Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
244 Cards in this Set
- Front
- Back
|
What is accounting?
|
the process of identifying, recording, summarizing and reporting economic information to decision makers
|
|
|
What is financial accounting?
|
focuses on specific needs of decision makers external to the organization such as stockholders, suppliers, banks, and government agencies.
|
|
|
What should you understand to use your financial accounting training?
|
understand the underlying business transaction that give rise to the economic information and why that information is helpful in making the financial decision.
|
|
|
What does accounting do?
|
organizes and summarizes economic information so decsion makers can use it
|
|
|
What is a financial statement?
|
an output of an accounting process....an accountant's ability to analyze, record, quantify, accumulate, summarize, classify, report and interpret economic events and their finacial effects on the organization
|
|
|
What is the accounting system?
|
a series of steps involved in initially recording information and converting it into financial statements
|
|
|
Where is the value in any accounting system?
|
in the information it provides
|
|
|
What does accounting through financial statments do?
|
1) gives financial picture of organization on any given day
2) shows how welll it did during any given period of time |
|
|
How is accounting information useful?
|
1) helps anyone making decisions that have economic consequences
2) shows where and when money has been spent and commitments made by evaluating performance and indicating financial implications of choosing one plan over another 3) predicts future effects of decisions and helps direct attention to current problems, imperfections, and inefficiencies as well as opportunities |
|
|
What is the difference between financial and management accounting?
|
the use by two different classes of decision makers
|
|
|
What is management accounting?
|
serves internal decision makers, such as top execs, dept. heads, college deans, hosp. admin, and other levels of mgmt within an organization
|
|
|
What are the three major financial statements used in accounting?
|
1) balance sheet
2) income statement 3) statement of cash flows |
|
|
What does a balance sheet focus on?
|
financial picture as of a given day
|
|
|
What do income statement and statement of cash flow focus on?
|
performance over time
|
|
|
What is the annual report?
|
combo of financial statements, mgmt discussion and analysis, and graphs and charts that is provided annually to investors
document prepared by mgmt and distributed to current and potential investors to inform about company's past performance and future prospects |
|
|
What do annual reports include?
|
1) financial statements
2) letter from corporate manager 3) discussion and analysis of recent economic events by mgmt 4) footnotes that explain elements of the fin. statements in more detail 5) report of independent auditors 6) statement of mgmt's resp. for prep of financial statements 7) other corporate info |
|
|
What is a balance sheet?
|
the financial statement that shows the financial position of a business at a particular point in time; also known as the statement of financial position or statement of financial condition
|
|
|
What are the two sections of a balance sheet?
|
1) left side - list of assets (resources of firm - cash, bldgs)
2) right side - list of liabilities and owner's equity (sources of resources used to acquire assets - claims against resources) |
|
|
What are alternative names for balance sheet?
|
statement of financial position or statement of financial condition
|
|
|
What is the balance sheet equation?
|
assets = liabilities + owner's equity
right side represents outsider and owner "claims against" total assets shown on the left of the equation |
|
|
What are assets?
|
economic resources that are expected to increase or cause future cash inflows or reduce or present future cash outflows (cash, inventories, equipment)
|
|
|
What are liabilities?
|
economic obligations of organ. to outsiders, or claims against its assets by outsiders (debt to bank)
|
|
|
What is notes payable?
|
the existance of a promissory note - state terms of payment
|
|
|
What is owner's equity?
|
residual interest in, or remaining claims against the organ.'s assets after deducting liability
|
|
|
What is an entity?
|
an organ. or section of organ. that stands apart from other organ.s and indiv.s as a separate economic unit
|
|
|
What is a transaction?
|
any event that affects financial position of an entity and can be reliably recorded in money terms (for each transaction, an accountant must determine what accounts are affected and by how much)
each transaction requires two counterbalancing entries so equation remains "balanced" |
|
|
What is inventory?
|
goods held by the company for purpose of sale to customers
|
|
|
What is an account?
|
summary record of changes in a particular asset, liability, or owner's equity
|
|
|
What is an account balance?
|
total of all entries to the account to date
|
|
|
What does an accuntant determine for each transaction?
|
analysis of transactions is heart of accounting...you must determine:
1) which specific accounts are affected 2) whether the account balances are increased or decreased 3) amt of change in each acct balance |
|
|
What is an open account?
|
buying or selling on credit, usually by just an "authorized signature" of buyer
|
|
|
What is an account payable?
|
liability that results from a purchase of goods or services on open account
|
|
|
What is a compound entry?
|
transaction that affects more than two accounts
|
|
|
What is a creditor?
|
one to whom money is owned
|
|
|
What is a debtor?
|
one who owes money
|
|
|
How often are balance sheets prepared?
|
using the totals of each account....they could be prepared after every transaction but usually once a month
|
|
|
What are the three basic forms of ownership structures for bsiness entities?
|
1) sole proprietorships
2) partnerships 3) corporations |
|
|
What is a sole proprietorship?
|
separate organization with a single owner - most often owner is manager (small retail business, professional business - dentist, atty, MD)
|
|
|
What is a partnership?
|
organ. that joins two or more individuals who act as co-owners (retail estab., dentists, MD's, atty's, accountants).
each partnership is individual entity separate from personal activities of each partner |
|
|
What is a corporation?
|
business created under state law in the US;
|
|
|
What is limited liability?
|
feature of corporate form of organ. whereby corporate creditors ordinarily have claims against the corporate assets only; owner's personal assets are not subject to creditors' grasp
|
|
|
What is publicly owned corp?
|
corp. in which shares in ownership are sold to public
|
|
|
What is privately owned corp?
|
corp owned by family, small group, or single indiv. in which shares of ownership are not publicly sold
|
|
|
Benefits of corporation?
|
1) limited liability
2) easy transfer of ownership 3) ease in raising ownership capital from potential stockholders 4) continuity of existence (continues even if changing ownership) 5) separates ownership and management 6) depending on personal tax situation of owner - tax advantage |
|
|
What is a capital stock certificate (stock certificate)?
|
formal evidence of ownership shares in a corporation
|
|
|
What is capital?
|
owners' equity for proprietorships and partnerships
|
|
|
What is stockholder's or shareholder's equity?
|
owners' equity of a corporation; excess of assets over liabilities of a corporation
|
|
|
What is paid-in-capital?
|
total capital investment in a corp. by owners at inception of business and subsequently.... recorded in two parts (1) capital stock at par value, and (2) paid-in capital in excess of par value
|
|
|
What is par value (stated value)?
|
nominal dollar amount printed on stock certificate
|
|
|
What is paid-in capital in excess of par value?
|
difference between total amount received and par value when issuing stock
|
|
|
Formula for total paid-in capital?
|
Total paid-in capital = capital stock at par + paid-in capital in excess of par
|
|
|
What is common stock (common shares)?
|
stock representing class of owners having a "residual" ownership of a corporation
|
|
|
What is paid-in capital?
|
amount that owners actively contributed to the firm
|
|
|
What is the chain of command in a business?
|
Proprietorships & Partnerships = top managers are usually the owners
Corporation = Stockholders elect Board of Directors who appoint Managers |
|
|
What is an auditor?
|
person that examines the information used by managers to prepare the financial statements and attests to the credibility of those statements
|
|
|
Ways that a manager is held accountable for telling the truth in accounting practices?
|
1) auditors
2) legal penalities |
|
|
What is a CPA?
|
certification earned by combo of education, qualifying experience, and passing of a two-day written national exam
|
|
|
What four areas does the exam for CPA cover?
|
1) auditing
2) accounting theory 3) business law 4) accounting practice |
|
|
How are practice regs determined for a CPA?
|
on a national level (exam) and state level (qualifying/taking exam and practice laws)
|
|
|
What is an audit?
|
examination of transactions and financial statements made in accordance with generally accepted auditing standards
|
|
|
What is included in an audit?
|
misc. tests of accoutning records, internal control systems, other auditing procedures as deemed necessary
|
|
|
What is an auditor's opinion (independent opinion)?
|
report describing the auditor's examination of transactions and financial statements
included with the financial statements in an annual report issued by the corporation |
|
|
Is an auditor employed by the corporation preparing the financial statements?
|
NO!!
|
|
|
What are public accountants?
|
those whose services are offered to the general public on a fee basis (auditing, preparing income taxes, mgmt consulting)
|
|
|
What are private accountants?
|
individuals who work for businesses and those who work for govt agencies (including IRS and other nonprofit organizations)
|
|
|
What is public accounting?
|
field of accounting where services are offered to the general public on a fee basis
|
|
|
What are ethical guidelines of CPA's?
|
1) independent auditors are forbidden to ownshares of their client corporations
2) auditors must satisfy themselves that their clients' financial statements are properly prepared 3) must abide by code of ethics 4) abide by professional responsibilities including: competence, confidentiality, integrity, and objectivity |
|
|
What is the heart of accounting?
|
transaction analysis
|
|
|
What is the most important form of business ownership?
|
corporations because they conduct so much business
|
|
|
Why is there a demand for auditing in corporations?
|
because of the separation of ownership from management
|
|
|
How does professional accounting give credibility to auditing?
|
by specifying qualifications for CPA's, including ethical standards and by developing generally accepted auditing standards to ensure thoroughness of audits
|
|
|
Why are accounting positions fertile ground for future top managers?
|
because they work with managers in all management functions
|
|
|
What is one of the most important and controversial topics in accounting?
|
the measurement of income
|
|
|
How is income calculated?
|
it is the difference between revenue and expense
|
|
|
What is a key measure of performance and value?
|
profits
|
|
|
What is income?
|
measure of the increase in the "wealth" of an entity over a period of time
accountants have agreed on a common set of rules for measuring income so all decision makers can easily compare performance of one company to another |
|
|
What is an operating cycle (cash cycle, earnings cycle)?
|
time span during which cash is used to acquire goods and services, which in turn are sold to customers, who in turn pay for their purchases with cash
|
|
|
What is the most popular time period for measuring incomeor profits?
|
the calendar year
|
|
|
What is a fiscal year?
|
the year established for accounting purposes
|
|
|
What is an interim period?
|
time span established for accounting purposes that are less than a year
|
|
|
What are the key components for measuring income?
|
revenues and expenses
|
|
|
What is revenue (inflows, sales)?
|
increase in owners' equity arising from increases in assets received in exchange for the delivery of goods or services to customers
|
|
|
What are expenses (outflows)?
|
decreases in owners' equity that arise because goods or services are delivered to customers
|
|
|
What is income (profit, earning)?
|
excess of revenues over expenses
|
|
|
What is retained income?
|
additional owners equity generated by income or profits
|
|
|
What are the two methods of measuring income?
|
1) accrual basis
2) cash basis difference is the timing associated with a transaction's effect on financial statements |
|
|
What is an accrual basis?
|
accounting method that recognizes the impace of transactions on the financial statements in the time periods when revenues and expenses occur
|
|
|
What is a cash basis?
|
accounting method that recognizes the impace of transactions on the financial statements only when cash is received or disbursed
|
|
|
What is recognition?
|
test for determining whether revenues should be recorded inthe financial statements of a given period. To be recognized, revenues must be earned and realized.
|
|
|
What is the current basis for income measurement?
|
accrual basis
|
|
|
What two criteria must revenues meet in order to be recognized?
|
1) must be earned (when co. delivers good/services to a customer)
2) must be realized (when cash/claims to cash are rec'd in exchange for goods/services - credit) |
|
|
What are two types of expenses in every accounting period?
|
1) product costs
2) period costs |
|
|
What are product costs?
|
costs linked with revenues and are charged as expenses when the related revenue is recognized
|
|
|
What are period costs?
|
items identified directly as expenses of the time period in which they are incurred
|
|
|
What is cost of goods sold (cost of sales)?
|
original acquisition cost of the inventory that was sold to customers during the reporting period
|
|
|
What is matching?
|
the recording of expenses in the same tinme period as the related revenues are recognized
|
|
|
What is cost recovery?
|
concept where purchases of goods or services are reccorded as assets b/c their costs are expected to be recovered in the form of cash inflows (or reduced cash outflows) in future periods
|
|
|
What are the two types of expenses in every accounting period?
|
1) those linked with revenues earned that period
2) those linked with time period itself |
|
|
When are product costs recognized?
|
in the process known as matching
|
|
|
What are the two basic steps in the purchase and use of goods & services?
|
1) acquisition of assets
2) expiration of the assets as expenses |
|
|
What is depreciation?
|
the systematic allocation of the acquisition cost of long-lived or fixed assets to the expense accounts of particular periods that benefit from the use of the assets
|
|
|
What are stored costs?
|
assets such as inventory, prepaid rent, and equipment....they may be recorded as expenses in the future but also have potential to produce revenue
|
|
|
The purchase and uses of goods and services consist of what two basic concepts?
|
1) acquisition of the assets
2) expiration of the assets as expenses |
|
|
What does an income statement do?
|
explains changes between one balance sheet and another
|
|
|
What are revenue and expense accounts?
|
nothing more than subdivisions of stockholders equity
the balance sheet shows these as subparts of owners' equity |
|
|
What is an income statement?
|
report of all revenues and expenses pertaining to a specific time period
|
|
|
What are synonyms for income statement?
|
statement of earnings
operating statement |
|
|
What is net income?
|
famous "bottom line" on an income statement - the remainder after all expenses have been deducted from revenue
|
|
|
How often are income statements prepared?
|
for publishing purposes quarterly, semiannually or annually
for internal use in companies - weekly, monthly, and sometimes daily |
|
|
How is an income statement used?
|
1) assess company's performance or management over a period of time
2) shows how operations for period increase net assets through revenues and decrease net assets through expenses 3) net income measures amt. by which increase in newly acquired assets (revenues) exceeds expiration of other assets (expenses) 4) a measure of the wealth created by an entity during the accounting period 5) evaluate success of a period's operations |
|
|
What is the relationship between the income statement and balance sheet?
|
the income statement is the major link between two balance sheets - fills in the gaps between balance sheets - explains changes that have taken place between the two balance sheets
|
|
|
What does income measure?
|
the entity's performance in generating net assets - not the measure of entity's performance in generating cash
|
|
|
What is the statement of cash flows (cash flow statement)?
|
required statement that reports the cash receipts and cash payments of an entity during a particular period
|
|
|
How do you create a statement of cash flows?
|
1) list activities that increased cash (inflows) and decreased cash (outflows)
2) place each cash inflow and outflow into one of three categories according to the type of activity that caused it (operating, investing, and financing activities) |
|
|
What are operating activities?
|
sale and purchase or production of goods and services including collecting accounts payable, paying suppliers or employees, and paying for items such as rent taxes and interest
|
|
|
What are investing activities?
|
acquiring and selling long-term assets and securities held for long-term investment purposes
|
|
|
What are financing activities?
|
obtaining resources from owners and creditors and repaying amounts borrowed
|
|
|
What is a net loss?
|
difference between revenues and expenses when expenses exceed revenues
|
|
|
What are cash dividends?
|
distribution of cash to stockholders that reduce retained income
|
|
|
Are cash dividends expenses?
|
NO!! They should not be deducted from revenues because dividends are not directly linked to the generation of revenues or the costs of operating activities. They are not paid out of retained income; tey are distributions of assets that reduce a portion of ownership claim.
|
|
|
Who decides the amont of dividends paid?
|
the boad of directors
|
|
|
What affects the decision to pay dividends?
|
1) growth rate of firm
2) stability of company 3) |
|
|
What are three important steps related to dividends?
|
1) board declares a dividend on the date of declaration
2) payable to stockholders on record as owning the stock on the record date 3) actually paying dividend on payment date |
|
|
What are the accounting transactions required on a dividend transaction?
|
1) date of declaration - affects corporate financial position because shareholders become creditors for amount of legally declared dividends
2) payment date - resulting liability is reduced only when cash is disbursed |
|
|
Are cash and retained income related?
|
NO.....two separate entities
|
|
|
What is a statement of retained income?
|
statement that lists the beginning balance in retained income, followed by a description of any changes that occurred during the period, and the ending balance.
|
|
|
What is a statement of income and retained income?
|
statement including a statement of retained income at the bottom of an income statement
|
|
|
How do you determine net income?
|
expenses are subtracted from revenues (expenses linked to revenues via matching); cash flow from operations can be larger or smaller than net income
|
|
|
What is an earnings per share of common stock (EPS)?
|
1) required to be present on face of income statement of publicly held corporations; only instance where financial ratio is required as part of the body of the financial statements.
2) most popular ratio used by analysts net income / avg. # of shares outstanding |
|
|
What is the price-earnings ratio (P-E)?
|
measures how much public is willing to pay for chance to share the company's potential earnings
market price per share of common stock / earnings per share of common stock |
|
|
What is the earnings multiple?
|
another name for P-E; a high ratio indicates prediction the net income will grow rapidly
|
|
|
What is a dividend yield ratio?
|
indication of return or profitability, in form of dividends, of stock relative to current market price
common dividends per share / market price per share |
|
|
What ratio would those who seek regular cash returns on their investments?
|
dividend-yield ratio
|
|
|
What is a dividend-payout ratio?
|
indication of percentage of earnings that will be distributed to the shareholders in the form of dividends
common dividends per share / earnings per share |
|
|
Name some popular financial ratios
|
1) earnings per share of common stock (EPS)
2) price-earnings ratio (P-E) 3) dividend-yield ratio 4) dividend-payout ratio |
|
|
Synonyms for net income
|
1) net earnings
2) profit |
|
|
Synonyms for retained income
|
1) retained earnings
2) reinvested earnings 3) earnings reatined for use in the business 4) profit employed in the business |
|
|
What is the double entry accounting system?
|
method usually followed for recording all of a business entity's transactions; at least two accounts are always affected by each transaction
|
|
|
How must each transation be analyzed in a double entry accounting system?
|
1) determine which accounts are involved
2) whether to increase or decrease the accounts 3) the amount of change in each account balance |
|
|
What is a ledger?
|
contains records for group of related accounts kept current in a systematic manner
|
|
|
What is a general ledger?
|
collection of accounts that accumulate the amounts reported in the firm's major financial statements
|
|
|
What forms can a ledger present itself in?
|
bound record book
loose-leaf pages electronic storage element (magnetic tape, disk) There is 1 page for each account. |
|
|
What are T-accounts?
|
simplified versions of ledger accounts
|
|
|
What is a balance?
|
difference between the total left-side and right-side amounts in an account at any particular time
|
|
|
What kind of balance do asset accounts have?
|
left-sided - increased by entries on the left side and decreased by entries on the right side
|
|
|
What kind of balance do liabilities and owner's equity have?
|
right sided - increased by entries on the right side and decreased by entries on the left side
|
|
|
What is a debit (dr.)?
|
denotes an entry on the left side of any account (can use term "charge" instead of "debit")
|
|
|
What is a credit (cr.)?
|
denotes an entry on the right side of any account
|
|
|
What is the recording process?
|
the sequence of steps in recording a transaction
transaction-documentation-journal-ledger-trial balance-financial statements |
|
|
When does recording begin?
|
(TRANSACTION) when the transaction is substantiated by source documents
|
|
|
What are source documents?
|
(DOCUMENTATION) original records of any transaction... sales slip, invoice, check stub, purchase orders, receiving reports, cash receipt slip, minutes of board of director's meeting
|
|
|
Where is the analysis of transactions placed?
|
in the general journal is a book of original entry....a formal chronological record (like a diary) of all transactions in an entity
|
|
|
What is journalizing?
|
process of entering transactions into the journal
|
|
|
What is a journal entry?
|
analysis of effects of a single transaction on the accounts, usually accompanied by an explanation (for each transaction, this analysis identifies the accounts to be debited and credited)
|
|
|
What is a chart of accounts?
|
a numbered or coded list of all account titles (used as references in the Post Ref. column of the journal)
|
|
|
What are postings?
|
transferring of amounts from the journal to the appropriate accounts in the ledger
|
|
|
What is the keying of entries or cross referencing?
|
process of numbering, dating, and/or some other form of identification to relate each posting to the appropriate journal entry (allows users to find other parts of the transactions in the ledge no matter where they are started)
|
|
|
What is a running balance format?
|
adds an additional column to the presentation to provide a running balance of the account holdings (similar to a checkbook)
|
|
|
What is a simple entry?
|
transaction that affects only two accounts
|
|
|
What is a compound entry?
|
transaction affecting more than two accounts
|
|
|
What is the best way to begin mentally analyzing transactions?
|
by pinpointing the effect, if any, on cash.....then think of effects on other accounts
|
|
|
How does revenue and expense relate to retained income?
|
1) these accounts are part of retained income
2) any credit to revenue is credit to retained income (both accounts increased by credit entry) 3) debit entry increases expenses although it decreases retained income 4) revenue and expense accounts are periodically summarized into one number, net income or net loss, which increases or decreases retained income respectively 5) keeping revenue and expenses in separate accounts makes it easier to prepare an income statement |
|
|
How is an expiration of an asset recorded?
|
increase to an expense and decrease in stockholder's equity
|
|
|
What is a contra account?
|
separate but related account that offsets or is a deduction from a companion account; always has a companion account and has the opposite balance of the companion account
|
|
|
What is a contra asset account?
|
account offsetting an asset
|
|
|
What is a book value (net book value, carrying amount, or carrying value)?
|
balance of an account shown on the books, net of any contra accounts
|
|
|
What is accumulated depreciation (allowance for depreciation) account?
|
records cumulative sum of all depreciation recognized since date of acquisition of particular assets described
|
|
|
What is a function of accumulated depreciation?
|
preserves original cost in original asset account throughout asset's useful life
in contrast, accumulated depreciation is an estimate, result of a calculation whose accuracy depends heavily on the accountant's less reliable prediction of an asset's useful life |
|
|
How does an investor estimate the average age of an asset?
|
by computing the percentage of the original cost that has been depreciated
|
|
|
What is a trial balance?
|
list of all the accounts with their balances
|
|
|
What is the purpose of a trial balance?
|
1) help check accuracy of postings by proving whether the total debits equal the total credits
2) establishes a convenient summary of balances in all accounts for the preparation of formal financial statements |
|
|
How is a trial balance prepared?
|
assets - liabilities - stockholders' equity - revenues - expenses
|
|
|
How do you derive financial statements from the trial balance?
|
1) income statement accounts will be summarized as a single number (net income or net loss) which will become part of the Retained Income account
2) the financial statements are usually prepared in the following order: income statement then balance sheet, |
|
|
What are the effects of error?
|
1) if detected immediately, the entry can be erased or crossed out and corrected
2) if detected after posting to the ledger accounts, a correcting entry must be made which then balances the accounts to what they should have been originally |
|
|
What is counterbalancing an error?
|
offsetting errors in the ordinary bookkeeping process in the next period (cancel each other out in the second period and only show as an error in the first period)
|
|
|
Can all errors be counterbalanced?
|
No.....example would be an error in the computation of depreciation expense in one year would mistake pretax income, assets, and retained income in that year and in subsequent years if not corrected
|
|
|
Can financial statements be completed from incomplete records?
|
yes....sometimes they must be constrcted from incomplete data because documents may have been stolen, destroyed or lost
|
|
|
How are T-accounts used to analyze accounting relationships?
|
1) help organize an accountant's thinking and aid the discovery of unknown amounts
2) entering all known items into the key T-account will help find the unknown amount |
|
|
What is data processing?
|
general term referring to the procedure used torecord, analyze, store, and report on chosen activities (an accounting system is a data processing system)
|
|
|
How have computers impacted accounting?
|
1) have been refining data processing systems
2) regardless of format, the same input is required |
|
|
What are two very important steps in the accountant's records?
|
the journal and general ledger - journal provides chronological record o transactions and general ledger provides a dated summary of effects of the transactions on accounts (account by account)
|
|
|
What does debit and credit mean?
|
Debit = LEFT SIDE!!
Credit = RIGHT SIDE!! |
|
|
What is the purpose of a trial balance?
|
used as an internal report to check for errors in the accounting and to aid in preparing financial statements
|
|
|
What is the purpose of T Accounts?
|
help organize thinking and aid in discovery of unknown amounts
|
|
|
Why are there adjusted entries?
|
because some transactions are implicit rather than explicit
|
|
|
What is an explicit transaction?
|
obvious events that trigger nearly all day-to-day routine entries
|
|
|
What is implicit transactions?
|
events that:
1. do not generate source documents or any visable evidence that the event actually occurred 2. are temporarily ignored in day to day recording procedures and are recognized at the end of an accounting period |
|
|
What do adjustments (adjusting entries) do?
|
1) help assign the financial effects of implicit transactions to the appropriate time periods
2) improve the matching of revenues and expenses to a particular period |
|
|
When are adjustments made?
|
at periodic intervals (when inancial statements are about to be prepared)
made in the form o journal entries that are recorded in the general journal and then posted to the general ledger |
|
|
What is at the heart of accrual accounting?
|
adjusting entries
|
|
|
What does accrue mean?
|
the accumulation of a receivable (asset) or payable (liability) during a given period even though no explicit transaction occurs; receivables and payables grow as the clock ticks (as some services are continuously acquired and used) so they are said to accrue (accumulate).
|
|
|
When do costs expire?
|
some costs expire because of the passage of time
|
|
|
What are examples of expiration of unexpired costs?
|
recognition of monthly depreciation expense and rent expense; write offs to expense of such assets as office supplies inventory and prepaid insurance
|
|
|
What is the key characteristic of unexpired items?
|
an explicit transaction in the past has created an asset, and a subsequent implicit transaction serves to adjust the value of this asset
|
|
|
What is unearned revenue (revenue received in advance, deferred revenue, deferred credit)?
|
revenue that is received and recorded before it is earned (payment is received in exchange or a commitment to provide service or goods at a later date)
|
|
|
Is unearned revenue as asset or liability?
|
Liability.....because the company receiving the advance payment is obligated to deliver the service or goods, or refund the money if the services or goods are not delivered
|
|
|
Is stockholder's equity affected by unearned revenue?
|
No....it is not affected until the unearned revenue is earned....then an adjusting entry is made to record the revenue
|
|
|
What is the accrual of unrecorded adjustments?
|
when adjustments are made to bring each accrued expense (and corresponding liability) account up to date at the end of the period, just before the formal financial statements are prepared in order to match the expense to the period
|
|
|
How do most companies do accounting for payment of wages?
|
most companies pay employees at predetermined times making routine entries for wage payments
|
|
|
How do you account for the accrual of wages?
|
adjustments must be made to account for the accrual of any unrecorded wages which are owed, but not paid in that period
|
|
|
How do you account for accrual of interest?
|
interest on borrowed money accumulates (accrues) as time unfolds, regardless of when the actual cash for interest is paid.
if adjusting entry omitted, both expenses and liabilitiues will be understated |
|
|
How do you account for accrual of income tax?
|
accrued each month (not just once a year) as pretax income (income beore taxes) is generated
|
|
|
What are unrecorded expenses?
|
1) payment of wages
2) accrual of wages 3) accrual of interest 4) accrual of income taxes |
|
|
How do you adjust for unrecorded revenues?
|
1) adjusting entries show recognition of revenues that have been entered but not yet shown in accounts
2) affect stockholders' equity in the period they are earned, not the period in which they are received |
|
|
What are four things that require adjusting entries?
|
1) expiration of unexpired costs
2) earnings of unearned revenues 3) accrual of unrecorded expenses 4) accrual of unrecorded revenues |
|
|
What is the final aim of the recording process?
|
the preparation of accurate inancial statements prepared on the accrual basis; this process must include adjusting entries to record implicit transactions
|
|
|
What are the final steps in the recording process?
|
ledger - unadjusted trial balance - journalize and post adustments - adjusted trial balance - financial statements
|
|
|
How does cash flow impact adjusting entries?
|
1) cash receipts and disbursements may precede or follow the adjusting entry that recognizes the related revenue or expense
2) adjusting entries for expiration of unexpired costs and realization (earnings) of unearned revenues are usually made subsequent to the cash flows 3) adjusting entries for accrual of unrecorded expenses and revenues are made before the cash receipts and cash disbursements occur |
|
|
What is a classified balance sheet?
|
groups the accounts into subcategories, helps readers quickly gain a perspective on the company's financial position
|
|
|
What are the asset groupings in a classified balance sheet?
|
1) current assets
2) long term assets |
|
|
What are the liability groupings in a classified balance sheet?
|
1) current liabilities
2) long term liabilities distinction is useful in assessing the company's ability to meet obligations as they fall due |
|
|
What is the relationship between current assets and current liabilities?
|
current assets will give rise to the cash needed to pay current liabilities
|
|
|
What are current assets?
|
cash and those other assets that are expected to be converted to cas, or sold, or consumed during the next twelve months (or within the normal operating cycle if longer than a year)
|
|
|
What are current liabilities?
|
liabilities that fall due within the coming year (or within the normal operating cycle if longer than a year)
|
|
|
What is the current ratio?
|
current assets / current liabilities
|
|
|
What is solvency?
|
ability to meet immediate financial obligations with cash and near-cash assets as those obligations become due
|
|
|
How are current assets listed?
|
in the order in which they will be converted to cash during the coming year
|
|
|
How are current liabilities listed?
|
in the order in which they will draw on or decrease cash during the coming year
|
|
|
What are the formats of a balance sheet?
|
1) report format
2) account format |
|
|
What is a report format?
|
classified balance sheet with the assets at the top
|
|
|
What is an account format?
|
classified balance sheet with the assets at the left
|
|
|
What is more important to an investor - balance sheet or income statement?
|
income statement because investors are concerned about a company's ability to produce long-run earnings, and dividends
|
|
|
What is a single step income statement?
|
it groups all revenues together and then lists and deducts all expenses together without drawing any intermediate subtotals
|
|
|
What is a multi-step income statement?
|
contains one or more subtotals that highlight significant relationships, such as gross profit and operating income
|
|
|
What is gross profit (gross margin)?
|
excess of sales revenue over the cost of the inventory that was sold (most multiple step income statements start with this section)
|
|
|
What is operating income (operating profit)?
|
obtained by deducting operating expenses from gross profit
|
|
|
What is profitability?
|
ability of a company to provide its investors with a particular rate of return on their investment
|
|
|
What is the gross profit percentage?
|
useful to retailers in choosing a pricing stragegy and judging results
gross profit / sales |
|
|
What is the return on sales ratio?
|
net income / sales
managers follow this closely from month to month |
|
|
What is the return on stockholders' equity ratio?
|
net income / avg stockholders' equity
widely regarded as the ultimate measure of overall accomplishment |
|
|
What are generally accepted accounting principles (GAAP)?
|
broad concepts, guidelines, and practices that together make up accepted accounting practice in the United States at any given time
|
|
|
Who determines the GAAP in the US?
|
1) the FInancial Accounting Standards Board (FASB)
2) Accounting Principles Board (APB) |
|
|
What is the AICPA?
|
American Institute of Certified Public Accountants - supports the FASB board
|
|
|
What are thte APB Opinions?
|
thirty-one rulings on GAAP issued by the APB prior to 1973
|
|
|
What role does the Securities and Exchange Commission (SEC) play in GAAP?
|
has the ultimate responsibility for authorizing the GAAP for companies whose stock is held by the general investing public; works closely with the FASB and has informally delegated much power to the FASB
|
|
|
What is the main issue in setting GAAP?
|
it is a complex process involving heavy interactions among the affected parties: public regulators (congress and the SEC), private regulators (FASB), companies, the public accounting profession, representatives of investors, and other interest groups
|
|
|
What is the International Accounting Standards Committee (IASC)?
|
leads the movement seeking to eliminate differences in accounting principles that are not caused by cultural or environmental differences between countries
|
|
|
What are the concepts and conventions of GAAP?
|
1) the entity concept
2) the reliability concept 3) going concern convention 4) materiality convention 5) cost-benefit criterion 6) stable monetary unit |
|
|
What is the entity concept?
|
based on idea that an entity is an organization or part of an organization that is a separate economic unit from other organizations, or individuals such as the organization's owners
the separation of events or activities for accountability purposes is crucial if accounting is to measure the economic activity of a particular unit or business |
|
|
What is the reliability concept?
|
quality of information that assures decision makers that the information represented in teh financial records and financial statements truly representes the actual conditions and events of the reported entity
without reliability concept, accounting records might be based on whims and opinions open to dispute |
|
|
What is the going concern convention (continuity convention)?
|
assumption that in all ordinary situations an entity persists indefinitely
implies resources will be used to fulfill general purposes of a continuing entity rather than be sold in tomorrow's real estate or equipment markets; also implies existing liabilities will be paid at maturity in an orderly manner |
|
|
What is materiality convention?
|
item should be included in a financial statement if its omission or misstatement would tend to mislead the reader of the financial statement under consideration
|
|
|
What is cost benefit criterion?
|
system should be changed when the expected additional benefits of the change exceed its expected additional costs
|
|
|
What is stable monetary unit?
|
monetary unit ($ in the US) is the principal means for measuring assets and equities
|
