Accounting 3600 Financial Accounting

Statement of Cash Flows

A financial statement that provides relevant information about a company's cash receipts(inflows of cash) and cash payments (outflows of cash) during an accounting period. Financial statement that reports cash receipts and disbursements related to a firm's three major activities: operations, investments, and financing.

Retained Earnings Statement

A financial statement that reports how much of the company's income was retained in the business and how much was distributed to owners for a period of time. A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.

Balance Sheet

A financial statement that reports the assets and claims to those assets at a specific point in time. a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

Income statement

A financial statement that reports the profitability of a business over a specific period of time. A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

Balance Sheet

A financial statement that reports the resources (assets) owned by a company and the claims against those resources (liabilities and stockholders' equity) at a specific point in time. A financial statement that reports assets, liabilities, and owner's equity on a specific date.

multiple-step income statement

A form of income statement that contains several sections, subsections, and subtotals. A second income statement format is the _________________. _______________________ provides classifications of revenues and expenses that financial statement users find useful.

International Financial Reporting Standards (IFRS)

A general term that describes an international set of generally accepted accounting standards. A set of global accounting guidelines, formulated by the International Accounting Standards Board (IASB).

Gross Margin( gross profit)

A key performance measure that is computed as sales revenue less cost of goods sold. the difference between net sales and cost of goods sold ______________ represents the initial profit made from selling a product, but it is not a measure of total profit because other operating expenses have not yet been subtracted. However, ______________ is closely watched by managers and other financial statement users. A change in a company's gross margin can give insights into a company's current pricing and purchasing policies, thereby providing insight into the company's future performance.

Creditor

A person to whom money is owed

Audit Report

A report that describes the auditor's opinion of the fairness of the financial statement presentations and the evidence gathered to support that opinion The auditor's opinion as to whether the company's financial statements are fairly stated in accordance with generally accepted accounting principles(GAAP)

Management discussion and analysis (MD&A)

A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations. A section of the annual report that provides a discussion and explanation of various items reported in the financial statements. Management uses this section to highlight favorable and unfavorable trends and significant risks facing the company.

Financial Statements

A set of standardized reports in which the detailed transactions of a company's activities are reported and summarized so they can be communicated to decision-makers. periodic reports published by the company for the purpose of providing information to external users

Bond payable

A special form of note payable that is used by corporations to obtain large amounts of money is called a __________________. A form of an interest-bearing note payable issued by corporations in an effort to attract a large amount of investors.

double-entry accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit. A type of accounting in which the two-sided effect that every transaction has on the accounting equation is recorded in the accounting system.

contra asset

Accounts that have a balance that is opposite of the balance in the related account. An account that normally has a credit balance that is subtracted from a related asset on the balance sheet.

Accounts Receivable

Amounts to be received in the future due to the sale of goods or services

fiscal year

An accounting period that runs for one year.

Historical Cost Principle

An accounting principle that states that companies should record assets at their cost. A principle that requires the activities of a company to be initially measured at their cost—the exchange price at the time the activity occurs.

Economic Entity Assumption

An assumption that every economic entity can be separately identified and accounted for. One of the four basic assumptions that underlie accounting that assumes each company is accounted for separately from its owners.

Monetary Unit Assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records. One of the four basic assumptions that underlie accounting that requires that a company account for and report its financial results in monetary terms (e.g., U.S. dollar, euro, Japanese yen).

International Accounting Standards Board (IASB)

An independent, privately funded accounting standard-setting body with the goal of developing a single set of high-quality accounting standards that results in transparent and comparable information reported in general purpose financial statements. An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

Accounts Payable

An obligation that arises when a business purchases goods or services on credit. Amounts to be paid in the future for goods or services already acquired

Transaction

Any business activity that changes assets, liabilities, or owner's equity. Any event, external or internal, that is recognized in the financial statements.

Fundamental Accounting Equation

Assets = Liabilities + Owners' equity; this is the basis for the balance sheet The left side of the accounting equations shows the assets, or economic resources of a company. The right side of the accounting equation indicates the claims on the claims on the company's assets.

Time Period Assumptions

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years. One of the four basic assumptions that underlie accounting that allows the life of a company to be divided into artificial time periods so net income can be measured for a specific period of time(e.g., monthly, quarterly, annually). Without this income could only be reported at the end of its life.

current assets

Cash and other assets that are reasonably expected to be converted into cash within one year or one operating cycle, whichever is longer. cash and other assets expected to be exchanged for cash or consumed within a year

Investing Activities

Cash flow activities that include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans. Once a corporation has obtained funds though its financing activities it buys assets that enable it to operate. The corporation may also obtain intangible assets that lack physical substance, such as copyrights and patents. The purchase and sale of the assets that are used in operations (commonly referred to as property, plant, and equipment) are a corporation's investing activities.

Financing Activities

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends. A company's _____________________ include obtaining the funds necessary to begin and operate a business. These funds come from either issuing stock or borrowing money. Most companies use both types of financing to obtain funds.

Dividends

Company's share profits to the shareholders based on the corporation's performance. amounts paid periodically by a corporation to its stockholders as a return of their invested capital. __________________ represent a distribution of retained earnings, not an expense.

Cost Constraint

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available. Qualitative characteristic of useful information that states that the benefit received from accounting information should be greater than the cost of providing that information.

Current Ratio

Current assets divided by current liabilities; measures the availability of current assets to pay current liabilities A measure of liquidity that is computed as: Current Assets/Current liabilities.

Assets

Economic resources (things of value) owned by a firm. economic resources representing expected future economic benefits controlled by the business(e.g. cash, accounts receivable, inventory, land, buildings, equipment, and intangible assets).

All businesses engage in activities that can be categorized as ______________ ______________ _______________

Financing activities, investing activities, or operating activities.

Events

Happenings that both affect an organization's financial position and can be reliably measured. ______ make up the multitude of activities in which companies engage. External ______ result from an exchange between the company and another outside entity, and internal ______ result from a company's own actions that do not involve other companies.

single-step income statement

Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals. In a single-step income statement, there are only two categories: total revenues and total expenses. Total expenses are subtracted from total revenues in a single step. To arrive at net income. The advantage of a single-step income statement is its simplicity

The balance Sheet, The income statement, The retained earnings statement, and the statement of cash flows.

Information in financial accounting is provided though four basic financial statements which are: ______________________ ______________________ _____________________ ______________________

Revenue

Is the increase in assets that results from the sale of products or services. An increase in owner's equity resulting from the operation of a business

Conservatism Principle

Losses should be recorded when probable, but gains only when certain so that liabilities and expenses are not understated and assets and revenues are not overstated. A principle which states that when more than one equally acceptable accounting method exists, the method that results in the lower assets and revenues or higher liabilities and expenses should be selected.

Notes to the financial statements

Notes that clarify and expand upon the information presented in the financial statements. Notes clarify information presented in the financial statements and provide additional detail.

Relevance

One of the four qualitative characteristics that useful information should possess. Accounting information is said to be relevant if its s capable of making a difference in a business decision by helping users predict future events or by providing feedback about prior expectations. Relevant information must also be provided in a timely manner.

Comparability

One of the four qualitative characteristics that useful information should possess. Information has ______________ if it allows comparisons to be made between companies.

Consistency

One of the four qualitative characteristics that useful information should possess. _________________ refers to the application of the same accounting principles by a single company over time.

Faithful Representation

Qualitative characteristic of information stipulating it should be complete, neutral, and free from error.

Verifiability

Quality of information indicating the information is verifiable when independent parties can reach a consensus on the measurement of the activity.

Timeliness

Quality of information where it is available to users before it loses its ability to influence decisions.

Understandability

Quality of information whereby users with a reasonable knowledge of accounting and business can comprehend the meaning of that information.

Property, Plant, and Equipment

Represents the tangible, long-lived, productive assets used by a company in its operations to produce revenue. Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business.

Notes Payable

Short-term or long-term liabilities that a business promises to repay by a certain date. A payable that arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract.

Current Ratio Formula

The Current Ratio = Current Assets / Current Liabilities

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future. One of the four basic assumptions that underlie accounting that assumes a company will continue to operate long enough to Carry out its existing commitments.

Operating Cycle

The average time that it takes a company to purchase goods, resell them, and collect the cash from customers. The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Expenses

The cost of assets used, or the liabilities created in the operation of the business. The cost of assets consumed or services used in the process of generating revenues. Are the cost of resources used to earn revenues during a period

Net Loss

The excess of a company's expenses over its revenues during a period of time. The difference between total revenue and total expenses when total expenses are greater

Net Income

The excess of a company's revenue over its expenses during a period of time. the difference between total revenue and total expenses when total revenue is greater Nonoperating items are subtracted from income from operations to obtain income before taxes. Income taxes expense is then subtracted to obtain ____________. Regardless of the format used, notice that there is no difference in the amount of the revenue or expense items reported. That is, ________________ is the same under either the single-step or the multiple-step format. The only difference is how the revenues and expenses are classified.

long-term liabilities

The obligations of the company that will require payment beyond one year or the operating cycle whichever is longer. Obligations not due to be paid within one year or the operating cycle, whichever is longer.

Stockholder

The owners of a corporation who own shares in varying numbers.

Stockholders' Equity

The owners' claim to assets. The owners' claims against the assets of a corporation after all liabilities have been deducted.

Financial Accounting Standards Board (FASB)

The primary accounting standard-setter in the United States which as been granted this power to set standards by the Securities and Exchange Commission. the private board that establishes the generally accepted accounting principles used in the practice of financial accounting

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied. A principle that requires revenue to be recognized or recorded in the period in which it is earned and the collection of cash is reasonably assured.

Expense recognition principle (matching principle)

The principle that matches expenses with revenues in the period when the company makes efforts to generate those revenues. This principle requires that an expense be recorded and reported in the same period as the revenue it helped generate.

Depreciation

The process whereby companies systematically allocate the cost of their tangible operating assets(other than land) as an expense in each period in which the asset is used.

Contributed Capital

The resources that investors contribute to a business in exchange for ownership interest The owners' contribution of cash and other assets to the company (includes the common stock of a company)

Generally Accepted Accounting Principles (GAAP)

The rules and conventions used to prepare financial statements. By following these rules and conventions financial statements users are abler to compare performance over time and across companies. accounting guidelines that govern the content and form of financial reports

Accounting Cycle

The series of accounting activities included in recording financial information for a fiscal period The procedures that a company uses to transform the results of its business activities into financial statements.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded for an asset since the asset was acquired. It is reported on the balance sheet as a contra-asset. the total amount of depreciation expense that has been recorded since the purchase of a plant asset

Book value or carrying value

The value of an asset or liability as it appears on the balance sheet. _____________ is calculated as the cost of the asset or liability minus the balance in its related contra account(e.g., cost of equipment less accumulated deprecation; notes payable less discount on notes payable.) the difference between the cost of a long term asset and any depreciation taken to date

Nonoperating activities

Various revenues, expenses, gains, and losses that are unrelated to a company's main line of operations. A multiple-step income statement reports ____________________ in a section which is frequently called other income and expenses. _____________________ are revenues and expenses from activities other than the company's principle operations. They include gains and losses from the sale of equipment and other items that were not acquired for resale. For many companies, the most important _____________________________ item is interest and investment income.

Working capital formula

Working Capital = Current Assets - Current Liabilities

Accounting

_______ is the process of identifying, measuring, recording, and communicating financial information about a company's business activities so decision-makers can make informed decisions.

Financial Accounting

________________ accounting and reporting to satisfy the outside demand (primarily investors and creditors) for accounting information.

Intangible assets

________________ are similar to Property, plant and equipment in that they provide a benefit to a company over a number of year; however, these assets lack physical substance. long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

Net Profit Margin

___________________ (sometimes called return on sales) shows the percentage of profit in each dollar of sales revenue (or service revenue and is computed as: _______________________ = Net Income/Sales This ratio provides an indication of management's ability to control expenses. Future income depends on both maintaining(or increasing) market share while controlling expenses.

Other Noncurrent assets

a catch-all category including items such as deferred charges and other long=term miscellaneous items

Chart of accounts

a list of accounts used by a business the list of accounts used by a company.

Account

a record summarizing all the information pertaining to a single item in the accounting equation A record of increases and decreases in each of the basic elements of the financial statements (each of the company's asset, liability, stockholders' equity, revenue, expense, gain, and loss items).

Wages Payable

amounts owed to employees for work performed

Other expense

an expense that cannot be traced directly to the normal operations of the business a catch-all category used to capture other miscellaneous expenses incurred by the company.

Long-term investments

are similar to short term investments, except that the company expects to hold the investment for longer than 1 year. This category also includes land or buildings that a company is not currently using in operations. Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

notes to the financial statements (footnotes)

clarify and expand upon the information presented in the financial statements Notes that clarify and expand upon the information presented in the financial statements.

Income Tax Expense

expense incurred by a corporation related to federal and state income taxes

income from operations

gross profit - operating expenses the difference between gross margin and operating expenses. Operating expenses are the expenses the business incurs in selling goods or providing services and managing the company. Operating expenses typically include research and development expenses, selling expenses, and general administrative expenses. _______________________ indicates the level of profit produced by the principal activities of the company

Full Disclosure

guideline that financial statements should not include just numbers but should also furnish management's interpretations and explanations of those numbers A policy that requires any information that would make a difference to financial statement users to be revealed.

Operating Activities

includes cash receipts and cash payments for transactions relating to revenue and expense activities Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

Income taxes payable

taxes owed to the government The taxes accrued during the past year but not yet paid

Capital

the account used to summarize the owner's equity in a business A company's assets less its liabilities. ____________ is also known as stockholders' equity.

Cost of goods sold

the amount of money a firm spent to buy or produce the products it sold during the period to which the income statement applies. An expanse that represents the outflow of resources caused by the sale of inventory. This is often computed as the cost of goods available for sale less the cost of ending inventory.

Retained Earnings (or deficit)

the amount of net income retained in the corporation The accumulated earnings (or losses) over the entire life of the corporation that have not been paid out in dividends.

Common Stock

the basic ownership interstate's in a corporation. Owners of ________________ have the right to vote in the election of the board of directors, share in the profits and dividends of the company, keep the same percentage of ownership if new stock is issued(preemptive right), and share in the distribution of assets in liquidation.

Research and development expense

the cost of developing new products

Working Capital

the difference between current assets and current liabilities A measure of liquidity computed as current assets-current liabilities.

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange A company's ability to pay obligations as they become due.

Selling, General, and Administrative Expenses

the expenses that a company incurs in selling goods, providing services, or managing the company that are not directly related to production. These expenses include advertising expenses; salaries paid to salespersons or managers; depreciation on administrative buildings; and expenses related to insurance, utilities, property taxes, and repairs.

Accounting Entity

the organization for which financial data are to be collected _________ is a company that has an identity separate from that of its owners and managers and for which accounting records are kept.

Transaction Analysis

the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation

Inventory

the quantity of goods that a firm has on hand Products held for resale that are classified as current assets on the balance sheet

noncurrent assets

typically held and used for several years (land, buildings, euipment, patents, long-term investments in securities) _______ that are not classified as current are classified as long-term or _____________ ___________ These include long-term investments; property, plant, and equipment; intangible assets; and other ____________________

Sole Proprietorship

A business owned by one person _____________, which accounts for more than 70% of all businesses, are usually small, local businesses such as restaurants, photography studios, retail stores, or website developers. This organizational form is popular because it is simple to set up and gives the owner control of the business. While ___________ is an accounting entity separate from its owner, the owner is personally responsible for the debt of the business. _______________ can be formed or dissolved at the wishes of the owner.

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts A ___________ is a business organized under the laws of a particular state. A ______________, such as Apple, is owned by one or more persons called stockholders, whose ownership interests are represented by shares of stock. A primary advantage of the corporate form is the ability to raise large amounts of money(capital) by issuing shares of stock. Unlike a sole proprietorship or a partnership, a ___________ is an "artificial person" and the stockholders' legal responsibility for the debt of the business is limited to the amount they invested in the business. In addition, shares of stock can be easily transferred from one owner to another though capital markets without affecting the corporation that originally issued the stock. The ability to raise capital by selling new shares, the limited legal liability of owners, and the transferability of the shares give ______________ an advantage over other forms of business organization. However, the requirements to form a _____________ are more complex compared to the other forms of business organization. In addition, owners of ______________ generally pay more taxes than owners of sole proprietorships or partnerships for two reasons: • First, the _______________ income tax rate is greater than the individual income tax rate. • Second, a ________________ income is taxed twice—at the corporate level as income is earned, and at the individual level as earnings are distributed to stockholders. This is known as double taxation.

Partnership

A business owned jointly by two or more individuals. Small businesses and many professional practices of physicians, lawyers, and accountants are often organized as partnerships. Relative to sole proprietorships, _____________ provide increased access to financial resources as well as access to the individual skills of each of the partners. Similar to sole proprietorships, ________________ are accounting entities separate from the partners; however, the partners are jointly responsible for all the debt of the partnership. Finally, the ___________ is automatically dissolved when any partner leaves the ____________; of course, the remaining partners may form a new partnership and continue to operate.

liability

A debt or obligation owed to others.