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accounting

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the process of measuring economic activity of an entity in monetary terms and communicating results to users

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four basic financial statements

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balance sheet, income statement, statement of stockholder's equity, and statement of cash flows

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balance sheet

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listing of a firm's assets, liabilities, and stockholder's equity as of a given date, usually the end of an accounting period

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accounting equation

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assets=liabilities+stockholder's equity

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assets

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economic resources of a business that can be expressed in monetary terms. assets take many forms. cash, accounts receivable, supplies, furniture, and equipment

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liabilities

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obligations or debts that a business must pay in cash or in goods and services at some future time as a consequence of past transactions or events. accounts payable, notes payable, and unearned revenue

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stockholder's equity

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refers to the ownership (stockholder) claims on the assets of the business. it represents a residual claim on a business assets; it is a claim on the assets of a business that remain after all liabilities to creditors have been satisfied. sometimes referred to as a business's net assets

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income statement

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reports the results of operations for a business for a given time period, usually a quarter or a year. lists the revenues and expenses of the business.

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sales revenue

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increases to a company's resources that result when goods or services are provided to customers. measured by the slue of assets received in exchange for the goods or services delivered.

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expenses

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decreases in a company's resources from generating revenue, usually measured by the value of the assets used up or exchanged as a result of business's operating activities. cost of goods sold, selling expenses, marketing expenses, admin expenses, interest expense, income taxes. two parts: contributed capital and earned capital

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contributed capital

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measure of the capital contributed by the stockholders of a company when they purchase ownership shares in the company. ownership shares are called common shares or common stock

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earned capital

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a measure of the capital that is earned by the company, reinvesting in the business, and not distributed to its stockholders-- its retained earnings

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retained earnings

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increased when operations produce net income and decreased when operations produce a net loss. also decrease when a company pays a dividend to its stockholders. RETAINED EARNINGS BOP +net income - dividends = RET EARN EOP

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accounting cycle

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analyze, record, adjust, report, close

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analyze

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analyze transactions from source documents

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record

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journalize transactions and prepare unadjusted trail balance

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adjust

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journalize adjusting entries and prepare adjusted trial balance

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report

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prepare financial statements

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close

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journalize closing entries and prepare post-closing trial balance

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prepaid expenses

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allocating previously recorded assets to expenses, to reflect the proper expenses incurred during that period

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unearned revenues

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allocating previously recorded unearned revenue to earned revenue, to reflect revenues earned during the period

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accrued expenses

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recording operating expenses that have not yet been paid or recorded, to reflect expenses incurred during the period

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accrued revenues

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recording revenues that have not yet been received or recorded, to reflect revenue earned during the period

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closing process

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the process of transferring the balances in temporary accounts to retained earnings

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current assets

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will be cash within a year

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liquidity

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determined by the ability of an asset to be readily converted into cash.

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long term assets

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assets that the company does not expect to convert to cash within the next year or use up during the course of the normal operating cycle, whichever is longer. ppe

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PPE

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property, plant, and equipment, long term assets

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intangible assets

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include brand names, copyrights, patents, trademarks, that a company acquires. lack a physical presence but enable a company to generate revenue from its customers who recognize the quality associated with products bearing a brand name or trademark

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current liabilities

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consist of liabilities that must be settled within the normal operating cycle or one year, whichever is longer. (accts payable, accrued expenses payable, short term notes payable, and other current liabilities)

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accounts payable

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reflects the amts owed for inventory that was purchased on credit

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accrued expenses payable

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includes wages, utilities, interest, income tax, and property taxes that are legally owed by a company but which have not yet been paid.

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short-term notes payable

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represents amounts owed that are specified in a formal contract called a note

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long-term liabilities

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consist of debt obligations not due to be settled within the normal operating cycle or one year

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single step income statement

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sum of the expenses is subtracted from the sum of the revenues in a single step to arrive at net income

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current ratio

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current assets/current liabilities, measurement of liquidity. more than one means that a company has more cash and current assets than needed to pay off its current obligations, less than one means they don't have enough.

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debt to total assets ratio

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total liabilities/total assets, how much debt for every dollar of cash that they have. the greater it is, the greater the company's risk of not being able to pay its interest payments or principal repayments on a timely basis. the smaller, the opposite applies

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profitability

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one way to measure a company's success, indicates whether or not a company is able to bring its products or services to the market efficiently, and whether it produces things that are valued by the market.

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return on sales ratio

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aka profit margin. net income/net sales

Accounting Test Unit 1 – Flashcards

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