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accounting
na
101
Accounting
Undergraduate 1
04/07/2013

Additional Accounting Flashcards

 


 

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Term
what is accounting?
Definition
It is an information system that identifies, records, and communicates relevant, reliable and comparable information about an organization's business activities
Term
What is the objective of accounting
Definition
It’s objective is to help people make better decisions
Term
External Users of Accounting
Definition
lenders, shareholders, external auditors, unions, cra
Term
typical questions asked by external users
Definition
• Will the company be able to pay debts?
• Is the company earning enough money to give me a return?
• Can the company afford a pay raise?
• Will the company stay in business to service the product I buy?
Term
GAAP
Definition
Generally Accepted Accounting Principles
Term
internal users
Definition
Internal users are involved in managing and operating an organization
Term
accounting helps internal users..
Definition
Accounting provides information to these users to help them improve the efficiency and effectiveness of the organization
Term
Typical questions asked by internal users
Definition
• What are the manufacturing expenses per unit of product? • What is the most profitable mix of services?
• How much do we have to sell to break-even?
• How much profit did we earn last month?
• Are we keeping our expenses under control?
Term
ethics are..
Definition
beliefs that differentiate right from wrong
Term
Ethics obligations of accountants
Definition
• Maintain a high level of professional competence
• Treat sensitive information as confidential
• Exercise due care and professional judgment
• Must not be associated with deception information
Term
Business Entity Principle
Definition
Every business is to be accounted for separately from its owner(s) or any other economic entity of the owner (separate financial records)
Term
Historical Cost Principle
Definition
All transactions are recorded based on the actual cash amount received or paid; or in the absence of cash, the cash equivalent amount of the exchange is recorded
Term
Revenue Recognition Principle
Definition
Revenue is recorded at the time it is earned regardless of whether cash or another asset has been exchanged (measured by the cash plus the cash equivalent of any other assets received)
Term
Going Concern Assumption
Definition
Financial statements reflect the assumption that that business will continue operating instead of being closed or sold (assume that business will operate indefinitely)
Term
Matching Principle
Definition
Expenses incurred to generate revenue are matched against revenue
Term
Fiscal Year End
Definition
Financial statements prepared at least annually (likely not calendar end)
Term
Consistency
Definition
No changes in chosen set of accounting alternatives from year to year
Term
Monetary Unit
Definition
Transactions are expressed using units of money as the common denominator (and one currency)
Adjustments are not made for changes in exchange rates or inflation
Term
Sole Proprietorship
Definition
Usually operated by the owner
• Easy to set up & gives you control over the business (no special legal requirements to start up this form of business, other than to file for a business license and register the business name)
• Relatively low start-up capital
• Owner receives any profits & suffers any losses
Term
main disadvantage of a sole proprieotorship
Definition
Not a separate legal entity – meaning owner is personally liable for all debts of the business (a court can order an owner to sell personal belongings to pay a proprietorship’s debt)
• Unlimited liability is a main disadvantage of this form of business
Term
sole proprietorship-income tax
Definition
Since this is not a separate entity - proprietors pay personal income tax on any business profits (reported as part of the owners’ personal earnings)
Term
Partnership
Definition
• Operated by 2 or more owners who may bring unique skills or resources to the business
• As with a SP, easy to set up and gives you control over the business (no special legal requirements to start up a partnership, other than to register business name and obtain a business license)
• Relatively low start-up capital but more economic resources to initiate or expand business
• Wise to obtain a written / oral agreement indicating how profits and losses are to be shared
• Owners receive any profits & suffer any losses (owners are personally liable for all debts of the business – “unlimited liability”)
Term
partnership-income tax
Definition
No legal distinction b/w business as economic unit & owners, therefore, partners pay personal income tax on their respective share of business profits
Term
corporation
Definition
Separate legal entity incorporated under prov. or fed. laws (entitles the corporation to conduct business with the rights, duties and responsibilities of a person)
• Responsible for its own acts and its own debts (can enter into its own contracts, can buy/own/sell property, can sue and be sued)
• Owned by investors who receive shares to indicate their ownership claim (can be an owner by investing small amounts of money)
Term
corporation liability
Definition
Shareholders are not personally liable for business debt (limited liability - risk of losing amount invested in shares only) *key reason by corporations can raise funds from shareholders who are not active in managing the business (much easier)
Term
corporation income tax
Definition
Corporations pay income tax on any profits as a separate legal entity (file its own tax return and pay tax on profits separately from its owners)
Term
Public Corporations:
Definition
Owned by numerous, often thousands, of shareholders
• Shares are publicly traded on an organized stock exchange (i.e. TSE)
• Distribute financial statements to shareholders, creditors, other interested parties & general public upon request (i.e. Loblaw)
Term
Private Corporations:
Definition
• Do not issue publicly traded shares
• Almost never distribute financial statements publicly (i.e. Sobeys, McCain Foods)
Term
AccountingEquation
Definition
(Assets = Liabilities + Equity)
Term
Assets
Definition
• Properties or economic resources owned by a business
Term
Liabilities
Definition
• Debts or obligations of the business
Term
Equity
Definition
• Owner(s) claim on the assets of the business
Term
Current Assets:
Definition
• Resources whose benefits will be realized within 1 year
Term
Non-current Assets:
Definition
Resources whose benefits will be realized over more than 1 year
Divided into 3 main groupings:
1. Long-term investments
2. Property, plant, and equipment
3. Intangible assets
Term
non current assets are divided into 3 main groups
Definition
Divided into 3 main groupings:
1. Long-term investments
2. Property, plant, and equipment
3. Intangible assets
Term
Current assets
Definition
• Assets expected to be converted into cash or that will be sold or that will be used within 1 year of the balance sheet date
• Listed in order of liquidity on balance sheet
Term
common types of current assets
Definition
• Cash
• Receivables (i.e.. accounts receivable, notes receivable, interest receivable – all converted into cash within the year)
• Supplies • Short-terminvestments(e.g.debtorequitysecurities) • Inventory • Prepaid expenses
Term
Common types of non-current assets
Definition
Long-Term Investments
• corporate & government notes, corporate bonds, asset-backed securities, equity (shares) in other businesses, real estate
Property, Plant, and Equipment
• land, buildings, equipment, furniture
Intangible Assets
• Patents. copyrights, trademarks & trade names, licenses
Term
current liabilities
Definition
Current Liabilities:
• Obligations that are to be paid within the coming year • Often listed in order of liquidity (i.e. those expected to be paid first are
listed first) or they’re arranged according to internal company custom
• Users of statements look carefully at the relationship between assets & current liabilities to evaluate business’ ability to pay its current debt
Term
current liabilities
Definition
Current Liabilities:
• Obligations that are to be paid within the coming year • Often listed in order of liquidity (i.e. those expected to be paid first are
listed first) or they’re arranged according to internal company custom
• Users of statements look carefully at the relationship between assets & current liabilities to evaluate business’ ability to pay its current debt
Term
Examples Of current liabilities
Definition
Accounts payable
Income & sales tax payable
Interest payable
Unearned or deferred revenue
Current maturities of long-term debt
Salaries / wages payable
Bank loans or notes payable
Term
Long term liabilities
Definition
Financial obligations expected to be paid after 1 year
Term
examples of non current liabilities
Definition
Mortgages payable
Long-term notes payable
Lease or pension liabilities
Future income taxes payable
Term
Equity
Definition
Called Owner’s Equity for a Sole Proprietorship or Partnership
Called Shareholders’ Equity for a Corporation
Represents the ‘claim’ on total assets
Term
Equity will increase for 2 reasons:
Definition
1.If the owner puts their own money into the business
2. If the business earns money (revenue)
Term
Equity will decrease for 2 reasons:
Definition
1.If money is distributed to the owner(s)
2.If the business spends money (expense)
Term
revenues
Definition
Any income source earned by the business
Common revenue accounts can be identified by having a key word in their account name (i.e. income earned, sales, revenue, etc.)
Term
expense
Definition
Any outlay of cash for something required to run the business
Term
income statement
Definition
The income statement reports:

Revenues of the organization Expenses (costs incurred in earning the revenues)
Net income or loss
The income statement covers a period of time
Term
Balance sheet
Definition
The balance sheet reports:
• Assets
• Liabilities
• Equity
•Reported at a point in time (snapshot)
Term
Financial statements must be completed in the following order:
Definition
1. Income Statement is done first because the earnings figure is required for the second statement
2. Statement of Retained Earnings (SRE) uses the earnings from I/S to determine the ending retained earnings (equity)
3. Balance Sheet uses the ending retained earnings to calculate the owner’s equity section of that report
Term
Not all events are recorded and reported as accounting transactions
Definition
 Only those that change assets, liabilities or shareholders’ equity
Term
Debiting
Definition
– entering an amount on the left side
Term
Crediting –
Definition
entering an amount on the right side
Term
 If debits exceed credits
Definition
-> account has a DEBIT BALANCE
Term
If credits exceed debits
Definition
-> account has a CREDIT BALANCE
Term
Accrual Accounting
Definition
only one that adheres to accounting standards
Term
Cash Accounting:
Definition
...per CRA, only allowed for Farming and Fishing
Term
accrual basis of accounting
Definition
Transactions affecting a company’s financial statements are recorded in the period the event occurs, rather than when the cash is received or paid
Revenue is recorded when earned (not just when received)
Expenses are recorded when goods or services are consumed (not just when paid)
Term
cash basis of accounting
Definition
Transactions are recorded when the cash is received or
paid
Revenue is recorded when received Expenses are recorded only when cash is paid
Term
Reasons not to use cash basis accounting
Definition
Can lead to misleading financial statements
* Revenue and expenses can be manipulated by timing the receipt and/or payment of cash (increase/decrease profit)
• Can cause peaks & valleys in your earnings (forcing you into higher tax brackets in some years)
• Can cause confusion over what your real earnings are (since you’re not reporting outstanding debt or receivables or true value of depreciable assets)
Term
Accounts receivable
Definition
A receivable is recorded when service is provided on account

A receivable is reduced when cash is collected
Term
What happens when a customer doesn’t pay by the due
date?
Definition
OInterest charge may be added to the balance due
Some accounts become uncollectible
Term
depreciation
Definition
This is how we recognize the costs associated with using the asset over time
Systematic allocation of the cost of the asset over it’s useful life
Term
Straight line depreciation
Definition
A delivery van was bought on Jan 1, 2012:

Cost = $33,000
Estimated residual value = $3,000
Estimated useful life = 5 years
Estimated useful life = 100,000 km

Depreciable amount = cost – residual value = $33,000 – 3,000
= $30,000

Depreciation expense = depreciable amount ÷ useful life (years)
= $30,000 ÷ 5 years
= $6,000 per year
Term
diminishing -Balance depreciation
Definition
Depreciation is calculated based on the asset’s carrying amount, which gets smaller each year as accumulated depreciation increases

Ignores any residual value for depreciation expense (but we still need to make sure the asset isn’t depreciated below this amount)
Term
Units-of-Production Depreciation
Definition
Useful life is expressed in terms of total units of production or activity expected from the asset

i.e. units produced or machine-hours worked

Depreciable amount
= cost – residual value = $33,000 – 3,000
= $30,000

Depreciation expense = depreciable amount ÷ useful life (km)
= $30,000 ÷ 100,000 km
= $0.30 per km
If total km for the year = 15,000 km Depreciation expense = $0.30 x 15,000 = $4,500
Term
A perpetual inventory system
Definition
keeps a running tally of inventory levels by recording sales and purchase transactions as they occur
• In other words - inventory is updated after each sale or purchase
Term
A periodic inventory system
Definition
does not keep a running tally of inventory levels but instead only records purchases made (additions to inventory, not deductions or sales)
• Inventory is updated at the end of the period based on a physical count
• Physical count must occur to determine both the ending inventory and likewise, the cost of goods sold
• Shrinkage cannot be determined
Term
determining ownership
Definition
Items in inventory include all goods owned by a company and held for sale...even if those goods are not necessarily physically held by the company
Term
Goods in transit
Definition
At the end of the period, there may be some goods in transit (either being shipped by you to a customer or being shipped to you by a supplier)
Term
FOB shipping point
Definition
ownership of the goods passes to the buyer as
soon as the goods are shipped from the seller
Term
FOB destination
Definition
ownership of the goods remains with the seller until the goods reach the buyer
Term
Consigned Goods
Definition
The ownership of consigned goods remains with the owner not the holder of the goods
Term
On Approval
Definition
• Goods taken home “on approval” by the customer are still owned by the company
Term
specific identification
Definition
This method can be used when items can be directly identified with a specific purchase and its invoice

Common examples: automobiles, horses, art, custom furniture
Term
first in first out
Definition
Assumes that the first item purchased is the first item sold
When a sale occurs:
•The earliest units purchased are removed from the balance sheet and charged to Cost of Goods Sold (COGS) on the Income statement

• The cost of the most recent purchases remain in inventory
Term
moving weighted average
Definition
Under this method, the costs of all inventory are averaged together
Average cost per unit: Cost of goods available for sale
Number of units available for sale

Unlike FIFO or Specific Identification, this is the only method that will produce different results depending on whether you are using a perpetual or periodic inventory system
Term
Under a perpetual inventory system
Definition
a new weighted average is calculated after each purchase
Term
Under a periodic inventory system
Definition
only one average is calculated at the end of the period
Term
Statement of Cash Flows:
Definition
Shows where a company obtained cash during a period of time & how that cash was used
Term
Balance Sheet (Statement of Financial Position):
Definition
Presents a picture of what a company owns (assets), what it owes (liabilities), &
its net worth (owner’s equity) at a specific point in time
Term
Balance Sheet (Statement of Financial Position):
Definition
Presents a picture of what a company owns (assets), what it owes (liabilities), &
its net worth (owner’s equity) at a specific point in time
Term
Statement of Retained Earnings (Statement of Owner’s Equity):
Definition
• Indicates the portion of a company’s earnings that was distributed to the owners of a company & how much was retained in the business to allow for future growth
Term
Income Statement (Statement of Earnings): •
Definition
Reports revenue & expenses to show how successfully a company performed
during a period of time
Term
liquidity
Definition
the order in which they are expected to be converted into cash)
Term
voluntary changes in accounting policy
Definition
allowed when a new policy would result in more reliable and relevant information
Term
Mandatory change in accounting policy
Definition
required by standard setters
Term
Changes in accounting policy
Definition
• occurs when the accounting policy used in the current year
changes from the one used previously • could be either a voluntary change or mandatory
Term
ratio analysis
Definition
Used to evaluate the efficiency or condition of a particular aspect of a company’s operations
Term
3 main categories / types of ratios:
Definition
1. Liquidity 2. Solvency 3. Profitability
Term
LiquidityRatios
Definition
measures the short-term ability of a company to pay its maturing debt and meet any unexpected cash needs
Term
Solvency Ratios
Definition
measures the ability of a company to survive over a long period of time
Term
Profitability Ratios
Definition
measures the earnings or operating success of a company for a given period of time
Term
limitations of financial analysis
Definition
• Alternative / changes to accounting policies • Professional judgement (estimates)
• Diversification of company (comparable?)
• Inflation
• Economic factors
Term
internal control
Definition
means having the necessary policies and procedures in place in order to do all of these things
Term
Control activities might include:
Definition
Establishing roles & responsibilities for each person
Maintaining good records / proper documentation Ensuring authorization of certain transactions and activities
Controlling physical access to goods / technological controls
Segregation of duties Insuring assets / bonding key employees
Performing regular independent reviews
Term
limitations of internal control
Definition
Human Error
Negligence, fatigue, confusion

2) Fraud
Intent to defeat internal controls for personal gain (independent or collusion)

3) Cost vs. Benefits
Costs cannot exceed the benefits Size matters
Term
controlling your cash- general guidelines
Definition
General Guidelines:
Separate handling of cash from the recordkeeping of cash
Consider more than 1 signature on authorization
Deposit cash receipts daily – or even better, accept payment via cheque or EFT
Make cash disbursements by cheque or EFT
Term
bank reconciliation
Definition
Report prepared periodically to explain the difference between the cash balance reported on the bank statement and the cash balance reported in the company’s books
It reconciles these two balances These 2 totals MUST agree!
Term
why dont the bank records and yours match ?
Definition
There is a difference between these two sets of records because...
1) Time lag between when a cheque is written and when it is cashed
2) Time lag between when receipts are recorded the company and when they are logged and recorded by the bank
3) Fees charged or interest paid by the bank may not be known to the company until posted by the bank
4) Potential for errors by either party in recording
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