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122 Cards in this Set
- Front
- Back
Sole Proprietor
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Simple to set up, one owner who has control of the business.
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Partnership
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Two or more partners. each partner may bring economic resources or unique talents or skills
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Corporation
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separate legal entity owned by stock holders.
Adavantage: no person liability, ownership is eaiser to transfer and raising funds is easy. produce far more revenue |
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Purpose of financial Information
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provide inputs for decision making.
Identifies records and communicated the economic events of an organization to interested users |
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Internal User
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managers who plan, organize and run a business. answer questions like, Does this business have enough resources to build a new manufacturing plant.
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external user
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investors, creditors, taxing authorites, regualtory agencies, customers, labor unions, economic planners.
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Sarbanes-Oxley Act
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2002 top management must certify accuracy of financial information, penalties for fraudulent financial activity. Outside auditors must be more independent.
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Buisness Activity: Financing
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Ways a business raises funds for operations
borrowing money selling shares of stock |
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Borrowing Money
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loan from bank, debt securites, buying on goods on credit,.
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Creditor
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person or entity to which business owe money.
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liability
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debt or other obligation that represents crediters claim on a business.
notes payable, |
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Business Activity: Investing
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what corporation does with financing it receives. purchase assests.
property plant and equipment like buildings and trucks cash is most important asset |
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Business Activity: Operating
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operations of business
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Revenues
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Increase in assets arising from the sale of a product or service.
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Expenses
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cost of assest consumed or services used in the process of generating revenues
cost of goods sold selling expense marking expense income taxes |
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Income Statement
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Reports the success or failure of the company's operations during the peropd.
Only Revenues and expenses. either net income net loss |
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Statement of Retained Earnings
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Amounts and caueses of changes in the retained earning balance during the period.
can find out about managements divided policy by analyzing this statement total of all the net income net losses dividends has declard |
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Balance Sheet
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assets and claims to those assets at a specific point in time
Claim of creditors (liabilities) Claim of owners (stockholders equity) Assest= Liabilites + Stock Holders Equity |
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Stockholders Equity
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Common Stock & Retained Earnings
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Statement of Cash Flows
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financial information about the cash receipts and cash payments of a business for a specific period of time.
Info on: Financing Investing Operating Activities |
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Net Incomes or Net Loss From income statement appears on....
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Statement of retained earnings
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Ending balance of retained earnings is the same number on the balance sheet for...
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Retained Earnings
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Ending balance of cash must be the same both on balance sheet and...
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the statement of cash flows
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Comparative Statements
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statements reporting information for more than one period
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Preparing Financial Statements
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Heading
Company Name Name of Document Balance Sheet date (point in time) May 6, 2010 Date on Income Sheet Statement Statement of retained Earnings Statement of Cash Flows |
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Annual Report
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Financial statements, mangagement discussion and analysis section
ability to fund operations and expansion results of operations |
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management discussion and analysis (MD&A)
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Ability to Pay near-team obligations, ability to fund operations and expansion, results of operations
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Notes to financial statements
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additional detials about the items in the main body of the statements
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independent auditors report
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independent examination of companys accounting data.
most desirable opinion is the UNQUALIFED opinon which statesthe financial statement |
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Classified Balance Sheet: Four assets
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Current Assets
Long-Term Investments Property, Plant and equipment Intangible Assets |
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Current Assets
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expected to be converted into cash or used in the business within a relatively short period of time
listed in which they are expected into cash |
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Long-Term Assets
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Stocks or bonds of other corporations held for more than 1 year
land building that are not currently using in operating activities |
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Property, Plant and Equipment
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relativley long useful live that are used in operations of the business.
land building machinery/equipment on balance sheet shown at their cost less total accumulated deprecation |
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Intangible Assets
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noncurrent assets that have no physical substamce
goodwill patents copyrights |
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Stockholders Equity: Common Stock
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Stockholders investments of assets in the business.
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Stockholders Equity: Reatined Earnings
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Earning, or income retained for use in business
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Liquidity
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companies ability to pay obligations expected to come due within the next year of operating cycle
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Equation for
Working Capital |
Current assets / current liability
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Current Ratio
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Current assets / current liability
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Solvency
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ability to survice over a long period of time, ability to pay its long-term obligations and the interest due on them
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Debt To assets Ratio
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Measures the percentage assets financed by creditors rather than invested by stockholders
Total Debt / Total Assets |
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Cost Principle
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assests are recorded at their cost.
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Conservatism
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choose the method least likely to overstate assets or income
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Transaction Analysis
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mathematical Equation:
Stockholders invests cash in the business, the cash on the left side of the equation increases while stockholders equity on the ride side increases by same amount |
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Cash to be preformed in the future....
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should not record revenue
increase in cash on the left side & increase in LIABILITIES on right side. it OWES performance of future work |
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Revenue increases...
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stockholders equity
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Expenses and Dividends decrease....
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stockholders equity
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Individual assest is increased corresponding...
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Decrease in another asset
increase in specific libility increase in stockholder equity |
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Debit to an account
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Enter number on the left side of the account
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Credit to an account
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enter number on the right of the account
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Normal Balance
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Found on the side that increases a particular account.
Dividends=debit revenues=credit |
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Journal
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Place where a transaction is initially recorded
entered in chronological order Complete effect of transaction helps precent or locate errors |
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Ledger
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Entire group of accounts mainted by a company
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Posting
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Procedure of transferring journal entries to ledger accounts
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Trial balance
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list of accounts and their balance at a given time.
dollar amount of the debits |
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When does
Revenue get Recognition |
revenue is to be recognize in the accounting period in which it is earned.
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Matching Principle
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Expense(efforts) must be matched with revenues (accomplishments)
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Accural Basis Accounting
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Transactions that change a companys financial statements are recorded in the periods in which the events occur
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Deferrals
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prepaid expenses (paid in cash and recorded as assets before they are used) unearned revenue (cash recieed and recoreded as liabilites before revenue is earned)
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prepaid Expense
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payments of expense that will benefit more than one accounting period.
increase (debit) to expense account and decrease (credit) asset account AS AN ASSET IS USED UP OR CONSUMED, ITS COST BECOMES AN EXPENSE |
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Unearned Revenue
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Cash is recieved before revenue is earned. opposite of prepaid expense.
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Accrued Revenue
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revenues earned and expense incurred in the current accounting period that have not been recognized through daily entries and thus are not yet reflected in the accounts.
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Accured Expense
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expenses incurred but not yet paid or recorded at the statement date.
increase (debit) or an expense account and an increase (credit) to a liability account |
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Adjusted Trial Balance
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prepared after many journal entries have been journalized and posted.
to prove the equality of debits and credits in the general ledger. |
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Accounting Cycle 1/3
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1.Analyze Business Transactions
2. Journalize the transactions 3. Post to ledger accounts |
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Accounting Cycle 2/3
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4. Prepare Trail Balance
5. Journalize and post adjusted entries 6. prepare an adjusted trial balance |
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Accounting Cycle 3/3
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7. Prepare Financial Statements
8. Journalize and Post Closing Entries 9. Prepare a post-closing trial balance |
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Retailers
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merchandisers that purchase and sell directly to consumer.
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Wholesellers
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merchandisers that sell to retailers
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Expenses
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Cost of goods sold (total cost of merchandise sold during the period)
Operating expense Sales Revenue -Cost of good sold ________________ Gross Profit -Operating Expense _________________ Net Income |
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Inventory Control: Perpetural System
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Detailed Records of the cost of each inventory purchase and sale are maintained
Cost of goods sold is determined only at the end of the accounting period BETTER INVENTORY CONTROL |
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Inventory Control: Periodic System
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detailed records are not kept throughout the period.
Cost of good sold is determined only at the end of the accounting period. |
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Purchase
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recorded a debit to Merchanse Invetory and a credit to cash or to accounts payable.
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Purchase Return
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Defective goods. Purchase allowance occurs when the purcasher keeps the merchandise but is granted an allowance (deduction) by the seller
Debiting cash or accounts payable and crediting Merchandise Inventory |
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FOB Shipping Point
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Buyer Pays, part of the cost of purchasing the inventory
debit merchandise inventory credit cash or accounts payable |
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FOB Destination
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Seller Pays
operating expense Debit to Freight-out or Delivery Expense Credit Cash or Accounts Payable |
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Operating Income
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Sustain and long-term
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Non-operating income
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nonrecurring and short-trem
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Cosigned Goods
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When you give someone to sell something at thier business. counts for your inventory but not theirs
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Cost of Goods available
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Cost of goods sold
- ending inventory |
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Cost Flow Assumptions: FIFO
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Earliest good purchased are the first sold.
parallels the actual physical flow of goods. Ending inventory consists of the most recent purchases |
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Cost Flow Assumptions: LIFO
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Most recent goods purchased are the first sold.
opposite physical flow of goods. Ending inventory consists of the oldest purches |
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Average Cost
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cost of goods avaliable / goods avaliable to sell
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Lower-of-cost-or-market basis
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when companies have inventory that they paid a price for but would currently have to pay a lower price now than before.
Requires departure from Cost Principle Example of conservatism Can write down the lower price in the period used. |
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Chap 7 Cash:Bank Reconciliation
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using a bank can increase good internal control over cash
minimizes the amount of currency that must be kept on hand |
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Chap 7 Cash:Bank Reconciliation: Bank Statements
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Receives monthly banks statements
ending balance under general ledger account "cash" bank and company not the same number due to time lags and errors made by either the bank or company |
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Chap 7 Cash:Bank Reconciliation: Balance per bank statement adjustments Deposits in transit
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(which the company has recorded but the bank has not) ADDED to the balance per bank column
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Chap 7 Cash:Bank Reconciliation:
Balance per bank statement Adjustments Outstanding Check |
checks recorded by company and not bank. SUBTRACTED from the balance per bank
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Chap 7 Cash:Bank Reconciliation:
Balance per bank statement adjustments Errors |
may be either be added to or subtracted from the column depending on the nature of the error
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Chap 7 Cash:Bank Reconciliation:
Balance per Book statements NSF Checks |
Bounced Checks
SUBTRACTED from balance per books column DEBITED to all accounts receivable. |
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Chap 7 Cash:Bank Reconciliation:
Balance per book statement Bank Service Charges |
SUBTRACTED from the balance per books column
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Chap 7 Cash:Bank Reconciliation:
Balance per book statement adjustments Note and interest collections |
ADDED to balance
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Key Question to ask when preparing a bank reconciliation
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Who knows about the transaction and who doesn't yet
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After the bank reconciliation has been prepared....
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Each reconciling item in the balance per books column must be recorded.
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Chap 8 Receivables:
Bad Debts Direct Write Off Method |
When a specific customers account is uncollectible
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Chap 8 Receivables:
Bad Debts Allowance Method |
uncollectible accounts receiveable are estimated and matched against sales in the same account period in which the sales occured.
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Chap 8 Receivables
Maturity Date |
Life of note expressed in months. count months from date of issue.
Specific Date end of stated period on demand |
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Chap 8 Receivables
Interest on a 12,000, 90-day note, 10% |
$12,000x10%x90/360 = 300
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Chap 8 Receivables
Note Receivable |
recorded at face value. if a note exchanged for cash--->
DEBT to notes receivable CREDIT to cash |
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Chap 8 Receivables
Disposition of notes Note is Honored |
Paid in full at the maturity date
Cash 12,300 Notes Receivable 12,000 Cash 300 |
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Chap 8 Receivables
Disposition of Notes Note is dishonored |
is not paid in full at maturity
Accounts Receivable 12300 Notes Receivable 12,000 Interest Revenue 200 Interest Receivable 100 |
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Chap 8 Receivables
Principles of Account Receivable Management |
1. Who to extend CREDIT
2. PAYMENT PERIOD 3. MONITOR COLLECTIONS 4. LOOK AT RECEV. BAL 5. ACCELERATE CASH RECEIPTS FROM RECEIVABLES |
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Chap 8
Ratios to analyze receivables Receivables turnover ratio |
net credit sales/average net receivables
measures the number of times receivables are collected during the period. |
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Chap 9
Cost Principle to Assets Revenue Expenditures |
cost expensed immediately, not included in the cost of a plant asset.
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Chap 9
Cost Principle to Assets Capital Expenditures |
cost included in a plant asset account, not expensed immediately
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3 Factors of
Depreciation |
Cost, Useful life, Salvage Value
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Chap 9
Depreciation Journal Entry |
Depreciation
Accumulated Depreciation |
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Chap 9
Depreciation Straight-Line Method |
same dollar amount of dep. is taken each full year.
Depreciable Cost= assest cost-salvage value/usefull life. or 100% / useful life x depreciable cost |
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Chap 9
Depreciation Declining Balance Method |
accelerated method. more depreciation in the early years.
depreciation expense is lower in later years. use rate that is double straight line right. |
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Chap 9
Depreciation Units-of-Activity |
useful life expressed in terms of the total units of production or use expected from the asset.
excellent for machinery, vehicles, airplanes |
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Chap 9
Depreciation Disposal |
Asset account is CREDITED
Accumulated depreciation is DEBITED |
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Chap 9
Depreciation Disposal is a sale |
book value of the asset is compared with proceeds of the sale.
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Chap 9
Depreciation EX |
cost 10000
accumulated dep. 6000 sold 5000 Cash 5000 Accum. Dep.6,000 Machinery 10000 Gain on Disp. 1000 sold= 5000 Book Value=4,000 gain= 1000 |
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Chap 9
Depreciation Disposal is a retirement |
Recorded as a sale in which no cash in received.
Asset CREDITED cost Accum. Dep. DEBITED Entry Accum. Dep. 6000 Loss on disp. 4000 Machinery 10000 |
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Chap 9
Depreciation Evaluating use of plant asset Return on assets Ratio |
net income/average assets
high ratio preferred. |
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Chap 9
Depreciation Evaluating use of plant asset Asset turnover ratio |
net sales/average assets
how many dollars of sales are generated by each dollar invested in assets. |
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Chap 10
Liabilities Secured Bond |
there is specific collateral
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Chap 10
Liabilities Unsecured Bond/Debenture Bond |
general credit of borrower
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Chap 10
Liabilities Convertible Bond |
converted to common stock at bondholders option
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Chap 10
Liabilities Callable Bonds |
subject to retirement at a stated dollar amount prior to maturity at the of issuer
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Chap 10
Liabilities Current Market Value (present Value) |
1. dollar amounts to be received
2. length of time until the amounts are received 3. the market rate of interest equal to the present value of all the future cash payments promised by the bond. rate investors demand for lending funds to the corporation |