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86 Cards in this Set
- Front
- Back
an event between an entity and its environment |
external event |
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an event that occurs entirely within an entity |
internal event |
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Revenue is recorded when... |
services are performed |
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Expenses are recognized when... |
occurred |
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Types of adjusting entries |
1. Prepaid Expense 2. Unearned revenue 3. accrued revenue 4. accrued expense |
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a deferral; expense paid before used |
Prepaid exp |
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a deferral; payment received before service is performed |
unearned revenue |
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accrual; revenue performed before payment |
accrued revenue |
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accrual; expense incurred but not yet paid |
accrued expense |
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Journal entry for prepaid expense |
supplies cash
supplies exp supplies |
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journal entry for unearned revenue |
unearned rev rev |
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journal entry for accrued revenue |
A/R rev |
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journal entry for accrued exp |
exp A/P |
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Rent, (airline/concert/season) tickets, tuition, magazine subscription are examples of: |
unearned revenue |
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Salaries/wages, bad debt are examples of: |
accrued expenses |
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Permanent/real accounts |
Accounts that are not closed; balance sheet accounts |
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Accounting Cycle |
1. journal 2. general ledger 3. trial balance 4. adjusting entries (journal and ledger) 5. adjusted trial balance 6. financial statements 7. closing entries 8. post closing trial balance 9. optional reversing entries |
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Gains and losses result from |
peripheral or incidental transactions |
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Acceptable presentations of the income statement include |
single step, multiple step, condensed |
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How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? |
Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate |
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Which kind of concept has the accounting profession adopted for income reporting? |
A modified all inclusive concept; it requires application of this approach in practice |
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The transaction approach focuses on... |
the income related activities that have occurred during the period, including revenues, expenses, gain, and losses |
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The income statement evaluates: |
past performance and helps predict future performance |
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Management needs to meet/exceed expectations for positive effect; Is reduced if is less useful for predicting future information |
Quality of Earnings |
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Form of income statement that emphasizes total revenue and total expenses |
Single Step |
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Form of income statement that shows intermediate components; Separates operating and non operating |
Multiple Step |
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Intermediate Components |
Operating section Non operating section Income tax Discontinued Operations Extraordinary Items Interest EPS |
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Unusual/Irregular Income Items |
1. Unusual Gains/Losses 2. discontinued operations 3. extraordinary items 4. noncontrolling interest |
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Occurs when a) company eliminates the results of operations of a component of the business, and b) there is no significant involvement in that component after the disposal transaction;
reported net of tax |
discontinued operations |
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Nonrecurring material items that differ slightly from a company's typical business activities;
Must meet both criteria a) unusual nature b) infrequent occurrence;
reported net of tax |
extraordinary items |
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Earnings per Share = |
(Net Income - Preferred Dividends) / (Weighted Average of Common Shares Outstanding) |
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A retrospective adjustment that preserves comparability across years;
will be offset by retained earnings |
Change in accounting principle
ex. FIFO --> LIFO |
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Single Step Income Statement |
Rev - Exp ________ Net Income EPS |
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Multiple Step Income Statement |
Sales -COGS ________ Gross Profit -Operating Exp (Selling & Admin) ________ Income from Operations + Other Rev/Gains - Other Exp/Losses ________ Income before Income Tax - Income Tax ________ Net Income EPS |
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Restrictions on R/E are disclosed in financial statement notes as |
appropriated retained earnings |
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All change in equity during a period except those resulting from investments by owners and distributions to owners |
comprehensive income |
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gains and losses that bypass net income but affect stockholder's equity |
other comprehensive income |
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ratios that measure how effectively the company uses its assets |
activity ratios |
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types of coverage ratios |
debt to total assets times interest earned cash debt coverage book value per share free cash flow |
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how well debt can be paid off |
solvency |
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accounting information system |
collects and processes transaction data; spreads financial information to interested parties |
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factors that shape the accounting information system |
- the transactions in which the business engages - the informational demands of management - the volume of data to be handled |
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parts of a journal entry |
1. account/amount debited 2. account/amount credited 3. date 4. explanation |
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book value |
the depreciated cost of an asset |
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when a company makes reversing entries, |
it debits all cash payments of expenses to the related expense account |
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Columns generally found on a worksheet include |
trial balance adjustments adjusted trial balance income statement balance sheet |
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the title of the account when a company transfers an amount of restricted retained earnings into a different account |
appropriated retained earnings |
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also known as statement of financial position |
balance sheet |
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usefulness of the balance sheet |
- assesses risk and future cash flow - analyzes liquidity, solvency, & financial flexibility - evaluates capital structure - computes rate of return |
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limits of the balance sheet |
- most assets and liabilities are reported at historical cost - use of judgements and estimates - many items of financial value are often omitted |
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current assets (in order) |
cash short term investments A/R inventory prepaid expenses |
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short term highly liquid investments that mature within 3 months or less |
cash equivalents |
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ST or LT Investments |
Held to Maturity Trading Available for Sale |
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Held to Maturity |
intend to hold to maturity, debt, amortized cost, current/non current |
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Trading Investment |
intend to sell in the near future, debt/equity, fair value, current |
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Available for Sale |
not intended to hold to maturity and not intended to sell in the near future, debt/equity, fair value, current/noncurrent |
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Long Term Investments |
securities tangible fixed assets special funds non consolidated subsidiaries |
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current liabilities |
notes payable accounts payable unearned revenue tax payable |
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long term liabilities |
long term debt capital lease deferred income tax |
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section of the statement of cash flows that deals with core activities |
operating |
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section of the statement of cash flows that deals with long term assets and investments |
investing |
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section of the statement of cash flows that deals with interactions between company and its creditors/owners |
financing |
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significant non cash activities |
issuance of common stock for assets issuance of bonds for common stock issuance of debt for assets exchanging of long term assets |
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how much discretionary cash a company has; the higher, the better |
free cash flow |
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free cash flow equation |
Net cash provided by operating activities - capital expenditures - dividends |
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material events that have uncertain outcomes |
contingencies |
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explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries, etc |
accounting policies |
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explanations of certain restrictions or covenants attached to specific assets, or more likely, to liabilities |
contractual situations |
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the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date |
fair value |
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ratios that measure the company's short term ability to pay its maturing obligations |
liquidity ratios |
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ratios that measure the degree of success or failure of a given company or division for a given period of time |
profitability ratios |
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ratios that measure the degree of protection for long term creditors and investors |
coverage ratios |
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examples of liquidity ratios |
current ratio quick or acid-test ratio current cash debt coverage
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examples of activity ratios |
accounts receivable turnover inventory turnover asset turnover |
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examples of profitability ratios |
profit margin on sales return on assets return on common stock equity earnings per share price earnings ratio payout ratio |
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noncontrolling interest is reported as |
a separate item below net income or loss as an allocation of the net income or loss; not an item of income or expense |
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Stockholder's equity accounts for proprietorship or partnership |
owner's capital, owner's drawing |
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stockholder's equity accounts for corporation |
common stock, paid in capital, dividends, retained earnings |
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revenues recorded when |
services are performed |
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expenses recognized when |
occurred |
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the nature of expense method is |
simple to apply |
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the function of expense method |
is viewed as more relevant because it identifies the major cost drivers of the company and therefore helps users assess whether the amounts are appropriate of the revenue gathered |
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change in estimate |
only prospective, not retrospective (no add/subt to "fix" the past --> no journal entry)
accounted for in the period of change and future periods (if affected)
not considered errors
ex: inventory obsolescence, allowance for uncollected a/r |
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result from mathematical mistakes, misuse of facts, accounting principle application mistakes;
treated as prior period adjustment |
correction of errors |
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advantage/disadvantage to one statement comprehensive income statement |
(+) no new financial statement
(-) net income is a subtotal |
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adjustments are often prepared |
after balance sheet date but dated as of balance sheet date |