Financial Accounting Final Review – Flashcards
60 test answers
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when a company owes money to a business or individual
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creditors
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a person who gives a loan expecting financial money in return
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investors
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assets and liabilities should be initially recorded at the original cost to the company
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historical cost principle
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when a business/organization and its owners are treated as two separate identifiable parties
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entity concept
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debit what a person receives ex furniture, car, cash, books
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assets
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credit what a person owes the bank
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liabilities
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debit decreases assets increases liabilities only on income statement
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expense
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credit increases assets
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revenue
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indicates the effects of each days transactions in a debits=credits format
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journal entry
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simplified version of the overall companies transactions used for summarizing effects of journalized entries
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t-accounts
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to ensure equal debits and credits
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double entry bookkeeping
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most effective because it provides a better measure of profits arising from the company tells you the companies profits at any given time reports revenue when earned and expenses when incurred regardless of timing of cash receipts or payments always up to date
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accrual basis
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only tells you companies profits once cash is received reports revenue when cash is received and expenses when cash is paid not allowed under GAAP
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cash basis
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positive incentives can influence people to pay sooner
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incentives management of companies has to manipulate financial statements
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when in doubt, understate the good, overstate the bad
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conservative accounting practices
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updates periodically and inventory is physically counted at the end of the period
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periodic inventory system
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inventory updated perpetually, every time inventory is bought, sold, or returned
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perpetual inventory system
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all expenses must be matched in the same accounting period as the revenues they helped to earn doesn't matter when cash is paid, expense and revenue must be recorded under the same accounting period depreciation
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matching principle
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expresses relationship between inventory on hand, purchased, and sold beg invty + purchase - ending invty = cogs
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cost of goods sold
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directly related to running a business to earn profit electricity, etc expenses you need to operate your business
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operating expenses
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first in first out reuse units until they are gone
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FIFO
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last in first out work your way back
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LIFO
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evidence must exist that a transaction produced revenue revenue must have been earned value must be determined at present must be realizable, meaning payment will be received
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4 criteria in order to record revenue
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capitalized- record a cost as an asset expensed- annual cleanings etc
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when expenditures should be capitalized or expensed
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what you bought an item for
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historical cost
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the amount an item depreciates from original cost
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depreciation expense
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all depreciation expenses added up
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accumulated depreciation
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cost value after depreciation
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net book value
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at the end of its life what its worth
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residual value
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the use of life (how long useful)
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service life asset
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when usage is the same each period
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straight line
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when usage varies each period
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units of activity
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when the asset is more efficient in early years but less so over time used to tax
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double declining balance
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*need legal documents trademarks copyrights patents technology licensing rights franchises goodwill
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types of intangible assets
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gross pay - taxes
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employee's net pay
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wages expense (gross pay) on debit taxes payable and cash on credit
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employers' wages expense
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FICA payable + fed and state unemployment
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payroll tax expense
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bond document that each bond hold receives
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bond certificates
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percentage you get back from a specific bond interest payment=1/2(coupon rate)(face value) for the buyers
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coupon rate
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interest expense=(1/2)(market rate)(carrying value) for the business for their books
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market yield
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basic voting stock issued by corporation
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common stock
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when the company sells treasury stock for less or more than what they paid
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additional paid in capital
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cumulative amount of net income earned - cumulative dividends since beginning of corporation
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retained earnings
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company buys back their own stock to resell
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treasury stock
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amount of a company's equity that cannot legally be allowed to leave the business
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legal capital
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establishes minimum amount a stockholder must contribute has no relation to market price
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par value
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total number of shares of stock that are owned by stockholders
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outstanding shares
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A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves
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secondary equity markets
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A=L+SE
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balance sheet equation
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R-E=Net income
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income statement equation
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net sales = sales rev - sales ret allow - sales disc
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net sales
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gross profit = net sales - cogs
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gross profit
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wa = price x units total units
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weighted average
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nr = (total note)(annual interest)(months/days)
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notes receivable
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interest payment = (1/2)(coupon rate)(face value) interest expense = (1/2)(market rate)(carrying value)
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bonds
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straight-line - annual depreciation expense = (historical cost - residual value)/use of life units of production - annual depreciation expense = (historical cost - residual value) x (average used in period)/(average total used) double declining ~straight line rate = (1)/(use of life) ~double declining rate = 2 x straight line rate OR (cost-accumulated depreciation) x (2)/(use of life) = depreciation expense
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depreciation
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