Term
The four basic financial statements
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Definition
- Balance Sheet
- Income Statement
- Statement of Retained Earnings
- Cash Flow Statement
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Term
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Definition
| Summarize the financial activities of the business. They can be prepared at any point in time (such as the end of the year, quart, or month) and can apply to any time span (such as one year, on quarter, or one month) |
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Definition
| The purpose of the balance sheet is to report the financial position (assets, liabilities, owners' equity) of an accounting enity at a particular point in time. |
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Definition
| The organization for which financial data are to be collected |
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Definition
| Assets = Liabilities + OE |
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Definition
| Economic resources (e.g. cash, inventory) |
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Definition
Sources of financial for the economic resources
Liabilities: From creditors
Are the company's debts or obigations |
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| Indicates the amount of financial provided by owners of the business and earnings. The investment of cash and other assets in the business by the owners is called contributed capital |
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Definition
Reports the accountant's primary measure of performance of a business.
Revenues less expenses during the accounting period (net income). Reports a specific period of time as of a certain date.
Revenues - Expenses = Net Income |
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Definition
| Companies can earn revenues from the sale of goods or services to customers. Revenues normally are reported for goods or serveices that have been sold to a customer whether or not they have yet been paid for. |
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| Represent the dollar amount of resources the entity used to earn revenues during the period. Expense reported in one accounting period may actually be paid for in another accounting period. |
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Definition
| Or net earnings (often call the "bottom line") is the excess of total revenues over total expenses |
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Term
| Statement of Retained Earnings |
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Definition
Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period
Net income earned during the year increases the balance of retained earnings, showing the relationship of the income statement to the balance sheet
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
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Term
| Elements of Statement of Retained Earnings |
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Definition
| Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings |
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Definition
| Reports inflows and outflows of cash during the accounting period in the categories of operating, investing and financing. |
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| Elements of the Cash Flow Statement |
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Definition
+/- Cash Flows from Operating Activities (CFO)
+/- Cash Flows from Investing Activities (CFI)
+/- Cash Flows from Financing Activities (CFF)
= Change in Cash |
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Term
| Cash Flows from operating activities |
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Definition
| Are cash flows that are directly related to earning income. |
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| Cash flows from investing activities |
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Definition
| Include cash flows related to the acquistion or sale of the company's productive assets. |
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| Cash flows from financing activities |
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Definition
| Are directly related to the financing of the enterprise itself. They involve the receipt or payment of money to investors and creditors (except for suppliers). |
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Term
| Relationship Among Statements |
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Definition
- Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings.
- Ending retained earning from the statement of retained earnings is one of the two components of stockholders' equity on the balance sheet.
- The change in cash on the cash flow statement added to the beginning of the year balance in cash equals the end of year balance in cash on the sheet.
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Term
| Notes to the financial statements |
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Definition
| Provide supplemental information about the financial condition of a company without which the financial statments cannot be fully understood |
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Term
| Generally Accepted Accounting Principles |
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Definition
| Are the measurement rules used to develop the information in financial statements. |
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Term
| The Securities and Exchange Commission |
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Definition
| Is the U.S. government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements. |
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| Financial Accounting Standards Board (FASB) |
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Definition
| Is the private sector body given the primary responsibility to work out the detailed rules that become GAAP |
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Term
| Why is GAAP Important to Mangers and External Users? |
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Definition
| GAAP are of great interest to the companies that must prepare financial statements, their auditors, and the readers of the statements. Companies and their managers and owners are most directly affected by the information presented in financial statements. |
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Term
| Management Responsibility and the Demand for Auditing |
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Definition
| Primary responsibility for the information in the financial statements lies with management, represented by the highest officer of the company and the highest financial officer. |
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Term
| Companies take three important steps to assure investors that the company's records are accurate |
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Definition
- They maintain a system of controls over both the records and the assets of the company
- They hire outside independent auditors to verify the fairness of the financial statements
- They form a committe of the board of directors to oversee the integrity of these other two safeguards.
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Definition
| Is an examination of the financial reports to ensure that they represent what they claim and conform with GAAP |
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| Objective of Financial Reporting |
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Definition
| The primary objective of external financial reporting is to provide useful economic information about a business to help external parties, primarily investors and creditors, make sound financial decisions. |
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Definition
| The users of accounting information. These decision makers include average investors, creditors, and experts who provide financial advice. |
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Definition
- Separate-Entity Assumption: States that business transactions are accounted for separately from the transactions of owners.
- Unit-of-measure assumption: State that accounting information should be measured and reported in the national monetary unit.
- Continuity Assumption (or going concern): States that businesses are assumed to continue to operate into the foreseeable future.
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Term
| Elements of a Balance Sheet |
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Definition
Assets: Are economic resources with probable future benefits owned by the entity as a result of past transactions.
Current Assets: Are assets that will be used or turned into cash within one year. Inventory is always considered a current asset regardless of the time needed to produce and sell it.
Long-term Assets: Are assets that will be used or turned into cash beyond the coming year.
Liabilities: Are probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services.
Current Liabilites: Are obligations that will be settled by providing cash, goods, or services within the coming year.
Stockholders' equity (also called owner's equity or shareholders' equity) Is the financing provided by the owners and business operations.
Contributed capital: Results from owners providing cash (and sometimes other assets) to the business
Retained Earnings: Refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.
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Term
Historical Cost Principle (or cost principle)
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Definition
| Requires assets to be recorded at historical cost that, on the date of the transaction, is cash paid plus the current dollar value of all noncash considerations also given in the exchange |
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Term
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Definition
- An exchange of assets or servcies for assets, services, or promises to pay between a business and one or more external parties to a business.
- A measureable internal event such as the use of assets in operations
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Definition
These are exchanges of assets, goods, or services by one party for assets, services, or promises to pay (liabilities) by one or more other parties.
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Definition
| These include certain events that are not exchanges between the business and other parties but nevertheless have a direct and measurable effect on the entity. Examples include using up insurance paid in advance using buildings and equipment over several years. |
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Definition
| Is a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item. |
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| A list of all account titles and their unique numbers. |
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Term
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Definition
| Is the process of studying a transaction to determine its economic effect on the entity in terms of the accounting equation. |
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| Two pinciples underlying the transaction analysis process |
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Definition
- Every transaction affects at least two accounts; correctly identifying those accounts and the direction of the effect (whether an increase or a decrese) is critical.
- The accounting equation must remain in balance after each transaction
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Term
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Definition
| The idea that every transaction has at least two effects on the basic accounting equation |
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Term
| Balancing the Accounting Equation |
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Definition
| The accounting equation must remain in balance after each transaction. That is, total assets (resources) must equal total laiblities and stockholders' equity (claims to resources). |
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Term
Systematic transaction analysis includes the following steps, in this order:
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Definition
- Identify and classify accounts and effects
- Identify the accounts (by title) affected, making sure that at least two accounts change. Ask yourself: What is received and what is given?
- Classify them by type of account. Was each account an assets (A), a laibility (L), or a stockholders' equity (SE)?
- Determine the direction of the effect. Did the account increase [+] or decreas [-]?
- Verify accounting equation is in balance. Verify that the accounting equation (A = L + SE) remains in balance.
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Term
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Definition
During the period:
Analyze transactions.
Record journal entries in the general journal.
Post amounts to the general ledger.
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End of the period:
Adjust revenues and expenses
and related balance sheet accounts
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set of financial statements.
Disseminatestatements
to users.
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Close revenues, gains,
expenses and losses
to retained earnings.
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Term
The Direction of Transaction Effects
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Definition
- The increase symbol is located on the left side of the T for accounts on the left side of the accounting equation (assets) and on the right side of the T for accounts on the right side of the equation (liabilities and stockholders' equity).
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Term
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Definition
| Is on the left side of an account. |
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Definition
| Is on the right side of an account |
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Term
| From this transaction analysis model, we can observe the following: |
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Definition
- Asset accounts increase on the left (debit) side; they have debit balances. It would be highly unusual for asset account, such as Inventory, to have a negative (credit) balance.
- Liability and stockholders' equity accounts increase on the right (credit) side, creating credit balances.
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Term
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Definition
Is an accounting method for expressing the effects of a transaction on accounts in a debits = credits format.
(Dr) (Cr)
(c) PP&E 10,000
Cash 2,000
Note Payable 8,000
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