paid rent expense of $725 the first month. 6. The pub repaid $1,500 of the bank loan along with $50 of interest for the first month. - answer-1. Financing 2. Operating 3. Operating 4. Operating 5. Operating 6. Financing and Operating Effect on Shareholders' Equity - answer-Numbers that belong in the asset and liability column and NOT the CC or R/E column do not effect Shareholders Equity Determine if there is an increase, decrease, or no change on net income 1. Fun Movie earned $10,000 in monthly sales.