Review Notes First Midterm Exam Chapters 2 – 4: Spring 2016 EBD – 301 Accounting and Finance For Entrepreneurs Dr. D.P. EchevarriaAll Rights Reserved1

Chapter 2 Basics of Record Keeping Timely and accurate financial records help to; –Monitor the progress of the business –Prepare financial statements –Identify sources of revenues and expenses –Provide data for preparing tax returns Dr. D.P. EchevarriaAll Rights Reserved2

Chapter 2 Basics of Record Keeping Two Areas of Focus –Financial Accounting Systematic recording of all business transactions Prepare Financial Statement –Balance Sheet –Income Statement (P&L) –Managerial Accounting Using accounting data to analyze the business Dr. D.P. EchevarriaAll Rights Reserved3

Chapter 2 Basics of Record Keeping Two Basic Methods –Single-Entry (best for cash only business) –Double-Entry (Debits and Credits) Decision Criteria –Complexity of the business –IRS requirements Accrual based accounting requires double-entry Dr. D.P. EchevarriaAll Rights Reserved4

Chapter 2 Basics of Record Keeping Double-Entry most popular for recording transactions –Each account has two columns Debit Credit –Each transaction recorded in two accounts The first gets a debit entry The second gets a credit entry Verification of all entries when Debits = Credits Dr. D.P. EchevarriaAll Rights Reserved5

Chapter 2 Basics of Record Keeping G ENERAL J OURNAL –Book of original entry –Special Journals  Ledgers Asset accounts: Cash, Receivables, Inventory Liability Accounts: Payables, Loans Owner’s Equity: Capital, Retained Earnings, Draw Revenues Expenses: Rent, wages, utilities, etc. Dr. D.P. EchevarriaAll Rights Reserved6

C HAPTER 3 Basics of Financial Accounting The systematic recording of transactions that affect the financial aspects of the business –The Fundamental Relationship Assets = Liabilities + Owner’s Equity + Revenues - Expenses –Profits (Losses) = Revenues – Expenses Profits increase the cash account Losses decrease the cash account Dr. D.P. EchevarriaAll Rights Reserved7

C HAPTER 3 Basics of Financial Accounting Double-Entry Accounting –Assets ~ carry debit balances –Liabilities and Equity ~ carry credit balances –Expenses ~ carry debit balances –Revenues ~ carry credit balances Dr. D.P. EchevarriaAll Rights Reserved8

C HAPTER 3 Basics of Financial Accounting T-Account Model –Every transaction will result in at least one debit entry and one credit entry Example #1: Cash Sale –Debit the Cash account –Credit the Revenue account Example #2: Pay a Bill –Debit an Expense account –Credit Cash account Dr. D.P. EchevarriaAll Rights Reserved9

C HAPTER 3 Basics of Financial Accounting Dr. D.P. EchevarriaAll Rights Reserved10

C HAPTER 3 Basics of Financial Accounting Preparing the Trial Balance Preparing the Balance Sheet Preparing the Income Statement Dr. D.P. EchevarriaAll Rights Reserved11

Chapter 4 Financial Statements A. All us own things and owe money B. If we own more than we owe – we are said to have a positive net worth. C. In Accounting & Finance: –What we own are called Assets. –What we owe are called Liabilities. –If our Assets exceed our Liabilities then we have [positive] Equity. –Accordingly: Assets = Liabilities + Equity Dr. D.P. EchevarriaAll Rights Reserved12

Chapter 4 Financial Statements Balance Sheet (2 questions) –How has the business invested its capital (money)? Current Assets (cash, receivables, inventory) Fixed Assets (plant, property, equipment) –How has the business financed its investment? Personal Funds (owner’s capital) Borrowing: short-term (current liabilities) and/or long-term (loan paid back over several years) Trade Credit from suppliers Later: Reinvesting a portion of profits in the business Dr. D.P. EchevarriaAll Rights Reserved13

Chapter 4 Financial Statements Income Statement –Information relating to the firm’s Revenues and Expenses –Revenues have Credit Balances and Expenses have Debit Balances Dr. D.P. EchevarriaAll Rights Reserved14

Chapter 4 Financial Statements Revenues - Cost of Goods Sold Labor + Materials = Gross Profit - Overhead Expenses Utilities, rent, advertising, etc. = Operating Profits (= EBITDA) - Depreciation Expense (non-cash!) = Earnings before Interest & Taxes (EBIT) - Interest Expense = Net Income or Net Profit (2 more steps if corporation) Dr. D.P. EchevarriaAll Rights Reserved15

First Midterm Exam Multiple Choice: 10 pts True False: 5 pts Fill in the blank: 5 pts –Financial Statements (putting accounts in the proper place: B/S, I/S, Revenues and Expenses Recording Transactions: 30 pts –General Journal Entries –General Ledger Entries –Preparing the Trial Balance, B/S and I/S Dr. D.P. EchevarriaAll Rights Reserved16