Assets, Liability, Owners Equity, Revenue, and Expense Accounts

indirect method

reports cash flows from operating activities by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash

direct method

reports operating cash inflows (receipts) and cash outflows (payments)

fees earned

revenue from providing services

cash balances of accounting

revenue is recorded when it is received in cash and expenses are recorded when they are paid in cash

accounts payable

short term obligations or charge accounts usually due within 30 days

preferred stock

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.

discount

stock that is issued (sold) for a price that i less than its par, Many states do not permit this.

Book value or carrying value

the cost of an asset minus the accumulated depreciation

expenses

the costs of operating a business

Liquidity

the ease with which an asset can be converted into cash

horizontal analysis

the percentage analysis of increases and decreases in related items in comparative financial statements

vertical analysis

the percentage analysis of the relationship of each component in a financial statement to a total within the statement

outstanding stock

stock in the hands of stockholders

retained earnings

the stockholders' equity created from business operations through revenue and expense transactions

restrictions

the use of retained earnings for payment of dividends may be restricted by action of a corporations board of directors.

closing entries

to close out or zero revenue, expense, and drawing accounts.

capital stock

total shares of ownership in a corporation

leverage

using debt to increase the return on an investment.

Accounts Receivable analysis

A company's ability to collect its accounts receivable.

inventory analysis

A company's ability to manage its inventory effectively.

financial statement

Financial reports that summarize the financial condition and operations of a business

Cash flow from operating activities

cash flows directly related to sale and production of the firm's products and services. affects net income from transactions.

cash flows from investing activities

cash flows from transactions that affect investments in the non-current assets of the company

profitability

ability to provide financial rewards sufficient to attract and retain financing

cash flows from financing activites

cash flows from transactions that affect the debt and equity of the company.

source documents

checks, invoices, receipts, letters, and memos

average daily cost of goods sold

cost of goods sold/365 days

inventory turnover

cost of goods sold/average inventory

ledger accounts

accounting records showing all the transactions that affect a particular item

current ratio

current assets divided by current liabilities

Extraordinary Item

an event that is (1) unusual in nature and (2) infrequent in occurrence

adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.

accrual basis of accounting

reporting income when it is earned and expenses when they are incurred. when they occur of when the bill is received

objectivity concept

requires that the amounts recorded in the accounting records be based on objective evidence

net income

the difference between total revenue and total expenses when total revenue is greater. revenue minus expenses

transposition

the digits have been transposed or switched around

Managerial Accounting

the internal use of accounting statements by managers in planning and directing the organization's activities

common stock

the most basic form of ownership, including voting rights on major issues, in a company

Accured wages

unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal period

report form

A balance sheet format that lists classifications one under another.

Sole Proprietorship

A business owned by one person

merchandising business

A business that purchases and sells goods

matching concept

A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.

treasury stock

A corporation's own stock that has been reacquired by the corporation and is being held for future use.

stock dividend

A distribution of shares by a corporation of its own stock to its stockholders.

post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

cost principle

A principle that states that acquired assets and services should be recorded at their actual cost.

stock

A share of ownership in a corporation.

double-entry accounting

Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.

Nominal (temporary-equity) accounts

Accounts that apply to only one fiscal period and that are to be closed at the end of that fiscal period. These are the revenue, expense, and Drawing accounts. This category may also be described as all accounts except assets, liabilities, and the Capital account.

mixed accounts

Accounts with balances that are partly income statement amounts and partly balance sheet amounts.

matching principle

Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period.

Interest Revenue

Money received for interest.

rent revenue

Money received for rent.

earnings per common share (EPS)

Net income per share of common stock outstanding during a period.

financial position

Status of assets, liabilities, and owners equity of an individual business or other organization as shown in its financial statements.

cumulative preferred stock

Stock that has a right to receive regular dividends that were not declared (paid) in prior years.

premium

Stock that is issued (sold) for a price that is more than its par.

Owner's Equity

The owner's right to or investment in the business.

Accounting Cycle

The sequence of steps in the accounting process completed during the fiscal period

sales

The total amount charged customers for merchandise sold, including cash sales and sales on account.

journal

a book of transactions recorded as they happen

services business

a business that performs an activity for a fee

cash dividend

a cash distribution of earnings by a corporation to its shareholders

statement of stockholders' equity

a financial statement that summarizes the changes in stockholders' equity over an interval of time. changes in stock and and paid in capitol accounts

depreciation

a lessening in value

fiscal period

a period of time covering a complete accounting cycle

cost concept

amounts are initially recorded in the accounting records at their cost or purchase price

slide

an error in placing the decimal point

business

any activity that seeks to provide goods and services to others while operating at a profit

manufacturing business

change basic inputs into products that are sold to customers

liabilities

debts that you owe

business entity concept

limits the economic data in an accounting system to data related directly to the activities of the business

creditor

one to whom money is owed

stockholders

people or entities that own stock in a corporation and therefore are its owners

journaling

recording a business transaction in the journal in the journal

unit measure of concept

requires that economic data be recorded in dollars

stock split

the division of a single share of stock into more than one share. reduces par value proportionate to the number of additional shares.

statement of cash flows

the financial statement that identifies a firm's sources and uses of cash in a given accounting period. company's inflows and outflows

equity

the owner's claims to the assets of the business

normal balance

the side of the account that is increased (plus side)

posting

transferring information from a journal entry to a ledger account

in arrears

(n.,pl.) unpaid or overdue debts; an unfinished duty

common sized statement

A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.

Management's Discussion and Analysis (MD&A)

An annual report disclosure that provides management's analysis of the results of operations and financial condition.

number of days' sales in receivables

Average Accounts Receivable / Average Daily Sales

number of days sales in inventory

Average Inventory / Average Daily Cost of Goods Sold

quick assets

Cash and other current assets that can be quickly converted to cash, such as marketable securities and receivables.

dividends per share

Measures the extent to which earnings are being distributed to common shareholders. dividends on common stock/shares of common stock outstanding

earnings per share (EPS) on common stock

Measures the share of profits that are earned by a share of common stock. GAAP requires the reporting of earnings per share in the income statement.

accounts receivable turnover

Net Sales / Average Accounts Receivable

cash flow per share

Normally computed as cash flow from operations per share.

solvency

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Income Summary Account

The general ledger account used to summarize the revenue and expenses for the period. does not have plus or minus signs. does not have a normal balance just debit and credit.

cross reference

The ledger account number in the Post. Ref. column of the journal and the journal page number in the Post. Ref. column of the ledger account.

normal balances

The normal balance of an account can be either a debit or a credit depending on whether increases in the account are recorded as debits or credits.

account numbers

The numbers assigned to accounts according to the chart of accounts

footings

The totals of each side of a T account

price earnings (P/E) ratio

measures a company's future earnings prospects. market price per share of common stock/earnings per share on common stock

ratio of liabilities to stockholder's equity

measures how much of the company is financed by debt and equity. total liabilities/total stockholders equity

ratio of net sales to assets

measures of how effectively the company uses its assets. net sales/average total asserts

ratio of fixed assets to long-term liabilities

measures of whether note-holders or bondholders will be paid. Fixed Assets (net) / Long-Term Liabilities

rate earned on total assets

measures the profitability of total assets, without considering how the assets are financed. net income + interest expense/average total assets.

rate earned on common stockholder's equity

measures the rate of profits earned on the amount invested by the common stockholders. net income - preferred dividends/ average common stockholders equity

dividend yield

measures the rate of return to stockholders based on cash dividends. dividends per share of common stock/market per share of common stock

number of times interest charges are earned

measures the risk that interest payments will not be made if earnings decrease. income before income tax + interest expense/interest expense

quick ratio

quick assets/current liabilities

Fundamental Accounting Equation

Assets = Liabilities + Owner's Equity

revenues

Amounts recorded when the company sells products or services to customers

contra accounting

An account that always has a companion account and whose normal balance is opposite that of the companion account.

straight line depreciation

(cost - salvage value) / useful life Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

profit

A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something

income statement

A financial statement showing the revenue and expenses for a fiscal period. Revenue minus expenses. yields net income or loss

balance sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

T account form

A form of account shaped like the letter T in which increases and decreases in the account may be recorded. One side of the T is for entries on the debit or left side. The other side of the T is for entries on the credit or right side.

two-column general journal

A general journal in which there are two amount columns, one used for debit amounts and one used for credit amounts.

general ledger

A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts.

real (permanent) accounts

The accounts that remain open (assets, liabilities, and the Capital account in owner's equity) and have balances that will be carried over to the next fiscal period.

Separate Entity Concept

The business is treated as a separate entity, separated from its owners, creditors and customers.

net loss

The difference between total revenue and total expenses when total expenses are greater

financial accounting

The field of accounting that focuses on providing information for external decision makers.

public accounting

The field of accounting where accountants and their staff provide services on a fee basis.

private accounting

The field of accounting whereby accountants are employed by a business firm or a not-for-profit organization.

par value

a value assigned to a share of stock and printed on the stock certificate

work sheet

a working paper used to collect information from the ledger accounts in one place

chart of accounts

an official list of accounts tailor made for the business

Prior period adjustments

corrections of material errors in prior period financial statements

withdrawal

decrease owners equity

dividends

earnings distributed to stockholders

prepaid expenses

expenses paid in cash before they are used or consumed

Business Entity

financial information is recorded and reported separately from the owner's personal financial information

interim statements

financial statements, covering a period that is less than 12 months, that are prepared during the fiscal year

fair market value

present worth of an asset

Assets

properties or things of value, such as cash, equipment, copyrights, buildings, and land, owned and controlled by an economic unit or a business entity

accural

recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded