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Accounting

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System that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers.

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Accounting entity

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Is the organization for with financial data are to be collected.

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The four basic statements:

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1. Balance Sheet 2. Income Statement 3. Statement of Retained Earnings 4. Statement of Cash flows

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Balance Sheet

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Reports the amount of assets, liabilities and stockholders' equity of an accounting entry at a point in time.

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Income Statement

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Reports the revenues less the expenses of the accounting period.

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Statement of Retained Earnings

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Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

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Statement of Cash Flows

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Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

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Basic Accounting Equation

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Assets = Liabilities + Stockholders' Equity

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Assets

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Are the economic resources owned by the company. Each of these economic resources is expected to provide future benefits to the firm.

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Liabilities

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Are the company's debts or obligations. Which will be paid with assets or services.

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Stockholders' Equity (Owners' Equity)

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Indicates the amount of financing provided by owners of the business and earnings. Is the sum of the contribute capital + the retained earnings.

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Accounting Period

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Is the time period cover by the financial statements.

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Elements of the Income Statement

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Revenues, Expenses and Net Income.

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Revenues

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Earnings from the sale of goods or services to costumers. Revenues are reported whether or not have yet been paid for.

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Expenses

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Represent the dollar amount of resources the entity used to earn revenue during the period.

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Net Income ("the bottom line")

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Is the excess of total revenues over total expenses.

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Net Loss

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If total expenses exceed total revenues.

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Retained Earning Equation

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Ending Retained Earnings = (Beginning of Retained Earnings + Net Income) - Dividends

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The Cash Flow Statement Equation

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+/- Cash flow from Operating Activities (CFO) +/- Cash flow from Investing Activities (CFI) +/- Cash flow from Financing Activities (CFF) ---------------------------------------- Change in Cash

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Cash Flow from Operating Activities, and examples

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CFO- Are cash flow that are directly related to earning income. Example, collecting cash from costumers, pay salaries, pay bills, pay to suppliers.

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Cash Flow from Investing Activities, and examples

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CFI- Are cash flow related to the acquisition or sale of the company's productive assets. Example, the purchase of additional equipment.

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Cash Flow from Financing Activities, and examples

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CFF- Are cash flow directly related to the financing of the enterprise itself. Example, the payment of money to investors and creditors.

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Notes

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"Footnotes" provide supplemental information about the financial condition of a company.

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GAAP

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Generally Accepted Accounting Principles, are the measurement rules used to develop the information in financial statements.

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SEC

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Security and Exchange Commission, is the U.S government agency that determines the financial statements that public companies must provide to stockholders, and the rules that they must use in producing those statements.

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FASB

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Financial Accounting Standards Board, is the private sector body given the primary responsibility to work out the detailed rules that become GAAP.

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Audit

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Is an examination of the financial reports to ensure that they represent claim and comfort with GAAP.

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Primary objective of external financial reporting

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Is to provide useful economic information to help external parties make financial decisions.

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Qualitative Characteristics of Financial Information

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Information should be Relevant and Reliable.

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Separate-Entity Assumption

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States that a business transactions are accounted for separately from the transactions of owners.

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Unit-Measure Assumption

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States that accounting information should be measure and reported in the national monetary unit.

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Continuity Assumption

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States that businesses are assumed to continue to operate into the foreseeable future.

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Cost Principle

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Requires assets to be recorded at historical cost-cash paid plus the current dollar value of all none cash considerations given on the date of the exchange.

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Current Assets

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Are assets that will be used or turned into cash within one year.

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Current Liabilities

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Are obligations that will be settle by providing cash, goods, or services within the coming year.

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Materiality

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Exception suggest that small amounts that not likely to influence a user's decision can be accounted for in the most beneficial manner.

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Conservatism

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Exception suggest that care should be taken not to over state assets and revenues or understate liabilities and expenses.

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Transaction

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Is an exchange of assets or services to pay between a business and one or more external parties to a business or a measurable internal event such as the use of assets in operations.

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Accounts

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Is a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item. "Chart of account"

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Transaction Analysis

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Every transaction affects at least two accounts (dual effect), and the accounting equation MUST remain in balance after each transaction.

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The three steps in the transaction analysis process

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1. Identify the accounts affected and classify them by type of account. 2. Determine the direction of the effect on each account. 3. Verify that the accounting equation remains in balance.

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Direction of Transactions

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Debit (dr) is on the LEFT side of an account. Credit (cr) is on the RIGHT side of an account.

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General Journal

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Is a bookkeeping system, that records transactions in chronological order.

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Journal Entry

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Is an accounting method for expressing the effects of a transaction on accounts in debits-equal-credits format.

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T-Account

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Is a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities.

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Current Ratio and formula

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Helps measure the ability of the company to pay its short-term obligations with short-term assets. Current Ratio = Current Assets / Current Liabilities

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Operating cycle

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"Cash-to-cash" is the time it takes for a company to pay cash to suppliers, sell goods and services to costumers, and collect cash from costumers.

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Time Period Assumption

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Indicates that the long life of a company can be reported in shorter time periods.

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Gains

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Are increases in assets or decreases in liabilities from peripheral transactions.

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Losses

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Are decreases is assets or increases in liabilities from peripheral transactions.

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Cash Basis Accounting

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Records revenues when cash is received and expenses hen cash is paid.

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Accrual Basis Accounting

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Records revenue when earned and expenses when incurred, regardless of the timing of cash receipts or payments.

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Revenue Principle

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States that revenues are recognize when: 1. Good or services are delivered. 2. There is persuasive evidence of an arrangement for costumer payment. 3. The price is fixed or determinable. 4. Collection is reasonably assured.

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Matching Principle

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Requires that expenses be recorded when incurred in earning revenue.

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Total Assets Turnover Ratio and formula

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Measures the sales generated per dollar of assets. TATR = Sales Revenue / Average Total Assets *average* (beginning balance + ending balance)/2

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Order of the financial statements.

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Income statement, statement of retained earnings, balance sheet, and statement of cash flows.

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Accounting Cycle

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Is the process followed by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle.

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Trial Balance

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Is a list of all accounts with their balances to provide a check on the equality of the debits and credits.

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Adjusting Entries

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Are entries necessary at the end of the accounting period to measure all revenues and expenses of that period.

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Deferred Revenues

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"Unearned revenues" are previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned. Example, when cash was received and previously recorded: Unearned revenue xxx Revenue xxx

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Accrued Revenues

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Are previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account. Example, cash will be received: Receivable xxx Revenue xxx

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Deferred Expenses

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Are previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expenses incurred in using the asset to generate revenue. Example, if cash was paid and previously recorded: Expense xxx Prepaid Expense xxx

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Accrued Expenses

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Are previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account. Example, if cash will be paid: Expense xxx Payable xxx

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Contra-Account

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Is an account that is an offset to, or reduction of, the primary accout.

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Net Book Value

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Of an asset is the difference between its acquisition cost and accumulated depreciation, its related contra-account.

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Earnings Per Share and formula

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Is the ratio that evaluates the operating performance and profitability of a company. EPS = Net Income / Average number of shares of common stock outstanding during the period

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Permanent Accounts

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"Real" are the Balance Sheet accounts that carry their anding balances into the next accounting period.

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Temporary Accounts

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"Nominal" are Income Statement accounts that are closed to Retained earnings at the end of the accounting period.

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Closing Entry

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Transfers balances in temporary accounts to Retained Earnings and establishes zero balances in temporary accounts.

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Post-Closing Trial Balance

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Should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.

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Order of the steps in the accounting cycle at the end of the accounting period

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Prepare a trial balance, journalize and post adjustments, prepare financial statements, and journalize and post the closing entries.

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Gross Profit

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Net sales revenue minus cost of sales.

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FOB Shipping Point (free on board)

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When goods are shipped, title changes hands at shipment, and the buyer normally pays for shipping.

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FOB Destination

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When title changes hand on delivery, and the seller normally pays for shipping.

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FOB Shipping Point vs FOB Destination

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Revenues from good shipped FOB Shipping Point are normally recognized at shipment. Revenues from goods shipped FOB destination are normally recognized at delivery.

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Credit Card Discount

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Is the fee charged by the credit card company for its services.

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Sales Discount

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(Cash discount) is a cash discount offered to encourage prompt payment of an account receivable.

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Sales Returns and Allowances

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Is a reduction of sales revenues for return of or allowances for unsatisfactory good.

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Gross Profit Percentage and formula

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Measures a company's ability to charge premium prices and produce goods and services at low cost. Gross Profit Percentage = Gross Profit / Net sales

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Accounts Receivables

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Are open accounts owned to the business by trade costumers.

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Notes Receivables

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Are written promises that require another party to pay the business under specified conditions (amount, time, interest).

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Allowance Method

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Bases bad debt expenses on an estimate of uncollectible accounts.

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Bad Debt Expense

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Is the expense associated with estimated uncollectible account receivable. Bad debt expense xxx Allowance for doubtful accounts xxx

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Allowance for Doubtful Accounts

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Is a contra-asset account containing the estimated uncollectible account receivable.

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Writing Off Uncollectible Accounts

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Writing off of an individual bad debt is recorded through a journal entry. Allowance for doubtful accounts xxx Accounts Receivables xxx

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Percentage of Credit Sales Method

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Bases bad debt expenses on the historical percentage of credit sales that result in bad debts.

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Aging of Accounts Receivable Method

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Estimates uncollectible accounts based on the age of each account receivable.

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Receivables Turnover Ratio and formula

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Reflects how many times average trade receivables are recorded and collected during the period. Receivables Turnover = Net sales / Average net trade account receivables

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Cash

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Is money or any instrument that banks will accept for deposit and immediate credit to a company's account, such as check, money, or bank draft.

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Cash Equivalents

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Are short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change.

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Internal Controls

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Are the process by which a company safeguards its assets.

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Bank Statement

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Is a monthly report from a bank that shows deposits recorded, checks cleared, other debits and credits and a running bank balance.

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Bank Reconciliation

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Is the process of verifying the accuracy of both the bank statement and the cash accounts of a business.

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Inventory

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Is tangible property held for sale in the normal course of business or used in producing goods or services for sale.

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Merchandise Inventory

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Includes goods held for sale in the ordinary course of business.

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Raw Materials Inventory

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Includes items acquire for the purpose of processing into finish goods.

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Work In Proces Inventory

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Includes goods in the process of being manufactured.

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Finished Goods Inventory

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Includes manufactured good that are complete and ready for sale.

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Direct Labor

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Refers to the earnings of employees who work directly on the products being manufactured.

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Factory Overhead

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Are manufacturing costs that are not raw material or direct cost labor. Example, cost of light, supervisor's salary.

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Goods Available For Sale

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Refers to the sum of beginning inventory and purchases for the period.

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Cost of Goods Sold Equation

answer

CGS = Beginning Inventory + Purchases of merchandise - Ending Inventory

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Specific Identification Method

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Identifies the cost of the specific item that was sold.

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FIFO First-in, First-out Method

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Assumes that the first goods purchased are the first goods sold.

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LIFO Last-in, First-out Method

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Assumes that the most recently purchased units are sold first.

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Average Cost Method

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Uses the weighted average unit cost of the goods available for sale for both cost of goods and ending inventory.

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Inventory Turnover and formula

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Ratio reflects how many times average inventory was produced and sold during the period. Inventory Turnover = Cost of Goods Sold / Average Inventory

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Perpetual Inventory System

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A detailed inventory record is maintained, recording each purchase and sales during the accounting period.

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Periodic inventory System

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Ending inventory and cost of good sold are determined at the end of the accounting period based on a physical count.

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Long-Lived Assets

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Are tangible and intangible resources owned by a business and used in its operations over several years.

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Tangible Assets

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Assets have physical substance.

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Intangible Assets

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Assets have special rights but not physical substance.

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Fixed Assets Turnover and formula

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Ratio that measures the sales dollar generated by each dollar of fixed assets used. Fixed Asset Turnover = Net Sales / Average Net Fixed Assets

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Acquisition Cost

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Is the net cash equivalent amount paid or to be paid for the asset.

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Depreciation

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Is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method. Depreciation Expense xxxx Accumulated Depreciation xxxx

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Net Book Value

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Is the acquisition cost of an asset less accumulated depreciation.

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Estimated Useful Life

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Is the expected service life of an asset to the present owner.

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Residual Value

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Is the estimated amount to be recovered by the company at the end of the asset's estimated useful life.

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Straight-Line Depreciation and formula

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Is the method that allocates the cost of an asset in equal periodic amounts over its useful life. Depreciation Expense = (Cost - Residual Value) x (1 / Useful life)

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Units-Of-Production Depreciation and formula

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Is the method that allocates the cost of an asset over its useful life based on the relation of it periodic output to its total estimated output. Depreciation Expense = ((Cost - Residual Value) / Estimated total production) x Actual Production

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Declining-Balance Depreciation and formula

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Is the method that allocates the cost of an asset over its useful life based on a multiple of the straight-line rate (often two times). Depreciation Expense = ((Cost - Accumulated Depreciation) x ( 2 / Useful Life))

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Modified Accelerated Cost Recovery System (MACRS)

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Is the method similar to the Declining-Balance method and is applied over relatively short asset live to yield high depreciation expense in the early years.

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Natural Resources

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Are assets that occur in nature, such as minerals deposits, timber tracts, oil and gas.

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Depletion

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Is a systematic and rational allocation of the cost of a natural resource over the period of its exploitation.

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Amortization

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Is the systematic and rational allocation of the acquisition cost of an intangible asset over its useful life.

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Goodwill and formula

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Is the excess of the purchase price of a business over the fair value of the business's assets and liabilities. Goodwill = Purchase Price - Fair value of identifiable assets and liabilities.

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Trademark

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Is an exclusive legal right to use a special name, image, or slogan.

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Copyrights

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Is the exclusive right to publish, use, and sell a literary, musical, or artistic work.

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Patent

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Is granted by the federal government for a period of 20 years for an invention.

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Liquidity

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Is the ability to pay current obligations.

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Quick Ratio Formula

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Ratio suggests good liquidity. Quick Ratio = Quick Assets / Current Liabilities

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Accounts Payable Turnover Formula

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Ratio that measures how quickly management is paying trade accounts. Average Payable Turnover = Cost of Good Sold / Average Accounts Payable

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Accrued Liabilities

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Are expenses that have been incurred but have not been paid at the end of the accounting period.

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Time Value of Money

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Is the interest that is associated with the use of money over time.

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Contingent Liability

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Is a potential liability that has arisen as the result of a past event.

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Working Capital

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Is the dollar difference between total current assets and total current liabilities.

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Long-Term Liabilities

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Are all the entity's obligations not classified s current liabilities.

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Operating Lease

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Does not meet any of the four criteria establish by GAAP and does not cause the recording of an asset and liability.

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Capital Lease

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Meets a least one of the four criteria establish by GAAP and results in the recording of an asset and liability.

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Present Value and formula

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is the current value of an amount to be received in the future; a future amount discounted fro compound inters. PV = ((1 / (1 + I)N ) x Amount

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Annuity

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Is a series of periodic cash receipts or payments that are equal in amount each interest period.

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Future Value

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Is the sum to which an amount will increase as the result of compound interest.

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Bond Principal

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Is the amount (a) payable at the maturity of the bond and (b) on which the periodic cash interest payments are computed.

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Par Value

answer

Is another name for bond principal, or the maturity of a bond.

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Face Amount

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Is another name for bond principal, or the maturity amount of the bond.

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Stated Rate

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Is the rate of cash interest per period stated in the bond contract.

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Bonds Payable

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Are both stocks and bonds issued by corporations to raise money for long-term purposes.

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Debenture

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Is an unsecured bond; no assets are specifically pledged to guarantee repayment.

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Callable Bond

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May be called for early retirement at the option of the issuer.

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Convertible Bond

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May be converted to other securities of the issuer (usually common stock).

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Indenture

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Is a bond contract that specifies the legal provision of a bond issue.

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Bond Certificate

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Is a bond document that each bondholder receives.

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Trustee

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Is an independent party appointed to represent the bondholder.

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Coupon Rate

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Is the stated rate of interest on bonds.

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Market Interest Rate

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Or Yield, is the current rate of interest on debt when incurred.

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Bond Premium

answer

Is the difference between the selling price and par when the bond is sold for more than par.

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Bond Discount

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Is the difference between the selling price and par when the bond is sold for less than par.

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Times Interest Earned and formula

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The ratio shows the amount of resources generated for each dollar of interest expense. Times Interest Earned = (Net Income + Interest Expense + Income Tax expense) / Interest Expense

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Straight-Line Amortization

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Is a simplify method of amortizing a bond discount or premium that allocates an equal dollar amount to each interest period.

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Effective-Interest Amortization

answer

Is a method of amortizing a bond discount or premium on the basis of effective-interest rate; is the theoretically preferred method.

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Debt-to-Equity and formula

answer

Ratio that suggests that the company relies on fund provided by creditors. Debt-to-Equity = Total liabilities / Stockholders' Equity

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Authorized Number of Shares

answer

Is the maximum number of shares of a corporation's capital stock that can be issued as specified in the charter.

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Issued Shares

answer

Represent the total number of shares of stock that have been sold.

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Outstanding Shares

answer

Refers to the total number of shares of stock that are owned by stockholders on any particular date.

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Common Stock

answer

Is the basic voting stock issued by a corporation.

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Par Value

answer

Is the nominal value per share of capital stock specified in the charter; servers as the basis for legal capital.

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Legal Capital

answer

Is the permanent amount of capital defined by state law that must remain invested in the business; serves as s cushion for creditors.

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No-Par Value Stock

answer

Is capital stock that has no par value specified in the cooperate charter.

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Treasury Stock

answer

Is a corporation's own stock that has been issued but subsequently reacquire and is still being held by that corporation.

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Dividend Yield and formula

answer

Return on investments based on dividends. Dividend Yield = Dividend per Share / Market Price per Share.

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Stock Dividend

answer

Is a distribution od additional shares of a corporation's own stock.

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Stock Split

answer

Is an increase in the number of authorized shares by a specific ratio; it does not decrease retained earnings.

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Preferred Stock

answer

Is a stock that has specified rights over common stock.

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Current Dividend Preference

answer

Is the feature of preferred stock that grants priority on preferred dividends over common dividends.

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Cumulative Dividend Preference

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Is the preferred stock feature that requires specific current dividends not paid in full to accumulate for every year in which they are not paid. These cumulative preferred dividends must be paid before any common dividends can be paid.

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Dividends In Arrears

answer

Are dividends on cumulative preferred stock that have not been declared in prior years.

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Passive Investments

answer

Are investments made to earn a return on funds that may be needed for future short-term or long-term purposes (less than 20% of the outstanding voting shares).

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Stock for Significant Influence

answer

Is the ability to have an important impact on the operating, investing and financing policies of another company (from 20% to 50% of the outstanding voting shares).

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Stock for Control

answer

Is the ability to determine the operating and financing policies of another company through ownership of voting stock (company owns more than 50% of the outstanding voting shares).

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Held-to-Maturity Investments

answer

Are investments in debt securities that management has the intent and ability to hold until maturity.

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Amortized Cost Method

answer

Reports investments in debt securities held to maturity at cost minus any premium or plus any discount.

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Fair Value Method

answer

Is used to report securities at their current market value.

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Unrealized Holding Gains or Losses

answer

Are amounts associated with price changes of securities that are currently held.

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Trading Securities

answer

Are all investments in stock or bonds held primarily for the purpose of active trading (buying and selling) in the near future (classified and short term).

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Securities Available for Sale

answer

Are all passive investments other than trading securities and debt held to maturity (short or long term).

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Economic Return from Investing formula

answer

Economic Return from Investing = (Dividends and Interest Received + Change in Fair Value) / Fair Value of Investments

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Equity Method

answer

Is used when an investor can exert significant influence over an affiliated; the method permits recording the investor's share of the affiliate's income.

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Investments in Affiliates

answer

Or Associated companies, are investments in stock held for the purpose of influencing the operating and financing strategies of the entity for the long term.

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Merger

answer

Occurs when one company purchase all of the assets and liabilities of another and the acquired company goes out of existence.

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Purchase Method

answer

Record assets and liabilities acquired in a merge or acquisition at their fair value on the transaction date.

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Cash Equivalent

answer

Is a short-term, highly liquid investment with an original maturity of less than three months.

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Direct Method

answer

Of presenting the operating activities section of the cash flow statement reports components of cash flow from operating activities as gross receipts and gross payments.

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Indirect Method

answer

Of presenting the operating activities section of the cash flow statement adjust net income to compute cash flow from operating activities.

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Quality of Income Ratio and formula

answer

Ratio that measures the portion of the income that was generated in cash. Quality of Income Ratio = Cash Flow from Operating Activities / Net Income

question

Capital Acquisition Ratio and formula

answer

Ratio that reflects the portion of purchases of property, plan, and equipment financed from operating activities. Capital Acquisition Ratio = Cash Flow from Operating Activities / Cash Paid for Property, Plant, and Equipment

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Non-cash Investing and Financing Activities

answer

Are transactions that do not have direct cash flow effects; they are reported as a supplement to the statement of cash flow in narrative or schedule form.

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