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Revenue Recognition Principle is recognized in accounting records when

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it is earned

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the expense recognition principle matches

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expenses with revenues

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depreciation is

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the process of allocating the cost of an asset to expense over its useful life

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useful life is

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the length of service of a productive asset

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Periodicity Assumption states that

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the economic life of a business can be divided into artificial time periods

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cash basis accounting

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basis in which a company records revenue only when it receives cash, and an expense only when it pays cash

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Accrual Accounting expenses are recorded and reported

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only when they are incurred whether or not cash is paid

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Adjusting entries are made at the end of an accounting period to

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ensure that the revenue recognition and expense recognition principles are followed

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adjusting entries include

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deferrals & accruals

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deferrals include

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prepaid expenses & unearned revenue

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prepaid expenses are

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paid in cash and recorded in an asset account before they are used or consumed

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unearned revenues are

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cash received and recorded as liabilities before they are earned

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accruals include

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accrued revenues & accrued expenses

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accrued revenues are

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revenues earned but not yet received in cash recorded & impact assets

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accrued expenses are

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expenses incurred but not yet paid in cash or recorded & impact liabilities

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the closing entry process consists of closing

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all temporary accounts

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Temporary accounts include

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all revenue accounts all expense accounts dividends

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net income will result if gross profit exceeds

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operating expenses

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the primary difference between a periodic and a perpetual inventory system is that a periodic system

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determines the inventory on hand only at the end of the accounting period

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inventory becomes part of cost of goods sold when a company

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sells the inventory

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under a perpetual inventory system, acquisition of merchandise for resale is debited to

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the inventory account

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a company using a perpetual inventory system that returns goods previously purchased on credit would

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debit accounts payable and credit inventory

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under the perpetual inventory system, in addition to making the entry to record a sale, a company would

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debit Cost of Goods sold and credit inventory

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in a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense

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LIFO

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which inventory method generally results in costs allocated to ending inventory that will approximate their current cost

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FIFO

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Manufacturers' inventory accounts

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finished goods work in process raw materials

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FOB shipping point is when

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the buyer pays for shipping

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FOB destination is when

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the seller pays for shipping

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consigned goods are

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goods held for sale by one party while ownership of the good is retained by another party

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gross profit rate =

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gross profit ÷ net sales evaluates profitability

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profit margin ratio =

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net income ÷ net sales

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inventory turnover ratio =

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costs of goods sold ÷ average inventory evaluates operating capacity

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inventory turnover is

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the number of times the company sold its average inventory during the year

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number of days in selling period ratio =

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number of days in year ÷ inventory turnover

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lower of cost or market (LCM) is

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when the value of inventory is lower than its cost, the company must perform an inventory write down

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Multi-step income statements show

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both income from operations and gross profit

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the 3 Multiple Step Income Statement line items are

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determine gross profit subtract operating expenses from gross profit to determine income from operations add or subtract the results of activities not related to operations to determine net income

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Multiple Step Income Statement

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sales revenues - sales discounts - cost of goods sold = gross profit gross profit - operating expenses = income from operations ± other revenues and gains ± other expenses and losses = Net Income

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Multiple Step Income Statement→ "Sales Revenues" include

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sales revenue Less: sales returns and allowances, sales discounts

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Multiple Step Income Statement→ "Operating Expenses" include

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expenses also shipping expenses

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Multiple Step Income Statement→ "Other Revenues and Gains" examples include

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interest revenue rent revenue "gains"

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Multiple Step Income Statement→ "Other Expenses and Losses" examples include

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interest expense casualty losses

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number of days in selling period is

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the number of days the company took to sell its average inventory during the year

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LIFO Reserve

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for a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO

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Inventory Errors

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beginning inventory understated = COGS understated (beginning is the same) Ending inventory understated = COGS overstated (ending is the opposite)

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transactions for SELLER when inventory is →sold

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debit: A/R credit: Revenue debit: COGS credit: inventory

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transactions for SELLER when inventory is →returned

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debit: inventory credit: COGS debit: sales return credit: A/R

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equipment depreciation

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debit: depreciation expense credit: accumulated depreciation

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Accounting Cycle

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1. Analyze business transactions 2. Journalize the transactions 3. Post to ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries: Deferrals/Accruals 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance

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