Term
| What are the responsibilities of accountants? |
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Definition
1. Identify certain economic events
2. Record those events
3. Communicate those events (prepare reports, analyze, interpret). |
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Term
| What are the four basic financial statements? |
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Definition
1. Balance sheet
2. Income statement
3. Statement of retained earnings
4. Statement of cash flows |
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Term
| What is reported on a BALANCE SHEET? |
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Definition
| Assets = Liabilities + Stockholder's equity |
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Term
| What is the BASIC ACCOUNTING EQUATION? |
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Definition
(balance sheet equation)
Assets = Liabilities + Stockholder's equity |
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Term
| What are the company's debts or obligations? |
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Definition
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Term
| What term indicates the amount of financing provided by owners of the business plus the earnings? |
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Definition
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Term
| The amount of profits (earnings) reinvested in the business is called what? |
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Definition
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Term
| The investment of cash and other assets by the owners of the company into the business is called what? |
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Definition
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Term
Write an L (liability), A (asset), or SE (Stockholder's equity) next to each of the following:
1. Accounts payable
2. Accounts receivable
3. Cash
4. Contributed Capital
5. Buildings and equipment
6. Inventories
7. Land
8. Notes payable
9. Retained Earnings |
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Definition
1. L
2. A
3. A
4. SE
5. A
6. A
7. A
8. L
9. SE |
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Term
| What is the INCOME STATEMENT? |
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Definition
| It reports the accountant's primary measure of performance of a business (revenue minus expense). |
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Term
| what is the term accountants use to refer to PROFIT? |
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Definition
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Term
| On the income statement, when are REVENUES reported? |
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Definition
| When the goods or services have been sold to a customer (incurred), regardless of whether or not they have been paid for. |
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Term
| What are the elements of an INCOME STATEMENT? |
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Definition
REVENUES
-
EXPENSES
=
NET INCOME |
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Term
| True/False: Expenses reported in one accounting period may actually be paid for in another? |
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Definition
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Term
TRUE/FALSE
The NET INCOME equals the CASH generated by the operations of a business? |
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Definition
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Term
Mark each of these with an E (expense), or R (Revenue):
1. Cost of goods sold
2. Income tax
3. Sales
4. Selling, general, and administrative |
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Definition
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Term
What is one of the 4 basic financial statements that reports the way the net income and distribution of dividends affects the company's financial position during the accounting period?
What is the equation for it? |
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Definition
RETAINED EARNINGS
BEGINNING RE = NET INCOME - DIVIDENDS = ENDING RE |
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Term
| What should the HEADING of a financial statement look like? |
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Definition
1. NAME OF ENTITY
2. TITLE OF STATEMENT
3. ACCOUNTING PERIOD
4. UNIT OF MEASURE |
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Term
| What is the significance of retained earnings? |
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Definition
| It indicates the relationship of the income statement to the balance sheet. |
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Term
| How does the STATEMENT OF CASH FLOWS report the cash inflows and outflows? |
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Definition
| It divides the inflows and outflows into three primary categories: CASH FLOWS FROM OPERATING, INVESTING, AND FINANCING ACTIVITIES. |
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Term
| TRUE/FALSE The income statement provides information concerning cash flows? |
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Definition
| FALSE - The STATEMENT OF CASH FLOWS does this. |
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Term
| Cash flows from OPERATING ACTIVITIES are... |
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Definition
| Cash flows that are directly related to earning income. |
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Term
| Cash flows from investing activities... |
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Definition
| Include cash flows related to the acquisition or sale of the company's productive assets. |
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Term
| Net income from the income statement results in an _(inc/dec)_ in ending retained earnings on the statement of __________. |
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Definition
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Term
| What are the MEASUREMENT RULES applied in computing the numbers on the financial statements called? |
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Definition
| GAAP - GENERALLY ACCEPTED ACCOUNTING PRINCIPLES |
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Term
| What does the SEC do and what does it stand for? |
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Definition
| SEC (Securities and Exchance commission) is the US government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in providing those statements. |
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Term
| What is the FASB and who made it? |
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Definition
| The FASB is the Financial Accounting Standards Board, set in place by the SEC, and given the responsibilities of working out the detailed rules that become GAAP (generally accepted accounting principles). |
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Term
| Where does the PRIMARY RESPONSIBILITY belong to, concerning the accuracy of the financial information provided on a financial statement? |
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Definition
| MANAGEMENT (HIGHEST OFFICER AND HIGHEST FINANCIAL OFFICER OF COMPANY) |
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Term
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Definition
| Describes the auditor's opinion of the fairness of the financial statements and the evidence gathered to support that opinion. |
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Term
| What does an AUDIT involve? |
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Definition
| It involves the examination of the financial reports to ensure they represent what they claim and conform to GAAP. |
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Term
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Definition
| CPA - CERTIFIED PUBLIC ACOUNTANT |
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Term
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Definition
| The public company accounting oversight board, in consultation with the SEC, sets standards for the CPA's who audit public companies. |
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Term
C.2
Who are the DECISION MAKERS? |
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Definition
| The users of accounting information. |
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Term
C.2
What are the 4 BASIC ACCOUNTING ASSUMPTIONS? |
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Definition
1. SEPARATE-ENTITY ASSUMPTION
2. UNIT-OF-MEASURE ASSUMPTION
3. CONTINUITY ASSUMPTION
4. TIME PERIOD ASSUMPTION |
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Term
| This assumption states that each business's activities must be accounted for separately from the activities of its business owners, and other owners or entities. |
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Definition
| SEPARATE-ENTITY ASSUMPTION |
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Term
| This accounting assumption states that each business entity accounts for and reports its financial results primarily in terms of the national monetary unit. |
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Definition
| Unit-of-Measure Assumption |
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Term
| This ACCOUNTING ASSUMPTION states that a business normally is assumed to continue operating long enough to meet its contractual commitments and plans. |
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Definition
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Term
| What are the ELEMENTS of the balance sheet? |
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Definition
| ASSETS, LIABILITIES, AND STOCKHOLDER'S EQUITY |
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Term
| What is the term used to describe: The cost is measured on the date of the transaction as the cash paid plus the dollar value of all noncash considerations (assets, privileges, or rights)? |
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Definition
| HISTORICAL COST PRINCIPLE |
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Term
| Most companies list assets in order of __________. |
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Definition
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Term
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Definition
| Current Assets are assets that will be turned into cash within ONE YEAR. |
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Term
| TRUE/FALSE - INVENTORY is always considered an asset, regardless of how long it takes to produce and sell the inventory. |
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Definition
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Term
| TRUE/FALSE - Intangible objects such as TRADEMARKS, PATENTS, and COPYRIGHTS cannot be reported on the balance sheet, because they are not assets. |
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Definition
| FALSE - They are assets because they have been researched and developed over time. |
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Term
| Just as assets are reported in order of liquidity, liabilities are reported in order of ________. |
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Definition
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Term
Put a CA (current asset), a CL (current liability), a NCA (non-current asset), a NCL (non-current liability), or a SE (stockholder's equity), in front of the following:
1. Accrued expense payable
2. Property and equipment
3. Accounts receivable
4. Long-term debt
5. Retained earnings
6. Inventories
7. Notes receivable (due in 5 years)
8. Accounts payable |
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Definition
1. CL
2. NCA
3. CA
4. NCL
5. SE
6. CA
7. NCA
8. CL |
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Term
| People buy stocks in hope of receiving two types of cash flows: |
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Definition
1. Dividends (distribution of company's earnings)
3. Capital Gains (Gains from selling the stock for more than they paid) |
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Term
| Why is signing a CONTRACT not reflected on financial statement? |
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Definition
| Signing a contract is not considered to be a transaction because it only involves the exchange of promises, not of assets. |
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Term
| Accounts with a ______ title are always assets, while accounts with a _______ title are always liabilities. |
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Definition
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Term
| TRUE/FALSE - The account PREPAID EXPENSE is an asset? |
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Definition
| TRUE - It represents amounts paid to others for future benefits. |
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Term
| TRUE/FALSE - Accounts with UNEARNED in the title are always expenses? |
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Definition
| FALSE - They are LIABILITIES representing amounts paid in the past to the company by others expecting future goods or services from the company. |
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Term
| TRANSACTIONAL ANALYSIS is the process of studying a transaction to determine it's economic effect on the business in terms of ________. |
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Definition
| THE ACCOUNTING EQUATION (Assets = Liabilities + Stockholder's equity) |
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Term
| What 2 PRINCIPLES underly the TRANSACTION ANALYSIS? What is this phenomenon called? |
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Definition
1. EVERY transaction affects AT LEAST 2 accounts.
2. The accounting equation MUST remain in BALANCE after each transaction.
This is called the DUAL-EFFECTS concept. |
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Term
| What are the steps to BALANCING the ACCOUNTING EQUATION? |
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Definition
A. Identify and classify accounts and effects
1. Identify the accounts (by title) affected (at least 2, ask yourself what is received and what is given).
2. Classify them by type of account (A, L, or SE?)
3. Determine the direction of the effect (Did acount + or - ?)
B. Verify that accounting equation is in balance (A = L+SE) |
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Term
| GENERAL JOURNAL stands for _________ as GENERAL LEDGER STANDS FOR _________. |
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Definition
1. Journal entry
2. T-Account |
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Term
| In T-ACCOUNTS, Debits are always on the left side, and credits on the right side, but they increase and increase differently according to Account Type. Explain: |
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Definition
For ASSETS, T-ACCOUNTS increase (+) on the left and decrease (-) on the right.
For Liabilities and Stockholder's Equity, T-ACCOUNTS increase (+) on the right and decrease (-) on the left. |
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Term
| The term debit means increase, while the term credit means to increase: TRUE/FALSE? |
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Definition
| False, they do not mean increase or decrease in Accounting. Debit simply means the left hand side, and credit is the right hand side. |
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Term
| __________ is an accounting method for expressing the effects of a transaction on accounts in DEBIT-EQUAL-CREDITS format. |
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Definition
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Term
| TRUE/FALSE: The order of the debited accounts or credited accounts in a JOURNAL ENTRY depends on the accounts. |
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Definition
| FALSE - The order does not matter, but debits are always written on top, and credits are listed below, and indented. |
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Term
| Define a "COMPOUND ENTRY." |
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Definition
| Any journal entry that affects more than 2 accounts. |
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Term
| What is a good way to clarify a JOURNAL ENTRY? |
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Definition
| Write a (A) next to assets, (L) next to liabilities, and (SE) next to stockholders' equity, along with a + or - in the front to signify whether the account titles increase or decrease. |
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Term
| By themselves, JOURNAL ENTRIES do not provide the balances in accounts. What is the next step in BOOKKEEPING that shows the balances of each of the accounts? |
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Definition
| General Ledger (or T-ACCOUNTS) provide balances for accounts, drawing inferences about a company's activities. |
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Term
What equation is used to provide information about a company's EFFECTIVENESS AT MANAGING DEBT AND EQUITY FINANCING?
What is the equation? |
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Definition
1. Financial Leverage Ratio
2. FLR = Average Total Assets / Average Stockholders' Equity
Average means (beginning balance + ending balance) / 2 |
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Term
| In the FINANCIAL LEVERAGE RATIO, what do values represent? |
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Definition
A ratio of 1 indicates the company has NO LIABILITIES
A ratio of 2 indicates that the company uses debt and equity financing equally to acquire assets.
A ratio above 2 indicates that the company has a heavier reliance on DEBT THAN EQUITY. |
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Term
Chapter 3
What is the CYCLE that begins when a company receives goods to sell (or in the case of a service company, has employees work) and ends when customers pay cash to the company? |
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Definition
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Term
| TRUE/FASE - Shortening a company's OPERATING CYCLE increases the CASH FLOW? |
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Definition
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Term
| Since the OPERATING CYCLE repeats itself, the ______ assumption indicates that the long life of a company can be reported in shorter TIME PERIODS. |
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Definition
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Term
| What TWO issues arise when reporting the PERIODIC INCOME to users? |
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Definition
1. When should the effects of operating activities be recognized (recorded).
2. What amounts should be recognized (recorded)? |
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Term
| _______ are recognized as increases in assets or settlements of liabilities from ONGOING OPERATIONS of the business. |
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Definition
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Term
| When a customer pays for a good or service in advance, a _______ account is created. This account is called _________. At this point no revenue is recorded, because there isn't any transaction, just a receipt. |
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Definition
1. Liability account
2. Unearned Revenue (deferred revenue) |
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Term
| What is the difference between an EXPENDITURE and an EXPENSE? |
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Definition
| An EXPENDITURE is any outflow of cash for any purpose, whereas an EXPENSE is an ASSET USED TO GENERATE REVENUES DURING A PERIOD. Either all or a portion of an asset's cost is recorded as an expense. Any amount that is used to generate revenues during a period, such as electricity, whether paid for or to be paid in the future, is an expense. |
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Term
|
Definition
| The COST OF USING BORROWED MONEY. |
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Term
| What items belong on the OTHER ITEMS account section and are not considered to be part of a company's OPERATING ACTIVITIES? |
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Definition
INTEREST EXPENSE
INVESTMENT INCOME/REVENUE (dividends or interest earned on investment) |
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Term
| TRUE/FALSE: Selling land for more than the original purchase price does not result in earning revenue? Why? |
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Definition
| TRUE - REVENUES only record items in the CENTRAL OPERATING FOCUS of a company. Selling land for a higher price is not one of the central operating focus's of a company, unless that is their main business. |
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Term
| What is the last EXPENSE listed on the INCOME STATEMENT before determining the NET INCOME? |
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Definition
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Term
| In ____________ accounting, revenues are recorded when CASH is received, and expenses are recorded when CASH is paid, regardless of whether or not the revenues were earned, or expenses incurred. |
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Definition
CASH-BASIS ACCOUNTING
Revenues (cash receipts)
- Expenses (cash payments)
_____________________________
= Net Income (cash basis) |
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Term
| In __________ accounting, revenues are recorded when they are EARNED, and expenses when they are INCURRED, regardless of the timing of cash receipts or payments. |
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Definition
ACCRUAL-BASIS ACCOUNTING
Revenues (when earned)
- Expenses (when incurred)
__________________________
= Net Income (accrual basis) |
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Term
| What are the two BASIC ACCOUNTING PRINCIPLES that determine when revenues and expenses are recorded, under ACCRUAL BASIS ACCOUNTING? |
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Definition
REVENUE PRINCIPLE
AND
MATCHING PRINCIPLE |
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Term
| What is the REVENUE PRINCIPLE, relating to ACCRUAL-BASIS ACCOUNTING? What are the 4 criteria which must all be met so that REVENUE can be recognized? |
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Definition
1. Delivery has occurred, or services have been rendered.
2. There is persuasive evidence of an arrangement for customer payment. (customer provides cash, or a payable account/note)
3. The price is fixed.
4. Collection is reasonably assured. (creditworthy customer) |
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Term
| When are FRANCHISE FEES recognized? |
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Definition
| When the franchise restaurant begins operations. |
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Term
| What happens when cash is received IN THE SAME PERIOD AS THE GOODS OR SERVICES ARE DELIVERED? |
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Definition
| Revenue is earned AND Cash is received. |
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Term
| What happens when cash is received before the goods or services are delivered? |
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Definition
No revenue is recorded.
Records a liability account (unearned...something) |
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Term
| What happens when cash is received AFTER the goods or services are delivered? |
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Definition
Record both Sales Revenue and Asset Accounts receivable
When the customer pays the bill, company will increase the CASH account, and decrease the ACCOUNTS RECEIVABLE. |
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Term
| This PRINCIPLE requires that costs incurred to generate revenues be recognized in the same period - A matching of costs with benefits. |
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Definition
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Term
| Wages to employees (wage expense), utilities for electricity (utilities expense), food and paper products (cost of sales), facilities rental (Rent expense), and use of equipment (depreciation expense), all DURING THE PERIOD, are examples of: |
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Definition
| The cost of generating revenue - relating to the Matching Principle. |
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Term
Using the Matching Principle:
Spending 800 dollars for advertising on the same day that money is paid would create a cost that is recorded as... |
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Definition
| Advertising Expense, and would be recorded in the current year's income statement. |
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Term
Using the Matching Principle:
If cash is paid before the expense is incurred to generate revenue, when is it recorded? |
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Definition
| Expense should be recorded when the supplies are used to earn revenue. Say that Papa Johns buys paper plates in January, but does not use them until February. Then, in January, the paper plates would be recorded as an ASSET (SUPPLIES), and when they are used in February, SUPPLIES will decrease, and a new expense (Supplies Expense) will be reported on the NEXT PERIOD. |
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Term
Using the Matching Principle:
If cash is paid AFTER the cost is incurred to generate revenue, when are things recorded? |
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Definition
| The Expense is reported in the current period, and a Liability account will be reported for money that owed. |
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Term
| What would give you the answer to HOW EFFECTIVE management is in generating sales from assets (resources)? |
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Definition
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Term
| What is the TOTAL ASSETS RATIO? What does the number signify? |
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Definition
TOTAL ASSETS RATIO
= Sales (operating) revenues/ Avg. total assets.
A high asset turnover ratio signifies efficient management. |
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Term
| TRUE/FALSE: In general, revenues are to be recorded when earned, and expenses are to be recorded when incurred. |
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Definition
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Term
| Why must ADJUSTMENTS be made to a FINANCIAL STATEMENT? |
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Definition
| Many operating activities occur over several periods, and recording these activities and others can be very costly. This is why companies wait till the end of the period to make the necessary adjustments. Essentially, ADJUSTMENTS update the records. |
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Term
THE ACCOUNTING CYCLE starts with Analyzing the Transactions and ends with Closing Revenues, gains, expenses, and losses.
Please list all the steps, from the START OF A NEW PERIOD. |
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Definition
1. Analyze Transactions
2. RECORD journal entries in general journal
3. POST amounts to the general ledger
4. ADJUST revenues and expenses and related balance sheet accounts (record in journal and post to ledger)
5. PREPARE a complete set of financial statements and disseminate it to users.
6. CLOSE revenues, gains, expenses, and losses to RETAINED EARNINGS (record in journal and post to ledger). |
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Term
| When is it required to PREPARE AN ADJUSTING ENTRY? |
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Definition
| Every time you need to prepare a financial statement for external users. |
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Term
| There are 4 types of ADJUSTMENTS divided into 2 categories, what are they? |
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Definition
REVENUES
1. Unearned Revenues
2. Accrued Revenues
EXPENSES
1. Prepaid Expenses
2. Accrued Expenses |
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Term
| Each ADJUSTMENT requires 2 ENTRIES, what are they? |
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Definition
1. One for the cash RECEIPT or PAYMENT.
2. One for recording the REVENUE or EXPENSE in the proper period. |
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Term
| In analyzing adjustments at the end of the period, there are three steps: |
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Definition
Step 1. Identify the type of adjustment
Step 2. Determine the amount
Step 3. Record the adjusting journal entry. |
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Term
| In identifying the type of adjustment, during the first of three steps of the ADJUSTMENT PROCESS, what must you take note off? |
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Definition
Unearned Revenue and Prepaid expense accounts are overstated.
Revenues and Expenses that have accrued but have not been recorded are understated. |
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Term
| What is an allocation of an asset's cost over its estimated life to the company? |
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Definition
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Term
| Is DEPRECIATION of an ASSET subtracted directly from the account the asset is in? |
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Definition
No, a new account is made (Contra-Account) in the Assets row, but the amount of depreciation is not added to DEBITS, it is added to CREDITS!
For Property and Equipment, the Contra-account is called "ACCUMULATED DEPRECIATION" and is listed right under the Property and Equipment account, with the balance in the Credit side of the financial report. |
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Term
| What is the NET BOOK VALUE? |
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Definition
| Net Book Value refers to difference between an asset's ACQUISITION COST and ACCUMULATED DEPRECIATION. So basically the amount the asset was worth when it was bought, minus the amount of depreciation it endured. |
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Term
| Balance sheet accounts (Assets, liabilities, and SE) are (permanent/temporary) while revenue, expense, gain, and loss accounts are (permanent/temporary). |
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Definition
Balance sheet accounts are permanent
The others are temporary. (they all start at zero at the beginning of a new period) |
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Term
| The EPS ratio is reported on the INCOME STATEMENT and is widely used in EVALUATING THE OPERATING PERFORMANCES AND PROFITABILITY OF A COMPANY. What does it stand for and what other things can you say about it? |
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Definition
It stands for the Earnings Per Share ratio.
Net Income / (average number of shares of common stock outstanding during the period)
It is the only ratio required to be disclosed on the statement or in the notes to the statement. |
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Term
| The third RATIO examines manager's effectiveness at controlling revenues and expenses to generate more profit for the shareholders. What is it called, and how is it calculated? |
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Definition
NET PROFIT MARGIN
= Net Income / Net Sales (or Operating Revenue)
In effect, the net profit margin measures how much of every dollar of sales generated is profit. A rising net profit margin signals more efficient management of sales and expenses. |
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Term
| TRUE/FALSE: The ending balance in each of the asset, liability, and stockholders' equity accounts is the beginning asset for the next period? |
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Definition
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|
Term
| what is the point of CLOSING AN ACCOUNT? |
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Definition
| Closing an account transfers balances in temporary accounts (revenue, expense, gain, loss) to RETAINED EARNINGS and establishes ZERO BALANCES in temporary accounts. |
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Term
| What two purposes does CLOSING THE ENTRY serve? |
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Definition
1. To transfer NET INCOME or LOSS to Retained Earnings.
2. To establish a ZERO BALANCE in each of the temporary accounts to start the accumulation in the next accounting period. |
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Term
| What are the steps to CLOSING THE BOOKS? |
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Definition
1. List the Revenues and Gains debits and wages, losses, in the credit column in GENERAL ENTRY format.
2. SUBTRACT expenses from revenue, and you get the RETAINED EARNINGS amount, which will be added to the JOURNAL list right under the LOSS account in the CREDIT column.
3. Write T-ACCOUNTS for each of the above accounts, including Retained Earnings, but switch the revenues and expenses and losses and gains. So for Wage Expense, for example, the Balance would be on the left, and for Sales Revenue, the balance would be on the right.
4. In the Retained Earnings T-account, the new balance, showing the previous balance plus the new retained earnings, should be posted in the right column, with the old balance. |
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Term
| What should the post-closing trial balance look like in terms of order of things? |
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Definition
Going down the sheet:
Assets (Cash, receivables, supplies, paid expenses, current assets, investments (long term), property, equipment, notes receivable, accumulated depreciation)...
Liabilities (Payables, unearned accounts)
Stockholders' Equity (Contributed capital, retained earnings)
Revenues and Gains
Expenses and losses
TOTAL |
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