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ACCT1101 Mid-Term

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12 views4 pages

ACCT1101 Mid-Term

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atk /
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We take content rights seriously. If you suspect this is your content, claim it here.
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Wordings Shits

Week 1
Sole Proprietorship = unincorporated business owned by a single individual.
Partnership = unincorporated business owned by two or more individuals.
Corporation: business incorporated under the laws of a particular state. Ownership is represented
by shares of stock that can be bought and sold freely and operate separately from its owners.

Accounting keeps track of economic activities and facilitates decision-making.

Balance Sheet is a financial snapshot at a specific point in time (i.e., end of the current
accounting period).
> Creditors and shareholders analyze assets to determine if the company has sufficient resources
available to operate
> Creditors and shareholders are concerned about whether the company has sufficient sources of
cash to pay its liabilities (debts)
> Stockholders’ Equity is considered a protective “cushion” to creditors because the creditors’
claims legally come before those of the owners.

The Income Statement measures the business’s performance during the current accounting
period.
> Investors and creditors closely monitor a firm’s net income because it indicates the firm’s
ability to sell goods and services for more than they cost to produce and deliver.
> Investors buy stock when they believe that future earnings will improve and lead to dividends
and the ability to sell their stock for more than they paid.
> Lenders rely on future earnings to provide the resources to repay loans. The income statement
helps investors and creditors estimate the company’s future earnings.

The Statement of Stockholders’ Equity reports the change in each stockholders’ equity
account during the current accounting period.
> Common Stock: Amounts invested in the business by stockholders.
> Retained Earnings: Past earnings not distributed to stockholders (and hence retained by the
company).
> Reinvestment of earnings, or retained earnings, is an important source of financing for
companies.
> Creditors closely monitor a firm’s statement of stockholders’ equity because the company’s
policy on dividend payments affects its ability to repay its debts.
> Investors examine retained earnings to determine whether the company is reinvesting a
sufficient portion of earnings to support future growth.

The Statement of Cash Flows reports inflows and outflows of cash during the current
accounting period.
> Cash Flows from Operating Activities: Related to earning income e.g., cash collected from
customers; cash paid to suppliers and employees.
> Cash Flows from Investing Activities: Related to purchasing or selling the company’s plant,
equipment, and investments.
> Cash Flows from Financing Activities: Related to financing activities e.g., receipt or payment
of money to investors and creditors (except suppliers).

Fundamental characteristics
> Relevance
> Materiality
> Faithful representation
Enhancing characteristics
> Comparability
> Verifiability
> Timeliness
> Understandability

Week 2
Assumptions
Separate entity assumption: business activities must be accounted for separately from the
personal activities of the owners, all other persons, and other entities.
Going concern assumption: the business will continue operating into the foreseeable future, long
enough to meet its contractual commitments and plans.
Monetary unit assumption: the financial statements are reported using the fiat currency (e.g.,
HKD in Hong Kong).
Measurement Concept
Historical cost: balance sheet items are initially recorded at their cost.

Assets = Economic resources owned or controlled by a company; they have measurable value
and are expected to provide future economic benefit.
Liabilities: Obligations resulting from a past transaction; they are expected to be settled in the
future by transferring assets or providing services
Stockholders’ Equity: Represents the residual interest in the assets of the entity after subtracting
liabilities. It is a combination of the financing provided by the owners (stockholders) and by
business operations.

Current ratios reflect whether the firm have the short-term resources to pay its short-term debt
Week 3
Net sales margin reflect how effective is management in generating profit on every dollar of
sales

Week 4
Total Asset Turnover Ratio = Net Sales/Total assets (Average)
It reflects how efficient is management in using its resources to generate sales

Week 5
> FOB destination - the title of the goods changes hands on delivery.
> FOB shipping point - the title of the goods changes hands at the shipping date.
Quick Ratio = Current Assets – Inventory – Prepaid Expenses / Current Liabilities (more

stringent test of short-term liquidity)

Cash Ratio = Cash + Cash Equivalents / Current Liabilities


(adequacy of available cash)

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