Financial Accounting (Ch 1-4)

lender, money supplier
person or organization who is in debt or under financial obligation to another
a system that collects and processes financial information about an organization and reports that information to decision makers
financial activities
borrowing/paying back money to lenders and receiving additional funds from stockholders or paying them dividends
investing activities
buying/selling items (such as plant and equipment used in the product production process means)
operating activities
the day-to-day process of purchasing supplies, manufacturing products, delivering them to customers, collecting cash from customers, and paying suppliers
Financial Accounting
for external decision makers; common standardized language
Managerial Accounting
for internal decision makers
Balance Sheet
report financial position (assets, liabilities, and stockholder’s equity)
Accounting Entity
the organization for which financial data are to be collected
Basic Accounting Equation
Assets = Liabilities + Stockholder’s Equity
economic resources owned by the entity
amount of financing provided by creditors
Stockholder’s Equity
amount of financing provided by owners of the business and reinvested earnings
common stock
investment of cash and other assets in the business of stockholders
(# of shares * PAR value per share)
retained earnings
amount of profits reinvested in the business
Income Statement
reports accountant’s primary measure of performance of a business
(Revenues – Expenses)
cash/promise amounts expected to be received for goods/services that have been delivered to a customer
cash/promise amount of resources the entity used to earn revenues
Net Income
revenues earned – expenses incurred
accounting period
time period covered by the financial statements (usually 1 year)
Statement of Stockholder’s Entity
reports changes in business’ stockholders equity accounts via net income & dividends during the accounting period
(beginning retained earnings + Net Income – Dividends = ending retained earnings)
Statement of Cash Flow
reports cash inflows and outflows via cash flows from operating, investing, financing
Notes (footnotes)
provides supplemental information about the financial condition of a company
Generally Accepted Accounting Principle (GAAP)
measurements and disclosure rules used to develop the information in financial statements
an examination of the financial reports to ensure honesty and GAAP confirmation
relevant information
can influence a decision
faithful representation
requires that the information be complete, neutral and free from error
separate-entity assumption
states that a business’ activities are accounted for separately from those of its owner
continuity assumption
states that business are assumed to continue into the foreseeable future
stable monetary unit assumption
states that accounting information should be measured and reported in the national monetary unit without any adjustment for changes in purchasing power
mixed-attribute measurement model
is applied to measuring different assets & liabilities
current assets
assets that will be used or turned into cash within 1-year
non-current assets
property and equipment, long-term investments
current liabilities
liabilities that a business will need to pay or settle within the coming year
non-current liabilities
notes payable
internal (exchange) and external events (adjustment)
dual effect
every transaction has at least 2 effects on the fundamental accounting model
PAR value
minimum amount a stockholder must contribute
Additional paid-in capital
amount of capital contributed by the stockholders less the PAR value of the stock
General Journal (journal entries)
a listing in chronological order of each transaction’s effect
General Ledger (T-accounts)
a record of effects to and balances of each account
left side of the T account
right side of the T account
trial balance
a list of all accounts with their balances to provide a check (debits=credits)
The operating cycle
time is takes for a company to pay cash to suppliers, sell goods/services to customers, and collect cash from customers
time period assumption
indicates that the long life of a company can be reported in shorter time periods
operating revenues
increases in assets or settlement of liabilities from ongoing operations
unearned revenue
when a customer pays in advance
general & administration expense
expenses not directly related to operating stores
depreciation expense
wear and tear on buildings and equipment
operating income
a measure of the profit from central ongoing operations
increase in assets or decrease in liabilities from peripheral transactions
decrease in assets or increase in liabilities from peripheral transactions
income tax expense
last expense listed on the income statement before determining net income
earning per share
ratio used in evaluating the operating performance or profitability of a company
(Net Income / Weighted average # of shares of stock outstanding)
Cash Basis Accounting
records revenues when cash is received and expenses when cash is paid
Accrual Basis Accounting
records revenues when earned and expenses when incurred, regardless of when cash receipts or payments
Revenue Realization Principle (4)
revenue is recognized when: goods/services are delivered, persuasive evidence of arranged customer payment, price is fixed, and collection is reasonably assured
Expense matching principle
requires that expenses be recorded when incurred in earning revenue (same period)
no end-of-period adjustments have been made yet to reflect all revenues earned and expenses incurred during the quarter
Net Profit Margin
“how much of every sales dollar generated during the period is profit?”
(Net Income / Net Sales)
Deferred Revenues
previously recorded liabilities
(unearned revenue)
Accrued Revenues
revenues that have been earned but not yet recorded
(investment income)
Deferred Expenses
previously recorded assets
(Supplies, Prepaid expenses)
Accrued Expenses
expenses that have been incurred, but not yet recorded
(Wages, Interest Payable)
allocation of an assets cost over its estimated useful life to the organization
an account that is an offset to/reduction of the primary account
(accumulated depreciation)
Net Book Value
(Cost – used cost)
Earnings per Share
(Net Income / Average # of shares of common stock outstanding)
Total Asset Turnover Ratio
sales generated per $ of assets
(Net Sales / Average Total Assets*)
*(beginning + ending /2)
permanent accounts
balance sheets accounts that carry their ending balances over
temporary accounts
income statement accounts that are closed to retained earnings at the end of the accounting period
closing entry
transfer balances in temporary accounts to retained earnings and establishes zero balances
post-closing trial balance
additional step in accounting cycle that checks (credits=debits), and temporary accounts closed
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