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122 Cards in this Set

  • Front
  • Back
Sole Proprietor
Simple to set up, one owner who has control of the business.
Partnership
Two or more partners. each partner may bring economic resources or unique talents or skills
Corporation
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
Purpose of financial Information
provide inputs for decision making.
Identifies
records
and communicated the economic events of an organization to interested users
Internal User
managers who plan, organize and run a business. answer questions like, Does this business have enough resources to build a new manufacturing plant.
external user
investors, creditors, taxing authorites, regualtory agencies, customers, labor unions, economic planners.
Sarbanes-Oxley Act
2002 top management must certify accuracy of financial information, penalties for fraudulent financial activity. Outside auditors must be more independent.
Buisness Activity: Financing
Ways a business raises funds for operations
borrowing money
selling shares of stock
Borrowing Money
loan from bank, debt securites, buying on goods on credit,.
Creditor
person or entity to which business owe money.
liability
debt or other obligation that represents crediters claim on a business.
notes payable,
Business Activity: Investing
what corporation does with financing it receives. purchase assests.
property
plant and equipment like buildings and trucks
cash is most important asset
Business Activity: Operating
operations of business
Revenues
Increase in assets arising from the sale of a product or service.
Expenses
cost of assest consumed or services used in the process of generating revenues
cost of goods sold
selling expense
marking expense
income taxes
Income Statement
Reports the success or failure of the company's operations during the peropd.
Only Revenues and expenses.
either net income
net loss
Statement of Retained Earnings
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
Balance Sheet
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
Stockholders Equity
Common Stock & Retained Earnings
Statement of Cash Flows
financial information about the cash receipts and cash payments of a business for a specific period of time.
Info on:
Financing
Investing
Operating Activities
Net Incomes or Net Loss From income statement appears on....
Statement of retained earnings
Ending balance of retained earnings is the same number on the balance sheet for...
Retained Earnings
Ending balance of cash must be the same both on balance sheet and...
the statement of cash flows
Comparative Statements
statements reporting information for more than one period
Preparing Financial Statements
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
Annual Report
Financial statements, mangagement discussion and analysis section
ability to fund operations and expansion
results of operations
management discussion and analysis (MD&A)
Ability to Pay near-team obligations, ability to fund operations and expansion, results of operations
Notes to financial statements
additional detials about the items in the main body of the statements
independent auditors report
independent examination of companys accounting data.
most desirable opinion is the UNQUALIFED opinon which statesthe financial statement
Classified Balance Sheet: Four assets
Current Assets
Long-Term Investments
Property, Plant and equipment
Intangible Assets
Current Assets
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
Long-Term Assets
Stocks or bonds of other corporations held for more than 1 year
land building that are not currently using in operating activities
Property, Plant and Equipment
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
Intangible Assets
noncurrent assets that have no physical substamce
goodwill
patents
copyrights
Stockholders Equity: Common Stock
Stockholders investments of assets in the business.
Stockholders Equity: Reatined Earnings
Earning, or income retained for use in business
Liquidity
companies ability to pay obligations expected to come due within the next year of operating cycle
Equation for
Working Capital
Current assets / current liability
Current Ratio
Current assets / current liability
Solvency
ability to survice over a long period of time, ability to pay its long-term obligations and the interest due on them
Debt To assets Ratio
Measures the percentage assets financed by creditors rather than invested by stockholders

Total Debt / Total Assets
Cost Principle
assests are recorded at their cost.
Conservatism
choose the method least likely to overstate assets or income
Transaction Analysis
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
Cash to be preformed in the future....
should not record revenue
increase in cash on the left side & increase in LIABILITIES on right side.
it OWES performance of future work
Revenue increases...
stockholders equity
Expenses and Dividends decrease....
stockholders equity
Individual assest is increased corresponding...
Decrease in another asset
increase in specific libility
increase in stockholder equity
Debit to an account
Enter number on the left side of the account
Credit to an account
enter number on the right of the account
Normal Balance
Found on the side that increases a particular account.

Dividends=debit
revenues=credit
Journal
Place where a transaction is initially recorded
entered in chronological order

Complete effect of transaction
helps precent or locate errors
Ledger
Entire group of accounts mainted by a company
Posting
Procedure of transferring journal entries to ledger accounts
Trial balance
list of accounts and their balance at a given time.

dollar amount of the debits
When does
Revenue get Recognition
revenue is to be recognize in the accounting period in which it is earned.
Matching Principle
Expense(efforts) must be matched with revenues (accomplishments)
Accural Basis Accounting
Transactions that change a companys financial statements are recorded in the periods in which the events occur
Deferrals
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)
prepaid Expense
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
Unearned Revenue
Cash is recieved before revenue is earned. opposite of prepaid expense.
Accrued Revenue
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.
Accured Expense
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
Adjusted Trial Balance
prepared after many journal entries have been journalized and posted.

to prove the equality of debits and credits in the general ledger.
Accounting Cycle 1/3
1.Analyze Business Transactions
2. Journalize the transactions
3. Post to ledger accounts
Accounting Cycle 2/3
4. Prepare Trail Balance
5. Journalize and post adjusted entries
6. prepare an adjusted trial balance
Accounting Cycle 3/3
7. Prepare Financial Statements
8. Journalize and Post Closing Entries
9. Prepare a post-closing trial balance
Retailers
merchandisers that purchase and sell directly to consumer.
Wholesellers
merchandisers that sell to retailers
Expenses
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
Inventory Control: Perpetural System
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
Inventory Control: Periodic System
detailed records are not kept throughout the period.
Cost of good sold is determined only at the end of the accounting period.
Purchase
recorded a debit to Merchanse Invetory and a credit to cash or to accounts payable.
Purchase Return
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
FOB Shipping Point
Buyer Pays, part of the cost of purchasing the inventory

debit merchandise inventory
credit cash or accounts payable
FOB Destination
Seller Pays
operating expense

Debit to Freight-out or Delivery Expense
Credit Cash or Accounts Payable
Operating Income
Sustain and long-term
Non-operating income
nonrecurring and short-trem
Cosigned Goods
When you give someone to sell something at thier business. counts for your inventory but not theirs
Cost of Goods available
Cost of goods sold
-
ending inventory
Cost Flow Assumptions: FIFO
Earliest good purchased are the first sold.

parallels the actual physical flow of goods.

Ending inventory consists of the most recent purchases
Cost Flow Assumptions: LIFO
Most recent goods purchased are the first sold.

opposite physical flow of goods.

Ending inventory consists of the oldest purches
Average Cost
cost of goods avaliable / goods avaliable to sell
Lower-of-cost-or-market basis
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.
Chap 7 Cash:Bank Reconciliation
using a bank can increase good internal control over cash

minimizes the amount of currency that must be kept on hand
Chap 7 Cash:Bank Reconciliation: Bank Statements
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
Chap 7 Cash:Bank Reconciliation: Balance per bank statement adjustments Deposits in transit
(which the company has recorded but the bank has not) ADDED to the balance per bank column
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
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
Chap 7 Cash:Bank Reconciliation:
Balance per Book statements
NSF Checks
Bounced Checks

SUBTRACTED from balance per books column

DEBITED to all accounts receivable.
Chap 7 Cash:Bank Reconciliation:
Balance per book statement
Bank Service Charges
SUBTRACTED from the balance per books column
Chap 7 Cash:Bank Reconciliation:
Balance per book statement adjustments
Note and interest collections
ADDED to balance
Key Question to ask when preparing a bank reconciliation
Who knows about the transaction and who doesn't yet
After the bank reconciliation has been prepared....
Each reconciling item in the balance per books column must be recorded.
Chap 8 Receivables:
Bad Debts
Direct Write Off Method
When a specific customers account is uncollectible
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.
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
Chap 8 Receivables
Interest on a 12,000, 90-day note, 10%
$12,000x10%x90/360 = 300
Chap 8 Receivables
Note Receivable
recorded at face value. if a note exchanged for cash--->
DEBT to notes receivable
CREDIT to cash
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
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
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
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.
Chap 9
Cost Principle to Assets
Revenue Expenditures
cost expensed immediately, not included in the cost of a plant asset.
Chap 9
Cost Principle to Assets
Capital Expenditures
cost included in a plant asset account, not expensed immediately
3 Factors of
Depreciation
Cost, Useful life, Salvage Value
Chap 9
Depreciation
Journal Entry
Depreciation
Accumulated Depreciation
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
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.
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
Chap 9
Depreciation
Disposal
Asset account is CREDITED
Accumulated depreciation is DEBITED
Chap 9
Depreciation
Disposal is a sale
book value of the asset is compared with proceeds of the sale.
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
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
Chap 9
Depreciation
Evaluating use of plant asset
Return on assets Ratio
net income/average assets
high ratio preferred.
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.
Chap 10
Liabilities
Secured Bond
there is specific collateral
Chap 10
Liabilities
Unsecured Bond/Debenture Bond
general credit of borrower
Chap 10
Liabilities
Convertible Bond
converted to common stock at bondholders option
Chap 10
Liabilities
Callable Bonds
subject to retirement at a stated dollar amount prior to maturity at the of issuer
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