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186 Cards in this Set
- Front
- Back
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What is accounting often called?
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The language of business
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What does accounting do?
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Measures financial aspects of a business
Communicates this information to decision makers |
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Why should everyone in business study accounting?
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Business decisions are based on accounting information. Since accounting information is prepared accorder to "rules," an understanding of these rules is necessary for the appropriate use of the information
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What are the 2 types of Accounting Systems?
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1. Financial Accounting System
2. Managerial Accounting System |
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Explain the financial accounting system
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Preparation of 4 basic financial statements
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Explain the managerial accounting system
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The preparation of detailed plans, forecasts, and reports
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What type of decision makers come from the financial accounting system? Give examples.
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External Decision Makers (investors, creditors, suppliers, customers, etc.)
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What kind of decision makers come with the managerial accounting system? Give examples
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Internal decision makers (managers throughout the organization)
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What is the objective of external financial reporting?
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To provide useful economic information to external users for decision making and for assessing future cash flows
i.e. to provide useful information for decision making |
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What are the 4 types of financial statements?
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1. Balance Sheet
2. Income Statement 3. Statement of changes in equity 4. Statement of cash flows |
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What type of statement is a balance sheet?
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a point in time statement
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What 3 essential elements make up the balance sheet?
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1. assets
2. liabilities 3. owner's equity |
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What does the accounting equation say?
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Assets=liabilities + Equity
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Define asset
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An economic resource used by a business to produce revenue (i.e. something of value)
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What are the assets that we've studies so far? Name some additional assets.
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Cash
Acounts Receivable Interest Receivable CD Land Additional assets that could be on test: property, machinery/equipment, inventory |
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Define liability
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Obligation of business to provide assets or services in the future (i.e. something owed-the creditors' share of the assets)
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What liabilities could be on exam? Name additional ones that could be on exam
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Liabilities: Salaries Payable
Interest Payable Notes Payable Additional: Accounts Payable Loans Payable Mortgages Payable (They are all identified w/ the word payable) |
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Define owner's equity
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The owner's residual interest (i.e. what's life0the owners' share of the assets)
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What are the 2 accounts in Owner's Equity?
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1. Common Stock
2. Retained Earnings |
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What is equity?
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The owner's share
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What are the 2 sources of equity?
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1. equity received from the owners by issuing "common stock"
2. equity earned by operated: "Retained Earnings" |
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What is the expanded accounting equation?
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Assets-Liabilities + Common Stock + Retained Earnings
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What type of statement is the income statement?
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period of time statement
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What are the 3 main components of the income statement? Then put it into an equation
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1. Revenues
2. Expenses 3. Net Income EQUATION: Revenue - Expenses=Net Income |
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What type of statement is the statement of changes in equity?
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a period of time statement
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What are 2 parts to the statement of changes in equity?
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1. Start with our beginning common stock and we add stock issued. This gives us our Ending Common Stock
2. Beginning Retained Earnings + Net Income - Dividents=Ending Retained Earnings |
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What type of statement is the statement of cash flows?
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period of time statement
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What are the 3 categories in the statement of cash flows?
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1. Cash flows from operating activities
2. Cash flows from investing activities 3. Cash flows from financing activities |
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How do you find the ending cash balance?
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Take net change in cash and add the beginning cash balance
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Define footnotes
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Not a financial statement but information providing important support to the financial statements
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What does GAAP stand for?
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Generally Accepted Accounting Principles
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Explain the GAAP history
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Federal Government Congress came up with Securities Act of 1933 and Securities and Exchange Act of 1934. The Securities and Exchange Commission (SEC) was then established and given broad powers to determine measurement rules for financial statements. (The SEC has worked closely with the accounting profession to develop the rules that have become known as GAAP. Currently, the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP
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Why is GAAP important?
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It provides uniformity to the accounting system
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Define Accrual Basis Accounting
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a method of accounting that records effects of accounting events in the period in which such events occur, regardless of when cash is exchanged
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Define Cash Basis Accounting
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Revenue is recorded when cash is received and expenses are recorded when cash is paid
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Which accounting method is not GAAP
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Cash Basis Accounting
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Under Accrual Basis Accounting, we have _____________. Further explain this:
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Statement of cash flows; Because revenues reported do not always equal cash collected and expenses reported do not always = cash paid, income is usually not equal to the change in cash for the period
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How do we fine interest?
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i=prt
interest=principle * rate * time |
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Define accrual
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Recognize an event before cash is exchanged
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What decessitate the use of adjusting entries?
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accrual and deferrals
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Define adjusting entry
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an entry required at the end of the accounting period to properly state the income statement and balance sheet.
i.e. adjusting entries update the account balances prior to the creation of financial statements |
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What principles affect income determination?
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1. The revenue principle
2. The matching principle 3. The cost principle |
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Define revenue
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increase in assets or decrease in liabilities resulting from the operations of the business
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What is the revenue principle?
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Recognize revenues when:
1. Earnings process is complete or nearly complete, 2. An exchange transaction takes place, and 3. Collection is reasonably assured |
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Define Expense
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Decrease in assets or increase in liabilities that result from the revenue generation process
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What is the matching principle?
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Resources consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid
i.e. expenses are matched with the revenue they help to generate (Not vice-versa) |
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What is the historical cost principle?
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Items are recorded in the financial statements at their historical, cash equivalent cost (i.e. the price that was paid)
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Record used for the classification and summary of transaction data
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account
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Service-based profession that provides reliable and relevant financial information useful in making decisions
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Accounting
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Expression of the relationship between the assets and the claims on those assets
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Accounting equation
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Economic occurrence that causes changes in an enterprise's assets, liabilities, and/or equity
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accounting event
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Span of time covered by the financial statements, normally one year, but may be semiannually, quarterly, and monthly
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accounting period
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Document in which an organization provides information to stockholders, usually on an annual basis
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annual report
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Economic resource used by a business for the production of revenue
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asset
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Transaction that increases an asset and a claim on assets; three types of asset source transactions are acquired from owners (equity), borrowed from creditors (liabilities), or earned through operations (revenues)
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asset source transaction
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Statement that lists the assets of a business and the corresponding claims (liabilities and equity) on those assets
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balance sheet
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Owners' and creditors' interests in a business's assets
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claims
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Process of transferring balances from nominal accounts (Revenue, Expense, and Dividents) to the permanent account (Retained Earnings)
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Closing the Accounts
OR Closing |
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Basic class of corporate stock that carries no preferences as to claims on assets or dividends, certificates that evidence ownership in a company
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common stock
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Individual or institution that las loaned goods or services to a business
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creditor
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Transfer of wealth from a business to its owners
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dividend
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Method of keeping records that provides a system of checks and balances by recording transactions in a dual format
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double-entry bookkeping
OR double-entry accounting |
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The difference between the cost of a product or service and the selling price of that product or service. Same as net income or profit
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Earnings
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Primary components of financial statements including assets, liabilities, equity, contributions, revenue, expenses, distributions, and net income
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elements
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Specific unity (individual, business, or institution) for which the accountant records and reports economic information; has boundaries that are distinct and separate from those of the owners, creditors, managers, and employees
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entity
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Portion of assets remaining after the creditors' claims have been satisfied; also called called residual interest or net assets
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equity
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Accounting information designed to satisfy the needs of an organization's external users, including business owners, creditors, and government agencies
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Financial accounting
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Privately funded organization with the primary authrotiy for the establishment of accounting standards in the United States
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Financial Accounting Standards Board (FASB)
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Money or credit arrangements supplied to a business by investors (owners) and creditors
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financial resources
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Primary means of communicating the financial information of an organization to the external users.
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financial statements
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Cash transactions associated with owners and creditors; also one of the 3 categories of cash inflows and outflows shown on the statement of cash flows. This category of cash activities shows the amount of cash provided by these resource providers and the amount of cash that is reutrned to them
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financing activities
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Complete set of accounts used in accounting systems
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general ledger
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Rules and regulations that accountants agree to follow when preparing financial reports for public distribution
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GAAP
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Arrangement of a set of financial statements horizontally across a sheet of paper
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horizontal statements model
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Added value created in transforming resources into more desirable states
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income
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Statement that measures the difference between the asset increases and the asset decreases associated with running a business. This definition is expanded in subsequent chapters as additional relationships among the elements of the financial statements are introduced
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income statement
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Fee paid for the use of borrowed funds; also refers to revenue from debt securities
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interest
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One of the 3 categories of cash inflows and outflows shown on the statement of cash flows; include cash received and spent by the business on productive assets and investments in the debt and equity of other companies
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investing activities
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Company or individual who gives assets or services and receives a security certificate in exchange
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investor
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Both intellectual and physical labor used in the process of converting goods and services to products of greater value
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labor resources
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Obligations of a business to relinquish assets, provide services, or accept other obligations
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liabilities
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Process of dividing up the assets and returning them to the resource providers. Creditors normally receive first priority in business liquidations; in other words, assets are distributed to creditors first. After creditor claims have been satisfied, the remaining assets are distributed to the investors (owners) of the business
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liquidation
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Ability to convert assets to cash quickly and meet short-term obligations
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liquidity
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Branch of accounting that provides information useful to internal decision makers and managers in operating an organization
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managerial accounting
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Makers of goods sold to customers
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manufacturing companies
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Gathering of people or organizations for the purpose of buying and selling resources
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market
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Companies that buy and sell merchandise inventory
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merchandising businesses
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Portion of the assets remaining after the creditors' claims have been satisified; also called equity or residual interest
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net assets
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Increase in net assets resulting from operating activities
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net income
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Decrease in net assets resulting from operating activities
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net loss
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accounts that contain information applicable to a single accounting period; sometimes called temporary accounts
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nominal accounts
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Organizations whose primary motive is something other than making a profit, such as providing goods and services for the social good. Examples include state-supported universitites and colleges, hospitals, public libraries, and public charities
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not-for-profit entities
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1 of the 3 categories of cash inflows and outflows shown on the statement of cash flows; show the amount of cash generated by revenue and the amount of cash spent for expenses
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operating activities
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accounts that contain information transferred from 1 accounting period to the next
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permanent accounts
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Natural resources used in the transformation process to create resources of more value
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physical resources
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Ratio of the selling price per share to the earnings per share; generally, a higher P/E ratio indicates that investors are optimistic about a company's future
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Price-earnings (P/E) ratio
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Assets used to operate the business; frequently called long-term assets
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productive assets
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Value created by transforming goods and services to more desirable states
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profit
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The particular business or other organization for which financial statements are prepared
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reporting entities
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Portion of the assets remaining after the creditors' claims have been satisfied; also called equity or net assets
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residual interest
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Increase in equity that results from the retention of assets obtained through the operation of the business
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Retained earnings
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Increase in assets or a decrease in liabilities that results from the operating activities of the business
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Revenue
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Organizations-accountants, lawyers, and dry clearners-that provide services to consumers
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service organizations
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Parties interested in the operations of a business, including owners, lenders, employees, suppliers, customers, and government agencies
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stakeholders
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Statement that explains how a business obtained and used cash during an accounting period
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statement of cash flows
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Statement that summarizes the transactions occurring during the accounting period that affected the owners' equity
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statement of changes in stockholders' equity
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Simultaneous display of a set of financial statements
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statement model
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Owners of a corporation
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stockholders
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Stockholders' equity represents the portion of the assets that is owned by the stockholders
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stockholders' equity
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Accounts used to collect information for a single accounting period (usually revenue, expense, and distribution accounts)
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temporary accounts
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Particular event that involves the transfer of something of value between 2 entities
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transaction
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Individuals or organizations that use financial information for decision making
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users
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Arrangement of a full set of financial statements on a single page with account titles arranged from the top to the bottom of the page
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vertical statements model
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A cycle consisting of these stages: recording accounting data, adjusting the accounts, preparing the financial statements, and closing the nominal accounts; when one accounting cycle ends, a new one begins
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accounting cycle
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Expected future cash receipts arising from permitting customers to buy now and pay later; usually are small with a short term to maturity
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accounts receivable
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Recognition of events before exchanging cash
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accrual
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Method of accounting that records the effects of accounting events in the period in which such events occur regardless of when cash is exchanged
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accrual accounting
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Entry that updates account balances prior to preparing financial statements
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adjusting entry
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Audit opinion for a set of financial statements issued by a certified public accountant that means that part of or all of the financial statements are not in compliance with GAAP and the auditors believe this noncompliance would be material to the average prudent investor
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adverse opinion
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Set of ethical rules and guidelines above and beyond the requirements of laws and regulations that certified public accountants must follow
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American Institute of Certified Public Accountants' Code of Professional Conduct
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A transaction that decreases one asset while increasing another asset so that total assets do not change; for example, the purchase of land with cash
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asset exchange transaction
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Transaction that increases an asset and a claim on assets; 3 types of asset source transactions are acquired from owners (equity), borrowed from creditors (liabilities), or earned through operations (revenues.)
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asset source transaction
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Transaction that decreases an asset and a claim on assets; the 3 types are distributions (transferred to owners), liabilities (used to pay creditors), or expenses (used to operate the business)
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asset use transaction
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Detailed examination of a company's financial statements and the documents that support the infromation presented in these statements
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audit
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Accountant who has met certain educational and experiential requirements and is licensed by the state government to provide audit services to the public
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certified public accountant (CPA)
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Transaction that decreases one claim and increases another so that total claims do not change. For example, the accrual of interest expense is a claims exchange transaction; liabilities increase, and the recognition of the expense causes retained earnings to decrease
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Claimes exchange transaction
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Entries used to transfer the balances in the revenue, expense, and dividends accounts to the Retained Earning account at the end of the accounting period
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closing entries
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A set of guidelines established by the American Institute of Certified Public Accountants to promote high ethical conduct among its membership
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code of professional conduct
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position that an auditor can take with respect to financial statements when there is not enough informatin to confirm compliance or noncompliance with GAAP; is neither positive nor negative
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disclaimer of audit opinion
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Asset used in the process of generating revenues. Decrease in assets or increase in liabilities that occurs in the process of generating revenue.
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expense
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Detailed examination of a company's financial statements and the documents that support the information presented in those statements; includes a verification process that tests the reliability of the underlying accounting system used to produce the financial reports
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financial audit
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Actual price paid for an asset when it was purchased
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historical cost
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Certified public accountant licensed to perorm audits who is independent of the company being audited
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independent auditor
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A company's policies and procedures designed to reduce the opportunity for fraud and to provide reasonable assurance that its objectives will be accomplished
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internal controls
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Commitment of assets (usually cash) by a business to acquire other assets that will be used to produce revenue
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investment
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individual or business borrowing funds (the party receiving the cash when a note is issued)
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issuer of a note
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Process of matching expenses with the revenues they produce; 3 ways to match expenses w/ revenues include matching expenses directly to revenues, matching expenses to the period in which they are incurred, and matching expenses systematically with revenues
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matching concept
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error or otehr reporting problem that, if known, would have influenced the decision of an average prudent investor
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material error
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Liability that results from the execution of a legal document called a note that describes technical terms, including interest charges, maturity date, collateral, and so on
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note payable
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Expenses matched to the period in which they are incurred regardless of when cash payments for them are made; costs that cannot be directly traced to products but are usually recognzied as expenses in the period in which they are incurred
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period costs
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Opinion issued by a CPA that falls between an unqualified opinion and an adverse opinion; means that for the most part, the company's financial statements are in compliance with GAAP, but the auditors have reservations about something in the statements or have other reasons not to give a fully unqualified opinion; reasons that a qualified opinion is being issued are explained in the auditor's report
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qualified opinion
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a term that usually refers to transactions that involve the collection or payment of cash
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realization
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recording an accounting event in the financial statements
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recognition
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Increase in assets or a decrease in liabilities that results from the operating activities of the business
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revenue
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amounts of future cash payments owed to employees for services that have already been performed
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salaries payable
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Opinion on financial statements audited by a CPA that means the auditor believes the financial statements are in compliance w/ GAAP
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unqualified opinion
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Professinal responsibility to clients that forbids CPAs from voluntarily disclosing information obtained as a result of their client-accounting relationships
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voluntarily disclosing
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Analyze the following transaction:
The company started when it acquired $40,000 cash from the issue of common stock |
EVENT: Stock Issue
Cash-40,000 Common Stock-40,000 Cash Flow in amount of 40,000 FA |
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Analyze the following transaction:
Recognized $97,000 of revenue on account during the period for services performed |
EVENT: Revenue on Acct.
A/R-97,000 Revenue-97,000 Retained Earnings-97,000 Net Income-97,000 |
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Analyze the following transaction:
Collected $75,000 cash from accounts receivable |
EVENT: Collect A/R
75,000-Cash <75,000>-A/R Cash Flow-75,000 OA |
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Analyze the following transaction:
Paid an $8,000 cash divident |
EVENT: Divident
Cash-<8,000> Retained Earnings-<8,000> Cash Flow-<8,000> FA |
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Analyze the following transaction:
Paid $32,000 cash for salaries expense |
EVENT: Paid salaries
Cash-<32,000> Retained Earnings-<32,000> Expense-32,000 Net Income-<32,000> Cash Flow <32,000> OA |
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Analyze the following transaction:
Paid $21,000 cash for other operating expenses |
EVENT: Paid Expense
Cash-<21,000> Retained Earnings-<21,000> Expense: 21,000 Net Income-<21,000> Cash Flow: <21,000> OA |
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Analyze the following transaction:
Invested $24,000 in a certificate of deposit with an 18-month term |
EVENT: CD Purchase
Cash: <24,000> CD: 24,000 Cash Flow: <24,000> IA |
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Analyze the following transaction:
accrued salaries expense of 3,000 |
EVENT: Accd Salaries
Salaries Payable: 3,000 Retained Earnings: <3,000> Expense: 3,000 Net Income: <3,000> |
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Analyze the following transaction:
Made cash payment of $3,000 for salaries payable |
Event: Paid Salaries
Cash-<3,000> Salaries Payable-<3,000> Cash Flow-<3,000> OA |
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Analyze the following transaction:
Borrowed $40,000 from a local bank |
EVENT: Borrow
Cash-40,000 Notes Payable-40,000 Cash Flow: 40,000 FA |
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Analyze the following transaction: Received an additional $6,000 cash from the issue of common stock
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Event: Issue Sotck
Cash-6,000 Common Stock-6,000 Cash Flow-6,000 FA |
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Analyze the following transaction:
Recognized $120,000 of revenue on account during 2004 for services performed |
EVENT: Rev on account
A/R-120,000 Retained Earnings-120,000 Revenue-120,000 Net Income-120,000 |
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Analyze the following transaction:
Collected $112,000 of cash on accounts receivable during the period |
Event: Collect A/R
Cash-112,000 A/R-<112,000> Cash Flow-112,000 OA |
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Analyze the following transaction:
Purchased land for the company that cost $50,000 cash. A few months later, the land was appraised at $60,000 |
Event: Land purchase
Cash-<50,000> Land-50,000 Cash Flow-<50,000> IA |
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Analyze the following transaction:
Paid a $12,000 cash dividend to the stockholders of the company |
Event: Dividend
Cash-<12,000> Retained Earnings-<12,000> Cash Flow-<12,000> FA |
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Analyze the following transaction:
Paid cash of $40,000 for salaries expense |
Event: Paid Salaries
Cash-<40,000> Retained Earnings-<40,000> Expense-40,000 Net Income-<40,000> Cash Flow:<40,000> OA |
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Analyze the following transaction:
Paid $33,000 cash for other operating expenses |
Event: Other operating expenses
Cash-<33,000> Retained Earnings-<33,000> Expense-33,000 Net Income-<33,000> Cash Flow: <33,000> OA |
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Analyze the following transaction:
Accrued salaries expense of $7,000 |
Event: Accd sal
Sal Payable: 7,000 Retained Earnings <7,000> Expense: 7,000 Net Income: <7,000> |
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Analyze the following transaction:
Acquired $60,000 by issuing common stock |
Event: Issue Stock
Cash-60,000 Common Stock-60,000 Cash Flow-60,000 FA |
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Analyze the following transaction:
Received $100,000 for providing services to customers |
Event Provide Service
Cash-100,000 Retained Earnings-100,000 Revenue-100,000 Net Income-100,000 Cash Flow 100,000 OA |
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Analyze the following transaction:
Borrowed $25,000 cash from creditors |
Event Borrow
Cash 25,000 Loan Payable 25,000 Cash Flow 25,000 FA |
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Analyze the following transaction
Paid expenses amounting to $70,000 |
Event: Paid exp
Cash <70,000> Retained Earnings <70,000> Expense 70,000 Net Income <70,000> Cash Flow <70,000> OA |
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Analyze the following transaction:
Purchased land for $40,000 cash |
Event: Purchase land
Cash <40,000> Land 40,000 Cash Flow <40,000> IA |
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Analyze the following transaction:
Acquired an additional $20,000 from the issue of common stock |
Event: Issue stock
Cash 20,000 Common Stock 20,000 Cash Flow 20,000 FA |
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Analyze the following transaction:
Received $120,000 for providing services in 2002 |
Event: Provide service
Cash 120,000 Retained Earnings 120,000 Revenue 120,000 Net Income 120,000 Cash Flow 120,000 OA |
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Analyze the following transaction:
Paid $10,000 to creditors |
Event: Paid debt
Cash <10,000> Loan Payable <10,000> Cash Flow <10,000> FA |
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Analyze the following transaction
Paid expenses amounting to $80,000 |
Event: Paid exp
Cash <80,000> Retained Earnings <80,000> Expense 80,000 Net Income <80,000> Cash Flow <80,000> OA |
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Analyze the following transaction: Paid a $15,000 dividend to the stockholders
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Event: Dividend
Cash <15,000> Retained Earnings <15,000> Cash Flow <15,000> FA |
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What statement can you find common stock
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Statement of Changes in Equity
Balance Sheet |
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What financial statement can you find land on
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Balance Sheet
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What financial statement can you find ending cash balance on
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Statement of cash flows
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What financial statement can you find beginning cash balance
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Statements of cash flows
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What financial statement can you find notes payable on?
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balance sheet
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What financial statement can you find retained earnings on?
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Statement of changes in equity
Balance sheet |
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What statement can you find revenue on?
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income statement
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What statement can you find dividends on?
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Statement of changes in equity
Statements of cash flows |
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What statement can you find salary expense on?
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Income statements
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Provide the names of the 4 financial statements and alternative names for any statements that have them
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1.Income Statement
2. Statement of changes in equity/statement of retained earnings 3. Balance Sheet 4. Statement of cash flows |
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Provide the names of the 8 elements and any alternative names for any elements that have them
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assets
liabilities owner's equity common stock/contributed, capital, owner's capital and partner's equity revenue expenses distribution/withdrawals/dividends net income/net earnings/net profit |
