Financial Accounting – Accting Princ & Formulas – Flashcards
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Basic accounting equation
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Assets = Liabilities + Owner's equity Owner's equity = Assets - Liabilities Liabilities = Assets - Owner's equity
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Business entity
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The financial statements report about a single business. Every business gets its own set of books. Accountants do not mix in the owner's personal financial information
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Current
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Liabilties that are those debts that must be paid within one year or one operating cycle,, whichever is longer.
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Current ratio
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Current assets/Current liablities
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Debt ratio
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Total liabilities/Total assets OR 100% - Equity ratio =
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Double entry accounting
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Recording business transactions twice: once to show where the money came from and another time to show where the money went.
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Equity ratio
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Total equity/Total assets OR 100% - Debt ration =
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Book value of a long-lived asset
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Purchase price - Accumulated depreciation
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Ending owner's equity formula
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Equity--beginning + Net income - Withdrawal = Equity--ending
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Gross profit
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Sales - Cost of goods sold
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Income statement formula
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Sales - Cost of goods sold = Gross profit Gross profit - Expenses = Net Income
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Cash flow statement formula
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Cash from operations + Cash from investing activities + Cash from financing activities = Total change in cash + Cash--beginning of period = Cash--end of period
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Conservatibe Principle
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The accounting principle that require accountants to resolve financial statement uncertainty in the least favorable way.
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Going-Concern Principle
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The accounting principle that requires that financial statemens be based on the assumption that the business will last indefinitely
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Historical Cost Principle
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The accounting principle that requires assets to be reported on balance sheets at their historical cost.
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Objectivity Principle
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The accounting principle that requires business transactions to be recorded using the best objective evidence.
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Stable Monetary Unit Principle
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The accounting principle that assumes that the value of money stays the same year after year.
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Debit and Credit formula
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Debits = Credits. Always
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Materiality Principle
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The accounting principle that says that businesses should pay for more accurate information only if the information is useful for making business decisions.
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Bank reconciliation formula
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page 116
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Matchin Principle
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The company's income and expenses associted with that income should be matched with each other and reported in the same period.
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Percentage of accounts receivable method
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The method of esimating the allowance for uncollectible accounts. A/R X Est% = What allowance should be - What allowance is = Adjustment
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Percentage of sales method
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The method of estimating uncollectible accounts expense. Sales X Est% = Uncollectible accounts expense
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Acid test ratio formula
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Same as quick ration formula: Total quick assests/Total current liabilities
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Average net accounts receivable (A/R) formula
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(Beginning net A/R + Ending net A/R)/2
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Days' sales in A/R formula
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Average net A/R/One day's sales
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Discount on a note
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Future value of the note X Discount% X Years (or fraction thereof) =
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Interest formula
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Loan amount (principal) X Rate% X Years (or fraction thereof)
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Present Value Principle
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Financial assets are shown on the balance sheet at their present value. When given a non-interest-bearing note (which has interest in the face amount), GAAP requires that the interest be backed out.
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Proceeds from a discounted note formula
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Future value - Discount
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Quick ratio formula
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Total quick assets/Total current liabilities
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Average Inventory
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(Beginning inventory + Ending inventory)/2
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Consistency Principle
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Businesses should use the same accounting system from period to period. For example, there is no switching back and forth from LIFO to FIFO
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Cost of goods sold formula
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Beginnning inventory + Net purchases = Goods Available for Sale (GAS) - Ending inventory =
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Cost of goods sold percent (CGS%)
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Cost of goods sold/Total sales OR 100% - Gross profit percent (GP%)
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Days in inventory formula
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Measures the average number of days before merchandise sells. 365/Inventory turnover
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Disclosure Principle
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Financial statements should disclose enough information to allow outside readers to make intelligent decisions. The information should be relevant, reliable, and comparable. For example, financial statemens must disclose he inventory system used.
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Gross profit formula (or gross margin)
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Sales - Cost of goods sold
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Gross profit percen (GP%)
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Gross profit/Total sales
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Inventory turnover formula
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Measures the number of times inventory completely sells per year. Cost of goods sold/Average inventory
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Lower of Cost or Market (LCM) Principle
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The company must report inventories at cost or the current marke price, whichever is lower.
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Net purchases fomula
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Purchases - Purchase discounts - Purchase returns and allowances + Freight-in =
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All-Costs-to-Get-Operating Principle
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Requires a business to capitalize all costs necessary to get an asset operating
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Allocate a purchase price among assets
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page 187
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Book value of a fixed asset
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Historical cost of an asset - Asset's accumulated depreciation =
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Cash received on sale of asset
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Book value + Gain (or - Loss) =
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Gain or Loss calculation
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Amount received - Book value (BV) given up =
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New Life Principle
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If any work on an asset extends the life of that asset, the cost of that work should be capitalized.
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Change-in-Accounting-Estimates Principle
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Allows businesses to change esimtes when more accurate information becomes available. Changes are made for the current and all future years, but not retroactively.
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Consistency Principle
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Forbids businesses to change accounting methods from year to year.
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Double declining balance depreciation
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(Book value at beginning of year X 2)/Estimated life
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MACRS
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Historical cost X IRS decimal = Depreciation for year. Salvage value = $0
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Straight-line depreciation
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(Historical cost - Salvage value)/Estimated life = Depreciation for all years
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Units of production method
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(Historical cost - Salvage value) X Units this year/Total estimated units (hours or miles) = This year's depreciation
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Current Portion Principle
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The accounting principle that requires a reporting of the current and non-current portions of all debt. Where the current portion cannot easily be estimated, this principle requires reporting the entire debt as current.
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Loan amortization schedule
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A schedule that shows key information about all payments of a loan. See page 236
