Chapter 1 -4 of Fundamentals of Financial Accounting – Flashcards

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Sole Proprietorship is
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a business owned by one person who is liable for debts the business can't pay for
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Income statement includes
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Revenue Expenses Net Income
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Balance Sheet includes
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Assets Liabilities Stockholders' Equity
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Retained Earnings includes
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Beginning Retained Earnings Net Income Dividends Ending Retained Earnings
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Partnership
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legal liability is the responsibility of two or more owners
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Sole Proprietorship and Partnership
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owners have unlimited liabilities
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Corporations
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income is taxed twice
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Accounting Equation
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Assets = Liabilities + Stockholders' Equity
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Net Income Equation
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Net Income= Revenue - Expenses
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Retained Earnings is
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The amount of net income retained in the corporation.
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Liabilities
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are measurable amounts that the company owes to creditors
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Statement of Cash flows
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Reports the operating, investing, and financing activities that caused increases and decreases in cash during the period.
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Balance sheet
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A financial statement that reports assets, liabilities, and owner's equity on a specific date.
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Income Statement
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A report showing the revenue, expenses, and income (or loss) of a business for a specific period of time.
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Statement of Retained Earnings
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A financial statement that reports the amount of accumulated net profits that a business has retained and not paid in dividends since inception.
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financing activities
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Business activities that involve obtaining funds to begin and operate a business.
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operating activities
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Activities that involve the production or purchase of merchandise and the sale of goods and services to customers, including expenditures related to administering the business, are classified as:
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investing activities
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Cash flow activities that include (a) purchasing and disposing of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans.
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Accounting
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referred to as the language of business employed to communicate financial information based upon the recording, classification, summarization, and interpretation of financial data
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operating activities includes
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Cash used to buy supplies Cash received from customers Cash paid to employees
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LLC stands for
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Limited liability company
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Dividend are not
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an expense
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Dividends
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are earnings distributed to stockholders
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GAAP
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standards and practices used by publicly held corporations in the US and a few other countries in the preparation of financial statements
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Private Accountant
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an accountant who works for a single firm, government agency, or nonprofit organization
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Public Accountant
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An accountant who provides accounting services to individuals or for several business
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Separate Entity Assumption
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the financial reports of a business include only the results of that business's activities
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External Users of Financial Statements
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Creditors Investors Directors Government
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IFRS
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rules of accounting created by the International Accounting Standards Board of International use
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SEC (Securities and Exchange Commission )
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is government agency that oversees stock exchanges and financial reporting be public companies in the U.S.
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FASB
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Financial Accounting Standards Board
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SOX (Sarbanes-Oxley Act)
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states that Top Mangers must sign a report certifying their responsibilities for the financial statements, maintain an audited system of internal control to ensure accuracy, and maintain an independent committee to meet with the company's independent auditors
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Sources of Stockholders Equity
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Common Stock and Retained Earnings
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Increased by Credit
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Stockholders' Equity and Liabilities
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Increased by Debit
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Assets
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Journal Entries
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is a document that lists all of the transactions in Debit=Credit format
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Classified Balance Sheet
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shows subtotals for Current Assets and Liabilities
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Trial Balance
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at year end shows the ending balances from each T-account
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Ledger Account
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dollar amounts from journal entries are copied to the appropriate accounts in the ledger, so that account balances can be totaled
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Revenue Recognition Principle
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Revenue is recognized when it has been earned and not necessarily when it is received
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Expanse (Matching) Recognition Principle
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requires expenses to be recognized in the same period as related revenue (when incurred)
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Cash Basis Accounting
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reports revenues when cash is received and expenses when cash is paid (Not Allowed Under GAAP)
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Operating Activities
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are primary source of revenues and expenses, and affect whether a company earns profit or incurs a loss
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Net Profit Margin
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indicates how much profit is earned from each dollar of revenue
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Income Statement Accounts
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are Temporary Accounts
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Balance Sheet Accounts
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are Permanent Accounts
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Measurements of Net Income Involves
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Estimation
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Adjusting Entries
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update the accounts to their proper balances and are needed in order to measure the periods' net income or loss
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Accural Basis Accounting
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reports revenues when they are earned, and expenses when they are incurred regardless of the timing of cash receipts
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Expenses
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decreases Retained Earnings
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Revenue
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increases Retained Earnings
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Stockholders' Equity includes
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Common Stock Retained Earnings (includes Revenue and Expenses)
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Adjustments
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are entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts
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Two types of Adjustments
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Deferrals and Accrual
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Deferral Adjustments
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receiving or paying money in advance (before)
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Decrease Prepaid Insurance and Increase Insurance Expense
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Deferral
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Decrease Unearned Revenue and Increase Service or Sale Revenue
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Deferral
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Accural Adjustments
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receiving or paying in the future (later on or After)
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Increase Accounts Receivable and Increase Sales Revenue
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Accural
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Increase Supplies Expense and Increase Accounts Payable
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Accural
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Adjusting Journal Entries
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record the effects of each periods' adjustment in debit=credit format
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Adjusted Trial Balance
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Is prepared to ensure Debits=Credits after posting the adjusting journal entries to the accounts
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Accounting Cycle Step 1
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Analyze Transactions
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Accounting Cycle Step 2
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Prepare Journal Entries and T- accounts
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Accounting Cycle Step 3
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Prepare an Unadjusted Trial Balance
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Accounting Cycle Step 4
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Analyzed Adjustments
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Accounting Cycle Step 5
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Record Adjusting Journal Entries and Adjusted T-accounts
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Accounting Cycle Step 6
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Prepare a Adjusted Trial Balance
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Accounting Cycle Step 7
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Report Financial Statements
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Order of the Financial Statements
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1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet
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Carrying Value
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They amount at which an asset or liability is reported ("carried") in the financial statements. It is also known as "net book value" or simply "book value."
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Reduce the carrying value of assets on the balance sheet
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Deferral Adjustments
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They transfer the amount of reduction to related expense accounts on the income statement
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Deferral Adjustments
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Depreciation
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Is the process of allocating the cost of buildings and equipment to the accounting periods in which they are used
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contra-account
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Is an account that is an offset to, or reduction of, the primary account.
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Accumulated Depreciation
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is a negative asset account that's subtracted from the equipment account (Assets)
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Balance Sheet Account
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Accumulated Depreciation
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Income Statement Account
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Depreciation Expense
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Amortization
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using up long term assets that lack substance and have a limited period of usefulness
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To prepare an Adjusted Trial Balance
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just copy the T-account adjusted balances into debits and credits columns
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Last Step of the Accounting Process
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The Closing Process
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Closing Process
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is performed after the financial statements have been prepared
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Permanent Accounts
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All accounts that appear in the balance sheet; account balances are carried forward from period to period
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Temporary Accounts
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are accounts that are for a limited period of time, which the balances are zero out at the end of each accounting year (all revenue accounts, all expense accounts, dividends)
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Post-Closing Trial Balance
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an internal report prepared to check that all debits = credits and all temporary accounts have been closed
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