Questions

• What is the accounting equation?

  Assets = Liabilities + Stockholders Equity
• What is the primary objective of most businesses?

  To make a profit
• What is a business stakeholder?

  • is a person or entity, with an interest in the economic performance and well being of a company.
  • Ex: owners (Capital market), customers/suppliers (product/service market), government and employees (internal)
• What is a Service Business?

  • A type of business that provides services rather than products to customers.
  • Ex: A lawyer, or a doctor
  • Revenue is called fees earned
• What is a Merchandising Business?

  • Businesses that sell products they purchase from other businesses to customers.
  • Ex: Target, or Walmart.
• What is a manufacturing business?

  • A type of business that changes basic inputs into products that are sold to individual customers.
  • Ex: Apple factories manufacture phones which are then sold
• What do expenses and sales do?

  • Expenses reduce revenues
  • Sales increase profits
• Who wants a business to succeed?

  A business stakeholder
• When a business borrows money what does it incur?

  A liability
• What is a balance sheet?

  • A list of assets, liabilities, and owners equity as of a specific date.
  • usually at the close of the last day of a month or a year
• What is a financial statement of revenues and expenses for a specific period of time?

  • income statement
  • A summary of the revenue and expenses for a specific period of time, such as a month or a year.
• How do we find out the net income for the month of June?

  • Revenue - Expenses = Net Income/Loss
  • Net Income - revenues exceed expenses.
  • Net Loss - expenses exceed revenues.
  • Revenue accounts are Fees Earned or Sales.
  • Expense accounts have the word expense.
• What accounts are not used to calculate net income?

  • Cash
  • Accounts Payable
  • Common stock
  • Equipment
• ABC Corp borrowed $5000 from the bank. Which shows the effects of this transaction?

  • Increases cash (Assets)
  • Increases payable (Liability)
• ABC Corp paid rent expense of $10,000 how are the accounts affected?

  • Decreases cash (Assets)
  • Increases expense
  • Decreases net income
  • Decreases retained earnings (Stockholders equity)
• ABC Corp purchased land for cash, what are the effects on the accounts?

  • Decreases cash (Assets)
  • Increases Land (Land)
• What are dividends and what are they taken out of?

  • distributing money to stockholders
  • taken out of retained earnings (Decreases retained earnings)
• Income statement for March indicated net income of $50,000. The corp. paid $5000 in dividends. If this is first of operation and there are no beginning retained earnings. What is the ending balance of retained earnings?

  • Beginning retained earnings: 0
  • Net income: 50,000
  • Retained earnings decrease: -5,000 (paid dividends)
  • Ending retained earnings: 45,000
• What is the accrual basis of accounting?

  • Recognizes revenue when earned and expenses when incurred.
• What is the revenue recognition principle?

  • Matching revenue with the expenses it generates.
  • Revenue is recorded when services have been provided or when a product has been delivered to a customer.
  • A graphic designer completes a project for a client in January but doesn't get paid until February. According to the revenue recognition principle, the designer should recognize the income in January when the work is completed, even though the payment is received later
• What is the expense recognition principle?

  • Matching principle.
  • Expenses are recorded in the same period that they generate revenue.
  • Purchase supplies for $20 to make lemonade in January. The product of lemonade is sold until February.
  • You record the expense of buying supplies in January, even though the revenue was earned in February.
  • You record $20 expense in January, You record $50 revenue in February
  • (On account would only increase the Asset of Supplies, and increase the Liability of Accounts Payable)
• ABC co billed a client for lessons given in January the payment was received in February. Under accrual basis of accounting when should ABC record the revenue?

  • In January, under the revenue recognition principle (when services have been provided)
  • Record the revenue when earned, so since the lesson was given in January, it was earned in January.
• ABC Co sold goods receiving $15,000 in cash and $3000 in credit. How much revenue should the Co record under the accrual basis?

  • All revenue since it is under the accrual basis.
  • Issuing credit is also revenue (thus it is still earned)
  • So, $18,000 in total would be recorded.
• What is Unearned rent revenue?

  • Liability
  • The company owes the item to the customer. (They owe the rent of the place to the customer.)
  • Unearned rent revenue represents rent payments received in advance that need to be earned over time as the tenant occupies the property.
  • Each month the tenant occupies the apartment, you'll recognize the rent revenue for that month and reduce the unearned rent liability accordingly.
• What are Unearned revenues or deferred revenues?

  • Are initially recorded as liabilities but become revenues over time or through normal operations of the business. 
  • Ex: unearned rent revenue
• What are prepaid expenses or deferred expenses?

  • Are initially recorded as assets but become expenses over time or through normal operations of the business. 
  • Ex: prepaid insurance or supplies (Keyword: prepaid)
• ABC Co received $5000 in payments from clients for services billed in a previous month. What accounts are affected when ABC received the $5000 in payment?

  • Increases Cash by $5000 (Assets)
  • Decreases Accounts Receivable by $5000 (Assets) (Since the customer has now paid/owed back the company the money.)
• What is book value?

  • The cost of the asset less the balance of its accumulated depreciation is called the asset’s book value, or carrying value.
  • Cost of asset - accumulated depreciation = Book Value
  • Ex: When Office equipment total was $8,500 originally, then depreciation on office equipment is $160. The book value of Family Health Care’s office equipment, after the preceding adjustment, is $8,340.
  • ($8,500 − $160)
• When the accumulated depreciation on a building is subtracted from the building's cost, what are they trying to find?

  Book value
• What never depreciates?

  Land is never depreciated
• Merchandise sold and delivered by the end of the year is reported on the income statement as?

  Cost of goods sold
• Merchandise left over is what on the balance sheet?

  • Merchandise left over is ending inventory on the balance sheet
  • also known as Merchandise not sold at the end of the period
• What is the purpose of Sarbanes Oaxley?

  • Restores public confidence and trust in the financial statements of publicly held companies
  • It does NOT require companies to prepare financial statements or protect companies from demands of investors
  • applies only to companies whose stock is traded on public exchanges, referred to as publicly held companies.
• Why are internal controls important?

  • Deter fraud and prevent misleading financial statements
  • Deter can never guarantee
  • Safeguard its assets
  • Process information accurately
  • Ensure compliance with laws and regulations.
• What is a bank reconciliation? Why should it be prepared?

  • Errors should be discovered and corrected.
  • Any differences between the bank's records and depositor's records should be determined.
• Bank Reconciliation Exercise

  Bank Statement shows a balance of $3000 as of Dec 31. The following reconciling were IDENTIFIED.

  1. Deposit not recorded on bank statement $75
  2. Total outstanding checks $150
  3. Check of $50 returned because of not sufficient funds (NSF)

  What is the adjusted balance according to the BANK STATEMENT?

  • Add deposit in transit
  • Deduct outstanding check

  2,925
• What is the Bank Reconciliation Format for the BANK STATEMENT?

  • Cash balance according to bank
  • Add: Increases to cash not on bank statement
  • (Ex: deposits in transit, etc.)
  • Deduct: Decreases to cash not on bank statement
  • (Ex: outstanding checks, etc.)
  • Adjusted balance
• What is the Bank Reconciliation Format for the COMPANY STATEMENT?

  • Cash balance according to company
  • Add: Unrecorded bank increases to cash (credit memos)
  • (Ex: Notes collected by bank, etc.)
  • Deduct: Unrecorded decreases to cash (debit memos)
  • (Ex: NSF Checks, service charges, etc.)
  • Adjusted balance
• What are examples of a fixed cost?

  • Rent
  • Insurance
  • Salaries
  • Depreciation
  • Property Taxes
  • Basic utilities (like electricity, water, internet)
• What is a fixed cost?

  • an expense that stays the same no matter how much you produce or sell
  • Ex: Whether you sell 10 cups of lemonade or 100 cups, the cost of renting the lemonade stand remains the same.