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78 Cards in this Set

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Define a Balance Sheet.
Reports that amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time.
What is a typical heading on a statement?
1. Name of entity
2. Title of the statement
3. Specific date of the statement
4. Unit of Measurement
What is an accounting entity?
Organization for which financial data are to be collected.
State the basic accounting equation.
Assets = Liabilities + Stockholders' Equity
What are assets?
Economic resources owned by the company
What are liabilities?
Company's debts or obligations.
What are stockholders' equity?
Amount of financing provided by owners of the business and earnings.
Define the Income Statement.
Reports the revenues less the expenses of the accounting period.
What is the accounting period?
Time period covered by the financial statements.
What is the Income Statement equation?
Revenues - Expenses = Net Income
What are revenues?
Normally are reported for goods or services that have been sold to a customer whether or not they have yet been paid.
What are expenses?
Represent the dollar amount of resources the entity used to earn revenues during the period.
Define Net Income.
The excess of total revenue over total expenses.
Define Statement of Retained Earnings.
Reports the way that net income and the distribution of dividends affected the finacial position of the company during the accounting period.
State the Retained Earnings equation.
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings.
Define Statement of Cash Flows.
Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.
Three activities
What are flows from operating activities?
Cash flows that are directly related to earning income.
What are flows from investing activities?
Cash flows related to the acquistition or sale of the company's productive assets.
What are flows from financing activities?
Directly related to the financing of the enterprise itself.
What are notes(footnotes)?
Provide supplemental information about the financial condition of a company without which the financial statements cannot be fully understood.
What are the generally accepted accounting principles?
The measurement rules used to develope the information in financial statements.
Define the Financial Accounting Standards Board (FASB)?
Private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles.
What are the three important steps to ensure the accuracy of records?
1. System of Control over both the assets and records of the company
2. External Auditor
3. Board of Directors
What is an audit?
An examination of the financial reports to ensure that they represent what they claim and conform with GAAP.
Define Unit-of Measure Assumption
States that accounting information should be measured and reported in the national monetary unit.
$
What is the continuity assumption?
States that businesses are assumed to continue to operate into the foreseeable future.
What is an asset?
Resources with probable future economic benefits owned by the entity as a result of past transactions.
How do most companies list assets on their balance sheets?
In order of liquidity
What are current assets?
Assets that will be used or turned into cash within one year.
Inventory is always considered this.
What is the historical cost principal?
Requires assets to be recorded at the historical cash-equivalent cost, which on the date of the transaction is cash paid plus the current dollar value of all noncash considerations also given in the exchange.
If you trade your computer plus cash for a new car, the cost of the new car is equal to the cash paid plus the market value of the computer.
What is a liability?
Probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services.
What is stockholders equity?
The financing provided by the owners and by business operations.
What is contributed capital?
Results from owners providing cash to the business.
What are retained earnings?
Cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.
What is a transaction?
There is external events and internal events.
What is an external event in a transaction?
An exchange between a business and one or more external parties to a business.
What is an internal event in a transaction?
A measurable event such as the use of assets in operations.
What is an account?
Standardized format that organizations use to accumulate the dollar effect on transactions on each financial statement item.
Define the Transaction Analysis.
Process of studying a transaction to determine its economic effect on the business in terms of the accounting equation.
What are the two principles of the transaction analysis process?
1) Every transaction affects at least two accounts
2) The accounting equation must remain in balance
What is a debit?
Means the left side of an account.
Left
What is a credit?
Means the right side of an account.
Right
What is a journal entry?
An accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.
What are T-Accounts?
A tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities.
Define the operating cycle?
The time it takes for a company to pay cash to suppliers, sells goods and services to customers, and collect cash from customers.
3 parts to cycle
What is the time period assumption?
Indicates that the long life of a company can be reported in shorter time periods.
What is a revenue?
Increases in assets or settlements of liabilities from ongoing operations.
What is an expense?
Decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period.
What is a gain?
Increase in assets or decreases in liabilites from peripheral transactions.
What is losses?
Decreases in assets or increases in liabilities from peripheral transactions.
Define the Cash Basis Accounting.
Records revenues when cash is recieved and expenses when cash is paid.
Define Accrual Basis Accounting.
Records revenues when earned and expenses when incurred, regardless of the timing of cash reciepts or payments.
Define the Revenue Principle.
States that revenues are recognized when goods or services are delivered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured.
Four conditions
Define the Matching Principle.
Requires that expenses be recorded when incurred in earning revenue
When do most companies make their adjustments?
At the end of the period.
What is the Accounting Cycle?
Process followed by entities to analyze and record transactions, adjust records at the end of the period, prepare financial statements, and prepare the records for the next cycle.
How are the transactions in the general ledger recorded?
Chronologically
What is a Trial Balance?
A list of all accounts with their balances to provide a check on the equality of the debits and credits.
Define a Contra-Account?
An account that is an offset to, or reduction of, the primary account.
Opposite
Revenues are recorded when ______.
Expenses are recorded when ______.
Earned. Incurred.
What are Adjusting Entries?
Entries necessary at the end of the accounting period to measure all revenues and expenses of that period.
What are Deferred Revenues?
Previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned.
Before
What are Accrued Revenues?
Previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amound earned and the related receivable account.
After
What are Deferred Expenses?
Previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amound of expense incurred in using the asset to generate revenue.
What is an Accrued Expense?
Previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account.
The Financial Statements are interrelated. Explain.
Net Income is a component of Retained Earnings, Retained Earnings is a component of Stockholder's Equity, and Stockholder's Equity is a component on the Balance Sheet.
Assets are listed in order of what?
Liquidity.
Liabilities are listed in order of what?
Due Dates.
Define the Earnings Per Share Equation.
EPS = Net Income Available to the Common Stockholder / Weighted Average Number of Shares of Common Outstanding during the Period
What does the Financial Leverage Ratio do?
Examine managers' use of debt as a tool to increase resources that would generate more profit for the shareholders.
What does the Asset Turnover Ratio do?
Examine managers' effectiveness at utilizing assets efficiently to generate more revenues for the stockholders.
Define the Net Profit Margin Equation.
Net Profit Margin = Net Income / Net Sales
What does the Profit Margin Equation do?
Examine managers' effectiveness at controlling revenues and expenses to generate more profit for the shareholders.
What are Permanent (Real) Accounts?
Balance sheet accounts that carry their ending balances into the next accounting period.
What are Temporary (Nominal) Accounts?
Income statement accounts that are closed to Retained Earnings at the end of the accounting period.
Revenue, Expenses, Gains, Losses
What are Closing Entries?
Transfer balances in temporary accounts to Retained Earnings and establishes zero balances in temporary accounts.
Define a Post-Closing Trial Balance.
Should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.
What does Management usually consist of when preparing Annual Reports?
CEO & CFO
Dad