ACCT 301 Exam 1

Condensed Income Statement

- Company includes only the totals of expense groups in the statement of income - Prepares supplementary schedules to support the totals A statement that reports the revenues, expenses, and profits in a summary format, absent of specific departmental and undistributed expense details.

noncontrolling interest

-The portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

disclosing income

-diff between regular and non-recurring or incidental activities -assess efficiency

Usefulness of the Income Statement

1. Evaluate the past performance of the company. 2. Provide a basis for predicting future performance. 3. Help assess the risk or uncertainty of achieving future cash flows.

comparability

Ability to compare the accounting information of different companies because they use the same accounting principles.

income statement

A financial statement showing the revenue and expenses for a fiscal period. -determine profitability, investment value creditworthiness

did service but no cash

D- AR C- Sales rev

Performed services for patients who had dental plan insurance. At January 31, $860 of such services was completed but not yet billed to the insurance companies.

D- AR 860 C- Service rev 860

The equipment depreciates $400 per month. Adjust in march

D- Dep expense 1200 C- Accum Dep-Truck

didn't pay bill yet adjust

D- expense C- Payable

Utility expenses incurred but not paid prior to January 31 totaled $480.

D-Utilities expense C- Payable account

prepayment adjustments

D-expense C-insurance or supplies

verifable

Something that can be proven or shown to be true or correct

income tax

Tax paid to the state, federal, and local governments based on income earned over the past year.

common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Securities and Exchange Commission (SEC)

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

decrease current earnings so they

can increase earnings in the future

modified all-inclusive concept

companies record most items, including unusual or irregular ones, as part of net income

Closing Expense Accounts

debit income summary and credit expense accounts

net income closing

debit income summary credit retained earnings

dividends closing entry

debit retained earnings, credit dividends

Closing Revenue Accounts

debit revenue, credit income summary

lose

decrease in equity (net assets) from peripheral or incidental transaction

increase income in current year at

expense of income for future years

500s

expenses

prepaid expenses

expenses paid in cash before they are used or consumed

transaction approach

focuses on the income-related activities that have occurred during the period -further classify income by customer, product or function (Op or non op)

Discounted Operations

gains or losses from business segments that are being sold or have been sold in the current period

other revenues and gains

interest revenue, dividend revenue, rent revenue, gain -lists of revenues recognized or gains incurred, generally net related expenses of nonoperating transactions

adjusting entries

journal entries recorded to update general ledger accounts at the end of a fiscal period

200s

liabilities

companies want to

meet or beat wall street numbers

assets

money and other valuables belonging to an individual or business

Companies are required

o to highlight items on financial statements so that users can determine the long run earning power of the company

Limits of the income statement

omitting information that cannot measure reliability income #'s are affected by accounting methods employed -type of method used judgement

what is in a multiple step income statement

operating section, nonop section, income tax, discounted operations, noncontrolling interest, EPS

non-recurring transactions

outside normal business operations

300s

owner's equity

convergance

process of reducing differences between GAAP and IRFS

SEC Concern

profit vs ethics

Matching Principle

recognize expenses in the same period as the revenues they help to generate

most useful income measures reflect only

regular and recurring revenue and expense items -focus on important info on financial statements

Multiple-step income statement format

reports several critical subtotals before computing income from continuing operations and net income

400s

revenue

Accrued Revenues

revenues for services performed but not yet received in cash or recorded

gains and losses can result from

sale of investments or plant assets, settlement of liabilities, write-offs of assets.

earnings per share

the amount of net income after federal income tax belonging to a single share of stock -use of gross profit -no taxes into account

book value

the difference between the cost of a depreciable asset and its related accumulated depreciation

earnings management

the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income

cost of goods sold

the total cost of merchandise sold during the period

reserves

use unrealistic assumptions to estimate liabilities for such items as loan loses, restructuring charges and warranty returns -reduce in the future to increase earnings -impact of quality earnings making future unclear

Thus, if a business reports an increase in profits due to improved sales or cost reductions, the quality of earnings is considered to be high. Conversely, an organization can have low-quality earnings if changes in its earnings relate to other issues, such as:

§ Aggressive use of accounting rules § Elimination of LIFO inventory layers § Inflation § Sale of assets for a gain · Develop a strong relationship o Market plays a role

flexibility in viewing

FASB guidelines -what to include in income and how to report unusual or infrequent items

current operating performance approach

Income-reporting approach that advocates reporting only regular and recurring revenue and expense elements, but not irregular items, in income.

gain

Increase in equity from peripheral or incidental transaction

quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

revenues

Inflows or other enhancements of assets or settlements of its liabilities that constitute the entity's ongoing major or central operations, such as Sales

multiple-step income statement

an income statement that reports multiple levels of income (or profitability)

100s

assets

fair value principle

assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Condensed Income Statement formula

Sales - COGS = Gross Profit - S&A Expenses = Income from operations + Other revenues and gains - Other expenses and losses = Income before income tax - Income Tax = Net Income

Insurance expires at the rate of $470 per month. Adjust march

470 x 3= 1410 D-Insurance Exp 1410 C- Insurance 1410

fiscal year

A 12-month pd, October through Septmeber, for planning the federal budget

Accrual Basis Accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

accurals

Adjusting entries for either accrued revenues or accrued expenses

deferrals

Adjusting entries for either prepaid expenses or unearned revenues.

liabilities

Amounts owed to creditors

historical cost principle

An accounting principle that states that companies should record assets at their cost. -values change over time

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

retained earnings

An amount earned by a corporation and not yet distributed to stockholders.

Economic Entity Assumption

An assumption that every economic entity can be separately identified and accounted for.

Monetary Unit Assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Stockholders' Equity

The owners' equity in a corporation. -common stock plus retained earnings

time period assumption

Assumption that an organization's activities can be divided into specific time periods such as months, quarters, or years.

got cash but no service

Before: D-Cash C- Unearned Service Rev Now: D-Unearned Service Rev C-Service rev

In its first year of operations, Oriole Company recognized $32,400 in service revenue, $7,200 of which was on account and still outstanding at year-end. The remaining $25,200 was received in cash from customers.The company incurred operating expenses of $16,500. Of these expenses, $12,670 were paid in cash; $3,830 was still owed on account at year-end. In addition, Oriole prepaid $3,160 for insurance coverage that would not be used until the second year of operations.

Cash basis Net income=9,370 remaining rev= 25,200 expenses: 12,760 (PIC) plus 3,160 (IC) Accural Basis Rev=32.4 (Recognized) expense= op expense

balance sheet header

Company name Balance sheet Date Current Assets Cash AR Supplies Prepaid Insurance Total Current Assets Property plant and equipment Equipment Less-Accumulated Dep Total Assets Liabilities and OE CL -Liabilities accounts Total current liabilities SE Common Stock RE Total SE Total Liabilities and SE

Income Statement layout

Company name Income statement For year ended Rev Total rev Expenses Total expenses NI or loss

retained earnings statement format

Company name retained earnings statement For year ended RE Beg bal Add: NI Less: Dividends RE End balance

dividends

Company's share profits to the shareholders based on the corporation's performance.

calendar year

January 1 to December 31

interim periods

Monthly or quarterly accounting time periods

expenses

Outflows or other using-up of assets or incurrences of liabilities that constitute the entity's ongoing major or central operations, such as Cost of Goods Sold, Depreciation & Amortization, Selling Expenses and so on

Materiality Constraint

Prescribes that accounting for items that significantly impact financial statement and any inferences from them adhere strictly to GAAP.

Faithful Representation Principle

Principle that asserts accounting information is based on the fact that the data faithfully represents the measurement or description of that data. Faithfully represented data are complete, neutral, and free from material error

Cash Basis Accounting

Reporting income when the cash is received and expenses when the cash is paid.

Going Concern Assumption

The assumption that the company will continue in operation for the foreseeable future.

Unearned Revenue

The liability created by receiving revenue in advance.

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Relevance

The quality of information that indicates the information makes a difference in a decision.

Supplies on hand total $850. Supplies were $3280

Was 3280 Now-850 Used up-2,430 D-Supplies Exp 2430 C- Supplies 2430

capital maintenance approach

a company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions -not evident for measurement

adjusted trial balance

a list of accounts and their balances after all adjustments have been made

other expenses and losses

a list of the expenses or losses incurred, generally net of any related incomes, from nonoperating transactions

trial balance

a proof of the equality of debits and credits in a general ledger

nonoperating section

a report of revenues and expenses resulting from secondary or auxiliary activities of the company -other rev and gain, other expenses and losses

Operating section

a report of the revenues and expenses of the company's principal operations -Sales -Sales R+A -Sale discounts =get net sales COGS Sale expenses, admin or gen expenses

Generally Accepted Accounting Principles (GAAP)

a set of accounting standards that is used in the preparation of financial statements

general expenses

administrative expenses of the firm such as office salaries, depreciation, insurance, and rent