Accounting Ch.1-Ch.3

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Statement of Cash Flows equation

+/- Cash Flows from Operating Activities +/- Cash Flows from Investing Activities +/- Cash Flows from Financing Activities = Change in Cash + Beginning Cash = Ending Cash

What does a current ratio of .27 mean?

A current ratio of 0.27 indicates that the company has $0.27 of current assets for $1.00 of current liabilities. It does not appear that the company's current assets are sufficient to pay its current liabilities.

What are retained earnings?

Accumulation of all past revenues and expenses minus any income distributed to stockholders as dividends

What things are included on the statement of cash flows?

Amount of cash paid for equipment, amount of cash collected from customers, dividends paid to stockholders, Net Income

What are economic resources controlled/owned by the company called?

Assets

Balance Sheet equation

Assets = Liabilities + Stockholders Equity

What happens to retained earnings when net income has a loss?

Decrease

What happens to retained earnings when net income is positive?

Increase

What is revenue?

Increases in assets or settlements of liabilities from ongoing operations of the business: Results from the sale of goods/services

What side do expenses incurred go on a t chart?

Left (Debit)

What are economic resources that a company owes called?

Liabilities

What is a loss?

Losses are decreases in assets or increases in liabilities from a peripheral transaction Ex) Selling a company car for less than you bought it

How do you find the Net Profit Margin Ratio?

Net Income / Net Sales (or Operating) Revenues

How is the income statement and the balance sheet connected?

Net Income that's reported on the income statement is added to retained earnings on the statement of stockholder's equity. Retained earnings is reported on the balance sheet under shareholder's equity.

How does the income statement tie to the statement of stockholders' equity?

Net income, from the income statement, is a component in determining ending retained earnings on the statement of stockholders' equity.

Is accrued expenses classified as an expense on the income statement?

No

What things are considered liabilities?

Notes Payable, Accounts Payable

What are expenses?

Outflows or the using up of assets or increase in liabilities from ongoing operations incurred to generate revenues during the period

Income Statement purpose

Reports the financial performance of the business during the current accounting period.

Balance Sheet purpose

Reports the financial position of a business at a point in time.

Statement of Cash Flows purpose

Reports the inflows (receipts) and outflows (payments) for a stated period of time.

What are past earnings not distributed to stockholders called?

Retained Earnings

How does the statement of stockholders' equity stockholders' equity tie to the balance sheet?

The amount of ending retained earnings is then reported on the balance sheet.

Statement of Stockholders' Equity equation

Beginning balance + Increases- Decreases = Ending balances

How does the balance sheet tie to the statement of cash flows?

Cash on the balance sheet is equal to the ending cash reported on the statement of cash flows.

What things are considered assets?

Cash, Inventories, Accounts Receivable, PP&E, Land

What things are included on the balance sheet?

Cash, Notes Payable, Common Stock, Inventories, Accounts Receivable, Land, PP&E

What are amounts invested in the business by stockholder's called?

Common Stock

What things are included on the statement of stockholder's equity?

Common Stock, Dividends paid to stockholders, Net Income

What things are considered stockholder's equity?

Common Stock, Retained Earnings

What things are included on the income statement?

Cost of Goods Sold, Marketing Expense, Net Income

How do you find the current ratio?

Current Assets / Current Liabilities

What are economic resources used to earn revenue during the period called?

Expenses

How are expenses linked to stockholder's equity?

Expenses decrease net income, thus decreasing Retained Earnings and stockholder's equity, and therefore have debit balances

Statement of Stockholders' Equity purpose

Explains changes in stockholders' equity accounts (common stock and retained earnings) for a stated period of time.

What is a gain?

Gains result in an increase in assets or a decrease in liabilities from a peripheral transaction Ex) Selling property and making a profit

Income Statement equation

Revenues - Expenses = Net Income

How does accrual accounting work?

Revenues are recognized when they are earned and expenses are recognized when they are paid

How does cash basis accounting work?

Revenues are recorded when cash is received and expenses are recorded when cash is paid, regardless of when the revenues are earned or the expenses incurred

How is revenue linked to stockholder's equity?

Revenues increase stockholder's equity through the account Retained Earnings and therefore have credit balances

What side do liabilities incurred (ex. taking out a bank loan) go on a t chart?

Right (Credit)

What's the most important financial statement?

Statement of Cash Flows

What term is used for owner's of a corporation?

Stockholders / Shareholders

What does a net profit margin ratio of .04 mean?

The net profit margin ratio suggests that the company obtained nearly $0.04 in net income for every $1 in sales revenue. To analyze this result, we would need to calculate the ratio for the company over time to observe the trend in how effectively management is at generating sales and/or controlling expenses. We would also need the industry ratio for the current period to determine how the company is doing in comparison to others in the industry.


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