COMM 111 - Financial Accounting - Final Exam Review

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14 Dec 2012
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Financial Accounting Final Exam Review
Chapter 1
Accounting the information system that measures business activities, processes
data into reports, and communicates results to decision makers the ‘language of
business’
Who uses Accounting information? : investors and creditors, government and
regulatory agencies, taxing authorities, individuals and not-for-profit organizations
Financial accounting provides information for decision makers outside the
organization, while management accounting generates inside information for the
managers of the organization
Forms of
Business
Organizations
Proprietorship
Partnership
Corporation
Owner(s)
Proprietor one
owner
Partners two or
more owners
Shareholders
generally many
owners
Life of entity
Limited by
owner’s choice or
death
Limited by owner’s
choice or death
Indefinite
Personal Liability
of owner(s) for
business debts
Proprietor is
personally liable
Partners are
usually personally
liable
Shareholders are
not personally
liable
Accounting Status
Accounting entity
is separate from
proprietor
Accounting entity
is separate from
partners
Accounting entity
is separate from
shareholders
Board of directors policy maker for the corporation and appoints officers
The Accounting Equation
Assets = Liabilities + Shareholder’s Equity
Assets economic resources of a business that are expected to produce a benefit in
the future
Liabilities debts payable to outsiders, called creditors
Owner’s Equity – represents the ‘insider claims’ of a business – the owner’s interest
in the assets of a corporation. Can be divided into contributed capital and retained
earnings
Contributed Capital the amount that shareholders have invested in the
corporation
Retained earnings the amount earned by income-producing activities and kept
for use in the business. Revenues, expenses and dividends affect retained earnings.
Revenues expenses = Net Income
Beginning Balance of retained earnings +/- Net income/loss Dividends = Ending
Balance of retained earnings
Income Statement (Statement of operations, statement of earnings) reports the
company’s revenues, expenses, and net income or loss for a period
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Statement of retained earnings shows changes in retained earnings due to
income/loss and dividends
i.e. Huron Ltd.
Statement of Retained Earnings
For the year ended Dec 31, 2011
Beginning retained earnings…………………….$120 000
Net Income…………………………………………………30 000
Cash Dividends…………………………………………..(10 000)
Ending retained earnings…………………………..$140 000
Balance sheet (statement of financial position) reports assets, liabilities, and
shareholder’s equity
Current assets include cash and cash equivalents, as well as assets the company
expects to convert to cash, sell, or consume during the next year. i.e. Accounts
receivable, inventory, prepaid expenses
Current liabilities debts payable within one year or current operating cycle if
longer i.e. accrued liabilities, accounts payable, income taxes payable, current
portion of long term debt
Long term liabilities those liabilities that are due beyond one year after the
balance sheet date i.e. long term debt, future income taxes, non controlling interest
in consolidated joint venture
GAAP generally accepted accounting principles; Canadian rules that govern how
accountants measure, process, and communicate financial information
IFRS international financial reporting standards; international accounting
standards
Publicly Accountable Enterprises (PAEs) corporations that have issued or plan
to issue shares or debt in public markets, required to follow IFRS
Private Enterprises (PEs) required to follow accounting standards for private
enterprises, but info not released to public
Assumptions of Accounting
Entity assumption all the assets and liabilities of an entity belong to the
entity, and the owner may have personal assets and liabilities, however they
are not added to those of the entity
Going concern assumption assumes that the entity will remain in operation
long enough to use existing assets for their intended purposes
Cost assumption requires that assets and liabilities be measured at their
cost when they are acquired or assumed
Stable monetary unit assumption we ignore inflation and assume the
dollar’s purchasing power is relatively stable
Chapter 2
Transaction any event that has a financial impact on a business and can be
measured
Accrued liability a liability for an expense you have not yet paid like interest
payable or salary parable
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Liabilities or Equities
Dividends optional payments to shareholders, indicating a decrease in retained
earnings (not an expense!)
-each transaction affects at least two accounts in the double entry accounting
system
-the left side of a t-account is a debit, and the right side is a credit: each transaction
involves both a debit and credit
-DEBITS MUST EQUAL CREDITS!!!
-increases in assets are recorded on the left (debit) side of the account
-decreases in assets are recorded on the right (credit) side of the account
-increases in liabilities and shareholder’s equity re recorded by credits
-decreases in liabilities and shareholder’s equity are recorded by debits
Assets
Expenses Revenues
-dividends and expenses accounts are exceptions to the rule they are equity
accounts that are increased by a debit. This is because they are contra equity
accounts
Journal a chronological record of transactions
Ledger a grouping of all of the t-accounts with their balances
Trial Balance lists all accounts with their balances
i.e. Tara Inc.
Trial Balance
April 30, 2011
Account Title Debit Credit
Cash
$33 300
Accounts Receivable
2000
Office Supplies
3700
Land
18000
Accounts Payable
$1800
Common Shares
50 000
Dividends
2100
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