Integrated Accounting Test Ch 4-6

Front 1

5 Basic Concepts & Terms used in Accounting

Back 1

1. Entity Concept
2. Transactions
3. Source Documents
4. Monetary Unit Concept
5. Historical Cost Concept

Front 2

Entity Concept

Back 2

An owner's asset that is considered to be separate from its owners and from any other company

Front 3

Transactions

Back 3

and exchange of property or service by a company with another entity

Front 4

Source Document

Back 4

a business record used as evidence that a transaction has occurred

Hint 4

Ex. Company check, receipts, bill from supplier

Front 5

Monetary Unit Concept

Back 5

Record transactions should be recorded in money. Money unit depends on national currency

Front 6

Historical Cost Concept

Back 6

states that a company records its transactions based on the dollars exchanged (the cost) at the time the transaction occurred

Front 7

Accounting Equation

Back 7

Assets = Liability + Owner's Equity

Front 8

Assets

Back 8

A company's economic resources that will provide future benefits to the company

Front 9

Physical Assets

Back 9

land, buildings, supplies to be used, inventory that the company expects to sell to its customers, long term investments

Front 10

Nonphysical assets

Back 10

economic resources because of the legal rights (benefits) they convey to the company

Hint 10

amounts owned by owner(accounts receivable, right to insurance protection

Front 11

Liabilities

Back 11

economic obligations (debts) of a company. the external parties whom a company owes the debts are referred to as creditors, such as suppliers, employees owed wages

Front 12

Owner's Equity

Back 12

the onwers current investment in the assets of the company. the capital invested int he company by the owner, the company's earnings from operations and the owner's withdrawals of capital from the company

Front 13

Dual effect of transactions

Back 13

a company must make at least two changes in its assets, liabilities or owner's equity

Front 14

account

Back 14

place a company uses to record and retain info about the effect of its transactions on a specidic asset, liability, or owners equity item

Hint 14

ex. purchasing inventory on credit, purchasing store equipment on credit, selling extra store equipment, etc

Front 15

net income

Back 15

revenues - expenses

Front 16

revenues

Back 16

the prices a company charged to its customers for goods or services it provided during a specific time period

Front 17

expenses

Back 17

costs of providing the goods or services to customers during the time period

Front 18

accounting period

Back 18

time spun for which a company reports its revenues and expenses

Front 19

earnings and recording revenues

Back 19

includes purchasing inventory, selling inventory, and recording it

Front 20

matching concept

Back 20

states that to determine its net income for an accounting period, a company computes the expenses involved in earning the revenues of the period and deducts the total expenses from the total revenues earned in that period

Front 21

Accrual accounting

Back 21

recording its revenue and related expense transactions in the same accounting period that it provides foods or services

Hint 21

accrue means to accumulate

Front 22

Order of recording daily operations (17 steps)

Back 22

1. Cash sale
2. Payment for credit purchase of inventory
3. additional inventory purchase
4. credit sale
5. receipt of payment for credit sale of extra store equipment
6. Withdrawal of cash by owner
7. Payments for consulting
8. advertising
9. acquisition of store equipment
10. payment of salaries
11. payment of telephone bills
12. payment of utility bills
13. summary cash sales
14. Supplies used
15. expired rent
16. depreciation of store equipment
17. Accrual of Interest

Front 23

Income statement equation

Back 23

Net income = revenue - expenses

Front 24

Budgeting

Back 24

allows you to compare you expectations for revenue and expense amounts (reported in the projected income statement) with the actual amounts (reported in the actual income statement)

Front 25

Temporary accounts

Back 25

a company uses revenue and expense accounts for only one accounting period to record the effects of its transactions on its net income

Front 26

permanent accounts

Back 26

assets, liability, and the owner's capital. they are used for the life of the company to record the effects of its transactions on its balance sheet

Front 27

revenues

Back 27

prices charged to customers and result in increases in assets (cash or accounts receivable) or decreases in liabilities (unearned revenues)

Front 28

3 types of policies related to sales of their goods or services

Back 28

discount policies, sales return policies, sales allowance policies

Front 29

discount

Back 29

a quantity (or trade) discount is a reduction in the sales price of a good or service because of the number of items purchased or because of a sales promotion

Front 30

sales discount

Back 30

a percentage reduction of the invoice price if the customer pays the invoice within a specified period

Front 31

sales return

Back 31

occurs when a customer returns previously purchased merchandise

Front 32

sales allowance

Back 32

occurs when a customer agrees to keep the merchandise, and the company refunds a portion of the original sales price

Front 33

credit memo

Back 33

a business document that lists the information for a sales return or allowance

Front 34

net sales

Back 34

at the end of the accounting period, the balance of a company's sales revenue account column includes the initial sales revenue, less the sales returns and allowances and the sales (cash) discount taken

Front 35

expenses

Back 35

cost of goods sold

Front 36

cost of goods sold

Back 36

one of the major expenses of a retail company is the cost of goods (merchandise) that is sells during the accounting period

Front 37

perpetual inventory system

Back 37

keeps a continuous record of the cost of inventory on hand and the cost of inventory sold

Front 38

periodic inventory system

Back 38

does not keep a continuous record of the inventory on hand, but determines the inventory at the end of each accounting period by physically counting it

Front 39

net purchases

Back 39

used because the amount of merchandise purchases (invoice cost and transportation-in) is adjusted (reduced) for purchases, returns, allowances, and discounts

Front 40

cost of ending inventory

Back 40

the dollar amount of merchandise on hand, based on the physical count, at the end of the accounting period

Front 41

gross profit

Back 41

the amount of revenue 'left over' (after recovering the cost of the products it sold) to cover its operating expenses

Front 42

operating expenses

Back 42

the expenses (other than cost of goods sold) that a company incurs in its day to day operations

Front 43

selling expenses

Back 43

the operating expenses related to the sales activities of a company

Front 44

general & administrative expenses

Back 44

the operating expenses related to the general management of a company

Front 45

Risk

Back 45

the uncertainty about the future earnings potential of a company

Front 46

operating capability

Back 46

refers to a company's ability to continue a given level of operations in the future

Front 47

financial flexibility

Back 47

a company's ability to adapt to change in the future

Front 48

ratio analysis

Back 48

consists of computation in which an item on the company's financial statements is divided by another, related item

Front 49

profit margin equation

Back 49

profit margin = net income/net sales

Front 50

Gross profit percentage & equation

Back 50

ratio that relates a company's gross profit to its net sales.

gross profit percentage = grossprofit/netsales

Front 51

statement of owner's equity

Back 51

summarizes the transactions that affected owner's equity during the accounting period

Front 52

close entries

Back 52

entries made by a company to transfer the ending blances from its temporary revenue and expense accounts into its permanent account for owner's capital

Front 53

Why balance sheet is important

Back 53

presents company's financial position on a specific date, allowing users to "take stock" of a company's assets, liabilities and owner's equity on that date

Front 54

balance sheet

Back 54

a financial statement that reports the types and the monetary amounts of a company's assets, liabilities and owner's equity on a specific date

Front 55

classified balance sheet

Back 55

the balance sheet shows subtotals for assets, liabilities, and owners equity on a specific date

Front 56

assets

Back 56

a company's economic resoures that it expects will provide future benefits to the company

Front 57

current assets

Back 57

cash and other assets that the company expects to convert into cash, sell, or use up within one year

Front 58

current assets include (5 things)

Back 58

Cash
Marketable securities
receivables
inventory
prepaid items

Front 59

current asset: cash

Back 59

cash on hand in checking/savings accounts

Front 60

current asset: marketable securities

Back 60

sometimes called temporary investments or short term investments, are items such as government bonds and capital stock of corporations in which the company has temporarily invested (and which company expects to sell within a year)

Front 61

current asset: receivables

Back 61

includes accounts receivable (amounts owed by customers) and notes receivable (and related items)

Front 62

current asset: inventory

Back 62

goods held for resale

Front 63

current asset: prepaid items

Back 63

insurance, rent, office supplies, and store supplies will not be converted into cash but will be used up within one year

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long term investments

Back 64

items such s notes receivable, government bonds, bonds and capital stock of corporations, and other securities that company intends to hold on for more than year

Front 65

property & equipment

Back 65

all the physical, long term assets used in the operations of a company

Front 66

book value

Back 66

the original cost minues the related accumulated depreciation

Front 67

accumulated depreciation

Back 67

the total amount of depreciation expense recorded over the life of an asset to date, thus it is the portion of the asset's cost that has been "used up" to earn revenues to date

Front 68

Liabilities

Back 68

the economic obligations (debts) of a company

Front 69

current liabilities

Back 69

obligations that the company expects to pay within one year by using current assets

Hint 69

includes:
accounts & salaries payable
unearned revenues
short term notes (and interest) payable

Front 70

noncurrent liabilities

Back 70

obligations that a company does not expect to pay within the next year

Front 71

Owners equity

Back 71

the owner's current investment in the assets of the company

Front 72

liquidity

Back 72

a measure of how quickly a company can convert its assets into cash to pay its bills

Front 73

working capital

Back 73

a company's current assets minus its current liabilities

Front 74

current ratio & equation

Back 74

shows the relationship between current assets and current liabilities and is probably the most commonly used indicator of a company's short run liquidity

Hint 74

current ratio = current assets/current liabilities

Front 75

quick ratio & equation

Back 75

a more convincing indicator of a company's short term debt-paying ability

Hint 75

quick ratio = quickassets/currentliabilities

Front 76

financial flexibility

Back 76

the ability of a company to adapt to change

Front 77

debt ratio & equation

Back 77

The debt ratio shows the percentage of total assets provided by creditors and its calculated as follows:

Hint 77

debt ratio = totalliabilities/totalassets

Front 78

methods of measuring company's financial success in income statement & balance sheet (8)

Back 78

1.return on assets
2.return on owners equity
3. Evaluating operating capability
4. inventory turnover
5. accounts receivable turnover

Front 79

return on total assets equation

Back 79

return on total assets = (netincome + interest expense) / average total assets

Front 80

return on owners equity equation

Back 80

return on owner's equity = netincome/average OE

Front 81

operating capability

Back 81

refers to a company's ability to sustain a given level of operations

Front 82

inventory turnover

Back 82

inventory turnover = cost of goods/average accounts receivable

Front 83

limitations of balance sheet

Back 83

they dont provide much information about a company's cash flows during an accounting period