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86 Cards in this Set

  • Front
  • Back

an event between an entity and its environment

external event

an event that occurs entirely within an entity

internal event

Revenue is recorded when...

services are performed

Expenses are recognized when...

occurred

Types of adjusting entries

1. Prepaid Expense


2. Unearned revenue


3. accrued revenue


4. accrued expense

a deferral; expense paid before used

Prepaid exp

a deferral; payment received before service is performed

unearned revenue

accrual; revenue performed before payment

accrued revenue

accrual; expense incurred but not yet paid

accrued expense

Journal entry for prepaid expense

supplies


cash



supplies exp


supplies

journal entry for unearned revenue

unearned rev


rev

journal entry for accrued revenue

A/R


rev

journal entry for accrued exp

exp


A/P

Rent, (airline/concert/season) tickets, tuition, magazine subscription are examples of:

unearned revenue

Salaries/wages, bad debt are examples of:

accrued expenses

Permanent/real accounts

Accounts that are not closed; balance sheet accounts

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

Gains and losses result from

peripheral or incidental transactions

Acceptable presentations of the income statement include

single step,


multiple step,


condensed

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

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

The transaction approach focuses on...

the income related activities that have occurred during the period, including revenues, expenses, gain, and losses

The income statement evaluates:

past performance and helps predict future performance

Management needs to meet/exceed expectations for positive effect;


Is reduced if is less useful for predicting future information

Quality of Earnings

Form of income statement that emphasizes total revenue and total expenses

Single Step

Form of income statement that shows intermediate components;


Separates operating and non operating

Multiple Step

Intermediate Components

Operating section


Non operating section


Income tax


Discontinued Operations


Extraordinary Items


Interest


EPS

Unusual/Irregular Income Items

1. Unusual Gains/Losses


2. discontinued operations


3. extraordinary items


4. noncontrolling interest

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

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

Earnings per Share =

(Net Income - Preferred Dividends) / (Weighted Average of Common Shares Outstanding)

A retrospective adjustment that preserves comparability across years;



will be offset by retained earnings

Change in accounting principle



ex. FIFO --> LIFO

Single Step Income Statement

Rev


- Exp


________


Net Income


EPS

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

Restrictions on R/E are disclosed in financial statement notes as

appropriated retained earnings

All change in equity during a period except those resulting from investments by owners and distributions to owners

comprehensive income

gains and losses that bypass net income but affect stockholder's equity

other comprehensive income

ratios that measure how effectively the company uses its assets

activity ratios

types of coverage ratios

debt to total assets


times interest earned


cash debt coverage


book value per share


free cash flow

how well debt can be paid off

solvency

accounting information system

collects and processes transaction data;


spreads financial information to interested parties

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

parts of a journal entry

1. account/amount debited


2. account/amount credited


3. date


4. explanation

book value

the depreciated cost of an asset

when a company makes reversing entries,

it debits all cash payments of expenses to the related expense account

Columns generally found on a worksheet include

trial balance


adjustments


adjusted trial balance


income statement


balance sheet

the title of the account when a company transfers an amount of restricted retained earnings into a different account

appropriated retained earnings

also known as statement of financial position

balance sheet

usefulness of the balance sheet

- assesses risk and future cash flow


- analyzes liquidity, solvency, & financial flexibility


- evaluates capital structure


- computes rate of return

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

current assets (in order)

cash


short term investments


A/R


inventory


prepaid expenses

short term highly liquid investments that mature within 3 months or less

cash equivalents

ST or LT Investments

Held to Maturity


Trading


Available for Sale

Held to Maturity

intend to hold to maturity,


debt,


amortized cost,


current/non current

Trading Investment

intend to sell in the near future,


debt/equity,


fair value,


current

Available for Sale

not intended to hold to maturity and not intended to sell in the near future,


debt/equity,


fair value,


current/noncurrent

Long Term Investments

securities


tangible fixed assets


special funds


non consolidated subsidiaries

current liabilities

notes payable


accounts payable


unearned revenue


tax payable

long term liabilities

long term debt


capital lease


deferred income tax

section of the statement of cash flows that deals with core activities

operating

section of the statement of cash flows that deals with long term assets and investments

investing

section of the statement of cash flows that deals with interactions between company and its creditors/owners

financing

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

how much discretionary cash a company has; the higher, the better

free cash flow

free cash flow equation

Net cash provided by operating activities


- capital expenditures


- dividends

material events that have uncertain outcomes

contingencies

explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries, etc

accounting policies

explanations of certain restrictions or covenants attached to specific assets, or more likely, to liabilities

contractual situations

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

ratios that measure the company's short term ability to pay its maturing obligations

liquidity ratios

ratios that measure the degree of success or failure of a given company or division for a given period of time

profitability ratios

ratios that measure the degree of protection for long term creditors and investors

coverage ratios

examples of liquidity ratios

current ratio


quick or acid-test ratio


current cash debt coverage


examples of activity ratios

accounts receivable turnover


inventory turnover


asset turnover

examples of profitability ratios

profit margin on sales


return on assets


return on common stock equity


earnings per share


price earnings ratio


payout ratio

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

Stockholder's equity accounts for proprietorship or partnership

owner's capital,


owner's drawing

stockholder's equity accounts for corporation

common stock,


paid in capital,


dividends,


retained earnings

revenues recorded when

services are performed

expenses recognized when

occurred

the nature of expense method is

simple to apply

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

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

result from mathematical mistakes, misuse of facts, accounting principle application mistakes;



treated as prior period adjustment

correction of errors

advantage/disadvantage to one statement comprehensive income statement

(+) no new financial statement



(-) net income is a subtotal

adjustments are often prepared

after balance sheet date but dated as of balance sheet date