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186 Cards in this Set

  • Front
  • Back
What is accounting often called?
The language of business
What does accounting do?
Measures financial aspects of a business

Communicates this information to decision makers
Why should everyone in business study accounting?
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
What are the 2 types of Accounting Systems?
1. Financial Accounting System
2. Managerial Accounting System
Explain the financial accounting system
Preparation of 4 basic financial statements
Explain the managerial accounting system
The preparation of detailed plans, forecasts, and reports
What type of decision makers come from the financial accounting system? Give examples.
External Decision Makers (investors, creditors, suppliers, customers, etc.)
What kind of decision makers come with the managerial accounting system? Give examples
Internal decision makers (managers throughout the organization)
What is the objective of external financial reporting?
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
What are the 4 types of financial statements?
1. Balance Sheet
2. Income Statement
3. Statement of changes in equity
4. Statement of cash flows
What type of statement is a balance sheet?
a point in time statement
What 3 essential elements make up the balance sheet?
1. assets
2. liabilities
3. owner's equity
What does the accounting equation say?
Assets=liabilities + Equity
Define asset
An economic resource used by a business to produce revenue (i.e. something of value)
What are the assets that we've studies so far? Name some additional assets.
Cash
Acounts Receivable
Interest Receivable
CD
Land

Additional assets that could be on test: property, machinery/equipment, inventory
Define liability
Obligation of business to provide assets or services in the future (i.e. something owed-the creditors' share of the assets)
What liabilities could be on exam? Name additional ones that could be on exam
Liabilities: Salaries Payable
Interest Payable
Notes Payable

Additional:
Accounts Payable
Loans Payable Mortgages Payable

(They are all identified w/ the word payable)
Define owner's equity
The owner's residual interest (i.e. what's life0the owners' share of the assets)
What are the 2 accounts in Owner's Equity?
1. Common Stock
2. Retained Earnings
What is equity?
The owner's share
What are the 2 sources of equity?
1. equity received from the owners by issuing "common stock"

2. equity earned by operated: "Retained Earnings"
What is the expanded accounting equation?
Assets-Liabilities + Common Stock + Retained Earnings
What type of statement is the income statement?
period of time statement
What are the 3 main components of the income statement? Then put it into an equation
1. Revenues
2. Expenses
3. Net Income

EQUATION: Revenue - Expenses=Net Income
What type of statement is the statement of changes in equity?
a period of time statement
What are 2 parts to the statement of changes in equity?
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
What type of statement is the statement of cash flows?
period of time statement
What are the 3 categories in the statement of cash flows?
1. Cash flows from operating activities
2. Cash flows from investing activities
3. Cash flows from financing activities
How do you find the ending cash balance?
Take net change in cash and add the beginning cash balance
Define footnotes
Not a financial statement but information providing important support to the financial statements
What does GAAP stand for?
Generally Accepted Accounting Principles
Explain the GAAP history
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
Why is GAAP important?
It provides uniformity to the accounting system
Define Accrual Basis Accounting
a method of accounting that records effects of accounting events in the period in which such events occur, regardless of when cash is exchanged
Define Cash Basis Accounting
Revenue is recorded when cash is received and expenses are recorded when cash is paid
Which accounting method is not GAAP
Cash Basis Accounting
Under Accrual Basis Accounting, we have _____________. Further explain this:
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
How do we fine interest?
i=prt

interest=principle * rate * time
Define accrual
Recognize an event before cash is exchanged
What decessitate the use of adjusting entries?
accrual and deferrals
Define adjusting entry
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
What principles affect income determination?
1. The revenue principle
2. The matching principle
3. The cost principle
Define revenue
increase in assets or decrease in liabilities resulting from the operations of the business
What is the revenue principle?
Recognize revenues when:

1. Earnings process is complete or nearly complete,
2. An exchange transaction takes place, and
3. Collection is reasonably assured
Define Expense
Decrease in assets or increase in liabilities that result from the revenue generation process
What is the matching principle?
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)
What is the historical cost principle?
Items are recorded in the financial statements at their historical, cash equivalent cost (i.e. the price that was paid)
Record used for the classification and summary of transaction data
account
Service-based profession that provides reliable and relevant financial information useful in making decisions
Accounting
Expression of the relationship between the assets and the claims on those assets
Accounting equation
Economic occurrence that causes changes in an enterprise's assets, liabilities, and/or equity
accounting event
Span of time covered by the financial statements, normally one year, but may be semiannually, quarterly, and monthly
accounting period
Document in which an organization provides information to stockholders, usually on an annual basis
annual report
Economic resource used by a business for the production of revenue
asset
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)
asset source transaction
Statement that lists the assets of a business and the corresponding claims (liabilities and equity) on those assets
balance sheet
Owners' and creditors' interests in a business's assets
claims
Process of transferring balances from nominal accounts (Revenue, Expense, and Dividents) to the permanent account (Retained Earnings)
Closing the Accounts
OR
Closing
Basic class of corporate stock that carries no preferences as to claims on assets or dividends, certificates that evidence ownership in a company
common stock
Individual or institution that las loaned goods or services to a business
creditor
Transfer of wealth from a business to its owners
dividend
Method of keeping records that provides a system of checks and balances by recording transactions in a dual format
double-entry bookkeping
OR
double-entry accounting
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
Earnings
Primary components of financial statements including assets, liabilities, equity, contributions, revenue, expenses, distributions, and net income
elements
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
entity
Portion of assets remaining after the creditors' claims have been satisfied; also called called residual interest or net assets
equity
Accounting information designed to satisfy the needs of an organization's external users, including business owners, creditors, and government agencies
Financial accounting
Privately funded organization with the primary authrotiy for the establishment of accounting standards in the United States
Financial Accounting Standards Board (FASB)
Money or credit arrangements supplied to a business by investors (owners) and creditors
financial resources
Primary means of communicating the financial information of an organization to the external users.
financial statements
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
financing activities
Complete set of accounts used in accounting systems
general ledger
Rules and regulations that accountants agree to follow when preparing financial reports for public distribution
GAAP
Arrangement of a set of financial statements horizontally across a sheet of paper
horizontal statements model
Added value created in transforming resources into more desirable states
income
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
income statement
Fee paid for the use of borrowed funds; also refers to revenue from debt securities
interest
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
investing activities
Company or individual who gives assets or services and receives a security certificate in exchange
investor
Both intellectual and physical labor used in the process of converting goods and services to products of greater value
labor resources
Obligations of a business to relinquish assets, provide services, or accept other obligations
liabilities
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
liquidation
Ability to convert assets to cash quickly and meet short-term obligations
liquidity
Branch of accounting that provides information useful to internal decision makers and managers in operating an organization
managerial accounting
Makers of goods sold to customers
manufacturing companies
Gathering of people or organizations for the purpose of buying and selling resources
market
Companies that buy and sell merchandise inventory
merchandising businesses
Portion of the assets remaining after the creditors' claims have been satisified; also called equity or residual interest
net assets
Increase in net assets resulting from operating activities
net income
Decrease in net assets resulting from operating activities
net loss
accounts that contain information applicable to a single accounting period; sometimes called temporary accounts
nominal accounts
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
not-for-profit entities
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
operating activities
accounts that contain information transferred from 1 accounting period to the next
permanent accounts
Natural resources used in the transformation process to create resources of more value
physical resources
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
Price-earnings (P/E) ratio
Assets used to operate the business; frequently called long-term assets
productive assets
Value created by transforming goods and services to more desirable states
profit
The particular business or other organization for which financial statements are prepared
reporting entities
Portion of the assets remaining after the creditors' claims have been satisfied; also called equity or net assets
residual interest
Increase in equity that results from the retention of assets obtained through the operation of the business
Retained earnings
Increase in assets or a decrease in liabilities that results from the operating activities of the business
Revenue
Organizations-accountants, lawyers, and dry clearners-that provide services to consumers
service organizations
Parties interested in the operations of a business, including owners, lenders, employees, suppliers, customers, and government agencies
stakeholders
Statement that explains how a business obtained and used cash during an accounting period
statement of cash flows
Statement that summarizes the transactions occurring during the accounting period that affected the owners' equity
statement of changes in stockholders' equity
Simultaneous display of a set of financial statements
statement model
Owners of a corporation
stockholders
Stockholders' equity represents the portion of the assets that is owned by the stockholders
stockholders' equity
Accounts used to collect information for a single accounting period (usually revenue, expense, and distribution accounts)
temporary accounts
Particular event that involves the transfer of something of value between 2 entities
transaction
Individuals or organizations that use financial information for decision making
users
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
vertical statements model
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
accounting cycle
Expected future cash receipts arising from permitting customers to buy now and pay later; usually are small with a short term to maturity
accounts receivable
Recognition of events before exchanging cash
accrual
Method of accounting that records the effects of accounting events in the period in which such events occur regardless of when cash is exchanged
accrual accounting
Entry that updates account balances prior to preparing financial statements
adjusting entry
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
adverse opinion
Set of ethical rules and guidelines above and beyond the requirements of laws and regulations that certified public accountants must follow
American Institute of Certified Public Accountants' Code of Professional Conduct
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
asset exchange transaction
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.)
asset source transaction
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)
asset use transaction
Detailed examination of a company's financial statements and the documents that support the infromation presented in these statements
audit
Accountant who has met certain educational and experiential requirements and is licensed by the state government to provide audit services to the public
certified public accountant (CPA)
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
Claimes exchange transaction
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
closing entries
A set of guidelines established by the American Institute of Certified Public Accountants to promote high ethical conduct among its membership
code of professional conduct
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
disclaimer of audit opinion
Asset used in the process of generating revenues. Decrease in assets or increase in liabilities that occurs in the process of generating revenue.
expense
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
financial audit
Actual price paid for an asset when it was purchased
historical cost
Certified public accountant licensed to perorm audits who is independent of the company being audited
independent auditor
A company's policies and procedures designed to reduce the opportunity for fraud and to provide reasonable assurance that its objectives will be accomplished
internal controls
Commitment of assets (usually cash) by a business to acquire other assets that will be used to produce revenue
investment
individual or business borrowing funds (the party receiving the cash when a note is issued)
issuer of a note
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
matching concept
error or otehr reporting problem that, if known, would have influenced the decision of an average prudent investor
material error
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
note payable
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
period costs
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
qualified opinion
a term that usually refers to transactions that involve the collection or payment of cash
realization
recording an accounting event in the financial statements
recognition
Increase in assets or a decrease in liabilities that results from the operating activities of the business
revenue
amounts of future cash payments owed to employees for services that have already been performed
salaries payable
Opinion on financial statements audited by a CPA that means the auditor believes the financial statements are in compliance w/ GAAP
unqualified opinion
Professinal responsibility to clients that forbids CPAs from voluntarily disclosing information obtained as a result of their client-accounting relationships
voluntarily disclosing
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
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
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
Analyze the following transaction:
Paid an $8,000 cash divident
EVENT: Divident
Cash-<8,000>
Retained Earnings-<8,000>
Cash Flow-<8,000>
FA
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
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
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
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>
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
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
Analyze the following transaction: Received an additional $6,000 cash from the issue of common stock
Event: Issue Sotck
Cash-6,000
Common Stock-6,000
Cash Flow-6,000
FA
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
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
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
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
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
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
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>
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
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
Analyze the following transaction:

Borrowed $25,000 cash from creditors
Event Borrow
Cash 25,000
Loan Payable 25,000
Cash Flow 25,000
FA
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
Analyze the following transaction:

Purchased land for $40,000 cash
Event: Purchase land
Cash <40,000>
Land 40,000
Cash Flow <40,000>
IA
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
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
Analyze the following transaction:

Paid $10,000 to creditors
Event: Paid debt
Cash <10,000>
Loan Payable <10,000>
Cash Flow <10,000>
FA
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
Analyze the following transaction: Paid a $15,000 dividend to the stockholders
Event: Dividend
Cash <15,000>
Retained Earnings <15,000>
Cash Flow <15,000>
FA
What statement can you find common stock
Statement of Changes in Equity
Balance Sheet
What financial statement can you find land on
Balance Sheet
What financial statement can you find ending cash balance on
Statement of cash flows
What financial statement can you find beginning cash balance
Statements of cash flows
What financial statement can you find notes payable on?
balance sheet
What financial statement can you find retained earnings on?
Statement of changes in equity
Balance sheet
What statement can you find revenue on?
income statement
What statement can you find dividends on?
Statement of changes in equity
Statements of cash flows
What statement can you find salary expense on?
Income statements
Provide the names of the 4 financial statements and alternative names for any statements that have them
1.Income Statement
2. Statement of changes in equity/statement of retained earnings
3. Balance Sheet
4. Statement of cash flows
Provide the names of the 8 elements and any alternative names for any elements that have them
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