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104 Cards in this Set

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  • Back
The process of analyzing business events, collecting and processing information relating to those events, and summarizing that information is called - what?
The Accounting cycle
There are 4 steps to the accounting cycle, what are they?
1 - analyze transactions
2 - record the effect of the transactions in a journal entry
3 - Summarize the effects of the transaction (a - post journal entries to the ledger, b - prepare a trial balance)
4 - Prepare reports a) make adjusting entries, b) prepare financial statements c) close the books
What is the accounting equation?
Assets = liabilities + owner's equity
What is the name for the accounting system devised 500 years ago and its still used today?
T accounts
What is on the left side of the T account, what is on the right?
Left/Debit - Right/Credit
When an asset grows and decreases, what is the debit, what is the credit?
Asset grows - debit
Asset shrinks - credit
When a liability grows and decreases, what is the debit, what is the credit?
Liability grows - credit
Liability shrinks - debit
When equity grows and decreases, what is the debit, what is the credit?
Equity grows - debit
Equite Shrinks - credit
When you credit a revenue account, what else are you also increasing?
Retained Earnings
When you debit an expense account, you are increasing the amount of expense that in turn reduces what?
Retained Earnings
When listing transactions, what is listed first?
The account being debited is listed first and the account being credited is listed second
What are the three steps involved in a journal entry?
1 - Identify which accounts are involed. 2 - for each account, determine if it is increased or decreased. 3 - for each account, determine by how much it changed
What processed is used so you don't have to sort through all of the journal entries to determine an account's balance?
What do you call the collection of all of a company's accounts?
When you collate all of a company's ledger accounts and their balances, what is that?
Trial Balance
What action do you take to transfer all revenue, expense, and dividend amounts to the retained earnings account and reset the income statement and dividend accounts to zero in preparation for accumulating new information for the same period?
What are the two considerations used for adjusting entries?
1 - Determine whether the amounts recorded for all assets and liabilities are correct. If not, debit or credi the appropriate asset or liability. (Basically - fix the balance sheet.) 2- Determine what revenue or expense adjustments are required because of the changes in recorded amounts of assets and liabilities. Debit or credit the appropriate revenue or expense. In short, fix the income statement.
There are two occassions to adjust the closing entries
1) new information requires an adjustment to a transaction that has already been recorded. 2) No transaction has been recorded even though a business event has occurred. ((chemical cleanup closts, Interest eaned but not collected as cash, wages earned at the end of a year but not paid until the first of the new year.)
There are 4 reasons asserted in the text that may tempt a manager to manipulate earnings, what are they?
1- Meet internal targets 2 - Meet external expectations 3 - income smoothing 4 - Window dressing for an IPO or a loan
The practice of thoughtfully reporting earnings to meet expectations is called
Earnings management
What do you call the practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next?
Income smoothing
What do you call timing large one-time gains or losses in the same quarter, resulting in a smooth upward trend in reported earnings?
Strategic Matching
The earnings management continuum moves from savvy timing on the left to fraud on the right. In order, what are the example methods displayed?
Strategic matching, Change in methods with full disclosure, change in methods without full disclosure, Non GAAP accounting, Ficticious transactions.
What is a pro forma earnings number?
The regular GAAP earnings number with some revenue, expenses, gains or losses excluded. (The exclusions are held out because the companies claim that GAAP doesn't accurately reflect the company's performance.
Proforma numbers have earned a knickname because of their ability to show the company in a positive light.
EBS - Everything but the bade stuff.
What is the GAAP Oval?
The GAAP oval represents the flexibility a manager has, within GAAP, to report one earnings number from among many possibilities based on different methods and assumptions. The best case and worst case numbers that fall outside the gaap Oval would be unethical to report.
What is the cost of capital?
The cost of capital is the cost a company bears to obtain external financing.
Why is the cost of capital important?
A company's cost of capital is critical because it determines which long-term projects are profitable to undertake.
What determines the cost of capital?
A key factor is the risk associated with the company.
Who do you estimate the amount you should allocated for bad debts?
1) estimate the percentage of sales 2) Aging.
What is the phrase that ccountants use to refer to the recording of a sale in the formal accounting records?
Revenue Recognition
What are the two criteria for revenue recognition?
You have the cash or a valid promise of future payment OR The promised work has been substantially completed
In general, is revenue recognized prior to the point of sale?
No - because either the valid promise of payment has not been made OR The company has not provided the service
What do you call it when you clients don't pay their bills?
Bad Debts
Costs in approving a potential customer for credit requiring into their credit history and verifying their income and prexisting conditions
Book Keeping Costs
What do you call the real costs associated with having cash tied up in the form of receivables?
Carrying Costs
Define "net 30"
A credit term stating that the net amount of an invoice is due within 30 days of the date of sale.
Define 2/10, n/30
2/10 - A 2 percent discount is allowed if the payment is made within 10 days of the invoice. If the discount is not takent, the full amount is due in 30 days
What do you call the process of estimating the amount of bad debts created by credit sales during a year?
Allowance Method
How is a Bad Debt Expense reported?
As an Operating Expense in the Income statement.
What do you call the method using historical or industry data to estimate what fraction of total credit sales that will be uncollectable?
Percentage of Sales Method
What do you call the process where, at the end of the year, you examine the age and collectability of your accounting receivable?
Aging Method
Using a credit (or reduction) of accounts receivable, this method accounts for bad debt.
A write off
The revenue cycle is not complete until...
All promises related to the sale of a product or service have been satisfied.
What safeguarding tool assigns two different individuals to handle cash and record cash?
Separation of duties, it makes it more difficult to steal cash if two people are involved.
What disciplined, rigid process ensures that personal responsibility for the handling of cash occurs each day?
Daily Cash deposits
What cash control procedure is used with company checks?
Company checks are pre-numbered.
What is it called to use existing receivables as collateral for a loan?
What is it called when once company sells some of its receivables to another company?
What is it called when a US company makes a sale and accepts payment in a foreign currency?
Foreign Currency Transaction
If a company makes a foreign currency transacation for $10 and on the exchange date the value is only $9.50 how would it be recorded?
The company would record a .50 exchange loss.
What two ratios are most commonly used to evaluate how a company is managing its accounts receivable?
Accounts receivable turnovers: sales/average accounts receivable

Average Collection period: 365 / accounts receivable turnover
Generally, the bad debt allowance (as a percentage of total receivables) should be steady. If it fluctuates, what could that signify?
1) The company has is accepting a different type of credit customer 2) A change in economic circumstances of existing customers
What do you call the name given to goods that are either manufactured or purchased for resale in the normal course of business?
What do you call the costs removed from the asset classification (inventory) on the balance sheet and reported on the income statement as an expense?
Cost of goods sold
There are 3 types of inventory, name them
Raw Materials, Work in process, Finished goods
There are two types of deliery, what are they?
FOB - Free on Board, FOB Shipping Point
Describe FOB - Free on Board shipping
The seller is paying the shipping costs and thus owns the inventory until it is delivered. Ownership changes hands when the goods reach their desitnation
Describe FOB Shipping Point
The buyer is paying the shipping costs and as a result, owns the inventory while it is intransit
Describe Goods on Consignment delivery
A supplier will ship the inventory to a dealer on consignment. This transfer is not a sale, the supplier still owns the inventory and the dealer is under no obligation to pay for the inventory. In effect, the dealer is offering to sell the consigned goods on behalf of the supplier.
True / False - Inventory cost consists of all costs involved in buying the inventory and preparing it for sale.
Name some cost examples that would NOT be included in the cost of inventory.
Cost of maintaining the finished goods warehouse or retail showroom - salesperson's salaries - advertising cost - cost of the corporate headquarters - company president's salary
Describe ABC cost system
The ABC (Activity based cost system) strives to allocate overhead based on clearly identified cost drivers - characteristics of the production process that are known to create overhead costs.
What do you call the inventory purchased or manufactured during the period when it is added to beginning inventory and that group's total cost?
The cost of goods available for sale.
What do you call the inventory system that continously tracks changes in inventory levels?
Perpetual Inventory system
What do you call the inventory system that counts the inventory every once in a while (maybe quarterly)
What do you call inventory that is lost, stolen or spoiled during a period?
Inventory Shrinkage
There are 4 inventory valuation methods, what are they?
FIFO (First in first out) LIFO (Last in first out)
Average cost method
Specific identification
Describe the Average Cost Method
Each unit is assigned the same cost. The method is based on the assumption that each unit should be charged at an average cost, with the average being weighted by the number of units acquired at each price.
Describe FIFO
First in First Out assumes that the oldest units are the first ones sold. Units are charged at the price of the oldest units.
Describe LIFO
LIFO - Last in First out assumes that the newest units are the first ones sold. Units are charged at the price of the newest units.
In a time of generally rising inventory prices the cost of goods sold is highest with what method and lowest with what method?
Highest with LIFO (the last units purchased were most likely purchased at the newer, higher price.) Lowest with FIFO (The older units were probably purchased at the older, lower price.)
Why would a company use LIFO and most likely expense each unit at a higher per unit cost?
TAXES. If a company uses LIFO ina time of rising prices, the reported cost of goods sold is higher, reported taxable income is lower and cash paid for income taxes is lower.
Describe a LIFO Layer
A LIFO layer is when the number of puchased units exceeds the number of unit sold creating a LIFO Layer in Ending Inventory. Picture a company that sells coal. The newest coal is put on top of the pile and the older coal continues to sit on the bottom of the pile
What is the LIFO Reserve?
The difference between the LIFO ending inventory amount and the amount obtained using another inventory valuation method.
What do you call the simplest inventory estimation technique that is based on the observation that the relationship between sales and costs of goods sold is usually fairly stable.
The Gross Profit Method
What is this equation?
(sales - cost of goods sold / sales)
Gross profit percentage
Describe the "lower of cost or market" theory
Accounting conservatism dictates that INCREASES in inventory values are not recognized until the inventory is actually sold. The same conservatism causes accountants to recognize DECREASES in inventory as soon as they occur.
What do you call the value expected to be received when the inventory is sold, composed of the selling price less any costs associated with selling the inventory?
The Net Realizable Value
An alternative to Net realizable value, this measure of the market value uses the wholesale cost to buy equivalent new inventory items
Inventory's Replacement Cost
What do you call the measure of how many times a company turns over or replenishes its inventory during a year?
Inventory Turnover
Inventory Turnover equation is?
Inventory Turnover = cost of goods sold / average inventory
Inventory turnover can also be converted into the number of days' sales in inventory. How?
Number of days' sales in inventory = 365 / Inventory turnover
How does the use of LIFO affect the company's cost of goods sold and inventory values?
HIGHER cost of goods sold / LOWER inventory inventory values
You can learn about a company's use of its operating cash flow by computing the number of days' purchases in accounts payable. How?
Number of days' purchases in accounts Payable = 365 days / (purchases / average accounts payable)
Name the employee compensation timeline
payroll / compensated absences / stock options & bonuses / postemployement benefits / pensions and postretirement bonuses
Payroll seems simple, but gets messy. Why?
Taxes. FICA (Federal insurance contributions act - social security tax) FUTA (federal unemployment taxes) - Federal and state withholding taxes
The company obligates itself to pay employees for a certain number of days in the future even when the employee does not produce any economic input - under what method?
Compensated absences
Where is the expense associated with compensated absences recorded?
The expense for compensated absences is recognized in the period in which those days are EARNED, not when they're used.
There are two methods for accounting for employee stock options - what are they?
Intrinsic value method - based on the assumption that the value of an option is measured by whether there is any value in recognizing the option on the day it is granted. If the option is for $40 and the stock is at $50, there is a $10 intrinsic value. 2) Fair value method - the real value of the option lies in the chance that the stock price may increase above the option exercise prices some time during the life of the option.
What do you call benefits incurred after an employee has ceased to work for an employer but before that employee retires?
Post Employement benefits. (severance package, retraining costs, education costs, etc.)
What do you call a cash compensation after you retire?
There are two types of pensions - what are they?
Defined contribution plan - requiring the company to insert a certain amount into the pension each year. Defined Benefit plan - the company promises employees a certain monthly cash amount after they retire based on the factors like # of years worked for company, highest salary, etc.
Name an example of a "postretirment benefit other than pension"
Health plan after retirement
There are two reasons why reported income tax payments for a company may differ from the actual amount paid - why?
1 - as with many other expenses, income taxes are not necessarily pain in cash in the year in which they are incurred. 2- the difference between reported income tax expense and the actual amount of cash paid for taxes is that income tax expense is based on reported financial accounting income whereas the amount of cash paid for income taxes is dictated by the applicable government tax law.
US Corporations run two sets of books, why?
One for financial information for shareholders, one for taxes
Define a deferred tax asset
The expected benefit of a tax deduction for an expense item that has already been incurred and reported to shareholders but is not yet deductible according to IRS rules.
Why would rapid depreciation help a company for tax purposes?
Rapid depreciation allows a company to reduce its taxable income and its income tax payments in the early years of the life of an asset, thus making it easier to buy the building or machinery in the first place.
When considering between listing an expenditure as an expense or an asset, what is the determining question?
Will this expenditure offer an economic benefit for future period? If so, then its an asset. If it is simply going to be used up and not provide future benefit then its an expense (like office supplies)
Software development withheld, how should you record ALL R&D expenses?
The FASB concluded that R&D should be listed as an expense in the period incurred.
As a special exception for software R&D, how does technical feasibility work?
The special accounting standard for software development states all costs up to the point where technological feasibility is established are to be expensed as research and development.
There are two methods of recording expenses for oil/gas drilling - what are they?
Full-cost method. All exploratory costs are capitalized because the cost of drilling dry wells is part of the cost of finding productive wells. 2- The successful efforts method states that dry holes are expensed and only successful holes are capitalized.
What do you call an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs?
There are three classes of contingencies - what are they?
Probable, possible and remote