Financial Accounting, Chapter 3

Front 1

Time Period Principle

Back 1

Assumes that an organizations activities can be divided into specific time periods such as: months, quarters, semi annual, and annual.

Front 2

Annual financial statements cover..

Back 2

a 12 month period.

Front 3

Interim financial statements cover..

Back 3

less than a year.

Front 4

Calender Year

Back 4

Jan 1- Dec 31

Front 5

Fiscal Year

Back 5

Any consecutive 12 months

Front 6

Natural Business Year End

Back 6

Year ends when sales are at their lowest.

Front 7

Accrual Basis

Back 7

Revenues recorded when earned and expenses recorded when incurred. Consistent with GAAP

Front 8

Cash Basis

Back 8

Revenues recognized when cash is received, expenses are recorded when cash is paid. Not Consistent with GAAP

Front 9

Matching

Back 9

Requires expenses be recorded in the same period as the revenues earned as a result of these expenses.

Front 10

Unadjusted Trial Balance

Back 10

List of accounts and balances prepared BEFORE adjustments are recorded.

Front 11

Adjusted Trial Balance

Back 11

List of accounts and balances prepared AFTER adjusting entries have been posted.

Front 12

Post-Closing Trial Balance

Back 12

Consists of a list of only balance sheet accounts (permanent accounts and their balances).

Front 13

Adjusting Entry

Back 13

Recorded to bring an asset or liability accounts balance to its proper amount. It also updates a related expense or revenue.

Front 14

Types of adjusting entries..

Back 14

- Prepaid (deferred) Expense
- Depreciation
- Unearned (deferred) Revenue
- Accrued Expense
- Accrued Revenue

Front 15

Prepaid Expenses

Back 15

Items paid for in advance of receiving their benefits. Assets, prepaid insurance, rent, supplies...

Front 16

Depreciation

Back 16

cost-salvage value/useful life

Front 17

Unearned Revenues

Back 17

Liabilities created by the receipt of cash in advance of providing goods or services.

Front 18

Accrued Expenses

Back 18

Costs that are incurred in a period but are both unrecorded and unpaid.

Front 19

Accrued Revenues

Back 19

Revenues earned in a period that are both unrecorded and not yet received in cash.

Front 20

Temporary (Nominal) Accounts

Back 20

Income statement accounts (revenue & expenses), dividends, and the income summary. All are closed and start at zero the next year.

Front 21

Permanent (Real) Accounts

Back 21

All balance sheet accounts (assets, liabilities, and oe). Not closed and balances are carried forward.

Front 22

Steps in closing

Back 22

Close: all revenue accounts to the income summary, all expense accounts to the income summary, the income summary account to the retained earnings, dividends account to retained earnings.

Front 23

Classified Balance Sheet

Back 23

Organizes assets and liabilities into important subgroups that provide information to decision makers.

Front 24

Profit Margin

Back 24

Useful measure of a company's operating results. Formula to compute is: PM= NI/Net Sales (% of profit in each
dollar of sales)

Front 25

Current Ratio=

Back 25

Current assets/current liabilities