Chapter 2 and 4 (Week 1)

What are revenues?

(income statements) increases of assets or reduction of liabilities (or both) during period of time revenues result from entity's operating activities (i.e selling merchandise)

What are expenses?

(income statements) to operate a business, these are the costs you will encounter. These are the costs of providing products and services; such as rent, salaries, supplies, and utilities. costs and expenses are incurred in generating revenue and operating the entity

What is Gross profit?

(part of income statement) net sales - cost of goods sold

What is selling, general and administrative expenses?

(part of income statement) the operating expenses

What does Cost of goods sold mean?

(part of income statement) the total cost of merchandise removed from inventory and delivered to customers as a result of sales

What is accumulated depreciation?

*asset* in balance sheet - contra-asset account => credit balance total amount of depreciation expensed thus far in the asset's life - helps calculate the carrying value of an asset (the assets value)

What are accounts receivable?

*asset* in balance sheet money owed to a company by its debtors

Whats an account payable?

*liability* in balance sheet paid someone on credit, so have to pay them on a later date

Which of the following items are normally included as key components of a corporation's annual report?

- Highlights for the year, including net revenues, diluted earnings per share, and return of stockholders' equity - Management's discussion and analysis of the financial statements - The reporting firm's financial statements for the year - The report of the external auditor's examination of the financial statements - The notes to the financial statements - A five-year (or longer) summary of key financial data

What are the questions you need to answer in Transaction Analysis Methodology?

1. What's going on? 2. What accounts are affected? 3. How are they affected? 4. Does the Balance sheet balance? (do debits =credit?) 5. Does my analysis make sense?

What is the expanded accounting equation?

A = L + PIC + REbeg + NI - D (REend = REbeg + NI - D)

What is the accounting equation?

A = L + SE

The four concepts/principles that relate to bookkeeping procedures and the accounting process are:

Accounting Period Matching Revenue Recognition Accrual

The 3 concepts that relate to the entire model are:

Accounting equation, accounting entity, and going concern

What is equation for Net Asset? (aka SE)

Assets - Liabilities = SE = Net Assets

What is the equation that represents the Horizontal model?

Assets = Liabilities + Stockholders' Equity + Revenues - Expenses

What is the horizontal model?

Assets = Liabilities + Stockholders' Equity ç Net Income = Revenues - Expenses - representation of balance sheet and income statement relationship the arrow pointing from net income to stockholders' equity indicates that net income affects retained earnings

What is Accrual Accounting?

Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or received Recognizes revenue at the point of sale (when *earned*) and recognizes expenses as they are *incurred* even though the cash receipt or payment may occur at another time or in another accounting period.

What is a Revenue always?

Credit

what is a current liability? noncurrent liability?

Current liability = will be paid within 1 year Ex. short term debt, accounts payable, other accrued liabilities Noncurrent Liability = will NOT be repaid within one year of balance sheet date Ex. long term debt

What is an Expense always?

Debit

What is format of journal entry?

Debit is listed first, next to margin Credit is after debit, indented explanation of whats happening is indented more under the credit Total debits = Total Debits

What are Non-current assets?

Ex. Equipment (and then accumulated depreciation of that eequipment)

Reclassifying Assets to Expenses:

Ex. prepaid insurance and supplies is an asset that needs to be reclassified to "insurance expense" and "supplies expense" at end of the month as these things are used and expensed

Reclassifying Liabilities to Revenues:

Ex. unearned revenue, airline ticket advanced salees, unearned rental revenue are liabilities that need to be reclassified to Revenue at end of period

What is the full disclosure principle?

Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as the adequate disclosure principle.

What are Comparative financial statements?

Financial statements that show a column for the current year and the prior year

Which of the following is true regarding the balance sheet components?

Liabilities are the obligations of the organization.

What is a synonym for SE

Net Assets

Revenue includes...

Net sales net income

Most assets are reported on the balance sheet based on their:

Original / historical cost

What is found in an income statement?

Revenues Expenses (gains, losses)

What is a DEBIT

The left side of a T-account - synonym for charge

Purpose of Income Statement

To show net income or net loss for the period covered by the statement shows the profit (or loss) for the period of time under consideration

What is the Objectivity concept?

a given transaction should be recorded in the same way in all situations

What is the going concern concept?

a presumption that the entity will continue in existence for the indefinite future

What are Dividends?

a sum of money paid regularly by a company to its shareholders out of its profits

What is Materiality concept?

absolute exactness, is not necessary in the amounts shown in the financial statements - that the benefit of increased accuracy should outweigh the cost of achieving the increased accuracy

Liabilities include...

accounts *payable* notes payable dividends payable accrued liabilities short term debt long term debt line of credit

What is matching concept?

all expenses incurred to generate that period's revenues be deducted from revenues earned Revenues are recorded in period which they are earned Expenses are recorded in period in which thy are incurred matches costs with revenues. (It does not equate costs with revenues.)

What is paid-in capital?

amount invested in the entity by stockholders

What is the corporation's annual report?

annual report is distributed to shareholders and others

Which of the following accounts would be closed during the year-end closing process?

any income statement account (gains, losses, revenues, expenses) and dividends are closed to retained earnings EX. loss of sale on building, dividends, rent expense, wage expense, sales, loss on sale of equipment

What is bookkeeping?

are procedures for sorting, classifying, and processing accounting information

What accounts usually have debit balances?

assets and expenses

What are current assets?

assets likely to be converted into cash or used to benefit the entity within 1 year EX. cash, accounts receivable, merchandise inventory

What is found in a balance sheet?

assets, liabilities, stockholders equity

what are the four basic financial statements reported by companies?

balance sheet statement of changes in stockholders' equity income statement statement of cash flows

what is the distinction between a current asst and other asset?

based on when the asset is expected to be converted to cash, or used to benefit the entity

Assets include...

cash short term investment accounts *receivable* equipment accumulated depreciation merchandise inventory property

Accrual:

cash that hasn't been received or paid, but must be recorded at end of accounting period *Cash Lag*

Equity includes...

common stock retained earnings Paid in capital

Interest expense:

cost of borrowing funds

when assets are decreased they are

credits

when liabilities and SE are increased they are

credits

What is retained earnings?

cumulative net income that hasn't been distributed to the owner/stockholders of a corporation as dividends

When assets are increased they are

debits

when liabilities and SE are decreased they are

debits

Expenses include...

depreciation expense income tax expense costs of goods sold rent utilities

What is a statement of cash flow?

explains why cash changed during a fiscal period Reports the cash receipts and cash payment from operating, investing, and financing activities during a period of time Categories: operating, investing, financing activities

what is retained earnings?

falls under SE net income retained for use in the business

what is a statement of changes in stockholders equity?

financial statement that summarizes the changes during a fiscal period in capital stock, additional paid-in capital, retained earnings and other elements of SE considered a supplemental statement to BS => . The balance sheet reports the equity section at a "point in time," while the statement of changes in stockholders' equity details the changes that occurred throughout the accounting period affecting this portion of the balance sheet.

Accounts are summarized in ___

financial statements

When do gains and losses occur?

gains and losses result from non operating activities, rather than day-to-day operation activities that generate revenues and expenses

Income from operations =

gross profit - operating expenses

Reclassification:

initial recording of a transaction but doesn't result in appropriate assigning of revenues *Cash Leads*

what is "closing the books?"

it transfers the year-end balances of all income statement accounts (revenues, expenses, gains, losses) to the retained earnings account, which is part of the SE on balance sheet if any dividends were declared during the year the balance in that account would also be closed to retained earnings

dividends is NOT an expense...

its a distribution of earnings to stockholderrs - written as a deduction from retained earnings

transactions are initially recorded in a ...

journal ==> then in a ledger

What accounts usually have credit balances?

liabilities, SE and revenues

What type of asset is PPE?

long term asset - will benefit entity for several years

What is conservatism concept?

making judgements and estimates that result in lower profits and asset valuation estimates, avoid wishful thinking

What are adjustment entries?

making the book more accurate - Accruals and reclassification are usually adjusted

What are the limitations of financial statements?

o Qualitative data are not reflected in financial statements o Market values of assets are not generally reported o Estimates are commonly used and are sometimes inaccurate o It may be difficult to compare firms in the same industry because they often use different accounting methods

What is a stockholder equity?

owners equity

What is SE made up of?

paid-in Capital - common stock, additional paid-in capital retained earnings

What is time period of Statement of changes in SE?

period of time

Whats the time period of an income statement

period of time

What are assets?

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

What are the 3 types of business organizations?

proprietorship, partnership, corporation

Accrual accounting results in:

recognition of revenues when they are earned (at the point of sale) and recognition of expenses when they are incurred

In the closing process, all income statement accounts (revenues, expenses, gains, and losses) and dividends are closed. What is the name of the account in which all the aforementioned accounts are closed into?

retained earnings - which is part of SE

Net income from the income statement is added to the beginning balance of:

retained earnings in the statement of changes in retained earnings

Whats the time period of balance sheets?

single date in the past - is like a snapshot of the organization's financial position, frozen at a specific point in time.

What is a balance sheet also called?

statement of financial position, statement of financial condition

What is another name for an income statement?

statement of operations statement of earnings profit and loss statement

The investments by and distributions to owners during a reporting period are reported on the:

statement of stockholder quity

Transactions are ...

summarized in accounts

What is consistency concept?

the effect of any change in an accounting method will be disclosed in the financial statements or notes thereto

What is an Accounting Entity?

the entity for which the financial statements are being prepared. Every economic entity can be separately identified and accounted for

What is a CREDIT?

the right side of T-Account

how is net incomes reflected in balance sheet?

through retained earnings

Under accrual accounting, year-end adjustments are made: (Select all that apply).

to ensure that expenses are recognized in the year in which they are incurred. because revenue receipts may occur before or after the event that causes revenue recognition. to ensure that revenues are recognized in the year in which they are earned. because the cash disbursement for expenses may occur before or after the event that causes expense recognition.

What is cost principle?

transactions are recorded at their original/historical cost to the entity as measured in dollars

What is additional paid-in capital?

type of paid in capital (which falls under SE) - The difference between total amount invested by stockholders and the par (stated) value of the stock

What is common stock?

type of paid-in capital class of stock that represents residual ownership of corporation -The # of shares that have been issued to stockholders and the # of shares that are held by the stockholders

What is Financing activity?

under statement of cash flow cash flows from financing activities, shows the cash sources and uses related to transactions with creditors and stockholders.

What is investing activity?

under statement of cash flow shows the cash sources and uses related to long-lived assets

What is an operating activity?

under statement of cash flow, *shown first* Net Income is starting point for this measure

What are liabilities?

what you owe