accounting CH 1,2,3

Earnings per share are calculated by dividing

(net income less preferred dividends) by average common shares outstanding.

Preparation of classified of balance sheet

...

posting to the ledger

...

EPS=

EPS= net income - pref. dividends / avg# of common shares.

Income statement

Reports revenues and expenses for the period. Indicates how successfully the business performed during the period. Must be prepared first. Reports results of operations for a period of time. Revenues + expenses= net income.

GAAP "generally accepted accounting principles"

Standard setting bodies, in consultation with the accounting profession and the business community, determine these accounting standards.

corporation

a separate legal entity owned by stockholders

comparability

ability to compare the accounting info of different companies bc they use the same accounting principles.

accumulated depreciation:

account shows the total amount of depreciation that the company has expensed thus far in the assets life.

SEC "securities and exchange commission"

agency of the US government that oversees U.S. financial markets and accounting standard-setting bodies.

Depreciation:

allocation of cost of an asset to a number of years.

publically traded companies must provide

annual report

long term liabilities

are obligations that a company expects to pay after one year. liabilities in this category include: bonds payable, mortgages, payable, long term notes payable, lease liabilities, pension liabilities.

current liabilities

are obligations that the company is to pay within the next year or operating cycle, whichever is longer. Common examples: accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable.

resources owned by a business are referred to as?

assets

fair value principe

assets and liabilities should be reported at fair value (price received to sell an asset or settle a liability)

intangible assets

assets that do not have physical substance but valuable. goodwill, patents, copyrights, trademarks, trade names that give the company exclusive right.

property, plant, equipment:

assets with relatively long useful lives that are currently used in operating the business. Includes: land, building, equipment, delivery vehicles, and furniture.

order of balance sheet?

assets, liabilities, stock holders equity

general ledger contains all:

assets, liabilities, stockholders' equity, revenue, and expense accounts.

basic accounting equation is

assets= liabilities + stockholders equity

the element of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations are?

auditors opinion

common types of assets:

cash, investments (short term), receivables, inventories, prepaid expenses.

journals are posted in

chronological order before transferred to the accounts

stock holders equity represents?

claims of owners

assets must balance with its?

claims to assets.

2 categories of stockholders equity?

common stock and retained earnings

Different companies using the same accounting principles is an application of

comparability

cost constraint

constraint that weighs the cost that companies will incur to provide the info against the benefit that financial statement users will gain from having the info available.

expenses

cost of assets consumed or services used in the process of generating revenues.

Working Capital:

current assets - current liabilities

Current Ratio (liquidity):

current assets / current liabilities

In a classified balance sheet, assets are usually classified as

current assets; long-term investments; property, plant, and equipment; and intangible assets

in a classified balance sheet, liabilities and stockholders' equity are classified as

current liabilities, long term liabilities, stockholders' equity

Liabilities are generally classified on a balance sheet as

current or long term liabilities

retained earnings is?

ending retained earnings from the retained earnings sheet.

ledger

entire group of accounts maintained by a company, it provides the balance in each of the accounts as well as keeps track of changes in these balances.

notes to financial statements

every set of financial statement is accompanied by set of notes. Integral part of financial statements. Clarify the financial statements and provide additional detail. need not to be quantifiable in nature.

net loss=

expenses > revenue

ratio

expresses the mathematical relationship between one quantity and another.

ratio analysis

expresses the relationship among selected items of financial statement data.

annual report include

financial statements, management discussion and analysis, notes to financial statements, auditors report.

Four financial statements

income statement, retained earnings, balance sheet, statement of cash flows.

Revenue

increase in assets or decrease in liabilities resulting from the sales of goods or the performance of services in the normal course of business.

Retained earning statement

indicates how much of previous income was paid to owners as dividends and how much was retained in the company to allow for future growths. Retained earnings + net income (or - net loss) - dividends= retained earnings

debit

indicates left side

credit

indicates right side

understandibility

info present in a clear and concise fashion so that user can interpret it and comprehend its meaning.

timely

info that is available to decision makers before it loses its capacity to influence decisions.

faithful representation

info that is complete, neutral, and free from error.

Trademarks would appear in which balance sheet section?

intangible assets

long term investments:

investments in stocks and bonds of other corporations that are held for more than one year, long term assets such as land or buildings that a company is not current using in its operating activities, and long term notes receivable.

an example of a financing activity?

issuing shares of common stock

net income/loss is important bc?

it provides useful information for predicting future net incomes/loss.

The relationship between current assets and current liabilities is important in evaluating a company's

liquidity

internal users

managers who plan, organize, run the business. They must answer important questions therefore need timely information. they use both internal reports and financial statements.

Liquidity ratio:

measure the short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

retained earnings =

net income retained by in the company. not paid out as dividends.

amounts paid to investors (dividends) are?

not expenses, do not go on income statement. only on retained earnings.

amount received from company from investors are?

not revenue, do not go on income statement. only on balance sheet under stock holders equity.

the element of corporations annual report that describes the corporations accounting methods is?

notes to the financial statements

financial statements

objective in nature because disclosing future events

sole proprietorship

owned by 1 person, simple to set up, owner maintains control, more favorable tax treatment than corporations, owners are personally liable for business debts because not a separate legal entity.

external

owners (investors), creditors, taxing authorities, customers, labor unions, and regulatory agencies. owners (investors) use financial info to decide to buy/hold/ sell stock. creditors (debtors such as banks and suppliers) use financial information to evaluate the risk of selling on credit (suppliers) or lending money (banks)

disadvantages of partnership

partners personally liable for all business debts. transfer of ownership may be difficult.

Auditor's Report

prepared by an independent outside auditor "CPA". states the auditor's opinion of the fairness of the presentation of the financial position and results of operations and their conformance with GAAP. Unqualified opinion= auditor believes that financial statements are presented fairly. Anything other than unqualified opinion, users should be careful in using financial statements to make decisions.

FASB "financial accounting standards board"

primary accounting standard-setting body in the US.

Financial statements

primary means of communicating with users. "backbone of financial accounting.

posting

procedure of transferring journal entry amounts to ledger accounts; phase of recording process accumulates the effects of journalized transactions in the individual accounts.

transaction analysis

process of identifying the specific effects of economic events on the accounting equation.

disadvantages of sole proprietorship

proprietor personally liable for all business debts, financing may be difficult, transfer of ownership may be difficult.

trail balance

proves the mathematical equality of debits and credits after posting.

verifiable

quality of information that occurs when independent observers using the same methods obtain similar results

what is an advantage of corporations over of forms of business?

reduced legal liability for investors

full disclosure

reporting of all information that would make a difference to financial statement users

monetary unity assumption

reporting only those things that can be measured in dollars

Balance Sheet

reports what a company owns (assets) and what its owes (liability) at " a point in time." Assets, Liabilities, Stockholders equity.

common stock is?

results when a company sells new shares of stock to investors

interrelationships of statements is?

retained earning statement uses results of income statement. balance sheet and retained earnings statement are interrelated. cash flow statement relates to information on the balance during the period.

net income =

revenues > expenses

retained earnings and income statement

same time period

advantages of sole proprietorship

simple to establish, owner controlled, tax advantages that are more favorable than a corporation

advantages of partnership

simple to establish, shared control, broader skills and resources, tax advantages that are more favorable than a corporation.

3 forms of business

sole proprietorship, partnership, corporation

the higher debt to equity ratio =

the lower the company's solvency.

periodicity

the practice of preparing financial statements at regulars intervals

Relevance

the quality of information that indicates the info makes a difference in a decision.

Dividends appear on?

the retained earnings statement only.

Debt to Asset Ratio (Solvency): %

total liabilites / total assets

economic unity

tracing accounting events to particular companies

disadvantages of corporation

unfavorable tax treatment resulting in higher taxes paid by stockholders.

consistency

use of the same accounting principles and methods from year to year within a company

management discussion and analysis are

written by mgmt, discusses their views on ability to pay near term debt, ability to fund operations and growth, and results of operations. subjective in nature bc projecting future events.

which statement presents information as of specific point in time?

balance sheet

going concern

belief that a company will continue to operate for the foreseeable future

Partnership

business owned by 2 or more people

complete entry consists of:

date of transaction, accounts and amounts to be debited and credited, brief explanation of the transaction.

if company is profitable it must?

determine whether to pay out the profits to stockholders as dividends or to retain profits in the company for future growth.

Earnings Per Share (profitability):

earnings per share, measure the operating success of a company for a given period of time.

advantages of corporation

easier to transfer ownership, easier to raise funds, lower legal entity