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102 Cards in this Set
- Front
- Back
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Corporation Characteristics
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1. Easy to transfer ownership :)
2. No personal liability :) 3. Taxed 2 times :( |
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Retained Earnings Calculation
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Previous R/E + Net Income - Dividends
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Accounting Equation
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Assets = Liabilities + S/E
AKA Balance Sheet |
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Financial Statement Components
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1. Managment Discussion
2. Notes 3. Auditors Report 4. Financial Statements |
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GAAP
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Rules and practices for companies about how to measure assets, liabilities, expenses, revenues, ETC
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FASB
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Primary accounting standard setting body in US
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IASB
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Issues standards to countries outside of the US
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PCAOB
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Determines auditing standard and reviews the performance of auditing firms
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Materiality
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How much impact a financial statement has on the company's overall financial condition and operations.
EX> Don't have to depreciate a small item over its useful life |
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Cost VS Market Value
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All items are recorded at cost even if the market value changes over time
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Transaction Analysis
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Process of identifying the effects of economic events on the accounting equation.
EX> How assets / liabilities / SE change due to a transaction |
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Debit Balance accounts (+/-)
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Assets, Dividends, Expenses
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Credit Balance accounts (-/+)
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Liabilities, Common Stock, Retained Earnings, Revenue
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Accounting Cycle
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1. Analyze Data
2. Journalize 3. Post 4. Unadjusted Trial Balance 5. Adjusting Entries 6. Adjusted Trial Balance 7. Financial Statements 8. Close Books |
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Recording Transactions
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1. Analyze transactions and their affects on the accounts
2. Enter information to journal 3. Transfer journal entries to ledger (T-Accounts) |
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Accrual Basis of Accounting
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All transactions are recorded in the period in which the transaction occured - even if no cash is recieved.
Revenues recorded when earned and expenses when incurred. VS Cash Basis - only recorded when cash is recieved - MISLEADING |
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Adjusting Entries
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Includes one income statement item (rev, exp) and one balance sheet item (asset, liab, S/E)
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Temporary Accounts
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Revenue, Expense, Dividednds
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Permanant Accounts
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Asset, Liability, S/E
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Closing Entries
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Close all temporary accounts to the S/E account
Net income / loss and dividends moved to R/E Temp accounts > Income summary > R/E |
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Transaction Analysis
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Process of identifying the effects of economic events on the accounting equation.
EX> How assets / liabilities / SE change due to a transaction |
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Debit Balance accounts (+/-)
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Assets, Dividends, Expenses
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Credit Balance accounts (-/+)
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Liabilities, Common Stock, Retained Earnings, Revenue
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Accounting Cycle
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1. Analyze Data
2. Journalize 3. Post 4. Unadjusted Trial Balance 5. Adjusting Entries 6. Adjusted Trial Balance 7. Financial Statements 8. Close Books |
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Recording Transactions
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1. Analyze transactions and their affects on the accounts
2. Enter information to journal 3. Transfer journal entries to ledger (T-Accounts) |
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Accrual Basis of Accounting
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All transactions are recorded in the period in which the transaction occured - even if no cash is recieved.
Revenues recorded when earned and expenses when incurred. VS Cash Basis - only recorded when cash is recieved - MISLEADING |
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Adjusting Entries
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Includes one income statement item (rev, exp) and one balance sheet item (asset, liab, S/E)
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Temporary Accounts
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Revenue, Expense, Dividednds
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Permanant Accounts
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Asset, Liability, S/E
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Closing Entries
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Close all temporary accounts to the S/E account
Net income / loss and dividends moved to R/E Temp accounts > Income summary > R/E |
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Book Value of Depreciable Assets
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Cost - Accumulated Depreciation
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Multi Step Income Statement
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sales rev - returns / allow = net sales
net sales - COGS = gross profit gross profit - op exp = Income from operations Income from operations +/- other rev/exp = pre-tax income pre-tax income - income tax exp = net income |
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Perpetual System
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Detailed records of the cost of each inventory sale and purchase.
No entry needed at the end of the period. COGS is changed every time a sale occurs Good for large companies with a lot of inventory More costly but minimized with computer systems |
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Periodic System
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No detailed inventory records throughout the period - all entries occur at the end.
COG on hand in begining +COG purchased - COG on hand at the end = COGS Not as much control over inventory - a lot more room for fraud and error |
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Cost of goods sold
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Expense
Sell inventory, we take our cost out of inventory and run it through COGS |
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Discounts
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2/10 n/30
Means 2% discount if paid within 10 days, but if not total amount of invoice is due after 30 days |
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FOB Shipping Point
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Buyer pays freight.
Ownership is transfered to buyer once goods are in transportation |
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FOB On Board
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Seller pays freight costs.
Ownership is transfered to buyer once the goods arrive at the destination |
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Consigned Goods
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Holding the goods that belong to somebody else and selling them for a fee but never having ownership of goods.
EX> car, boat and antique dealers |
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Physical Inventory Count
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Count taken at end of the accounting period. Counting, weighing or measuring all on hand inventory.
Easiest to do when inventory levels are low. |
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Lower of Cost or Market
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When a product plumets in cost due to new styles or technology.
A lot of money is lost when this happens. Value is lower than the cost the company paid. The best choice among ACG alternatives is the method least likely to overstate assets and net income |
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Inventory Errors
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Having too little or too much inventory on hand.
Days in inventory and inventory turnover ratio evaluate the errors. |
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FIFO
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Earliest goods purchased are first to be sold.
Costs of earliest goods purchased are used then determining COGS Ending inventory reflects what was most recently purchased. |
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LIFO
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Most recently purchased inventory is sold first.
Ending inventory reflects oldest inventory purchased. Costs of most recently purchased goods are used to determine COGS |
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Average Cost Method
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Uses the average cost of goods available for sale.
Average is applied to remaining units and units sold. COG available for sale / total unites available for sale = weighted average unit cost. |
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Prices Rising Overtime
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LIFO VS FIFO
LIFO: COGS is higher and ending inventory is lower. Lower net income. FIFO: COGS is lower and ending inventory is higher. |
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Internal Controls - 5 primary components
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1. Control environment
2. Risk assessment 3. Control activities 4. Monitoring information 5, Communication |
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Internal Controls - 6 principles
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1. Establish responsibility
2. Segregation of Duties 3. Documentation 4. Physical Controls (Alarms) 5. Independant Internal Verification (review employees work) 6. HR Controls |
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Internal Controls - Human Element
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Employee carlessness and fatigue can disrupt the system.
There is no perfect system! |
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Bank Recconciliation - Books
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Balance Per Books
Cash Balance + N/R Collections - Bank Errors - NSF Check - Bank Service Charges |
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Bank Reconciliation - Bank
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Cash Balance Per Bank
Cash Balance + Deposits in Transit - Outstanding Checks = Cash Balance |
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Cash Management
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Cash used may not generate cash for a company for a long time, which is why cash must be managed closely.
Always want to convert recievables to cash quickly, keep inventory levels low, delay payment of liabilities and invest idle cash. |
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Operating Cycle
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1. Cash
2. Buy Inventory 3. Merchandise Inventory 4. Sell Inventory 5. A/R 6. Recieve Cash 7. CA$H |
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Balance Sheet Presentation
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All recievables should be listed.
Recievables - Allowance for doubtful trade recievables = Net recievables |
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Allowance Method
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Estimating uncollectable A/R at the ed of each period > Planning ahead.
Expenses and Revenues are matched better on Income Statement |
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Net Relizable Value
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Net amount a company estimates that it will recieve in cash from recievables.
A/R on Balance Sheet |
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Notes Recievable
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Promissory notes is a written promise to pay an amount by a certain time.
Stronger legal claim than A/R. Has interest. |
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Plant Assets (land, equipment and building)
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Taxes and expenses paid at time of purchase are added to cost / price paid of asset, as well as expenses incurred to set asses up for intended use.
When something is done to add to the useful life of an asset the price is added to the price paid for the asset |
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Cost of Land
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Price paid + closing costs + brokers commission + property tax = COST
NOT DEPRECIATED |
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Cost of Buildings
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Price paid + Closing cost + Commissions = COST when buying
ALL fees when building a building for all steps are a part of cost. |
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Cost of Equipment
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Price paid + Taxes paid + Freight charge + Set up cost + Transit insurance = COST
Depends if equip is used one time or recurring and if it can be used for a long time vs short. |
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Impairments
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Permanant decline in value of an asset (market value falls below book value)
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Big Bath
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making bad results look worse so next year they will look good
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Straight-Line Depreceiaton
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Most Common!
Equal amounts expensesd each year of useful life. Cost - Salvage Value = Depreciable cost Depreciable cost / useful life = Depreciation expense |
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Units of Activity
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Used for machinery - not buildings and furniture.
Life of an asset is considered units of production. # of units / total units = Depreciable value Depreciable value X % of production = Depreciation Exp |
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Double Declining
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Acellerated method - more depreciation in begining. Very fastly declining.
Double percentage used in Straight line. Doubled % X Book value = Depreciation Exp. Check book value oftern to make sure it isn't at the salvage value. |
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Disposals - Sale
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Gain on sale if sale price > book value.
Loss on sale if sale price < book price -OR- item was discarded and not sold. |
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Disposals - Retirement
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Equipment is discarded and will incur a loss.
No $ recieved because item no longer has value |
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Disposals - Exchange
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Old equipment is traded for new equipment and there is no exchange of money. Cycle restarts.
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Amortization of Intangibles
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Similar to depreciation > usually straight line.
EX> distributing the cost of a patent over its useful life rather than in the year it was purchased. |
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Goodwill
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Must purchase another company.
Dont amortize but always check for impairment. Price paid - (assets - liab) = goodwill |
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Research and Development
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Uncertain that the costs will lead to a patent or copyright. May happen but not for sure.
Always and expense! Rights may be awarded long after the research is paid for. |
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Current VS Longterm Liabilities
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Current> Liabilites that will be resolved over the next year.
EX> A/P, N/P, interest payable, saleries payable, payroll tax payable LONG> will not be paid in the near future EX> Bonds, N/P with interest |
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Interest Exp
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Accrues over the life of a note and the issuer must periodically record that.
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Sales Tax
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Percentage of the sales price> varrying state to state.
Pay more as you spend more. Record at the time of sale. |
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Issuing Bonds
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Bond certificate is issued to investor.
Face value = due at maturity of bond Maturity Date = final payment is due to investor RATE is annual INTEREST is paid semi-annually |
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Bond Discounts
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Market is paying more than the bonds interest rate.
Bond sells for less than face value |
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Bond Premium
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Market is paying less than the bonds interest rate.
Bond sells for more than face value. Total cost of borrowing is less than interest paid. |
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Par Value of Stock
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Capital stock that has been assigned a value per share in the corporate charter. Stocks that stockholders cannot withdraw. Lowest value stock can be sold for
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Issuance of Stock
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Corporations can issue stock directly to investors or through an investment bank.
Also, sold publicly through organized securities exchange |
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Authorized Stock
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Amount of stock a company is authorized to sell on its charter.
Once all our sold permission from the state must be granted to sell more. |
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Outstanding Stock
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Number of shares of issued stock that being held by stock holders currently.
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Treasury Stock
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Corporations own stock that has be re-acquired by the corporation and is being held for future use.
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Cash Dividends
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More common than other types
Requires cash to pay and R/E to pay from. To pay a cash dividend a company must have R/E, enough cash and declared dividends |
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Stock Dividends
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When cash isn't available it is paid in stock.
Reduces R/E and increases stock account. |
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Stock Split
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Similar to stock dividend.
Issuing additional shares to stockholders according to percentage of ownership. Ownership proportion doesnt change. Changes price of stock, market value, par value, # of shares, decreases market value per share. |
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Horizontal Analysis
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Compares a company to itseld from a previous period or year.
Comparing each line item to the previous year to find increase / decrease. |
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Verticle Analysis
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Use only one years financial statement and compare the same year to itself.
EX> current assets are 22% of total assets |
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Liquidity Ratios
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Measures short term ability of a company to pay its maturing obligations and meet needs for cash.
Current Ratio, Inventory turnover ratio, Recievables turnover ratio |
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Solvency Ratios
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Measure of ability of the company to survive over a long period of time.
Debt to Total Assets |
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Profitability Ratio
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Measure operating succcess or income of a company for a given period of time.
Earnings per share, price earnings ratio |
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Leverage
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Trading on the equity.
How to use our debt financing to generate profit. |
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Future Value
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Value at a future date of a given amount invested.
FV=p(1+i)^n FV= future value p = principal i= interest rate n = # of periods |
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Present Value
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Value of a given amount to be paid or recieved in he future, assuming compound interest.
Based on: 1. dollar amount to be recieved 2. length of time until amount is recieved. 3. interest rate PV= FV / (1+i)^n |
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Current Ratio
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Current Assets / Current Liab
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Inventory Turnover Ratio
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Cost of Goods sold / Average Inventory
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Recievables Turnover Ratio
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Net Credit Sales / Avg. Net Recievables
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Earnings per Share
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(Net income - preferred stock div)/(avg common shares outstanding)
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Price-Earnings Ratio
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Price of stock / Earnings per share
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Stockholders Equity
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Common stock + Retained earnings = S/E
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Interest on Notes Recievable
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Face Value X Annual Interest Rate X Time in Years
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Income Statement
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Revenue - Expenses = Net Income
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