acc midterm
Financing Activities
borrowing, paying dividends, selling stock
Liquidity
can comp pay short term liabilities and meet unknown cash needs
CA
cash, debt investments, accounts receivable, notes receivable, inventory, supplies, prepaid insurance
debit
increase in cash
Users of financial statements
internal users, external users, ethics
external users
investors and creditors
PPE
land, equipment, less accumulated depreciation
without unearned revenue adjusting entry
liabilities are overstated, revenues are understated
without accrued expenses aje
liability is understated, expense is understated
MDA
management's view on company's ability to pay short term debts, can they expand, results of operations, uncertainties
long-term liabilities
mortgage payable, notes payable
Investing Activities
purchasing equipment, investing in other stock
What does a balance sheet show?
ratio to debt and common stock financing, creditors: will they be repaid
Cash Basis Accounting
records revenues when cash is received and expenses when cash is paid
assets
resources of a company
finacial statements
retained earnings, net income, balance sheet
income statement in order
revenues, expenses, net income
Operating Activities
revenues, inventory, accounts receivable, expenses, liabilities, net income/loss
sole proprietorship pros
simple to establish, owner controlled, tax advantages
partnership pros
simple to establish, shared control, assets, and knowledge, tax advantages
3 business organizations
sole proprietorship, partnership, corporation
What does the retained earnings statement show?
to investors: dividend amount, to creditors: does dividends reduce company's ability to pay off debt
statement of cash flows
tracks where money comes from and what its used for, balance from beginning to end
potential errors uncovered in trial balance
transaction isnt journalized, correct journal entry is not posted, journal entry is posted twice
Accrual Basis Accounting
transactions that change a company's financial statements are recorded in the periods in which the events occur
Posting
transferring information from a journal entry to a ledger account
profitability ratio
(net income - preferred dividends) weighted avg of common stock outstanding
Sole Proprietorship
A business owned by one person
Corporation
A business that is owned by many investors.
journal
A form for recording transactions in chronological order
Auditor's Report
An independent accountant's review of a firm's financial statements.
Expanded Accounting Equation
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
Accounting Equation
Assets = Liabilities + SHE
Balance Sheet
Assets = Liabilities + SHE
Retained Earnings Statement
Beginning RE + Net Income - Dividends = Ending RE
Current Ratio
CA/CL
what financial statement is used for liquidity ratios
CBS
supplemental elements of an AR
MDA, auditors report, financial statements
Expense Recognition Principle
Match expenses with revenues in the period when the company makes efforts to generate those revenues
Qualified Opinion
Scope limitation or a departure from GAAP
Long-term investments
Stock investments Investment in real estate
debt to assets ratio equation
TL / TA (CBS)
Stockholders' Equity
The owners' claim to assets (common stock and RE)
unqualified opinion
The statements are presented fairly in conformity with GAAP
Partnership
a business owned by 2+ people
ledger
a collection of accounts and their balances
Solvency
ability for comp to survive for a long time, pay back longterm debt + interest
Accruals
accrued revenues and accrued expenses
Accounting Information System
analyze transactions, journalize, post, trial balance, adjusting entries, adjusted trial balance, financial statements, closing entries, post closing trial balance
without prepaid expense adjusting entries
assets are overstated, expense is understated
without accrued revenue aje
assets understated, revenue understated
SHE
common stock, retained earnings
intercomp
comp and competitor
industry average
comp to industry
Revenue Recognition Principle
companies recognize revenue in the accounting period in which the performance obligation is satisfied
Working Capital
current assets - current liabilities
Classified Balance Sheet
current assets, longterm investments, PPE, intangible assets, CL, LTL, SHE
liabilities
debt obligations
what are the solvency ratios
debt to asset, free cash flow
credit
decrease in cash
adjusting entries
deferrals and accruals
what is the profitability ratio
earnings per share
corporation pros
easier to transfer ownership, easier to raise funds, no personal liability, easy to transfer funds
purpose of adjusted trial balance
ensure dr=cr after ajes, used to create financial statements
adjusting entries
ensure that the revenue recognition and expense recognition principles are followed
3 business activities
financing, investing, operating
forms of partnership
general, limited, LLP
what does the CBS do?
gives clarity to debt history
corporation cons
harder to set up, double taxation
What does the statement of cash flows show?
if company generates enough from operations to fund investing activities
internal users
in company
what finacial statement is used to compute profitability ratio
income statement
free cash flow !!!
net cash from operations- capital expenditures - cash dividends
What does the income statement show?
net income/loss, company health, determines if operations are profitable
CL
notes payable, accounts payable, unearned sales revenue, salaries and wages payable, interest payable
intracomp
one comp over multiple years
profitability
operating success for given period
intangible assets
patents, trademarks, copyrights, franchises, and goodwill
defferals
prepaid expenses and unearned revenues
purpose of trial balance
prove dr=cr, uncovers era, useful for financial prep
sole proprietorship cons
unlimited personal liability, harder to get financing and transfer ownership
what are the liquidity ratios?
working capital, current ratio