Financial Accounting Test #1, Chapters 1-3

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an information system that measures business activities, processes that information into reports for decision makers.
What do we call the branch of accounting that provides information to external users ?
Financial Accounting.
What do we call the branch of accounting that provides information to internal users ?
Managerial Accounting
List the four common types of business organizations and indicate which of these types are required to pay tax on their income.
1. Sole Proprietorship = no income tax
2. Partnership = no income tax
3. Limited Liability Company = no income tax
4. Corporation = pays tax on its income
List the four common types of business organizations and indicate which of these types of businesses the owners of the business are personally liable for the liabilities of the business entity.
1. Sole Proprietorship = personally liable
2. Partnership = personally liable
3. Limited Liability Company = not liable
4. Corporation = not liable
What types of accounts compromise and make up Net Income ?
Revenues and Expenses
What types of accounts appear on the balance sheet ?
Assets, liabilities, and stockholder’s equity
inflows of resources that increase retained earnings
outflows of resources that decrease retained earnings.
Financial statements
the business documents that companies use to report the results of their activities.
economic resources expected to produce a benefit in the future. ex. Corporation’s cash, merchandise inventory, equipment, buildings
Debts you must pay to outsiders or creditors. ex. account payables, note payables.
Owner’s Equity
Equity means ownership. A companie’s stockholder’s equity is the stockholder’s interest in the assets of the company.
Assets = ???
= Liabitlies + Owner’s Equity
= Accounts payable + common stock + retained earnings
Paid in capital
the amount the stockholders have invested in the corporation
Retained Earnings
the amount earned by income producing activities and kept or “retained” for use in the business.
distributions of cash to stockholders. Dividends are not expenses, they don’t affect net income. Dividends are direct reductions from retained earnings.
Income Statement
a financial statement listing an entity’s revenues, expenses, and net income for a specific time period. ex. “for year ending December 31st, 2011”
Statement of Retained Earnings
Retained Earnings + net income – dividends = current retained earnings”for the year ending December 31st, 2003″
Balance Sheet
measures financial position by reporting assets, liabilities, and stockholder’s equity. “As of March 17th, 2013”
What’s the difference between current assets and long term assets ?
Current assets are expected to be converted to cash, sold, or consumed within a year.
Long term assets are things like property and equipment and also intangible things like patents, trademarks, and goodwill.
What’s the difference between current liabilties and long term liabilities ?
Current liabilities are debts payable within a year.
Long term liabilities are bigger payables that you won’t pay back in a year.
The statement of cash flows
measures cash receipts and payments. Only times when cash is exchanged. “Payments on account are not recorded here”
Unearned revenue is a…
A. Asset
B. Liability
C. Owner’s equity
B. Liability

It’s on the right side of the balance sheet along with service revenue.

A prepaid expense is a…
A. Asset
B. Liability
C. Owner’s equity
A. asset
Which is a better predictor for future operations ?
Net income or current cash flows ?
Net income.
Is service revenue on the right or left side of the balance sheet ? Why ?
Right side along with unearned revenue.
Revenues, by the way, are credits (where we got the money) and expenses are debits (what we did with the money.)
main lesson
Left side of the balance sheet increases with _____ and the right side of the balance sheet increases with _____ .
Debits, credits
Net income + retained earnings = ??
owner’s equity
Explain what a journal entry is and how one is made.
A journal records all transactions. The first line in a single transaction is always the debit. The second line of the same transaction is the credit.
Net income flows into _______
Retained Earnings.
In what order must you produce these 3 reports ?
-statement of retained earnings
-balance sheet
-income statement
1. Income statement
2. Statement of retained earnings
3. Balance sheet.
net income you get from 1, you plug it into 2, and then you use retained earnings from 2 to calculate 3.
Current ratio
current assets/current liabilities
Debt Ratio
What are the 3 types of activities presented on the Statement of Cash Flows ?
Financial, operational, and investment activities
The time period concept
Accounting information is reported at regular intervals
Categories: Financial Accounting