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88 Cards in this Set
- Front
- Back
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List Cash and Cash Equivalents |
Cash: Currency, coins, balances and checks in accounts and money orders Cash equivalents: investments maturing in 3 months. E.g. Money market funds, T-bills, certificates of deposits) |
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Bank Reconciliation: what are the two entries (titles) for before and after for the company and bank balances? |
Before: Balance per bank statement; Balance per company ledger. After: Bank balance per reconciliation; Company balance per reconciliation. |
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Define: Credit Sales |
Sales or Services on Account. I.e. Accounts Receivables |
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Define: Trade Discounts. How are they recorded? |
A reduction in the listed price of a product or service. They are recorded indirectly by recording the sale at the discounted price. |
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Define: Sales Return. How is it recorded? |
Product return by a dissatisfied customer. It is recorded by either reducing accounts receivable or cash, depending on the type of payment. |
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Define: Sales allowance. How is it recorded? |
Partial refund. It is recorded by either reducing accounts receivable or cash, depending on the type of payment as a contra revenue account. |
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Define: sales discount. |
Reduction in the amount to be paid if payment is made within a specified period of time. E.g. 2/10 n/30. |
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Define: Net Revenue (or Net Service Revenues). |
Service revenues earned less sales discounts, returns, or allowances. |
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Percentage of receivables method: what is it also known as and why? |
Balance sheet method because bad debts are estimated based on a balance sheet account: accounts receivables. |
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Define: Multi-step income statement |
Income statement which reports multiple levels of income from different activities. It contains gross profit, operating income, income before income taxes and income taxes. |
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Gross Profit formula |
Net Sales - Cost of Goods Sold |
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Operating Income formula |
Gross Profit - Operating Expenses |
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Income Before Income Taxes formula |
Operating Income + nonoperating revenues - nonoperating expenses |
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Net Income formula (multi-step) |
Income Before Income Taxes - Income Tax Expense |
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What can comprise operating expenses? |
Operating expenses come from the firm's primary operations such as Utilities, Advertising, Supplies, etc. |
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What can comprise nonoperating revenues and expenses? |
Both are don't come from the firm's primary operations. An example of revenue is interest earned. An example of expense is dividends. |
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Inventory Formula (with Cost of Goods Sold) |
Total Inventory = Ending Inventory + Cost of Goods Sold |
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Which method of inventory calculations will result in higher profitability when inventory costs are rising? |
First In First Out |
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Which method of inventory calculations will result in higher profitability when inventory costs are falling? |
Last In First Out |
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What are the steps in a multi-step income statement? |
1. Gross profit: Sales Revenue - Cost of Goods Sold 2. Operating Income: Gross Profit - Operating expenses 3. Net Income before taxes: Operating Income + nonoperating revenues - nonoperating expenses 4. Net Income: Net Income before taxes - Income Tax |
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What are the two systems for recording inventory transactions? |
Perpetual System and Periodic System |
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Define: Perpetual System |
Perpetual system is a method to account for inventory transactions. It adjusts inventory on a continual basis; increasing Cost of Goods Sold when selling inventory. |
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What is the difference between FOB Shipping point and destination? |
FOB Shipping point recognizes the transfer of title when goods are shipped. FOB destination recognizes it at the destination. |
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What are the three additional inventory transactions and how do they affect it? |
Freight Charges which increase inventory, Purchase Discount and Return which decrease it. |
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How is freight-in charges paid? What is the account name for periodic system? |
Cash. Freight-in |
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Lower-of-cost-or-market method: how is it adjusted? |
Debit Cost of Goods Sold Credit Inventory |
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How are freight charges and purchase discounts cost per unit calculated? How does this affect the cost per unit when calculating CoGS? |
Freight charges = Freight-in/Units Purchase Discounts = Purchase Discount/Units Cost per unit + Freight-in charge per unit - Purchase discount per unit |
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For Periodic System, what are the temporary accounts? |
Purchases, Freight-in, Purchase Discounts and Purchase Returns |
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Under Periodic System, how is a sale recorded? |
Debit Accounts Revenue Credit Sales Revenue (no entry for cost of goods sold since it is calculated at the end of the period) |
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Direct write-off method: how is recorded? |
Debit Bad-debt Expense Credit Accounts Receivable |
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Define: Capitalize |
Recording an expenditure as an asset. Expenditure: have a choice of recording as an expense of the current period or as an asset and depreciate it as an expense over time. |
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Basket Purchase allocation formula. |
(Fair Value(a)/Total fair value) * Basket Purchase Amount |
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Define: depletion |
The allocation of the cost of a natural resource over its service life. |
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Define: Patent |
An exclusive right to manufacture a product or to use a process. |
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Define: goodwill |
The value of the entire company, beyond its net identifiable assets. |
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Generally, how can one determine whether an expenditure is classified as an expense or capitalized? |
If it increases future benefits (i.e. more than one period), it is capitalized. If only within the current period, it is classified as an expense. |
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When is goodwill recorded? |
Only during the acquisition of a business |
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What are the different types of expenditures after acquisition? |
1. Repairs and maintenance: generally an expense; capitalized if increases future benefits. 2. Improvements: capitalize 3. Legal defense of intangible assets: capitalize if won; expense if lost *Materiality: the size of the asset can determine how it is classified. E.g. stapler having 20 years service life is expensed. |
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Define: Book Value (or Carrying Value) |
The original cost of an asset less its accumulated depreciation |
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What is the difference between amortization and deprecation? |
Depreciation is for tangible assets; Amortization is for non-tangible assets. |
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Define: Service Life and Residual Value. |
Service life is the expected time the company expects to use an asset. Residual value is the estimated value of an asset at the end of its service life. |
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If there is a change in depreciation estimate, how does it change depreciation? |
It changes the current and future periods, but not prior ones. |
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Straight-line method: how is depreciation rate calculated? |
Depreciation expense/Depreciable Cost OR 1/Service Life |
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How is depreciable cost calculated? |
Asset cost - residual value |
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Activity based: how is depreciation rate calculated? |
Depreciable cost/Total units expected to produce |
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Depreciation Schedule: how are the tables usually formatted? |
Year, Calculation, End-of-year Amount |
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What are the possible expenditures for land? |
Price, Fees for attorney, real estate agent commissions, title, title search and recording fees, clearing, filling, leveling and removing old buildings. All expenditures to get it ready for use. |
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What part of land is depreciable? |
Land improvements |
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What are the possible expenditures for building? |
Cost, realtor commissions and legal fees. |
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How are intangible assets developed internally reported? |
As an expense in the income statement as they are incurred as it is hard to know its benefits in future periods. |
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Goodwill calculation: |
Purchase price - fair value of net assets acquired. Net assets = Identifiable assets - liabilities assumed |
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For the sale, retirement or exchange of long-term assets, how are they recorded, with gain or loss? |
Sale: Debit Cash Debit Accumulated Depreciation Credit Equipment (original cost) Debit Loss/Credit Gain Retirement: Debit Accumulated Depreciation Debit Loss (Equipment value - accumulated depreciation) Credit Equipment (original cost) Exchange: Debit Equipment (new) Debit Accumulated Depreciation (old) Credit Cash Credit Equipment (old) Debit Loss/Credit Gain: Trade-in allowance - book value |
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Where and how are gains and losses recorded? |
Income statement as nonoperating revenues and expenses.
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Define: impairment |
Future cash flows (or future benefits) generated by a long-term asset is below its book value. Book value < Fair value < Future Cash Flows. Impairment occurs when this order is not met. |
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When is impairment only recorded? How? |
When book value exceeds both fair value and future cash flow. Debit Loss (Book value - Fair Value) Credit (related asset) |
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How are research and development and patent expenditures capitalized or expensed? |
Research and Development Expense (all non-legal fees) Patent (capitalized as legal fees) |
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Define: sales tax payable. How is it recorded? |
Additional cash collected to be paid to the government. It is recorded as a credit to sales tax payable. |
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Define: line of credit. When is it recorded? |
An informal agreement where a company can borrow funds from a bank up to a certain limit without paperwork. It is recorded only when the company borrows, not when it is first established. |
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Define: commercial paper |
Companies borrowing from another bank, usually maturing within 30 to 270 days. |
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Define: current portion of long-term debt. |
The current payment for a long-term note (current liabilities). Total borrowings = current portion of long-term debt + long-term debt |
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How are contingent liabilities recorded? |
Debit Loss Credit Contingent Liability ONLY if a loss is probable and the amount is reasonably estimated. If not probable, it could be mentioned as a full disclosure in a financial statement. |
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How is warranty calculated and recorded? How is it recorded when claimed? |
Percentage of sales. Debit Warranty Expense Credit Warranty Liability When claimed, Debit Warranty Liability Credit Cash |
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What are the difference between accounts and notes payable? How long does an interest cover? |
Accounts payable is for the current period (current liabilities). Notes payable is more than the current period. Interest is an annual rate. |
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Reissuing Treasury Stock: how is it recorded? How does it change if there is a loss or gain? |
Debit Cash Credit Treasury Stock *Debit/Credit Additional Paid-in Capital as the difference of stock price bought - stock price issued, NOT PAR VALUE. |
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What are the records for declaration date, record date and payment date? |
Declaration Date: Debit Dividends Credit Dividends Payable Record Date: (no entry required) Payment Date: Debit Dividends Payable Credit Cash |
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Define: stock dividends and splits |
Distributing additional shares of stock to shareholders as opposed to cash. This is to reduce the stock price to a 'favorable' range to attract new investors. |
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Define: Horizontal Analysis |
Analyze trends in financial statement data for a single company over time. |
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Define: Vertical Analysis |
Vertical Analysis, or Common-Size Analysis, is expressing the items within financial statements (e.g. balance sheets), as a percentage of the same base amount, such as total assets. |
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How is horizontal analysis calculated? |
[X(new) X(old)]/X(old) |
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Define: Liquidity |
The company's ability to pay its current liability. |
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Define: Solvency |
The company's ability to pay its long-term liabilities. |
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What are the various liquidity ratios (8)? How are these calculated? |
1. Receivables Turnover Ratio: net credit sales/average accounts receivables 2. Average collection Period: 365/receivables turnover ratio. 3. Inventory Turnover Ratio: Cost of Goods Sold/Inventory 4. Average Days in Inventory: 365/Inventory TR 5. Current Ratio: Current Assets/Current Liabilities 6. Acid-Test Ratio: (Cash + Current Investments + Accounts Receivables)/Current Liabilities 7. Debt to Equity Ratio: Total Liabilities/Stockholders' Equity 8. Times interest earned ratio: (Net Income before interest and expense + Interest Expense + Tax Expense)/Interest Expense |
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Define: receivables turnover ratio |
The average frequency a company takes to collect its receivables during the year.
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Define: average collection period |
The average time it takes to collect accounts receivables. |
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Define: inventory turnover ratio and average days in inventory. |
The average frequency a company sells its entire inventory during the year. |
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Define: current ratio |
Comparison of current assets to current liabilities. A ratio of more than one indicates that has enough current assets to cover it short term liabilities. |
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Define: acid-test ratio |
A more conservative method to calculate the company's liquidity. It only takes into account assets more easily converted to cash, such as cash, current investments and accounts receivables |
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Define: debt to equity ratio |
The ratio of long-term liabilities to stockholders' equity, or the company's solvency. |
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Define: times interest ratio |
A comparison of interest payments to a company's income available to pay them. (Net Income before interest and expense + Interest Expense + Tax Expense)/Income Expense |
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Define: profitability ratios |
The earnings or operating effectiveness of a company |
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What are the 6 profitability ratios? How are these calculated? |
1. Gross Profit Ratio: Gross Profit/Net Sales 2. Return on Assets: Net Income/Average total Assets 3. Profit Margin: Net Income/Net Sales 4. Asset Turnover: Net Sales/Average total Assets 5. Return on Equity: Net Income/Average Stockholders' Equity 6. Price-Earnings Ratio: Stock Price/Earnings Per Share |
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Define: gross profit ratio |
The portion of each dollar of sales above its cost of goods sold. |
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Define: return on assets |
The income of the company on each dollar invested. Net income/Average Total Assets. It can also be calculated as Profit Margin * Asset Turnover |
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Define: Profit Margin |
The income earned on each dollar of sales |
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Define: asset turnover |
Measurement of sales volume in relation to the investment in assets. Net Sales/Average Total Assets |
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Define: Return on Equity |
Measurement of the income earned for each dollar in the stockholders' equity. Net Income/Average Stockholders' Equity |
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Define: Price-Earnings Ratio (PE Ratio). |
Comparison of a company's share price with its earnings per share. |
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What do investors view as the number one measure of company success? |
Profitability |
