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75 Cards in this Set
- Front
- Back
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What are 3 types of businesses? |
Manufacturers/producers, retailers, service providers |
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What are 3 forms of organization for business entities? |
Sole proprietorship, partnership, and corporation |
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What are 3 business activities? |
Operating, investing and financing |
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What is accounting? |
Accounting is the process of identifying, measuring, and communicating economic info to various users including management of companies, stockholders, finance analysts, creditors and gov't. |
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What is the accounting equation? (aka balance sheet) |
ALOE Assets = Liabilities + Owner's equity
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What are examples of assets? |
Cash, Accounts receivable, land, buildings, equipment, patents, trademarks, goodwill, copyrights |
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What are examples of liabilities? |
Accounts payable, notes payable, wages & salaries payable |
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What are examples of Owner's Equity? |
Capital stock, retained earnings, dividends. |
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What is an income statement? |
Summarizes the inflow of revenue and outflow of expenses.
Net income = revenue - expenses |
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What is the statement of retained earnings? |
Explains the change in retained earnings during the period. It summarizes income earned (+) and dividends paid (-) over the life of a business. |
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What is the statement of cash flows? |
Summarizes the cash flow effects of a companies operating, investing and financial activities for a period. Shows how a company got cash and spent cash. |
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What are the five financial statement assumptions? |
Monetary Unit, Going concern, time period assumption, economic entity concept & cost principle |
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What is GAAP? |
Generally Accepted Accounting Principles are rules, methods, etc. that have evolved over time in response to the need to regulate the preparation of financial statements |
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What organizations influence GAAP? |
GAAP -> The rules FASB -> The rulemakers SEC -> The rule enforcers AICPA -> CPA regulators |
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What is auditing? |
Process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presented |
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What are some ethics of accounting? (qualitative characteristics) |
Understandability - meaningful Relevance - has capacity to make a difference Reliability - represents what it purports Comparability *between 2 companies Consistency *1 company dif. time periods Materiality - does an error influence decision Conservatism - worse case scenario Representational Faithfulness |
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What is a classified balance sheet? |
Separates assets and liabilities into current and non-current. |
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What is the operating cycle? |
Cash to inventory to accounts receivable. Begins when cash is invested towards inventory, ends when cash is collected by enterprise towards customers |
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What are current assets? |
Cash and other assets that a company can reasonably expect to convert within a year or its operating cycle. (whichever is longer) |
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What are investments? |
Long term assets that are NOT used in normal business operations and NOT converted to cash in the year. |
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What is PP&E? |
Property Plant & Equipment. The company uses them daily and are tangible. Ex: fixed, tangible, operating, long-lived assets |
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What are intangible assets? |
Longterm assets with no physical substance. Ex: goodwill, patents, copyrights, trademarks, brandname. |
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What is working capital? |
working capital = current assets - current liabilities |
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What are important subtotals on a multistep income statement? |
Gross profit, income from operations, & income before income taxes |
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How is a multi-step income statement laid out? |
sales - cost of goods = gross profit - general & administrative expense - selling expenses = income from operations +/- all other misc. expenses & revenue = income before taxes - taxes = Net income |
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What are net sales? |
Consist of the gross proceeds from sales (gross sales) less sales returns & allowances and discounts |
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What is the "cost of goods sold"? |
Amount a merchandiser PAID for the merchandise it sold. |
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What is the gross profit? |
Difference between net sales and cost of goods sold |
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What is a statement of retained earnings? |
Reports the net income and any dividends. (Beginning R.E. + Net Income) - Dividends = Ending retained earnings |
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When should a transaction be recorded? |
When merchandise passes from supplier to purchaser and creates an obligation to pay |
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What is the cost principle? |
We record an asset at the cost to acquire it and show this on balance sheets until it is rid of |
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What is an account? |
The basic unit for recording transactions. It is a record used to accumulate amounts for each individual asset, liability, revenue, expense and component of O.E. |
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What is recognition? |
Recording an item in the financial statements as an asset, liability, revenue, expense or equity. |
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What is measurement? |
The quantification of the economic effects on an entity |
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Because of it's objective nature, what kind of value is used in measurement most often? |
Historical Cost |
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What is the difference between cash based accounting and accrual accounting? |
Timing! Accrual occurs when service happens, Cash when cash is received. |
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What is the revenue recognition principle? |
Revenue is recognized when realized and earned, usually at the point of sale * A product or service is delivered * Collectability is reasonably assured. (rent and interest may occur over time) |
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What is the matching principle? |
Match expenses with associated revenue
Indirectly Directly Simultaneously Buildings inventory utilities *as used* *when sold* *last day*
The association of revenue with all the costs. |
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What expense should inventory be matched with? |
Cost of goods sold (when sold) |
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What should supplies and prepaid assets be matched with? |
Supplies, insurance and rent expense. (as used) |
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What should utilities, PP&E and intangibles be matched with? |
depriciation or amortization expense, (over period of provided benefits) |
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What are the 4 main adjusting entries? |
Deferred revenue & expenses Accrued revenue & expenses (remember A-$C$-D)
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What are adjustments? |
They are made at the end of an accounting period. They are internal transactions and do not affect the cash amount. They affect either an asset or liability with an equal change in revenue or expense. |
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What are 2 deferrals? |
Cash paid before expense is incurred -> Deferred Expense Cash paid before revenue is earned -> Deferred Revenue |
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What are 2 accruals? |
Expense incurred before cash paid -> Accrued liability/expense Revenue earned before cash is received -> Accrued asset/revenue |
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What are 2 types of inventories held by businesses? |
finished inventory and material inventory |
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What are three types of inventory costs? |
Direct materials, direct labor, and manufacturing overhead--supervision, depreciation |
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What are three forms of inventory? |
Raw materials, work in progress and finished goods |
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What 2 kinds of businesses only have merchandise inventories? |
Wholesalers and retailers. Manufacturers have the 3 forms of inventories. |
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What is a negative sale adjustment? |
Contra-sales |
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What are 2 deductions that can occur from sales? |
Sales returns & allowances (1 account) Sales discounts |
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What is the difference between n/30, 1/10, n/30 and 2/10, n/30? |
1) payment due 30 days from invoice 2) deduct 1% if paid in 10 days " " 3) deduct 2% if paid in 10 days " " |
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What is the formula for cost of goods sold? |
Beginning inventory + purchases of merchandise =Goods available for sale - ending inventory (asset) = Cost of goods sold |
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What is the formula for cost of goods purchased? |
Cost of Purchase -purchase returns & discounts + transportation cost |
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What are 2 systems for updating inventory? |
Perpetual (all the time, auto-updates 1 "inventory account") and Periodic (time-based, at end of accounting period, "purchases") can allow more theft |
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What are the 2 methods for assigning ownership? |
FOB Destination point - ownership passes when object arrives, seller pays shipping
FOB Shipping point - ownership passes when object is shipped, buyer pays shipping |
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What are the four inventory cost methods? |
FIFO, LIFO, Specific Identification and Weighted average |
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What is the net sales formula? |
sales revenue - discounts - returns & allowances |
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What is the weighted average formula? |
total cost ------------- total units |
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What is the lower of cost or market rule? |
Departure from historical cost principal. Inventory written if lower than initial cost. |
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What constitutes cash? |
Readily Available to pay debts. Monetary units, deposits, checks & money orders |
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What are cash equivalents? |
-Readily convertible to cash -Maturity of 3 months or less (90 days) ex: commercial paper, us treasury bills, traveler's check, money market fund. (not stocks) |
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What are the 6 internal control procedures? |
Independent verification, segregation of duties, safeguarding assets & records, proper authorization, the design and use of business documents, independent review & appraisal, |
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What are limitations on internal control? |
Employees in collusion may override Not completely foolproof Cost vs. benefit trade off |
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What does the acquisition cost of PP&E include? |
Everything necessary to get the item available to use. Purchase price, taxes, transportation, installation. |
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What is the depreciation method? (also straight line) |
Original cost - Salvage (aka book value) ------------------------------ or top times % time period (double this for double declining/accelerated method) |
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What is the units of production method? |
Acquisition cost - salvage ----------------------------------- Units in assets life
take answer, times how many units used in accounting period |
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Why use accelerated method? |
Technological rate of change and competitiveness Minimize taxable income Comparability |
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What is amortization of intangibles based on? |
Legal life or useful life, whichever is shorter. |
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What form can you see specific dates on? |
balance sheet |
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Where do expenses originate from? |
Using an asset, recognizing liabilities |
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What makes a gain or loss on a disposal? |
Proceeds > book value = gain Proceeds < book value = loss |
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What are 2 characteristics of an intangible asset? |
long-term non-physical |
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How long does a patent, trademark or copyright last? |
20 years, 20 years, 70 years |
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What is amortization and when should it be recognized? |
It is the allocation of the aquisiton cost to the period benefitted. It needs recognized if the life is finite, if indefinite, nope. similar formula to depreciation |
