Financial Accounting ACCTG 201

Monetary Unit Assumption

All transactions in the US are recorded in dollars and the financial statements only include those thins htat ca be expressed in money.

Liabilities

Amounts owed to creditors in the form of debts, or other obligations

Primary Qualities

Relevance Quality and Faithful Representation Quality

Revenue

The increase or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business

The Order of the financial Statements

1. Income Statement 2. Retained Earnings 3. Balance Sheet 4. Statement of Cash Flow.

3 important terms with relevance quality

1. predictive value 2. confirmatory value 3. material

Current Liability

A debt that a company reasonably expects to pay (1) from existing current assets or through the creation of other current liabilities 2. within a year of the operating cycle, whichever is longer.

Retained Earnings

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific period of time.

What are Generally Accepted Accounting Principles? (GAAP)

A set of accounting standards that have substantial authoritative support, that guide accounting professionals.

Cost Constraint

Accounting standard-setters weight the cost that companies will incur to provide the accounting information against the benefit that financial statement users will gain.

Accruals

Accrued revenues Accrued expenses

Permanent Accounts

All asset accounts All liability accounts Stockholders' equity accounts

Temporary Accounts

All revenue accounts All expense accounts Dividends

Fair Value Principle

Assets and liabilities should be reported in the statement at their fair value( what an item is worth and what would need to be paid to settle a liability). This is becoming more and more common for assets that are actively traded.

Historical cost principle

Assets are to be recorded and kept in the accounting records at their historical cost. This continues to be the standard for most assets.

Accrued Revenue

Assets understated Revenues understated dr. Assets cr. Revenue

Free Cash Flow Equation

Cash from operations - Capital Expenditures - Cash dividends

Current cash debt ratio

Cash provided by operations over average current liabilities

Cash debt coverage ratio

Cash provided from operations over Average total liabilities

Accrual Basis Accounting

Companies record in the period in which the events occur, transactions that change a company's financial statements.

Cash Basis Accounting

Companies records revenue only when it receives cash, and an expense only when it pays cash.

Enhancing Qualities

Comparability quality Consistency quality Verifiable quality Understandability quality Timely quality

Formula for Straight-Line Method

Cost - Salvage Value over useful life (in years)

Perpetual

Detailed record; shows what inventory should be on hand

Periodic

Determine Cost of Goods sold, at the end of the period. It is not detailed.

Accrued Expenses

Expenses understated Liabilities understated dr expenses cr. liabilities

Consistency Quality

Financial statement users consider changes in a company's earnings and financial position from year to year when judging its success. Therefore, accounting principles used to prepare a company's financial statements should be the same from year to year.

Full Disclosure Principle

Financial statements and the accompanying notes should disclose all of the circumstances and events that would make a difference to financial statement users to aid them in fully understanding a company's financial condition.

Economic Entity Assumption

From an accounting perspective, a business is a separate entity from its owners. Therefore, the financial transactions of a business are maintain separately from those of its owners.

Relevance quality

In order for accounting information to make a difference in a business decision it must have predictive value and confirmatory value. Accountants must follow GAAP for all material items reported in a company's financial statements. Immaterial items may be reported using the easiest method available; this method does not have to follow GAAP.

Understandability Quality

In order to understand the financial information being reported, it needs to be presented in a clear and consie manner to a reasonable person.

Unearned Revenue

Liabilities Overstated Revenues Understated dr. Liabilities cr. Revenue

Periodicity Assumption

Managers, owners, and other need periodic reports on the operations and financial condition of a business in order to make informed decisions. Therefore, the life of a business can be divided into artificial time periods for measurement and reporting purposes.

Gross profit

Net sales- Cost of goods sold=

Trade receivables

Notes and Accounts Receivable that result from sales transactions

Dividends

Payments of cash from corporation to its stockholders.

predictive value

Predict the future

Deferrals

Prepaid expenses Unearned revenues

Revenue Recognition Principle

Requires that companies recognize revenue in the accounting period in which the performance obligation has been satisfied ( When it has been earned). This is not necessarily when the cash was received.

Assets

Resources owned by a business

What REDI stands for

Revenue, Expenses, Dividends, Issue of Stock

Net Sales

Sales - sales revenue -sales discount=

Effect stock splits and stock dividends have on retained earnings.

Stock splits--no affect. Stock dividends-- decrease (Cash dividends--decrease)

Expense Recognition Principle

TO determine business profit (net income), you must recognize all revenues earned and the make sure that all the expenses necessary to earn this revenue are recorded in the same period as that revenue. Therefore, expense are "matched" against the revenues they generate. "Let he expenses follow the revenues." The expenses are recorded when they are incurred, not necessarily when the cash is paid. This idea of matching the correct expenses against he correct revenue is often called the "matching principle"

Common Stock

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

Expenses

The cost of assets consumed or serviced used in the process of generating revenue

Stockholders' Equity

The owners' claim to assets

Going Concern Assumption

Unless there is evidence to the contrary, assumes that a business will continue its operations for the foreseeable future when recording and reporting accounting data.

Prepaid Expenses

assets overstated Expenses understated dr. Expenses cr. Assets or Contra Asset

Confirmatory value

determine if the predictions were met

Comparability Quality

if all the companies use the same accounting principles. Each company must disclose the accounting methods that they sue.

immaterial

if it is too small to impact a decision maker

Faithful representation quality

in order for accounting information to be dependable, it must be complete, neutral, and free from error.

Verifiable Quality

in order for financial information to be useful, one needs to be able to prove that it is free from error.

Timely Quality

in order for information to be relevant, it needs to be presented in a timely manner

material

it its omission or misstatement would influence or change the judgments of a reasonable person.

FOB Shipping Point

ownership of goods on public carrier resides with and responsible for shipping charges: Buyer

FOB Destination

ownership of goods on public carrier resides with and responsible for shipping charges: seller

Intangible assets

rights, privileges and competitive advanges that result from ownership of long-lived assets that do not possess physical substance.