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Midterm

Financial Accounting Midterm Exam Review.docx
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Department
Commerce
Course
COMM 111
Professor
George Boland
Semester
Fall

Description
Financial Accounting Midterm Exam Review Chapter 1 Financial accounting the language of business: the process of identifying measuring, and communicating economic information GAAP generally accepted accounting principles used for companies, private corporations, governments etc CICA Canadian institute of chartered accountants CGAAC certified general accountants association of Canada SMAC society of management accountants of Canada IFRS international financial reporting statements, is a principals based system AcSB accounting standards board, makes rules AcSOC accounting standards oversight committee, oversees and provides insight to the deliberations of the AcSB PSAB public sector accounting board, sets standards for public sector IASB international accounting standards board PAEs, publicly accountable enterprises corporations that have issued or plan to issue shares or debt in public markets, required to follow IFRS standards PEs, private enterprises do not need to follow IFRS but do need to follow standards developed by AcSB ASPE accounting standards for private enterprises, standards developed by AcSB for PEs Underlying assumptions in accounting: Entity assumption (Forzani Group Ltd. Is one entity and John Forzani is a separate entity; the companies cash, computers, and equipment belong to the company, not to John Forzani) Going concern assumption (the company is not wrapping up tomorrow) Cost assumption (reporting things at initial costs) Stable monetary unit assumption (the dollar is somewhat stable) Financial statements business documents companies use to report results of activities to various user groups People make decisions -> business transactions occur -> businesses report results -taxes authorities require accounting data Proprietorship Partnership Corporation Owner(s) Proprietor one owner Partners two or Shareholders more owners generally many owners Life of Entity Limited by owners choice or Limited by owners Indefinite death choice or death Personal liability Proprietor is personally liable Partners are usually Shareholders are not of owner(s) for personally liable personally liable business debts Accounting Accounting entity is separate Accounting entity is Accounting entity is status from proprietor separate from separate from partners shareholders Accounting equation Assets = liabilities + shareholders equity Assets economic resources of a business Liabilities debts payable to creditors Owners equity the insider claims of a business; the owners interest in the assets of a corporation Accounts receivable the money due from customers that pay by credit Inventory raw materials Capital/fixed/plant assets property, plant and equipment Accounts payable liability for goods and services purchased on credit Owners equity = contributed capital + retained earnings So assets = liabilities + contributed capital + retained earnings Contributed capital amount shareholders have invested (common shares) Revenues inflows of resources that increase retained earnings Expenses decreases in retained earnings from operations Dividends distributions to shareholders of assets (do not go under expenses!!) Revenues expense = net income Net income dividends = ending balance of retained earnings statement statement statement income of retained of financial of cash statement earnings position flows Current Liabilities debts payable within one year or one normal operating cycle Long term liabilities liabilities due beyond one year after balance sheet date Audits performed by independent accountants to ensure that financial statements are correct and relevant with faithful representation Chapter 2 Transaction any event that has a financial impact on a business and can be measured. Has two sides (give and receive) and needs a dollar amount Account record of all the changes in a particular asset, liability or shareholders equity during a period ASSETS Cash & cash equivalents Accounts receivable when a company sells goods and receives a promise for future collection of cash Notes receivable similar to accounts receivable but more binding cause the customer signs the notes and an interest rate is specified Inventory the products the company sells to customers Prepaid expenses such as prepaid rent, insurance, office supplies. These are assets because they provide future benefit to business Land land used in operations Building Equipment, furniture and fixtures LIABILITIES Accounts payable opposite of accounts receivable Notes payable opposite of notes receivable Accrued liabilities liability for an expense you have not yet paid I.e. interest payable, salary payable, income taxes payable SHAREHOLDERS EQUITY Contributed capital (common shares or share capital) owners investment in the corporation; a corporation receives cash and issues common shares to investor Retained earnings shows the cumulative net income earned by the corporation over its lifetime, minus its cumulative net losses and dividends Dividends are optional; after profitable operations, board of directors may or may not declare and pay a cash dividend to shareholders Note: paying a dividend decreases cash and retained earnings Tara Inc. Income Statement For the month ended April 30, 2011 Revenue Service Revenue ($7000 + $3000)$10 000 Expenses Salary$1200 Rent..1100 Utilities400 Total Expenses2700 Net Income.$ 7300 Tara Inc. Statement of Retained Earnings For the month ended April 30, 2011 Retained earnings, April 1, 2011..$0 Add: Net Income for the month7300 7300 Less: Dividends.(2100) Retained earnings, April 30, 2011.$ 5200 Tara Inc. Balance Sheet As at April 30, 2011 Assets Liabilities Cash$33 300 Accounts Payable.$1800 Accounts Receivable.2000 Office Supplies..3700 Shareholders Equity Land.....18 000 Common Shares..50 000 Retained Earnings..5 200 Total SE.55200 Total Liabilities and Total assets..$ 57 000 shareholders equity.$ 57 000 -Every business transaction involves a debit and a credit -Debit is on the left, and assets are on the right Increases in assets are recorded on the left (debit) Decreases in assets are recorded on the right (credit) Increases in liabilities/SE are recorded on the right (credit) Decreases in liabilities/SE are recorded on the left (debit) Increases in revenues are recorded on the right (credit) Increases in expenses are recorded on the left (debit) -Every account has a balance, which is the difference between the accounts total debits and total credits -In a trial balance, debits should equal credits -Revenues, expenses, net income/loss are reported on the income statement -Assets, liabilities, and shareholders equity are reported on the balance sheet -Dividends and expenses carry debit balances because they represent decreases in shareholders equity -Debit balance -> Dr. ; Credit balance -> Cr. The balance sheet is a statement of financial position (at a specific time) whereas the income statement is a statement of comprehensive income (over a period of time) -income statement and statement of retained earnings are flow statements (for the month ended) where balance sheet is a point in time
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