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113 Cards in this Set

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Accounting definition
A system of providing quantitative information primarily financial in nature about economic entities that is intended to be useful in making economic decisions.
Focus of financial accounting is on three primary financial statement. Name them
Balance Sheet, The income statement, statement of cash flows
Name some of the users of financial accounting information
Lenders, investors, company management, suppliers, customers, employees, competitors, government agencies, politicians and the press
The practice of accounting in the US involves adherence to established accounting rules set by...
The FASB
Name the three factors that make RIGHT NOW a time of significant change in accounting
Rapid advance in information technology, the international integration of worldwide business and the increased scrutiny associated with large corporate accounting scandals.
Define Bookkeeping
The preservation of a systematic, quantitative record of an activity
An accounting system is used by businesses for two reasons, name them
1) to handle routing book keeping tasks
2) to structure the information so it can be used to evaluate the performance and status of the business
Financial and Managerial accounting differ, how?
Financial accounting provides information to outside users.
Managerial accounting provides information for internal users.
What financial document "reports the resources of the company (the assets), the company's obligations (the liabilities) and the owners equity?
The Balance Sheet
What financial document "reports the amount of net income earned by a company during a period, with annual and quarterly income statements being the most common?
The Income Statement - The income statement represents the accountant's best effort at measuring the economic performance of a company.
What financial document "reports the amount of cash collected and paid out by a company in the following three types of activities: Operating, investing and financing?
The Statement of cash flows.
What are the three types of activities on the "Statement of cash flows?"
Operating, investing and financing
In the US, the FASB sets the accounting standards. What does the FASB stand for?
Financial Accounting Standards Board
GAAP is defined as?
Generally accepted accounting principles.
In response to the 1929 stock market crash, the Congress created this group to regulate US Stock exchanges
SEC - Securities and Exchange Commission
The international equivalent to the FASB is this board...
IASB - International Accounting Standards Board
The FASB is a government agency - T/F?
False.
The company's resources can also be called -
Assets
The company's obligations can also be called
Liabilities
The net ownership interest of a company can also be called
Owner's equity
What document details how a company obstained and spent cash during a certain period of time?
Statement of cash flows - All of a company's cash transactions are categorizes as operating, investing or financing activities
Where would you find the information on the accounting assumptions used in preparing the statements and also get supplemental infomation not included in the statements themselves?
The notes to the financial statements. Notes are an integral part of the financial statements.
Why is an audit performed by an outside company?
It increases the reliability that users can place on the information in the company's financial statements.
What is the key trade-off in the preparation of useful accounting information?
Relevance vs. reliability. Other concepts include: comparability, conservatism, materiality, and articulation
In general terms, what does the Balance sheet show?
The balance sheet shows what a company owns and what it owes.
In general terms, what does the Income statement show?
The accountants best attempt at measuring the economic performance of a company
In general terms, what does the statement of cash flows show?
It outlines where a company gets its cash and how it spends that cash.
If the company is public, what do you call the owner's equity?
stockholder's equity
What are "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events?"
Assets
What is the residual interest in the assets of an entity that remains after deducting its liabilities?
Owner's equity
Owners withdraw assets
Company suffers a loss
These actions will...
Decrease Owner's equity
Owners invest assets
Company generates a profit
These actions will...
Increase Owner's equity
Define Paid-in capital
When the owners of a corporation invest cash or other assets in the business and receive shares of stock in exchange
What do you call the portion of stockholder's equity that has not been paid to the owners as dividends?
Retained earnings
What do you call the repurchased shares of a company?
Treasury stock
Is treasury stock an asset?
No. Treasury stock is a deduction of shareholder equity.
What do you call a balance sheet that distinguishes between current and long-term assets?
A classified balance sheet
What is the accounting equation?
Assets = liabilities + Owner's equity - A = L + E (Hint - after the test, we're getting some A.L.E!)
How would you twist the accounting equation to get Stockholder's equity?
Assets - Liabilites =Stockholder's equity.
What do you call the idea that personal financial activity is kept separate from business financial activity?
The Entity concept
With items that change in value, at what price do you record them?
Their Historical cost - they are not adjusted for their change in value. But, financial instruments such as investment securities and derivatives are reported in the balance sheet at current market value.
What is the "going concern assumption?
That the company in question will continue in business for the forseeable future
What are expenses?
The amount of assets consumed from the performance of business operations; the opposite of revenues.
The do you call the money made (or lost) on activities outside the normal business of a company?
Gains and Losses
What do you call the difference between revenues and expenses?/
Net Gain or Net Loss
EPS is the most widely cited measure of a company's performance - what is it?
Earnings per share. EPS tells the owner of one share of stock how much of the net gain (loss) belongs to him/her.
When deciding whether or not to recognize revenue, what are the two questions you must answer?
1) Is the promised work done, meaning that the goods have been delivered or the service has been provided?
2) Before recognizing revenue, cash must have been collected or be reasonably assumed to be collected.
What is the best measure of a company's economic performance?
Net Income.
What are the activities involved in producing and selling goods and services and thus comprise the day to day business of a company?
Operating Activities
What activities obtain cash from or repay cash to owners and creditors?
Financing activities
What four general notes would you expect to find in the "Notes to financial statement" section?
Summary of significant accounting policies; addl information about the summary totals found in the statement; disclosure of important information not recognized in the statement; supplementary information required by the FASB or SEC
What do you call the ease in which an outsider can tell what is going on inside a process?
transparency
Define Recognition
Breaking down all the estimates and judements into one number and then reporting that one numbers in the finanical statement.
Why do an external audit?
The outside auditors can give an independent outside opinion on the quality of the financial statements.
To be RELEVANT, the information must do 3 things:
the info must be provided on a timely basis, be useful in evaluating past decisions, and provide some basis for forecasting future financial performance.
Comparability helps data...
be more useful - data is stronger when it can be compared against a benchmark or standard
What is the concept of conservatism?
When in doubt, recognize all losses but don't recognize any gains.
What is the concept of materiality?
Poses the question: Is the item in question large enough to make any difference to anyone?
What is the concept of articulation?
It means that the three primary financial statements are not isolated lists of numbers but are an integrated set of reports on a company's financial status.
Analysis of financial statement numbers can be used to do two main things - what are they?
Diagnose existing problems and forecast how a company will perform in the future.
What statement allows the comparison of financial statements across years and between companies are prepared by dividing all financial statement numbers by sales for the year?
Common-size financial statements
The DuPont Framework decomposes return on equity into three components - what are they?
profitability, efficiency and leverage components
Define financial ratios
The relationship between financial statement amounts
The Debt ratio = total liabilities / total assets and tells you what?
What % of $ a company borrowed to buy its assets.
The current ratio = current assets / current liabilities and tells you what?
They liquidity of the company. Essentially, the company's ability to pay its debts in the short run.
The Return on Sales = Net Income / Sales and tells you what?
How much the company profits from each dollar of sales.
The Asset Turnover = Sales / Total Assets and tells you what?
It gives an overall measure of the company's efficiency (For each dollar of assets, how mand dollars does it generate in sales?)
Return on Equity = Net Income / Stockholder's Equity and tells you what?
Number of pennies earned during the year on each dollar invested
Price Earnings Ratio = Market Value of Shares / Net Income
Amount investors are willing to pay for each dollar of earnings; indication of growth potential
The _________ ratio is the single measure that summarizes the financial status of a company.
Return on Equity = net income / equity
DuPont framework breaks down Return on Equity how?
ROE = profitability x efficiency x leverage

return on sales x asset turnover x assets to equity ratio

net income/sales x sales/assets x assets/equity
When the DuPont framework shows a problem with profitability, where should you look to find expenses to manage?
The Common Size income statement can provide a year over year look at expense that may be growing and thus driving down profitability.
Average Collection Period
Average receivables / average daily sales
Average daily sales
Sales / 365
Average receivables
Beginning receivables balance + ending balance / 2
The Number of days' sales in inventory is average inventory / average daily cost of goods sold and tells you what?
The average number of days of sales that can be made using only the supply of inventory on hand.
Fixed Asset Turnover is computed as sales / average fixed assets and tells you what?
The number of dollars in sales generated by each dollar of fixed assets.
Return on Assets is computed as net income / total assets and tells you what?
The number of pennies made on each dollar of assets.
What is another name for a company's Profit?
Margin
The degree to which assets are used to generate sales is called...
turnover
These are an indication of the extent to which a company is using other people's money to purchase assets...
Leverage Ratios
What do you call borrowing that allows a company to purchase more assets than its stockholders are able to pay for through their own investments?
Leverage
Debt ratio = total liabilities / total assets and tells you what?
the percentage of total funds, both borrowed and invested that a company acquires through borrowing.
Debt to Equity ratio = total liabilities / total equity and tells you what?
the number of dollar of borrowing for each dollar of equity investment.
Times interest earned = income / interest expense for the period and tells you what?
The number of times the company can make its interest payments - a higher number reflects a greater likelihood that the company can meet future interest obligations.
There are two factors that help make financial ratios useful - what are they?
When ratios can be benchmarked to comparable values for the same company in prior years

Ratio values for other companies in the same industry are available.
In the US, what usually is the first asset listed on the Balance Sheet?
cash
Around the world, what usually is the first asset listed on the balance sheet?
long term assets
Accountants use their judgement to report two items on the balance sheet - what are they?
Recognition - what is listed and what isn't?

Valuation - what dollar amounts to associate with the listed items
What do you call a listing of an organization's assets and of its liabilities at a certain time?
Balance Sheet
What do you call the difference between assets and liabilities?
Equity
Define a current Asset
Assets expected to be used and liabilities expected to be paid or otherwise satisfied, within a year are current items. The most common are cash, accounts receivable and inventory.
What do you call amounts owed to a business by its credit customers that are usually collected in cash within 10 to 60 days?
Accounts receivable
What do you call goods held for sale in the normal course of business?
Inventory
Why would a company pre-pay an expense?
By paying for an expense in advance now, a business is able to conserve cash that otherwise would have had to be spend in the future.
Name some common long-term assets
investments; property, plant and equipment; intangible assets
What is depreciation?
The wear and tear of items since they were originally purchased.
What are intangible assets?
assets that have no physical or tangible characterisics: agreements, contracts, rights that provide economic benefits to a company by permitting the use of a certain production process; trade name or similar item. patents, trademarks, copyrights, franchises, and goodwill.
What is goodwill?
When one company buys another and pays more than the value of the indentifiable assets of the acquired company.
What are current liabilities?
Those obligations to be paid within one year, the most common being accounts payable.
What are short-term loans payable?
formal, interest bearing loans that are expected to be paid back within one year.
Is the current portion of long-term debt considered a short term liability?
Yes. The portion of the liability that is payable within the 12 months from the balance sheet date is classified as a current liability.
What is unearned revenue?
A company's obligation to provide service to customers who have paid the company for a service they have not yet received.
Name some examples of long-term debt
long term notes, bonds, mortgages, and similar obligations.
Explain deferred income tax liability
A liability that can be thought of as the income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed.
What is minority interest?
A long-term liability that represents that a corporation has subsidiaries that are not 100% owned by the corporation. For Example, Sears only owns 54% of Sears canada.
What do you call the difference between assets and liabilities?
Stockholder's equity
What are the differences between common and preferred stock?
Common stock holders can be thought of as true owners of the company because if the company does poorly, the common stockholders are likely to lose some or all of their investment because they can receive cash from the corporation only after the claims of all other parties are satisfied.

Preferred stock holders aren't better, just different. They surrender some rights (like voting) to be first in line when the company pays its liabilities. The preferred stockholders would be paid before common stockholders.
What is "additional paid-in capital?"
The amount invested by stockholders that exceeds the par value of the issued shares.
When it is determined that an item should be listed in the financial statements, what do you call the process of assigning a dollar value to the item?
Valuation
What do you call the process of determining how an economic event impacts the financial statements?
Transaction analysis
What is a company's "asset mix?"
The proportion of total assets in each asset category and is determined to a large degree by the industry in which the company operates
What is a company's "Financial mix?"
The percentage of total financing (liabilities plus equity) in each individual category.