D196 Study Guide

What is the role and purpose of accounting? Accounting is used to accumulate, measure, and communicate financial information about organizations. This information is used to make informed decisions regarding resource usage and allocation. Who uses accounting information and why? Managerial Accounting: Internal decision making (managers, CEO's, supervisors, etc.) Financial Accounting: External user benefit (stakeholders, investors, tax authorities, etc.) What are important influences on Accounting? Development of GAAP by FASB in the U.S. and by the IASB worldwide. International business considerations, ethical considerations. What is the role of ethics in Accounting? Accountants are seen by the public as ensuring that misrepresentation of financial information does not occur. What is the PCAOB and what does it do? PCAOB is the Public Company Accounting Oversight Board, and they oversee audits of public companies. Created by the SEC after passage of the Sarbanes Oxley Act of 2002 to restore public confidence. Explain the accounting cycle. 1. Analyze transactions 2. Record effects of transactions 3. Summarize effects of transactions 3a. Post journal entries 3b. Prepare trial balance 4. Prepare financial reports 4a. Adjust journal entries 4b. Prepare financial statements 4c. Close books What is the basic accounting equation? Assets (resources, cash, equipment) = Liabilities (method of financing req. repayment) + Owner's Equity (method of financing NOT req. repayment) What is the expanded accounting equation? Assets = Liabilities + Capital Stock + Revenues - Expenses - Dividends What are the four financial statements covered? 1. The Balance Sheet 2. The Income Statement 3. The Statement of Retained Earnings 4. The Statement of Cash Flows What is the purpose of the balance sheet? To report the financial position of an entity at any point in time. What components make up the balance sheet? Assets (resources), Liabilities (obligations), and Owners Equity What is the purpose of the income statement? To show the Revenue, Expenses and Net Profit for the period for an entity. **Also provides info re: long term profitability. What components make up the income statement? Revenues, Expenses, and Net Income (loss) What is the purpose of the Statement of Retained Earnings? Displays the changes in retained earnings from one accounting period to another. **Also links the balance sheet and the income statement together. What components make up the Statement of Retained Earnings ? Previous retained earnings, plus net income for the year, minus dividends paid = retained earnings now. What is the purpose of the Statement of Cash Flows? Shows the cash inflows (receipts) and cash outflows (payments) of an entity during a period of time. How are cash flow items classified (statement of cash flows)? Cash flow items are placed into one of three categories 1. Operating Selling goods/services Paying wages/utilities/taxes 2. Investing Selling Buildings/Land Purchasing Buildings/Land 3. Financing Borrowing Money Repaying Loans/Distributions to owners What are the four categories of notes included in financial statements? 1. Summary of significant accounting policies 2. Additional info re: summary totals found in statements 3. Disclosure of info not recognized in statements 4. Supplemental info required by FASB or SEC What are common-size financial statements? Common-size statements display items as a percentage of a common base figure. How are common-size financial statements used? These statements are commonly used for easy analysis between different companies or of the same company period to period. What is horizontal analysis and what information does it provide? H. A. compares a firms results from year to year. It is used to note general trends or one-time events that may require further investigation. What is vertical analysis and what information does it provide? V. A. compares companies in the same industry at the same point in time. What is the cash budgeting process? To use past patterns of cash collection and cash disbursement to create a forecast for expected future cash inflows and outflows.