What is the primary purpose of financial accounting? Tap to reveal

To provide useful financial information to external users so they can make decisions about a business.

Who are some common external users of financial accounting information? Tap to reveal

Investors, creditors, lenders, and other people or organizations outside the company.

What are the four primary financial statements? Tap to reveal

Income statement
Statement of stockholders' equity
Balance sheet
Statement of cash flows

Which financial statement reports a company's assets, liabilities, and stockholders' equity at a specific point in time? Tap to reveal

The balance sheet.

Which financial statement reports revenues and expenses for a period of time? Tap to reveal

The income statement.

How is net income calculated? Tap to reveal

Revenues - Expenses = Net Income

How does net income affect retained earnings? Tap to reveal

Net income increases retained earnings.

How are ending retained earnings calculated? Tap to reveal

Beginning retained earnings + Net income - Dividends = Ending retained earnings

What is an asset? Tap to reveal

A resource controlled by the company that is expected to provide future economic benefit.

A company orders a delivery van, but the van has not yet been delivered. Is the van an asset of the company? Tap to reveal

No. The company does not yet control the van.

A company owns a van that is currently being used by an employee on a sales call. Is the van still an asset? Tap to reveal

Yes. The company still controls the van and expects it to provide future benefit.

A company uses gasoline while driving its delivery van. Is the gasoline still an asset after it has been used? Tap to reveal

No. Once the gasoline has been used, its future benefit has been consumed, so it becomes an expense.

What is the difference between accounts payable and notes payable? Tap to reveal

Accounts payable usually results from purchases made on account.

Notes payable involves a formal written promise to repay borrowed money.

Does earning revenue always mean a company received cash? Tap to reveal

No. A company can earn revenue for cash or on account.

What happens when a company performs services on account? Tap to reveal

Accounts receivable increases and revenue increases.

Are dividends an expense? Tap to reveal

No. Dividends are distributions to owners. They reduce retained earnings but are not expenses.

What does the idea "every resource has a source" mean? Tap to reveal

Every asset must be financed by either creditors through liabilities or owners through stockholders' equity.

What does comparability mean in financial reporting? Tap to reveal

Financial information can be meaningfully compared across companies or across different periods for the same company.

What does verifiability mean in financial reporting? Tap to reveal

Independent knowledgeable people can reach similar conclusions using the same information.

What is the first thing you should do when given a business transaction? Tap to reveal

Analyze the transaction. Determine which accounts are affected and how each account changes.

What is the basic Chapter 2 process for handling transactions? Tap to reveal

Analyze → Record → Summarize

What does "debit" mean? Tap to reveal

Debit means left.

What does "credit" mean? Tap to reveal

Credit means right.

Does debit mean decrease and credit mean increase? Tap to reveal

No. Debit means left and credit means right. Whether an account increases or decreases depends on the type of account.

What is an account's normal balance? Tap to reveal

The normal balance is the side of the account where increases are recorded.

Which types of accounts normally increase with a debit? Tap to reveal

Assets, expenses, and dividends.

Which types of accounts normally increase with a credit? Tap to reveal

Liabilities, common stock, retained earnings, and revenues.

What is a T-account used for? Tap to reveal

A T-account summarizes increases, decreases, and the resulting balance of an individual account.

In a journal entry, which account is written first? Tap to reveal

The debit account is written first. The credit account is listed underneath and indented.

What must always be true of total debits and total credits in a journal entry? Tap to reveal

Total debits must equal total credits.

A company buys equipment for cash. Which accounts are affected? Tap to reveal

Equipment increases and cash decreases.

Both are asset accounts, so total assets do not change.

A company purchases supplies on account. What is the journal entry? Tap to reveal

Debit supplies
Credit accounts payable

A company performs services for cash. What is the journal entry? Tap to reveal

Debit cash
Credit revenue

A company borrows money from a bank by signing a note. What is the journal entry? Tap to reveal

Debit cash
Credit notes payable

What does a trial balance tell you? Tap to reveal

It shows whether total debit balances equal total credit balances.

It does not prove that every transaction was recorded correctly.

What is a current asset? Tap to reveal

An asset expected to be converted to cash, sold, or used within one year or the company's operating cycle, whichever is longer.

Is a note payable due in two years normally classified as a current liability? Tap to reveal

No. A note payable due in two years is generally classified as a noncurrent liability.

How is the current ratio calculated? Tap to reveal

Current assets ÷ Current liabilities

What does the current ratio help evaluate? Tap to reveal

A company's ability to pay its short-term obligations using its current assets.

A company uses cash to buy equipment. What happens to its current ratio, assuming everything else stays the same? Tap to reveal

The current ratio decreases because cash, a current asset, decreases while equipment, a noncurrent asset, increases. Current liabilities do not change.