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ACCOUNTING - CLUTCH

CH. 1 - INTRODUCTION TO ACCOUNTING

CONCEPT: TYPES OF ACCOUNTING

● Financial Accounting – creates information to report to ______________ users

Examples of users:

Laws/Standard Setting: USA follows Generally Accepted Accounting Principles Standards set by Financial Accounting Standards Board ____________ ____________ International follows International Financial Reporting Standards Standards set by International Accounting Standards Board ____________ ____________

● Managerial Accounting – creates information to report to ______________ users

Examples of users:

Laws/Standard Setting: ________________

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CH. 1 - INTRODUCTION TO ACCOUNTING

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CONCEPT: BUSINESS ORGANIZATION

● The income of a Sole Proprietorship completely ________________________ to the owner

□ The owner of the business has ________________ liability for the business’ debt

● A Partnership is generally the same as a _____________________________, only there are multiple owners.

□ The owners of the business generally have _________________ liability for the business’ debt

● A Corporation is a ___________________ entity from the owners of the business

□ Characteristics of a corporation:

- Unlimited life

- Easy transferability of ownership

- Owners have _____________________ liability for the business’ debt

● Hybrid Business Organizations, such as the ___________, have special rules for owner liability.

□ Example: Doctors who formed an LLP are not liable for another doctor’s malpractice

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CONCEPT: USEFUL INFORMATION

● For information to be useful to the user, it must have these two ____________________ qualitative characteristics:

□ Relevance – the information makes a difference in the user’s _______________________

- Predictive Value enables users to ________________ future outcomes

- Confirmatory Value enables users to _______________ previous predictions

□ Faithful Representation – the information is ______________

- Completeness means the company is providing __________ relevant information to users

- Neutrality means that the information is _______________

- Freedom from material error means that there are no _____________ errors in the information

● The ___________ establishes their accounting standards based on its conceptual framework.

● Useful information should also have the following four _________________ characteristics:

□ Comparability – information is _______________ across companies and ________________ with prior periods

□ Verifiability – information can be _____________ for accuracy, completeness, and reliability _____________

□ Timeliness – information is _________________ in time to make meaningful decisions

□ Understandability – the language is ___________________

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● There are also four underlying ____________________ in financial accounting:

□ Monetary Unit – the currency of the accounting information is expected to stay _________________

□ Economic Entity – the company can be separately _______________ from other companies and individuals

- Example: The personal residence of Elon Musk is not included in Tesla’s accounting records

□ Periodicity – the economic life of a company is divided into time periods (__________________ of reporting)

□ Going Concern – the business will __________________ indefinitely

● Finally, there are the _______________________ of financial accounting:

□ GAAP identifies two measurement principles:

- Historical Cost Principle – Companies should record their assets (i.e. what they own) at their cost.

Purchase Land for $50,000 After a year, land increases in value to $60,000

- Fair Value Principle – Companies should report their assets at their current market value

Purchase Apple Stock for $50,000 After a year, stock increases in value to $60,000

□ Full disclosure principle – a company must ____________ all events that would impact user’s decision making

- This helps fulfill the ________________________ requirement of useful information

- Cost constraint – Some information may be too _________ to gather. Must weigh benefits against costs

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CH. 1 - INTRODUCTION TO ACCOUNTING

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CONCEPT: FUNDAMENTAL ACCOUNTING EQUATION

This equation is the foundation of the financial accounting system:

𝐴𝑠𝑠𝑒𝑡𝑠 = 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 + 𝐸𝑞𝑢𝑖𝑡𝑦

● Assets – Anything tangible or intangible ____________ by the company

□ Current Assets – Cash or any asset convertible to cash in less than ___________________

□ Long-term (Fixed) Assets – Assets expected to be used for more than _______________ (i.e. land or machinery)

● Liabilities – Money that the company ____________ to others

□ Current Liabilities – must be paid in under ____________ (i.e. accounts payable or short-term debt)

□ Long-term Liabilities – Payable in over ____________ (i.e. bonds payable)

● Equity has two main components:

□ The money that stockholders paid into the company when the company ___________ raised capital

□ The _____________ accumulated and _______________________ over the course of the company’s lifespan

- Paid-in Capital – the amount that stockholders have _________________ in the corporation

- Retained Earnings – income from _____________________ that has not been distributed as dividends

- Revenues – ____________ of resources (generally cash) from delivering goods or services to customers

- Expenses – ____________ of resources from receiving goods or services from outsiders

- Dividends – payments to shareholders that are taken from _________________________

DIVIDENDS ARE ________ AN EXPENSE!

- Income/Loss – the net amount of revenue minus expenses will result in income or loss.

Income and Profit are synonymous; Revenue is not the same as Income!

EXAMPLE: Equity when purchasing a home

The home costs $150,000 and you make a $30,000 down payment. The remainder is a mortgage from the bank.

You pay back $20,000 of the principal on the mortgage.

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CH. 1 - INTRODUCTION TO ACCOUNTING

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PRACTICE: A company has assets totaling $50,000 and equity of $20,000. What are their liabilities?

a) $0

b) $20,000

c) $30,000

d) $70,000

PRACTICE: A company has liabilities of $25,000 and assets of $35,000. What is the company’s equity?

a) $10,000

b) $20,000

c) $30,000

d) $60,000

PRACTICE: If a company has liabilities of $65,000 and equity of $25,000, what are the company’s assets worth?

a) $25,000

b) $40,000

c) $60,000

d) $90,000

ACCOUNTING - CLUTCH

CH. 1 - INTRODUCTION TO ACCOUNTING

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CONCEPT: THE FINANCIAL STATEMENTS

There are __________ main financial statements that are required by _________ and reported by companies:

● Balance Sheet – shows ____________ and how they are financed at a _____________________

□ __________________ = __________________ + __________________

● Income Statement – shows the firm’s __________ and _______________ over a ___________________

□ __________________ - __________________ = __________________

● Statement of Cash Flows – shows how the firm’s ___________ changed over a _______________________

● Statement of Stockholder’s Equity – shows how the firm’s ___________ changed over a _____________________

□ Some small companies might just show a Statement of Retained Earnings

The financial statements follow a flow when being assembled:

Accounts are going to fall into one of _________ broad categories, it is important to be able to classify an account by its title

Assets – ____________________________

Cash and cash equivalents Accounts “Receivable” Inventory

Investments Prepaid Expenses Buildings

Land Machinery Long-term Investments

Equipment Patents

Liabilities – __________________________

Accounts “Payable” “Accrued” Expenses Income Taxes “Payable”

Notes Payable Bonds Payable Current Portion of LT Debt

Equity – ____________________________

Common Stock Additional Paid-in Captial Retained Earnings

Preferred Stock Treasury Stock

Revenue – ___________________________

“Sales” “Revenue” Fees Earned

Expenses – __________________________

“Expense”

Income Statement

Statement of Stockholder's

Equity

Balance Sheet

Statement of Cash Flows

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CH. 1 - INTRODUCTION TO ACCOUNTING

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PRACTICE: Label the following accounts as either Asset, Liability, Equity, Revenue, or Expense

Accounts Receivable Accrued Expenses Notes Payable

Land Common Stock Retained Earnings

Prepaid Expenses Bonds Payable Accounts Payable

Marketable Securities Additional Paid-in Capital Unearned Revenue

Machinery Inventory Supplies

Customer Deposits Cash Investment in Apple

Common Stock

Treasury Stock Preferred Stock Restricted Cash

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CH. 1 - INTRODUCTION TO ACCOUNTING

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CONCEPT: SAMPLE FINANCIAL STATEMENTS – COCA COLA

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