Accounting and its use in business decisions

Accounting theory

"A set of basic concepts and assumptions and related principles that explain and guide the accountant's actions in identifying, measuring, and communicating economic information".evance and reliability

The accumulated depreciation account

... is a contra asset account that shows the total of all depreciation recorded on the asset from the date of acquisition up through the balance sheet date.

For a patent that becomes worthless before it is fully amortized....

....the company expenses the unamortized balance in the Patents account.

An exchange (most exchanges) has (have) commercial substance if, as a result of the exchange...?

...as a result of the exchange future cashflows are expected to be significantly affected.

When analyzing the financial condition of companies owning natural resources, exercise caution because...

...because the historical costs reported for the natural resources may be only a small fraction of their current value.

The closing process reduces....

...revenue, expense, and Dividends account balances to zero so they are ready to receive data for the next accounting period.

Patents have a legal life of __ years. When purchasing, _____ account is ______ at cost. Costs for first successful defense of the patent are ____ also.

17 years; Patents; Debited; Debited

Income Summary account

A clearing account used only at the end of an accounting period to summarize revenues and expenses for the period.

Unbilled training fees

A company may perform services for customers in one accounting period while it bills for the services in a different accounting period. This would involve an accrued adjustment

Purchase Discounts account

A contra account to Purchases that reduces the recorded gross invoice cost of the purchase to the price actually paid.

Accumulated amortization

A contra account to intangible assets.

Sales Returns and Allowances account

A contra revenue account to Sales used to record the selling price of merchandise returned by buyers or reductions in selling prices granted

Sales Discounts account

A contra revenue account to Sales; it is shown as a deduction from gross sales in the income statement.

Sales allowance

A deduction from original invoiced sales price granted to a customer when the customer keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit

Cash discount

A deduction from the invoice price that can be taken only if the invoice is paid within a specified time. To the seller, it is a sales discount; to the buyer, it is a purchase discount.

Invoice

A document prepared by the seller of merchandise and sent to the buyer. It contains the details of a sale, such as the number of units sold, unit price, total price billed, terms of sale, and manner of shipment. It is a purchase invoice from the buyer's point of view and a sales invoice from the seller's point of view.

Passage of title

A legal term used to indicate transfer of legal ownership of goods

Perpetual inventory procedure

A method of accounting for merchandise acquired for sale to customers wherein the Merchandise Inventory account is continuously updated to reflect items on hand; this account is debited for each purchase and credited for each sale so that the current balance is shown in the account at all times.

Periodic inventory procedure

A method of accounting for merchandise acquired for sale to customers wherein the cost of merchandise sold and the cost of merchandise on hand are determined only at the end of the accounting period by taking a physical inventory.

Percentage-of-completion method

A method of recognizing revenue based on the estimated stage of completion of a long-term project. The stage of completion is measured by comparing actual costs incurred in a period with total estimated costs to be incurred in all periods.

Completed

A method of recognizing revenue on long-term projects under which no revenue is recognized until the period in which the project is completed; similar to recognizing revenue upon the completion of a sale.

Materiality

A modifying convention that allows the accountant to deal with immaterial (unimportant) items in an expedient but theoretically incorrect manner; also a qualitative characteristic specifying that financial accounting report only information significant enough to influence decisions or evaluations.

Trade discount

A percentage deduction, or discount, from the specified list price or catalog price of merchandise to arrive at the gross invoice price; granted to particular categories of customers (e.g. retailers and wholesalers). Also see Chain discount.

Realization principle

A principle that directs that revenue is recognized only after the seller acquires the right to receive payment from the buyer.

Verifiability

A qualitative characteristic of accounting information; information is verifiable when it can be substantially duplicated by independent measurers using the same measurement methods.

Completeness

A qualitative characteristic of accounting information; requires disclosure of all significant information in a way that aids understanding and does not mislead; sometimes called the full disclosure principle.

Comparability

A qualitative characteristic of accounting information; when information is comparable, it reveals differences and similarities that are real and are not the result of differing accounting treatments.

Representational faithfulness

A qualitative characteristic requiring that accounting statements on economic activity correspond to the actual underlying activity

Timeliness

A qualitative characteristic requiring that accounting information be provided at a time when it may be considered before making a decision.

Relevance

A qualitative characteristic requiring that information be pertinent to or affect a decision.

Reliability

A qualitative characteristic requiring that information faithfully depict for users what it purports to represent.

Predictive value

A qualitative characteristic that information has when it improves users' abilities to predict outcomes of events.

Feedback value

A qualitative characteristic that information has when it reveals the relative success of users in predicting outcomes.

Neutrality

A qualitative characteristic that requires accounting information to be free of measurement method bias.

Installment basis

A revenue recognition procedure in which the percentage of total gross margin recognized in a period on an installment sale is equal to the percentage of total cash from the sale that is received in that period.

Delivery expense

A selling expense recorded by the seller for freight costs incurred when terms are FOB destination

• Together, these ratios show the liquidity of accounts receivable and give some indication of their quality. Generally, the higher the accounts receivable turnover, the better; and the shorter the average collection period, the better.

Accounts receivable turnover and number of days' sales in accounts recveible

Accrued items

Adjusting entries relating to activity on which no data have been previously recorded in the accounts. Also, see accrued assets and liabilities.

A means of classifying accounts receivable according to their age; used to determine the necessary balance in an Allowance for Uncollectible Accounts. A different uncollectibility percentage rate is used for each age category.

Aging schedule

Content and purpose of balance sheet

Aka Statement of financial position; it's like a photograph in that shows position of the business hey particular point in time; shows assets liabilities and stockholders' equity

Gross selling price

Also known as the invoice price is the price of the item minus trade discounts

For indefinite assets, ________ will however begin when it is determined that the useful life is no longer indefinite.

Amortization (for indefinite intangible assets)

Acquisition cost

Amount of cash and/or cash equivalents given up to acquire a plant asset and place it in operating condition at its proper location.

Capital stock

Amount of owners' investment in the corporation

Contra asset account

An account shown as a deduction from the asset to which it relates in the balance sheet; used to reduce the original cost of the asset down to its remaining undepreciated cost or book value.

Purchase Returns and Allowances account

An account used under periodic inventory procedure to record the cost of merchandise returned to a seller and to record reductions in selling prices granted by a seller because merchandise was not satisfactory to a buyer; viewed as a reduction in the recorded cost of purchases.

Transportation-In account

An account used under periodic inventory procedure to record inward freight costs incurred in the acquisition of merchandise; a part of cost of goods sold

Matching principle

An accounting principle requiring that expenses incurred in producing revenues be deducted from the revenues they generated during the accounting period.

Book value

An asset's recorded cost less its accumulated depreciation.

Appraised value

An expert's opinion as to what an item's market price would be if the item were sold.

Goodwill

An intangible value attached to a business, evidenced by the ability to earn larger net income per dollar of investment than that earned by competitors in the same industry.

Leasehold improvement

Any physical alteration made by the lessee to the leased property in which benefits are expected beyond the current accounting period.

The three factors involved in computing depreciation expense are:

Asset Cost Estimated residual value and Estimated Useful life

Prepaid Expense

Asset awaiting assignment to expense, such as prepaid insurance, prepaid rent, and supplies on hand. Note that the nature of these three adjustments is the same. (Adjustment for deferred items)

Losses

Asset expirations that are usually involuntary and do not create revenues

Accounting equation

Assets = liabilities + stockholders equity

Long-term assets

Assets that are on hand or used by a business for a relatively long time. Examples include long-term investments; property, plant, and equipment; and intangible assets.

Property, plant, and equipment

Assets with useful lives of more than one year that a company acquired for use in a business rather than for resale; also called plant assets or fixed assets.

Land improvements

Attachments to land, such as driveways, landscaping, parking lots, fences, lighting systems, and sprinkler systems, that have limited lives and therefore are depreciable.

The difference between the maturity value of a note and the actual amount—the note's proceeds—given to the borrower.

Bank discount

in the income statement of a merchandising firm, Cost of goods sold =

Beginning inventory + Net cost of purchases - Ending inventory.

Underlying assumptions or concepts

Business entity concept Money measurement concept Exchange-price concept(assets recorded at acquisition cost) Going concern concept (Business will continue indefinitely) Periodicity (entity's life can be subdivided into time periods)

FOB shipping point, freight collect

Buyer both incurs and initially pays the freight chargers. The proper party (buyer) paid the freight. The buyer debits Transportation-In and credits Cash

FOB shipping point, freight prepaid

Buyer incurs the freight chargers, and seller initially pays the freight charges. Buyer must reimburse seller for freight charges. The seller debits Accounts Receivable and credits Cash upon paying the freight. The buyer debits Transportation-In and credits Accounts Payable when informed of the freight charges

Current ratio

Calculated by dividing current assets by current liabilities.

Betterments (improvements)

Capital expenditures that are properly charged to asset accounts because they add to the service-rendering ability of the assets; they increase the quality of services obtained from an asset.

Current assets (shown in classified balance sheet)

Cash and other assets that a business can convert into cash or use up in one year or one operating cycle, whichever is longer.

Operating activities

Cash effects of transactions and other events

The maturity amount of a note less the bank discount.

Cash proceeds

Qualitative characteristics

Characteristics that accounting information should possess to be useful in decision making.

______ ________ liabilities are those for which the existence of the liability and its amount are certain. An example is accounts payable.

Clearly determinable

Adjunct account

Closely related to another account; its balance is added to the balance of the related account in the financial statements.

What are necessary to reduce the balances of revenue, expense, and Dividends accounts to zero so they are ready to receive data for the next accounting period?

Closing entries

companies do not recognize a gain or loss on an exchange of nonmonetary assets not having _______ _________. The do record book value of old asset plus cash paid.

Commercial substance

Manufacturers

Companies that produce goods from raw materials and normally sell them to wholesalers

Physical inventory

Consists of counting physical units of each type of merchandise on hand

• ________ ________are those for which the existence, and usually the amount, are uncertain because these liabilities depend (or are contingent) on some future event occurring or not occurring. An example is a liability arising from a lawsuit.

Contingent liabilities

Product costs

Costs incurred in the acquisition or manufacture of goods. Product costs are accounted for as if they were attached to the goods, with the result that they are charged to expense when the goods are sold.

Period costs

Costs that cannot be traced to specific products and are expensed in the period incurred.

Used to record credit card agency's service charges for services rendered in processing credit card sales.

Credit Card Expense account

• Long-term liabilities are obligations that do not qualify as ______ _______.

Current liabilities

Modifying conventions

Customs emerging from accounting practice that alter the results obtained from a strict application of accounting principles; conservatism is an example.

Units-of-production method: Assigns an equal amount of depreciation to each unit of product manufactured by an asset. The units-of-production depreciation formulas are:

DEPRECIATION PER PERIOD= Asset cost - Estimated salvage value/ Estimated total units of production(service)during useful life of asset DEPRECIATION PER PERIOD=Depreciation per unit×Number of units of goods/services produced

Decreases in liability accounts are ___; increases are____?

Debits; credits

Decreases in revenue accounts are ____; increases are ______

Debits; credits

Decreases in stockholders equity accounts are____; increases are____

Debits; credits

Increases an asset accounts are? And decreases are?

Debits; credits

Increases in Dividends accounts are ____; decreases are ____

Debits; credits

Increases in expense accounts are ____; decreases are ____.

Debits; credits

Current liabilities (shown in classified balance sheet)

Debts due within one year or one operating cycle, whichever is longer. The payment of current liabilities normally requires the use of current assets.

Long-term liabilities

Debts such as a mortgage payable and bonds payable that are not due for more than one year.

Credits 1. _____ assets 2. _____ liabilities 3. _____ stockholders' equity 4. _____revenues 5. _____ expenses 6. _____ dividends

Decrease Increase Increase Increase Decrease Decrease

To compute depletion charges, companies usually use the units-of-production method.The formula is:

Depletion cost per unit= (Cost of site - Residual value of land (if owned)+Costs develop site) / (Estimated number of units that can be economically extracted)

Double-declining-balance method: DDB is an accelerated deprecation method. Salvage value is ignored in making annual calculations. The formula for DDB deprecation is:

Deprecation per period=(2×straight−line rate)×(Asset cost -Accumulated deprecation)

Straight-line method:

Depreciation per period= Asset cost - Estimated salvage value/Number of accounting periods∈estimated useful life

Cost-benefit consideration

Determining whether benefits of including information in financial statements exceed costs.

A contra account used to reduce Notes Payable from face value to the net amount of the debt.

Discount on Notes Payable

The act of borrowing on a non interest-bearing note drawn for a maturity amount, from which a bank discount is deducted, and the proceeds are given to the borrower.

Discounting a note payable

Classified income statement

Divides both revenues and expenses into operating and nonoperating items. The statement also separates operating expenses into selling and administrative expenses. Also called the multiple-step income statement.

The conditions for revenue recognition are

Earning process must be complete (Completing an install) and Exchange Transaction must be complete...this leaves the accountant with a lot of gray area

Cost of goods available for sale

Equal to beginning inventory plus net cost of purchases

• ________ _______are those for which the existence of the liability is certain, but its amount can only be estimated. An example is estimated product warranty payable.

Estimated liabilities

Intangible assets generally rise from: (2 sources)

Exclusive privileges granted by the gov & superior entrepreneurial ability or goodwill

Capital expenditures

Expenditures debited to an asset account or to an accumulated depreciation account.

Extraordinary repairs

Expenditures that cancel a part of the existing accumulated depreciation because they increase the quantity of services expected from an asset.

______ _____are closed by crediting them and debiting the Income Summary account.

Expense accounts

Selling expenses

Expenses a company incurs in selling and marketing efforts

Administrative expenses

Expenses a company incurs in the overall management of a business.

Nonoperating expenses (other expenses) =

Expenses incurred by a business that are not related to the acquisition and sale of the products or services regularly offered for sale.

Matching principle

Expenses should be recognized as they are incurred to produce revenues

Sales return

From the seller's point of view, merchandise returned by a buyer for any of a variety of reasons; to the buyer, a purchase return

Only _____ intangible assets with _____ lives are amortized.

recognized; finite

businesses treat _____ _____ as if they were subclassifications of the credit (right, +) side of the Retained Earnings account.

revenue accounts

The closing process transfers (1) the balances in the _____& _____ accounts to a clearing account called Income Summary and then to Retained Earnings and (2) the balance in the _____ account to the Retained Earnings account

revenue & expense; Dividends

All ______, ______, & ______ accounts have zero balances and are not included in the post-closing trial balance.

revenue, expense, and Dividends

Other transactions affect both balance sheet items and income statement items

revenues, expenses, and eventually retained earnings

Investing activities

transactions involving acquisition or disposal of long-term assets such as land building and equipment

When are none of an intangible assets costs capitalized

when an asset is developed internally in it's entirety

The ____ _____ is a columnar sheet of paper on which accountants summarize information needed to make the adjusting and closing entries and to prepare the financial statements.

work sheet

A classified income statement has four major sections...

—operating revenues, cost of goods sold, operating expenses, and nonoperating revenues and expenses.

The four basic steps in the closing process are:

 Closing the revenue accounts—transferring the balances in the revenue accounts to a clearing account called Income Summary.  Closing the expense accounts—transferring the balances in the expense accounts to a clearing account called Income Summary.  Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account.  Closing the Dividends account—transferring the balance of the Dividends account to the Retained Earnings account.

Gain and loss recognition principle

Gains may be recorded only when realized, but losses should be recorded when they first become evident.

Consigned goods

Goods delivered to another party who attempts to sell the goods for the owner at a commission.

Income from operations

Gross margin - Operating (selling and administrative) expenses.

in the income statement of a merchandising firm, Income from operations =

Gross margin - Operating (selling and administrative) expenses.

Gross margin percentage

Gross margin divided by net sales

Gross margin percentage =

Gross margin/ Net sales

Net sales =

Gross sales - (Sales discounts + Sales returns and allowances).

in the income statement of a merchandising firm, Net sales = ?

Gross sales - (Sales discounts + Sales returns and allowances).

substance-over-form concept

In some business transactions, the economic substance of the transaction conflicts with its legal form. For example, a contract that is legally a lease may, in fact, be equivalent to a purchase. --It should be journalized as a purchase

Financial activities

Include cash effects of transactions and other events involving creditors and owners ( stockholders)

Net income =

Income from operations + Nonoperating revenues - Nonoperating expenses

in the income statement of a merchandising firm, Net income =

Income from operations + Nonoperating revenues - Nonoperating expenses

Four basic financial statements

Income statement, statement of retained earnings, balance sheet, and statement of cash flows

Debits 1. _____ assets 2. _____ liabilities 3. _____ stockholders' equity 4. _____revenues 5. _____ expenses 6. _____ dividends

Increase Decrease Decrease Decrease Increase Increase

Full disclosure principle

Information important enough to influence the decisions of an informed user of the financial statements should be disclosed.

An account showing the interest expense incurred but not yet paid; reported as a current liability in the balance sheet.

Interest Payable account

An account showing the interest earned but not yet collected; reported as a current asset in the balance sheet.

Interest Receivable account

Low-cost items

Items that provide years of service at a relatively low unit cost, such as hammers, paperweights, and drills.

If the Balance Sheet columns do not balance, the error is most likely to exist in the:

Last six columns of the work sheet. The Adjusted Trial Balance columns should balance before items are spread to the Income Statement, Statement of Retained Earnings, and Balance Sheet columns.

The party who prepares a note and is responsible for paying the note at maturity.

Maker (of a note)

FOB destination

Means free on board at destination; goods are shipped to their destination without charge to the buyer; the seller is responsible for paying the freight charges.

FOB shipping point

Means free on board at shipping point; buyer incurs all transportation costs after the merchandise is loaded on a railroad car or truck at the point of shipment.

Transaction

Measurable changes in the accounting equation; evidence and measurement

Merchandise in transit

Merchandise in the hands of a freight company on the date of a physical inventory

The information needed to prepare the income statement is in the Income Statement columns of the work sheet. ___ ______ for the period is the amount needed to balance the two Income Statement columns in the work sheet.

Net income

in the income statement of a merchandising firm, Net cost of purchases =

Net purchases + Transportation-in.

The amount the company expects to collect from accounts receivable.

Net realizable value

in the income statement of a merchandising firm, Gross margin =

Net sales - Cost of goods sold

Gross margin or gross profit

Net sales - Cost of goods sold; identifies the number of dollars available to cover expenses other than cost of goods sold.

Do dividends appear on the income statement?

No corporations are not required to pay dividends so they're not a business expense

The Dividends account is closed to Income Summary? (y/n)

No! To retained earnings

Are internally developed trademarks amortized?

No, only if they are purchased they are amortized

If a plant asset is used after it has been fully depreciated should the firm remove the asset's cost and the accumulated depreciation from the accounts?

No, they should not be removed until the asset is sold.

revenue, expense, and dividends accounts are ______(temporary) accounts that are merely subclassifications of a real (permanent) account, Retained Earnings.

Nominal

• Credit cards are charge cards used by customers to charge purchases of goods and services. These cards are of two types—______ credit cards (such as American Express) and ____ credit cards (such as VISA).

Non-bank, and bank

Chain discount

Occurs when the list price of a product is subject to a series of trade discounts.

Content and purpose of retained earnings statement

One purpose is to connect the income statement in the balance sheet; shows difference in the income or net loss between two balance sheet dates...along with deductions of dividends; represents a period of time

Accrued revenues and expenses

Other names for accrued assets and liabilities.

The party who receives a note and will be paid cash at maturity.

Payee (of a note)

Two methods of accounting for inventory are _______ inventory procedure and _______ inventory procedure.

Perpetual and Periodical

The face value of a note.

Principal (of a note)

in the income statement of a merchandising firm, Net purchases =

Purchases - (Purchase discounts + Purchase returns and allowances).

Net purchases =

Purchases - (Purchase discounts +Purchase returns and allowances).

_________ __________ are those that accounting information should possess to be useful in decision making. The two primary ones are ________and________. Another characteristic is comparability

Qualitative characteristics; relevance and reliability

According to the Financial Accounting Standards Board, firms must expense all ____ costs when incurred, unless they were directly ________ by government agencies and others.

R&D; reimbursable

Search documents

Receipts checks bills etc

Accelerated depreciation methods

Record higher amounts of depreciation during the early years of an asset's life and lower amounts in later years.

What is the effect of a dividend

Reduces cash and retained earnings by amount paid out

In the worksheet, the ending ______ ______ ______ is carried forward to the balance sheet.

Retained Earnings balance

______ _______ are closed by debiting them and crediting the Income Summary account.

Revenue accounts

Recurring and or minor expenditures that neither add to the asset's quality of service-rendering abilities nor extend its quantity of services beyond the asset's original estimated useful life are expenses. AKA _______ _________

Revenue expenditures: they are expensed immediately and reported in the income statement as expenses.

The difference between sales discounts and trade discounts

Sales discounts affect the growth selling price whereas trade discounts determine grow sales after reducing list price

Two common deductions from gross sales are?

Sales discounts; sales returns and allowances

FOB destination, freight prepaid

Seller both incurs and initially pays the freight charges. The proper party (seller) paid the freight. The seller debits Delivery Expense and credits Cash

FOB destination, freight collect

Seller incurs freight charges, and buyer initially pays freight charges. Buyer deducts freight charges from amount owed to seller. The buyer debits Accounts Payable and credits Cash when paying the freight. The seller debits Delivery Expense and credits Accounts Receivable when informed of the freight charges

Trade discount

Sellers deduct this from the list price to come up with the Gross selling price. Trade discounts are not recorded in the accountants records

Accounting cycle

Series of steps performed during the accounting period to analyze, record, classify, summarize, and report useful financial information for the purpose of preparing financial statements. The steps include analyzing transactions, journalizing transactions, posting journal entries, taking a trial balance and completing the work sheet, preparing financial statements, journalizing and posting adjusting entries, journalizing and posting closing entries, and taking a post-closing trial balance.

Three types of activities performed by business organizations

Service, merchandise, and manufacturing

Liabilities

Shown on the balance sheet; comprised of accounts payable and Notes payable

Content and purpose of cash flows

Shows cash and flows and outflows from operating, investing, and financing activities

Unclassified income statement

Shows only major categories for revenues and expenses. Also called the single-step income statement.

Cost of goods sold

Shows the cost to the seller of the goods sold to customers; under periodic inventory procedure, cost of goods sold is computed as Beginning inventory + Net cost of purchases - Ending inventory.

Three basic forms of business organizations

Sole proprietorship, partnerships, and corporations

Content and purpose of the income statement

Sometimes called earning statement; profitability for a stated period of time by showing revenues and expenses; shows either a net income or net loss; represents a period of time

Freight prepaid

Terms that indicate the seller has paid the freight bill at the time of shipment.

Freight collect

Terms that require the buyer to pay the freight bill on arrival of the goods.

Closing process

The act of transferring the balances in the revenue and expense accounts to a clearing account called Income Summary and then to the Retained Earnings account. The balance in the Dividends account is also transferred to the Retained Earnings account.

Going-concern (continuity) assumption

The assumption that an entity will continue to operate indefinitely unless strong evidence exists that the entity will terminate.

Service potential

The benefits that can be obtained from assets. The future services that assets can render make assets "things of value" to a business.

Inadequacy

The inability of a plant asset to produce enough products or provide enough services to meet current demands.

Gross selling price (also called the invoice price)

The list price less all trade discounts.

Fair market value

The price that would be received for an item being sold in the normal course of business (not at a forced liquidation sale).

Merchandise inventory

The quantity of goods available for sale at any given time

Record increases in expenses on the left (debit) side of the T-account and decreases on the right (credit) side.

The reasoning behind this rule is that expenses decrease retained earnings, and decreases in retained earnings are recorded on the left side.

Record increases in revenues on the right (credit) side of the T-account and decreases on the left (debit) side...Why?

The reasoning behind this rule is that revenues increase retained earnings, and increases in retained earnings are recorded on the right side.

Earning principle

The requirement that revenue be substantially earned before it is recognized (recorded).

Operating cycle

The time it takes to start with cash, buy necessary items to produce revenues (such as materials, supplies, labor, and/or inventories), sell services or goods, and receive cash by collecting the resulting receivables.

Operating expenses

Those expenses other than cost of goods sold incurred in the normal business functions of a company.

Operating revenues

Those revenues generated by the major activities of a business

Amounts customers owe a company for goods sold or services rendered on account. Also called accounts receivable or trade accounts receivable.

Trade receivables

Exchange-price (or cost) principle

Transfers of resources are recorded at prices agreed on by the parties at the time of the exchange.

In financial statements, you can calculate trend percentages by...

Trend percentage=Current year amount/Base year amount

T or F? If a net loss occurs, it appears in the Income Statement credit column and Statement of Retained Earnings debit column.

True. The net loss appears in the Income Statement credit column to balance the Income Statement columns. Then the loss appears in the Statement of Retained Earnings debit column because it reduces Retained Earnings.

True/false: Every adjusting entry affects at least one income statement account and one balance sheet account.

True: A fiscal year is any 12 consecutive months, so all calendar years are also fiscal years. A calendar year, however, must end on December 31, so it does not include fiscal years that end on any date other than December 31 (such as June 30).

Gains

Typically result from the sale of long-term assets for more than their book value.

An operating expense that a business incurs when it sells on credit; also called doubtful accounts expense or bad debts expense.

Uncollectible accounts expense

Long-term investment

Usually securities of another company held with the intention of (1) obtaining control of another company, (2) securing a permanent source of income for the investor, or (3) establishing friendly business relations.

Notes payable

Written promise to pay a specific sum of money...like loans

Capital lease is a means of financing a property acquisition so is it amortized?

Yes, as an asset, the lessee depreciates the leased property over its useful life. The lessee records part of each lease payment as interest expense and the balance as a payment on the lease liability.

contra asset account is...

a deduction from the asset to which it relates in the balance sheet.

Two primary goals of businesses are probability and solvency... describe solvency

ability to pay debts as they become due

Exchanges of nonmonetary assets having commercial substance

accountants record the new asset at the fair market value of the asset received or the asset(s) given up (cash price), whichever is more clearly evident. Also, when the book value and the market value of the old asset are different, companies always recognize a gain or a loss on an exchange of

Calculate ______ _______ ______ by dividing net credit sales, or net sales, by average net accounts receivable.

accounts receivable turnover

Companies use two methods to account for uncollectible accounts receivable: the _______ ______, which provides in advance for uncollectible accounts; and the ______ _____-___ method, which recognizes uncollectible accounts as an expense when judged uncollectible. The allowance method is the preferred method and is the only method discussed and illustrated in this text.

allowance method; direct write-off

The owner's equity section of a partnership is similar to that of a single proprietorship except that it shows a capital account

and its balance for each partner

If a lump-sum is made to obtain a franchise, the franchisee records the cost in an ______ ______ entitled Franchise and ______ it over the finite useful life of the asset.

asset account; amortizes

Deferred items consist of adjusting entries involving data previously recorded in accounts. Adjusting entries in this class normally involve moving data from ____ __ _____ accounts to _____ ___ _____ accounts.

asset and liability accounts; expense and revenue

The two types of adjustments within this deferred items class are

asset/expense adjustments and liability/revenue adjustments.

The two types of adjustments within this accrued adjustments class are...

asset/revenue adjustments and liability/expense adjustments

transactions that affect only balance sheet items:

assets (such as cash, accounts receivable, and equipment), liabilities (such as accounts payable and notes payable), and stockholders' equity (capital stock).

Accrued assets are

assets, such as interest receivable or accounts receivable, that have not been recorded by the end of an accounting period. These assets represent rights to receive future payments that are not due at the balance sheet date.

Modifying conventions include

cost-benefit, materiality, and conservatism.

Any revenue accounts and contra purchases accounts in the Adjusted Trial Balance credit column of the work sheet are carried to the Income Statement ______ column.

credit

Ending merchandise inventory is entered in the Income Statement _____ _____ and in the Balance Sheet _____ _______

credit column; debit column

What does a classified balance sheet subdivide the major categories on the balance sheet into?

current assets; long-term investments; property, plant, and equipment; and intangible assets. It subdivides liabilities into current liabilities and long-term liabilities. Later chapters show more accounts in the stockholders' equity section, but the subdivisions remain basically the same.

Beginning inventory, contra revenue accounts, Purchases, Transportation-In, and expense accounts in the Adjusted Trial Balance debit column are carried to the Income Statement ____ column.

debit

When making an adjusting entry, Salaries The recording of the payment of employee salaries usually involves a ____ to an expense account and a ____ to Cash.

debit; credit

The difference between an asset's cost and its estimated residual value is an asset's ______ _____

depreciable amount

The major principles include

exchange-price (or cost), revenue recognition, matching, gain and loss recognition, and full disclosure.

businesses treat ______ ______ as if they were subclassifications of the debit (left, -) side of the Retained Earnings account.

expense accounts

The gross margin rate indicates the amount of sales dollars available to cover ______ and produce ____.

expenses and produce income

The correct balance between proportions of stockholder and creditor equities depends on the______, __________, and management ____.

industry, general business conditions, and management philosophy.

Sales returns and allowances Account

is a contra revenue account (to Sales) that records the selling price of merchandise returned by buyers or reductions in selling prices granted.

Sales discount account

is a contra revenue account to the Sales account.

Sales allowance

is a deduction from the original invoiced sales price granted when the customer keeps the merchandise but is dissatisfied for any of a number of reasons, including inferior quality, damage, or deterioration in transit.

Amortization

is the systematic write-off of the cost of an intangible asset to expense.

 The equity ratio shows the percentage that assets would have to shrink before a company would become insolvent...which is the point when

liabilities exceed assets

A one-year lease on an apartment and a week's rental of an automobile are examples of _______ _______. As a result, there may be no recordable transaction when a lease is signed.

operating leases

• The two basic methods for estimating uncollectible accounts under the allowance method are the ______-__-_____ method and the ________-__ ________ method.

percentage-of-sales; percentage-of receivables

Although leaseholds are intangible assets, leaseholds and leasehold improvements sometimes appear in the _____ _____ ______ section of the balance sheet.

property, plant, and equipment section of the balance sheet.

To be classified as a PLANT ASSET, an asset must: (3 things)

(1) be tangible; (2) have a useful service life of more than one year; and (3) be used in business operations rather than held for resale.

Accountants consider four major factors in computing depreciation:

(1) cost of the asset; (2) estimated salvage value of the asset; (3) estimated useful life of the asset; and (4) depreciation method to use in depreciating the asset.

Other basic accounting concepts that affect the accounting for entities are

(1) general-purpose financial statements, (2) substance over form, (3) consistency, (4) double entry, and (5) articulation.

Two common deductions from gross sales are (1) ____ ______ and (2) ______ ________ ___ ______ . These deductions are recorded in contra revenue accounts to the Sales account. Both accounts normally have debit balances.

(1) sales discounts and (2) sales returns and allowances

Each adjusting entry has a dual purpose:

(1) to make the income statement report the proper revenue or expense and (2) to make the balance sheet report the proper asset or liability.

Cash discount

(Sales discount) Is a deduction from the invoice price that can be taken if the invoice is paid in a certain amount of time

In accounting for plant assets, accountants must: (Do four things)

(a)Record the acquisition cost of the asset. (b)Record the allocation of the asset's original cost to periods of its useful life through depreciation. (c)Record subsequent expenditures on the asset. (d)Account for the disposal of the asset.

Accounting Cycle Steps 1-9

1. Collect and verify source documents. 2. Journalize each transaction in the general journal 4. Post journal entries to account (General) ledger 4. Prepare a trial balance of the accounts and complete worksheet 5. Prepare financial statement 6. Journalize and post adjusting entries 7. Journalize and post closing entries

Accountants also refer to an asset's cost less accumulated depreciation as the ____ _____ (or ____ ___ _____) of the asset.

book value; net book value

• Calculate the number of days' sales in accounts receivable (or average collection period)

by dividing the number of days in the year by the accounts receivable turnover.

 The equity ratio is the stockholders' equity divided

by total equities (or total assets).

A ______ ______transfers to the lessee virtually all rewards and risks that accompany ownership of property.

capital lease

_____ ______(1) transfers ownership of the leased property to the lessee at the end of the lease term or (2) contains a bargain purchase option that permits the lessee to buy the property at a price significantly below fair market value at the end of the lease term.

capital lease

Stockholders equity includes

capital stock & retained earnings

the stockholders' equity section of the balance sheet for a corporation consists of

capital stock and retained earnings.

The Dividends account in a corporation is similar to an owner's _________ in a single proprietorship. These accounts both show amounts taken out of the business by the owners. In a

drawing account

Capital expenditures are debited to an asset account or an accumulated depreciation account and ______ the ____ ____ of plant assets. Expenditures that increase the quality of services or extend the quantity of services beyond the original estimate are capital expenditures.

increase; book value

A _______ account appears in the accounting records only if it has been purchased. A company cannot purchase it by itself; it must buy an entire business or a part of a business to obtain the accompanying intangible asset.

goodwill

The percentage-of-sales method focuses attention on the _____ _______ and the relationship of ______ _______ to sales. The debit to Uncollectible Accounts Expense is a certain percent of credit sales or total net sales.

income statement; uncollectible accounts

D-E-A-D = (debits increase... and normally carry what balance?)

increase expenses, assets, and dividends. These accounts normally carry a debit balance.

Credits increase what accounts? What balance do they normally carry?

increase liabilities, revenues, and equity, while debits result in decreases. These accounts normally carry a credit balance.

• To calculate the rate of return on operating assets, divide ___ ________ _____ by _______ _______. This ratio helps management determine how effectively it used assets to produce a profit.

net operating income; operating assets

When companies offer trade discounts, the gross selling price (gross invoice price) at which the sale is recorded is equal to the list price minus any _____ ________.

trade discounts

• The percentage-of-receivables method focuses attention on the balance sheet and the relationship of... The credit to the Allowance for Uncollectible Accounts is the amount necessary to bring that account up to a certain percentage of the Accounts Receivable balance. Either one overall percentage or an aging schedule may be used.

the allowance for uncollectible accounts to accounts receivable;

The owner's equity section of the balance sheet for a sole proprietorship consists only of

the owner's capital account