ACCTG 1

common stock

Basic class of corporate stock that carries no preferences as to claims on assets or dividends; certificates that evidence ownership in a company.

managerial accounting

Branch of accounting that provides information useful to internal decision makers and managers in operating an organization.

equity

Portion of assets remaining after the creditors' claims have been satisfied (i.e., Assets Liabilities Equity); also called residual interest or net assets.

Financial Accounting Standards Board (FASB

)Privately funded organization with the primary authority for the establishment of accounting standards in the United States.

transactions

1) assets source transactions: an asset account increases in the corresponding claims account increases

Sales returns and allowances

A reduction in sales revenue resulting from dissatisfaction with merchandise sold.

Purchase returns and allowances

A reduction in the cost of purchases resulting from dissatisfaction with merchandise purchased.

Shrinkage

A term that reflects decreases in inventory for reasons other than sales to customers.

asset exchange transaction AE

A transaction that decreases one asset while increasing another asset so that total assets do not change; for example, the purchase of land with cash.

asset exchange AE

A transaction that decreases one asset while increasing another asset so that total assets do not change; for example, the purchase of land with cash. pp. 14, 46

accrual accounting

Accounting system that recognizes expenses or revenues when they occur regardless of when cash is exchanged.

Product costs

All costs related to obtaining or manufacturing a product intended for sale to customers; are accumulated in inventory accounts and expensed as cost of goods sold at the point of sale. For a manufacturing company, product costs include direct materials, direct labor, and manufacturing overhead.

Balance Sheet

Assets (claims, land)= Liability (notes payable)+ Equity (Common stock, retained earnings)

Sales discounts

Cash discount extended by the seller of goods to encourage prompt payment. When the buyer of the goods takes advantage of the discount to pay less than the original selling price, the difference between the selling price and the cash collected is the sales discount.

operating activities

Cash inflows and outflows associated with operating the business. These cash flows normally result from revenue and expense transactions including interest.

Merchandising businesses

Companies that buy and resell merchandise inventory.

Retail companies

Companies that sell goods to consumers.

investors

Company or individual who gives assets or services in exchange for security certificates representing ownership interests.

Selling and administrative costs

Costs that cannot be directly traced to products that are recognized as expenses in the period in which they are incurred. Examples include advertising expense and rent expense.

Loss

Decreases in assets or increases in liabilities that result from peripheral or incidental transactions.

Gross margin

Difference between sales revenue and cost of goods sold; the amount a company makes from selling goods before subtracting operating expenses.

Cash discount

Discount offered on merchandise sold to encourage prompt payment; offered by sellers of merchandise and represent sales discounts to the seller when they are used and purchase discounts to the purchaser of the merchandise.

assets

Economic resources used by a business to produce revenue.

2/10, n/30

Expression meaning the seller will allow the purchaser a 2 percent discount off the gross invoice price if the purchaser pays cash for the merchandise within 10 days from the date of purchase.

financial accounting

Field of accounting designed to meet the information needs of external users of business information (creditors, investors, governmental agencies, financial analysts, etc.); its objective is to classify and record business events and transactions to facilitate the production of external financial reports (income statement, balance sheet, statement of cash flows, and statement of changes in equity).

Common size financial statements

Financial statements in which amounts are converted to percentages to allow a better comparison of period-to-period and company-to-company financial data since all information is placed on a common basis.

Period costs

General, selling, and administrative costs that are expensed in the period in which the economic sacrifice is made.

Multistep income statement

Income statement format that matches particular revenue items with related expense items and distinguishes between recurring operating activities and nonoperating items such as gains and losses.

Operating income (or loss)

Income statement subtotal representing the difference between operating revenues and operating expenses, but before recognizing gains and losses from peripheral activities which are added to or subtracted from operating income to determine net income or loss.

net income

Increase in net assets resulting from operating the business.

Gain

Increases in assets or decreases in liabilities that result from peripheral or incidental transactions.

creditors

Individuals or institutions that have loaned goods or services to a business.

Periodic inventory system

Method of accounting for changes in the Inventory account only at the end of the accounting period.

Perpetual inventory system

Method of accounting for inventories that increases the Inventory account each time merchandise is purchased and decreases it each time merchandise is sold.

liabilities

Obligations of a business to relinquish assets, provide services, or accept other obligations.

investing activities

One of the three categories of cash inflows and outflows shown on the statement of cash flows; includes cash received and spent by the business on productive assets and investments in the debt and equity of other companies.

claims

Owners' and creditors' interests in a business's assets.

retained earnings

Portion of stockholders' equity that includes all earnings retained in the business since inception (revenues minus expenses and distributions for all accounting periods).

financial statements

Primary means of communicating the financial information of an organization to the external users. The four general-purpose financial statements are the income statement, statement of changes in equity, balance sheet, and statement of cash flows.

accruel

Recognition of events before exchanging cash.

Purchase discount

Reduction in the gross price of merchandise extended under the condition that the purchaser pay cash for the merchandise within a stated time (usually within 10 days of the date of the sale).

generally accepted accounting principles (GAAP)

Rules and regulations that accountants agree to follow when preparing financial reports for public distribution.

Net sales

Sales less returns from customers and allowances or cash discounts given to customers.

Schedule of cost of goods sold

Schedule that reflects the computation of the amount of the cost of goods sold under the periodic inventory system; an internal report not shown in the formal financial statements.

accounting

Service-based profession that provides reliable and relevant financial information useful in making decisions.

statement of cash flows

Statement that explains how a business obtained and used cash during an accounting period.

balance sheet

Statement that lists the assets of a business and the corresponding claims (liabilities and equity) on those assets.

income statement

Statement that measures the difference between the asset increases and the asset decreases associated with running a business. This definition is expanded in subsequent chapters as additional relationships among the elements of the financial statements are introduced.

Merchandise inventory

Supply of finished goods held for resale to customers.

earnings

The difference between revenues and expenses. Same as net income or profit.

revenue

The economic benefit (increase in assets or decrease in liabilities) gained by providing goods or services to customers.

Cost of Goods Sold

Total cost incurred for the goods sold during a specific accounting period.

Cost of goods available for sale

Total costs paid to obtain goods and to make them ready for sale, including the cost of beginning inventory plus purchases and transportation-in costs, less purchase returns and allowances and purchase discounts.

asset use transaction

Transaction that decreases an asset and a claim on assets; the three types are distributions (transfers to owners), liability payments (to creditors), or expenses (used to operate the business).

asset use AU

Transaction that decreases an asset and a claim on assets; the three types are distributions (transfers to owners), liability payments (to creditors), or expenses (used to operate the business). pp. 25, 47

claims exchange CE

Transaction that decreases one claim and increases another so that total claims do not change. For example, the accrual of interest expense is a claims exchange transaction; liabilities increase, and the recognition of the expense causes retained earnings to decrease.

asset source AS

Transaction that increases an asset and a claim on assets; three types of asset source transactions are acquisitions from owners (equity), borrowings from creditors (liabilities), or earnings from operations (revenues).

asset source transaction.

Transaction that increases an asset and a claim on assets; three types of asset source transactions are acquisitions from owners (equity), borrowings from creditors (liabilities), or earnings from operations (revenues).

dividends

Transfer of wealth from a business to its owners.

expense

a decrease in assets or an increase in liabilities resulting from operating activities undertaken to generate revenue. Economic sacrifice incurred in the process of generating revenue. It's recognition is accompanied by a decrease in assets or an increase in liabilities from providing products or services to customers.

salaries payable

a liability. The balance in this account represents the amount of cash the company is obligated to pay employees in the future. This is a claims exchange transactions.

matching concept

a primary goal of accrual accounting is to appropriately match (recognize) expenses with revenues in the appropriate time period. Matching is not perfect and sometimes difficult to match the expense of the revenue created from that expense

cost, expense, and assets

accrual accounting draws a distinction: a cost might be either an asset or an expense. If a company has already consumed the purchase resource in the process of earning revenue the cost of the resource is an expense. If a company purchases a resource it will use in the future to generate income the cost of the revenue represents an asset (defer).

asset use transactions:

an asset account decreases and the corresponding claims account decreases

assets source transactions:

an asset account increases in the corresponding claims account increases

adjust entry, accounting for supplies

beginning supplies balance + supplies purchased = supplies available for use

adjust entry, accounting for unearned revenue

cash advance for unearned revenue ÷ 12 months = revenue earned per month

Asset use transactions

cash payments for salary expense. Cash payments for advertising expenses. cash payment to creditors. cash payments for salary expense. Paying accounts payable reflected on the statement of cash flows, cash payments for dividends, recognizing expenses

realization

collecting money generally from the sale of products or service

adjust entry, accounting for pre-paid rent

cost of annual lease ÷ 12 months = cost per month × months use = rent expense

Deferring and matching

deferring an expense recognition provides more accurate matching a revenues and expenses. Examples of deferring expenses is prepaid rent, prepaid insurance, and pre-paid taxes. Deferred expenses are frequently called prepaid items.

balance sheet

discloses an entity's assets, liabilities, and stockholders' equity at a particular point in time

revenue

economic benefit a company obtains by providing customer with goods and services; an increase in assets or a decrease in liabilities that a company obtained by providing customers with goods and services. arrived from operating the business. its recognition is accompanied by an increase in assets or a decrease in liabilities resulting from providing products or services to customers

period costs

expenses that are matched with the period in which they are incurred

accrued expenses

expenses that are recognized before cash is paid. These are recognized in the period in which the event takes place

recognition

formally reporting an economic item or event in the financial statement

assets source transaction

issue of stock for cash. Increases the company's assets and equity. Does not affect income statement. unearned revenue, supplies. Income and cash flow statement is unaffected until the supplies are used. Reflected on the asset and liability, issuing common stock for which cash is received

deferral

lRecognition of revenue or expense in a period after the cash is exchanged.

liabilities and expenses, compare

liabilities are not necessarily expenses. Liabilities may increase when the company recognizes expenses liabilities are not expenses. Liabilities are obligations. They can arise from acquiring assets as well as recognizing expenses. One of business borrowed money from a bank it recognizes an increase in cash and liabilities (notes payable).

unearned revenue

liability that a company defers recognizing revenue until it performs the work. Collecting the cash has no effect on the income statement until the work has been performed for which the cash was received. Reflected on cash flow statement

misconceptions about revenue and expense items

net income measured from accrual accounting differs from the amount of cash flow from operating activities. A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting. therefore this will create a difference between accrual accounting and cash flows.

asset exchange transaction:

one asset accounting increases and another asset account decreases

claims exchange transactions:

one claims account increases and another claims account decreases

conservatism

principle that guides accountants to select the alternative that produces the lowest amount of net income. It is better to under state income than to over state it. If subsequent events suggest that now income should have been higher investors will respond more favorably than if they learn it was really lower.

accrual accounting

recognize revenues and expenses in the period in which they occur regardless of when cash is collected or paid. A revenue or an expense event that is recognized before cash is exchanged and is based upon work done and cash owed.

claims exchange transactions

recognizing expenses incurred on account and decreases net income, adjusting entry from unearned revenue to revenue earned once work is done, accrued salary expense

income statement

reflects accrual accounting. It is the net income when revenue and expenses are taken into consideration

statement of change in stockholders equity

reports the effect on equity of issuing common stock, earning an income, and paying dividends to stockholders. It identifies how an entity's equity increased and decreased during the period as a result of transactions with stockholders and operating the business

deferral

revenue or expense event is recognized after cash has been exchanged

Income Statement

revenue-expenses= net income

Gross profit

see gross margin

Closing process

temporary accounts (revenue, expense, and dividend) are closed prior to the start of the next accounting cycle. Transfers the amount in each of these accounts to be "retained earnings" account

statement of cash flows

the change in cash from the beginning to the end of the accounting period.

asset exchange transaction

the collection of account receivable. One asset account increases in another asset account decreases. The amount of total assets is unchanged. prepaid rent. collecting money from customers were paying accounts receivable. Purchasing land with cash

adjusting entry

the entry to recognize the accrued expense. it is only to update the accounting records. it does not affect cash

Accounts Receivable

this balance represents the amount of cash the company expects to collect in the future. Classified as an assets source transactions. That asset exchange transactions