Accounting 220 – Flashcards
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Describe the primary forms of business organization
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Sole Proprietorship, Partnership, Corporation
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Sole Proprietorship
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a business owned by one person
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Partnership
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a business owned by two or more people associated as partners
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Corporation
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a separate legal entity for which evidence of ownership is provided by shares of stock
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Identify the users and uses of accounting information
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internal and external users
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Internal users
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managers who need accounting information to plan, organize, and run business operations.
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External users
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investors and creditors
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Investors
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stockholders; use accounting information to help them decide whether to buy, hold, or sell shares of a company's stock.
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Creditors
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suppliers and bankers; use accounting information to access the risk of granting credit or loaning money to a business. Also taxing authorities, customers, labor unions, and regulator agencies
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The three principal types of business activity
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financing activities, investing activities, operating activities
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Financing activities
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involve collecting the necessary funds to support the business
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Investing activities
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involve acquiring resources necessary to run the business
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Operating activities
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involve putting the resources of the business into action to generate profit.
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Financial statements
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income statement, retained earnings statement, balance sheet, statement of cash flows
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Income statement
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presents the revenues and expenses of a company for a specific period of time
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Balance sheet
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reports the assets, liabilities, and stockholders' equity of a business at a specific date
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Statement of cash flows
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summarizes information concerning the cash inflows (receipts) and outflows (payments) for a specific period of time
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Assets
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resources owned by a business
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Liabilities
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debts and obligations of the business. Represent claims of creditors on the assets of the business.
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Stockholders' equity
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represents the claims of owners on the assets of the business. stockholder's squirt is subdivide into two parts: common stock and retained earnings.
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Basic accounting equation
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Assets= liabilities + Stockholders' equity
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Components that supplement the financial statements on an annual report
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The management discussion and analysis, notes to the financial statement, auditor's report
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Management discussion and analysis
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provide's management's interpretation of the company's results and financial position as well as discussion of plans for the future
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Notes to the financial statements
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provide additional explanation or detail to make the financial statements more informative
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auditor's report
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expresses an option as to weather the financial statements present fairly the company's results of operations and financial position
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Sections of a classified balance sheet
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assets classified as: current assets, long-term investments, property plant and equipment, intangibles
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Tools for analyzing financial statement and ratios for computing a company's profitability
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Ratio analysis and profitability ratio
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Ratio analysis
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expresses the relationship among selected items of financial statement data.
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Profitability ratios
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measure aspects of the operating success of a company for a given period of time.
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Retained earnings statement
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presents the factors that changed the retained earnings balance during the period
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statement of stockholders equity
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presents the factors that changed the stockholder's equity during the period, including those that changed retained earnings. [statement of stockholders equity is more inclusive than retained earnings]
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Liquidity ratio
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e.g. current ratio; measure the short term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
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Solvency ratios
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e.g. such as the debt to assets rati, measure the ability of a company to survive over a long period
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Generally accepted account principles
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the basically object of financial reporting is to provide information that is useful or decision making
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Debits and credits
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the term debit and credit are synonymous with left and right. Assets, dividends, and expenses are increased by debits and decreased by credits. liabilities, common stock, retained earnings, and revenues are increased by credits and decreased by debits.
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Basic steps in the recording process
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Analyze each transaction in terms of its effect on accounts, enter the transaction information in a journal, and prevents or locates errors because the debit and credit amounts for each entry can be readily compared
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Journal
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A journal discloses in one place the complete effects of a transaction, provide a chronological record of transactions, and prevents or locates errors because the debit and credit amounts for each entry can be readily compared
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Ledger
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The entire group of accounts maintained by a company
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Posting
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procedure of transferring journal entries into the ledge accounts
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Trial Balance
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list of accounts and their balances at a given time. The primary purpose of the trail balance is to prove the mathematical equality of debits and credits after posting**
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Cash Activities
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operating, investing, financing
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Operating
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types of actives the company performs to generate profits
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Investing
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the purchase or sale of long-lived assets used in operating the business, or to the purchase or sale of investment securities (stock and bonds of other companies)
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Financing
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borrow money, issuing shares of stock, and paying dividends
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Revenue Recognition Principle
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dictates that companies recognize revenue when a performance obligation has been satisfied**
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The expense recognition principle
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dictates the companies recognize expenses in the period when the company makes efforts to generate those revenue
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Cash Basis of accounting
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Companies record events only in the periods in which the company receives or pays cash
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Accrual basis of accounting
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companies record, in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged
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Adjusting Entries
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Adjustments made at the end of an accounting period. These entries sure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred
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Major types of adjusting entries
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Prepaid expenses, unearned revenue, accrued revenues, accrued expenses.
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Deferrals
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prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period
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Accruals
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accrued revenues or accrued expenses. Adjusting enteries for accruals record revenues for services performed and expenses incurred in the current accounting period that have not been recognized through daily entries.
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Adjusted trial balance
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trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period
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Adjust trial
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to show the effects of all financial events that have occurred during the accounting period
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Closing entry
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transfer net income or net loss to the period to Retained Earnings. "zero-out" all temporary accounts (revenue accounts, expense accounts, and dividends) so that they can start each new period with a zero balance. To accomplish this, companies "close" all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed.
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Steps in the accounting cycle.
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1. Anaylze business transactions 2. Journalize the transactions 3. Post to the ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. journalize and post closing entries 8. Prepare a post-closing trial balance
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Net income
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based on accrual accounting, which relies on the adjustment process
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Net cash
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is determined by adding cash received from operating the business and subtracting cash expended during operations.
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Merchandising company
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sell stuff
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Service company
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sell time
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Purchases under perpetual inventory system
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inventory account is debited for all purchase and for freight costs and it is credited for purchase discounts and purchase returns and allowances.
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Sales Revenue under perpetual inventory system
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When inventory is sold, Accounts Receivable (or cash) is debited and Sales Revenue is credited for selling price of the merchandise. At the same time Cost of Goods Sold is debited and inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as need for record returns, allowances, or discounts related to the sale.
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Single-step income statement
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companies classify all data under two categories, revenues or expenses , and net income is determined in one step
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multiple-step income statements
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shows numerous steps in determining net income, including results of non-operating activities
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Periodic system
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uses multiple accounts to keep track of transactions that affect inventory.
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Cost of goods sold under periodic system
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1. calculate cost of goods purchased by adjusting purchase for returns allowances, discounts, and freight in. 2. calculate cost of goods sold by adding cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory.
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Factors affecting profitability
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gross profit, as measured by the gross profit rate, and by management ability to control costs, as measure by profit margin
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Earnings indicator
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earnings have high quality if they provide a full and transparent depiction of how a company performed. an indicator of the quality of earnings ratio, which is net cash provided by operating activities divided by net income. Measures above 1 suggest the company is employing conservative accounting practices. Measures significantly below 1 might suggest the company is using aggressive accounting to accelerate the recognition of income.
