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60 Cards in this Set
- Front
- Back
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What the company owns…
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Assets
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What the company owes…
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Liabilities
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The owner's claim on the assets
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Equity (net worth)
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How much did the company sell during the period?
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Revenue
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Regulation Governing Accounting…
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SEC Act of 1934
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What are the four basic financial statements?
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Balance Sheet, Income Statement, Statement of Changes in Owners Equity, Statement of Cash Flows
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Summarizes the resources controlled by the firm and the claims against those resources at a point of time
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Balance Sheet
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Resources over which the firm has control and which are expected to bring future benefits.
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Assets
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Financial (or other) obligations to individuals or institutions.
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Liabilities
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Assets = Liabilities + Owners Equity Resources = Claims
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Balance Sheet Equations
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Summarizes the profitability of the company for a period of time. Provides detail about the revenues generated and expenses incurred in generating profits
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Income Statement
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Income Statement Equations
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Revenues - Expenses = Net Income
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cash or other assets received in exchange for goods sold or services rendered
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Revenue
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costs incurred in the course of providing goods and services
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Expense
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excess of revenues over expenses
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Net Income
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What is Comprehensive Income ?
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Comprehensive income includes all changes in net assets arising from transactions with non-owners.
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OCI
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Other Comprehensive Income
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What is equation for Statement of Changes in Owner's Equity?
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Beginning Owners’ Equity +/- Additional capital transactions - Dividends or withdrawals + (-) Comprehensive income (loss) = Ending Owners’ Equity
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This is a subset of the statement of changes in owners’ equity
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Statement of Retained Earnings
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makes an explicit connection between net income and the increase in retained earnings
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Statement of Retained Earnings
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What is the equation for the Statement of Retained Earnings?
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Beginning Retained Earnings +/- Net Income for current period -Dividends for current period = Ending Retained Earnings
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What is the term for net income that is included in equity on the balance sheet?
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Retained Earnings
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Explains the change in cash on the balance sheet
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Statement of Cash Flows
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Tells how the company used and received cash over a time period
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Statement of Cash Flows
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What is the equation for the Statement of Cash Flows?
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Cash flows from Operations + Cash flows from Investing + Cash flows from Financing = Change in Cash over period + Cash at beginning of period = Ending Cash balance
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What is the Revenue Recognition Principle?
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In order for a company to recognize revenue, the following criteria must be met: 1. Work must be completed. 2. Amounts must be realized or realizable.
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What is the Matching Principle?
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When revenue is recognized, all costs necessary to generate that revenue must also be recognized as expenses in the same period.
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What should you look at before believing an income statement.
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Balance Sheet
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What are the characteristics of cash accounting?
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Revenues are recognized only when cash is received from customers. Expenses are recognized only when payments are made to suppliers of goods and services.
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What are the characteristics of accrual accounting?
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Revenue is recognized when the earnings process is substantially complete regardless of whether the cash is received or not. When revenue is recognized, all costs necessary to generate that revenue must also be recognized as expenses in the same period (matching principle) regardless of the cash is paid out or not.
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Where are Period costs (other than interest and some non-recurring items) included on the Income Statement?
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Under “Selling, General and Administrative” Expenses
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SEC
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Securities and Exchange Commission
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FASB
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Financial Accounting Standards Board
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IASB
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International Accounting Standards Board
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GAAP
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Generally Accepted Accounting Principles
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Accrual accounting
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Accrual accounting refers to the recognition of revenue when earned (even if not received in cash) and the recording of expenses when incurred (even if not paid in cash).
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3 possible methods of revenue recognition
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(1) Revenue is recognized at the time of sale (2) Revenue is recognized before goods/services are provided (3) Revenue is recognized after sale
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3 types of expenses are recognized
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(1) Associating Cause and Effect (Matching Principle) (2) Systematic and Rational Allocation (3) Immediate Recognition
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gains and losses
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economic events lead to increases and decreases in income but they are unrelated to the firm’s normal operations
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record every transaction of the company and how it affects the financial statements
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1 Journal
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keep track of each item in the financial statements to get latest balance
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2 Ledger
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to be sure there are no mistakes in recording the transactions
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3 Prepare Trial Balance
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make any necessary adjustments in the accounts to correct or update the balances of any items in the financial statements
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4 Prepare Adjusting Entries
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check to be sure there are no mistakes in adjusting entries
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5 Prepare Adjusted Trial Balance
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Prepare Financial Statements
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6 Prepare Financial Statements
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get accounting records ready for the next year
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7 Prepare Closing Entries
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Established Public Company Accounting Oversight Board (PCAOB) - Stronger independence rules for auditors - CEOs and CFOs must personally certify financial statements and disclosures - Requires audit committees to be independent board members and with financial expertise - Code of ethics for senior financial officers - Test of internal controls
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Sarbanes-Oxley Act (2002)
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accounts that have the opposite balance from a related (or parent) account, and are deducted from the related account when financial statements are prepared
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Contra accounts
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Qualitative Characteristics of Accounting (per the FASB)
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(1) Relevance, (2) Reliability, (3) Comparability and (4) Consistency
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Company book value =
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Stockholders’ equity
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profitability analysis
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we want to look at the return on the net operating assets
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liquidity analysis
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we want to look at net working capital (net working capital = current operating assets – current operating liabilities)
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Liquidity Ratios
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measure a firm’s ability to meet its short-term obligations (e.g., current ratio)
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Activity Ratios
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measure how efficiently and effectively a firm is using its assets (e.g., days’ sale in receivables, asset turnover )
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Profitability Ratios
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measure a firm’s profitability ( e.g., profit margin, return on assets)
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Coverage Ratios
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measure a firm’s ability to meet its total debt obligations (includes measures of solvency) ( e.g., debt-to-assets, times interest earned)
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Percentage of Completion
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revenue (and profit) is recognized each period based on the progress of the contract
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Alternative: Completed Contract
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revenue (and profit) is recognized only when the contract is completed
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Installment Method
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recognizes revenue as the seller collects cash from customers rather than at time of delivery
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Cash Recovery Method
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(1) Recognize the amount of cash collected as revenue each period (2) Expenses = Revenue each period and Profit = 0 before total costs are collected from customers (3) After total costs are collected from customers, report revenue without matching expenses
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