Accounting Chapter 1

Front 1

Form of business organization: Simple to establish, owner controlled, tax advantages, and personal liability.

Back 1

Sole Proprietorship

Front 2

Form of business organization: Simple to establish, shared control, broader skills and resources, tax advantages, and personal liability.

Back 2

Partnership

Front 3

Form of business organization: Easier to transfer ownership, eaiser to raise funds, and no personal liability.

Back 3

Corporation

Front 4

The information system that identifies, records, and communicates the economic events of an organization to interested users.

Back 4

Accounting

Front 5

Managers who plan, organize, and run a business.

Back 5

Internal users

Front 6

Three Types of Business Activity

Back 6

Financing, Investing, and Operating

Front 7

Business Activity: borrowing money and issuing shares of stock in exchange for cash.

Back 7

Financing

Front 8

Amounts owned to creditors (in the form of debt and other obligations)

Back 8

Liabilities

Front 9

Liability to the bank for money borrowed.

Back 9

Note Payable

Front 10

Debt securities sold to investors that must be repaid at a particular date some years in the future.

Back 10

Bonds payable

Front 11

The total amount paid in by stockholders for the shares they purchase.

Back 11

Common Stock

Front 12

Payments to stockholders

Back 12

Dividends

Front 13

Involves the purchase of those resources a company needs in order to operate

Back 13

Investing

Front 14

Resources owned by a business

Back 14

Assets

Front 15

Making and selling the product

Back 15

Operating

Front 16

The increase in assets resulting from the sale of a product or service in the normal course of business.

Back 16

Revenue

Front 17

Goods available for future sales to customers

Back 17

Inventory

Front 18

The right to receive money from a customer in the future.

Back 18

Accounts Receivable

Front 19

The cost of assets consumed or services used in the process of generating revenue.

Back 19

Expenses

Front 20

The obligations to pay for goods purchased on credit from suppliers.

Back 20

Accounts Payable

Front 21

Financial statement that presents a picture at a point in time of what your business owns and what it owes (assets and liabilities)

Back 21

Balance Sheet

Front 22

Financial statement that shows how successfully your business performed during a period of time (revenues and expenses)

Back 22

Income Statement

Front 23

Financial statement that indicates how much of a pervious income was distributed to you and the other owners in the form of dividends, and how much was retained in the business to allow for future growth

Back 23

Retained Earnings Statement

Front 24

Financial statement that shows from what sources your business obtained cash during a period of time and how that cash was used

Back 24

Statement of Cash Flows

Front 25

Net income retained in the corporation

Back 25

Retained Earnings

Front 26

ASSETS= LIABILITIES + STOCKHOLDER'S EQUITY

Back 26

Basic Accounting Equation

Front 27

Reports the cash effects of a company's operating, investing, and financing

Back 27

Statement of Cash Flows

Front 28

Financial statements that report info for more than one period and allow users to compare the financial position of the business at the end of an accounting period with that of previous periods.

Back 28

Comparative Statements

Front 29

Includes financial statements, management discussion and analysis, notes to the financial statements, and an independent auditor's report.

Back 29

Annual Report

Front 30

Included in the annual report: covers various financial aspects of a company inc. its ability to pay near-term oblgiations, its ability to fund operations, and results of operations.

Back 30

Management Discussion and Analysis

Front 31

In annual report: explanatory notes and supporting schedules that clarify info presented in the financial statements, and expand where additional detail is needed.

Back 31

Notes to the Financial Statements

Front 32

A report prepared by an independent outside auditor. It states the auditor's opinion as to the fairness of the financial position and results of operation and their conformances with GAAP.

Back 32

Auditor's Report

Front 33

An accounting pro who conducts an independent examination of a company's financial statements. (CPA)

Back 33

Auditor

Front 34

If the auditor is satisfied with the representation of a company's financial position, they give this.

Back 34

Unqualified opinion

Front 35

Groups together assets and liabilities by standard classifications and similar economic characteristics

Back 35

Classified balance sheet

Front 36

Assets that a company expects to convert to cash or use up within one year

Back 36

Current assets

Front 37

The average time that it takes to purchase inventory, sell it on account, and then collect cash from customers

Back 37

Operating cycle

Front 38

Investments in stocks and bonds of other corporations that are normally held for many years.

Back 38

Long-term investments

Front 39

Assets with relatively long useful lives that a company is currently using in operating the business.

Back 39

Property, plant and equipment

Front 40

Allocating the cost of assets to a number of years.

Back 40

Depreciation

Front 41

The total amount of depreciation that the company has expensed this far in the asset's life.

Back 41

Accumulated Depreciation

Front 42

Do not have physical substance yet often are very valuable

Back 42

Intangible assets

Front 43

Obligations that the company is to pay within the coming year.

Back 43

Current liabilities

Front 44

Obligations that a company expects to pay after one year

Back 44

Long term liabilities

Front 45

The investments of assets into the business by the stockholders

Back 45

Common stock

Front 46

The income retained for use in the business.

Back 46

Retained earnings

Front 47

Common stock and retained earnings make up what on the balance sheet?

Back 47

Stockholder's Equity

Front 48

Expresses the relationship among selected items of financial statement data.

Back 48

Ratio analysis

Front 49

Measures the operating success of a company for a given period of time

Back 49

Profitability ratios

Front 50

Measures the net income earned on each share of common stock.

Back 50

Earnings per share

Front 51

Net income - preferred stock dividends/average common shares outstanding

Back 51

EPS

Front 52

Reports all changes in retained earnings and common stock

Back 52

Statement of stockholder's equity

Front 53

Its ability to pay obligations expected to become due within the next year or operating cycle

Back 53

Liquidity

Front 54

Current assets- current liabilities

Back 54

Working Capital

Front 55

Measures the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.

Back 55

Liquidity ratios

Front 56

Current assets/ current liabilities

Back 56

current ratio

Front 57

A company's ability to pay interest as it comes due and to repay the balance of a debt due at its maturity

Back 57

Solvency

Front 58

Measures the ability of the enterprise to survive over a long period of time.

Back 58

solvency ratio

Front 59

measures the percentage of assets financed by creditors: total liabilities/total assets

Back 59

debt to total assets ratio

Front 60

Provides financial info about the sources and uses of a company's cash: Reports the cash effects of a company's operating, investing, and financing activities.

Back 60

Statement of cash flows

Front 61

Describes the cash remaining from operations after adjusting for capital expenditures and dividends

Back 61

Free cash flow

Front 62

Cash provided by operations-capital expenditures-cash dividends

Back 62

Free Cash Flow Equation

Front 63

A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes

Back 63

GAAP

Front 64

Agency that oversees U.S. financial markets and accounting standard-setting bodies

Back 64

Securities and Exchange Commission

Front 65

The primary accounting setting body in the U.S

Back 65

Financial Accounting Standards Board

Front 66

Financial statments provide relevant info that helps PREDICT future events and PROVIDE FEEDBACK about prior expectations for the financial health of a company. Must be TIMELY.

Back 66

Relevance

Front 67

The information can be depended on- must be VERIFIABLE, a FAITHFUL REPRESENTATION, and NEUTRAL

Back 67

Reliability

Front 68

Results when different companies use the same accounting principles: MUST DISCLOSE info used

Back 68

Comparibility

Front 69

A company uses the same accounting principles and methods from year to year

Back 69

Consistency

Front 70

The system of collecting and processing transaction data and communicating financial info to decision makers

Back 70

Accounting Information System

Front 71

The process of identifying the specific effects of economic events on the accounting equation

Back 71

Transaction analysis

Front 72

Investment of cash by stockholders

Back 72

Debit cash and credit common stock

Front 73

Note issued in exchange for cash

Back 73

Debit cash and credit notes payable

Front 74

Purchase of office equipment for cash

Back 74

Credit cash and debit office equipment

Front 75

Receipt of cash in advance from customer

Back 75

Debit cash and credit unearned revenue

Front 76

Services provided for cash

Back 76

Debit cash and credit retained earnings

Front 77

Services provided on account

Back 77

Debit accounts receivable and credit retained earnings

Front 78

Payment of rent

Back 78

Credit cash and debit retained earnings for rent expense

Front 79

Purcahse of insurance policy in cash

Back 79

Credit cash and debit prepaid insurance

Front 80

purchase of supplies on account

Back 80

credit accounts payable and debit supplies

Front 81

Hiring of new employees

Back 81

no transaction occurs

Front 82

payment of dividend

Back 82

credit cash and debit the retained earnings (payment of dividend)

Front 83

payment of cash for employee salaries

Back 83

credit cash and debit retained earnigns for salary expense

Front 84

An individual accounting record of increases and decreases in a specific asset, liability or stockholder's equity item.

Back 84

Account

Front 85

Three part account: the title, debit side (left) and credit side (right)

Back 85

T account

Front 86

The two-sided effect of each transaction is recorded in appropriate accounts.

Back 86

Double-entry system

Front 87

The side the increase happens on

Back 87

The normal balance

Front 88

Increase assets and decrease liability

Back 88

Debits

Front 89

Decrease assets and increase liabilities

Back 89

Credits

Front 90

Basic steps in the recording process

Back 90

Analyze, journalize, post

Front 91

An accounting record where the transactions are recorded in chronological order

Back 91

Journal

Front 92

Discloses in one place the complete effect of a transaction, provides a chronological record, and helps prevent or locate errors.

Back 92

General journal

Front 93

Lists accounts and their balances at a given time

Back 93

Trial balance

Front 94

Accounting divides the economic life of a business into artificial time periods (a month, quarter, or year)

Back 94

Time period assumption

Front 95

Requires that companies recognize revenue in the accounting period in which it is earned.

Back 95

Revenue Recognition Principle

Front 96

The practice of expense recognition that dictates that efforts (expenses) be matched with accomplishments (revenues).

Back 96

Matching Principle

Front 97

Transactions that change a company's financial statements are recorded in the periods in which the events occur.

Back 97

Accrual-basis accounting

Front 98

Companies record revenue only when cash is received. They record expense only when cash is paid

Back 98

Cash-basis accounting

Front 99

Ensure that the revenue recognition and matching principles are followed.

Back 99

Adjusting entries

Front 100

Expenses paid in cash and recorded as assets before they are used or consumed

Back 100

Prepaid expenses

Front 101

Cash received and recorded as liabilities before revenue is earned

Back 101

Unearned revenue

Front 102

Revenues earned but not yet received in cash or recorded.

Back 102

Accrued revenues

Front 103

Expenses incurred but not yet paid in cash or recorded

Back 103

Accrued expenses