Financial Accounting Ch 1-10

Current Assets

Cash and other resources that companies reasonably expect to convert to cash or use up within one year or the operating cycle, whichever is longer. - Cash, short-term investment, and current receivables are the most liquid assets, in that order

Cash and Cash equivalents

Cash is the liquid asset that is a medium of exchange, and cash equivalents include money-market accounts that are the same as cash

Expense

Decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues (e.g., wages, building rent, salaries, utility payments, depreciation, etc.)

Dividends

Distributions (usually cash) by a corporation to its stockholders

Ending balance of retained earnings

Ending balance of retained earnings = Beginning balance of Retained Earnings +/- Net Income/Loss for the period - Dividends for the period

Net loss

Excess of total expenses over total revenues

Net Income

Excess of total revenues over total expenses. Also called net earnings or net profit Revenues - Expenses = expenses

Depreciation

Expense associated with spreading (allocating) the cost of a plant asset over its useful life.

Conceptual Foundation of Accounting

For information to be useful for investment and credit decisions it must be: - Relevant (Primary characteristic) - able to influence a decision - Reliable (Primary) - verifiable and free of error and bias - Comparable (Secondary) - able to compare different companies - Consistent (Secondary) - able to compare a company from one period to the next

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For more practice and review of accounting cycle concepts,

Generally Accepted Accounting principal (GAAP) and Accrual Accounting

Generally Accepted Accounting principal (GAAP) requires the business use accrual accounting. This means that the business records revenues as the are earned and expenses as they are incurred - not necessarily when the cash changes hands.

Matching Principle

Guide to accounting for expenses. Identify all expenses incurred during the period, measure the expenses, and match them against the revenues earned during that same time period. - Some expenses are paid in cash. Other expenses arise from using an asset such as supplies. Still other expenses occur when a company creates a liability.

Net

In accounting, the word "net" refers to an amount after a subtraction. Net income is the profit left over after subtracting expenses and losses from revenues and gains.

Financial Accounting Standards Board (FASB)

In the US the FASB determines the GAAP.

Revenue

Increase in retained earnings from delivering goods or services to customers or clients

Intangible

Intangibles are assets with no physical forms, such as patents and trademarks.

Investments

Investments are long-term assets because they are not expected to be sold within the next year.

Property, plant, and equipment

Long-lived assets, such as land, buildings, and equipment, used in the operation of the business. Also called plant assets or fixed assets.

Plant asset

Long-lived assets. such as land buildings, and equipment used in the operation of the business. Also called fixed assets.

Main components of stockholders' equity

Main components of stockholders' equity: - Common stock - Retained earnings

Cash

Money and any medium of exchange that a bank accepts at face value.

Net Income

Net income is profit, the excess of revenues over expenses

Normal Balances of The Accounts

Normal Balances of The Accounts: Assets - Debit Liabilities - Credit Stockholders Equity - Credit Common Stock - Credit Retained earnings - Credit Dividends - Debit Revenues - Credit Expenses - Debit

Current Liabilities

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer (e.g., Accounts payable, Income taxes payable, Short-term borrowings, Salaries and wages payable, etc.).

Chart of Accounts

Organizations use a chart of accounts to list all of their accounts and account numbers.

Property, Plant, and equipment

PPE are the tangible, long-lived, productive assets used by a company in its operations to produce revenue. This includes land, buildings, machinery, manufacturing equipment, office equipment, and furniture.

Revenues and expenses measure net income as follows:

Revenues and expenses measure net income as follows: Net income = total Revenues and Gains - Total Expenses and Losses

Short-terms investments

Short-terms investments include stocks and bonds that a company intends to sell within the next year.

Statement of Retained Earnings

Statement of Retained Earnings: the portion of net income the company has retained. Net income flows from the income statement to the statement of retained earnings.

Reliability principle

The accounting principle that ensures that accounting records and statements are based on the most reliable data available. Also called the objectivity principle

The balance sheet at end of year

The balance sheet at end of year: 1. Reports assets, liabilities, and stockholders' equity at the end of the year. Only the balance sheet reports assets and liabilities. 2. Reports that assets equals the sum of liabilities plus stockholders' equity. This balancing feature follows the accounting equation and gives the balance sheet its name. 3. Reports retained earnings, which comes from the statement of retained earnings

Stable-monetary-unit concept

The basis for ignoring the effects of inflation in the accounting records, based on the assumption that the dollar's purchasing power is relatively stable.

Owners' equity

The claim of the owners of a business to the assets of the business. Also called capital, stockholders' equity, or net assets Owners Equity = Assets - Liabilities

Accumulated depreciation

The cumulative sum of all depreciation expenses from the date of acquiring a plant asset.

The flow data flow from one financial statement to the next

The flow data flow from one financial statement to the next: 1. Income statement 2. Statement of retained earnings 3. Balance sheet 4. Statement of cash flows

The income statement for the year end

The income statement for the year end: 1. Reports revenue and expenses of the year. Revenue and expenses are reported only on the income statement. 2. Reports net income if total revenues exceed total expenses . If expenses exceed revenues, there is a net loss.

Debit

The left side of the account

Merchandise inventory

The merchandise that a company sells to customers

Accounting equation

The most basic tool of accounting: Assets = Liabilities + Owners Equity

Cost principle

The principle that states that, when purchased, all assets are recorded at their actual cost regardless of market value.

Operating profit

The profit (or surplus) that the firm has made after overheads (indirect costs) have been deducted from the gross profit.

Credit

The right side of the account

Statement of Cash Flows

The statement of cash flows - reports cash receipts and cash payments classified according to the entity's major activities: operating, investing, and financing. - The cash-flow statement reports whether operations increased cash. Operating activities are most important, and cash flow from operations should always be positive. Negative cash flows from operations can mean bankruptcy. - Both purchase and sale of long-term assets are investing cash flows. - Companies need money for financing. When the companies pay off loans. Many companies pay dividends. These payments are financing cash flows.

The statement of cash flows for year end

The statement of cash flows for year end: 1. Reports cash flows from operating, investing, and financing. Each category results in net cash provided (an increase) or used (a decrease). 2. Reports whether cash increased (or decreased) during the year. The statement shows the ending cash balance, as reported on the balance sheet

The statement or retained earnings for the year end

The statement or retained earnings for the year end: 1. Opens with the beginning retained earnings balance 2. Adds net income (or subtracts net loss). Net income comes directly from the income statement 3. Subtracts dividends 4. Reports the retained earnings balance at the end of the year

Stockholders' equity

The stockholders' ownership interest in the assets of the corporation Assets = Liabilities + Stockholders' Equity Assets = Liabilities + Paid-in Capital + Retained Earnings

Increases and Decreases in Accounts

The type of account determines how we record increases and decreases. Assets - An increase in assets are recorded on the left side of the left (debit) side of the account Liabilities and Stockholder's equity - An increase in liabilities or Stockholders' equity are recorded on the right side (credit) of the account Additional Stockholders Equity accounts:(64)

Paid-in capital

Total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

Net Sales

Total sales less sales discount and sales returns and allowances.

Corporation

a business owned by stockholders who share in its profits but are not personally responsible for its debts

Stock

a certificate documenting the shareholder's ownership in the corporation

Operating activities

activities that create revenue or expense in the entity's major line of business; a section of the statement of cash flows. operating activities affect the income statement.

Investment activities

activities that increase/decrease (purchases/sales of) the long-term assets available to the business; a section of the statement of cash flows

Financing activities

activities that obtain from investors and creditors the cash needed to launch and sustain the business; a section of the statement of cash flows

Contra account

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

Cookie Jar Reserves

companies establich these reserves by using unrealistic assumptons to estimate libilies for such items as loan losses, restructurin charges, and warranty returns. The companies then redue these reserves in the future to increase reported income in the future

Time-period concept

ensures that accounting information is reported at regular intervals

Going-concern Concept

financial statements are prepared with the expectation that a business will remain in operation indefinitely

Board of Directors

governing body of a corporation that reports to its shareholders and delegates power to run its day-to-day operations while remaining responsible for sustaining its assets

Stockholder

someone who holds shares of stock in a corporation

Common stock

stock other than preferred stock

Retained Earnings

the accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends

Retained earnings

the accumulated earnings from a firm's profitable operations that were reinvested in the business and not paid out to stockholders in dividends. - Retained earnings links the income statement to the balance sheet.

Accounts payable

the amount a company owes to suppliers for goods and services purchased with credit

Revenue principle

the basis for recording revenues; tells accountants when to record revenue and the amount of revenue to record.

Management Accounting

the branch of accounting that focuses on information for internal decision makers of a business

Cost of Goods Sold

the total cost of buying raw materials and paying for all the factors that go into producing finished goods

Notes Receivable

Promissory notes that a business accepts from customers

Balance sheet

The balance sheet also called the statement of financial position, reports three items: assets, liabilities, and stockholder's equity

Accumulated Depreciation

the total amount of depreciation expense that has been recorded since the purchase of a plant asset

Pervade

to spread throughout

Prepaid expenses

A category of miscellaneous assets that typically expire or get used up in the near future. Examples include prepaid rent, prepaid insurance, and supplies.

Partnership

A contract between two or more persons who agree to pool talent and money and share profits or losses - Partner ships are quite risky. Accounting views the partnership as entirely separate from the partners.

Income statement

A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time. Also called the statement of operations.

Accounts payable

A liability backed by the general reputation and credit standing of the debtor

Note payable

A liability evidenced by a written promise to make a future payment.

Long-term debt

A liability that falls due beyond one year of the date of the financial statement.

money-market

A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded.

Trial Balance

A trial balance lists all accounts with their balances - assets first, then liabilities and stockholders' equity. The trial balance summarizes all of the account balances for the financial statement and shows whether total debits equal total credits. A trial balance may be taken at any time, but the most common time is at the end of the period.

AICPA Code of Professional Conduct

AICPA Code of Professional Conduct: A certified public accountant assumes an obligation of self discipline above and beyond the requirements of law and regulation...and an unwavering commitment to honorable behavior, even at the sacrifice of personal advantage.

Categories of Accounting Entries

Accounting adjustments fall into three basic categories: deferrals, depreciation, and accruals.

Generally Accepted Accounting Principles (GAAP)

Accounting guidelines, formulated by the Financial Accounting Standards Board, that govern how accountants measure, process, and communicate financial information.

Financial Accounting

Accounting information and analyses prepared for people outside the organization.

Accounting

Accounting is an information system. It measures business activities, processes data into reports, and communicates data to people.

Financial Statements

Accounting produces financial statments,m which report business information about a business entity. The financial statements measures performance and tell where a business stands in financial terms.

Double Entry Accounting

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

Cash-basis accounting

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Accrual Accounting

Accounting that records the impact of a business even as it occurs, regardless of whether the transaction affected cash.

Accounts receivable

Accounts receivable are amounts the company intends to collect from customers

The T-Accounts

An account can be represented by the letter T. The vertical line in the letter divides the account into two sides: The account tittle appears at the top of the T. For example, The Cash can appear as follows : The left side of the account is called the debit side and the right side of the account is called the credit side.

The Normal Balance of an Account

An account's normal balance falls on the side of the account - debit or credit - where increases are recorded. The normal balance of assets is on the debit side, so assets are debit-balance accounts. Conversely, liabilities and stockholders' equity usually have a credit balance, so they are credit balance accounts.

Accurals

An accrual is the opposite of a deferral. For an accrued expense, the business records an expense before paying cash. For an accrued revenue, it records the revenue before collecting cash.

Deferral

An adjustment for which the business paid or received cash in advance. Exampls include prepaid rent, prepaid insurance, and supplies.

Liability

An economic obligation (a debt) payable to an individual or an organization outside the business (e.g., loans, goods/ services purchased on credit, etc.)

Assets

An economic resource that is expected to be of benefit in the future (e.g., cash, office supplies, food inventory, furniture, land, buildings, etc.)

Entity

An organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit.

Proprietorship

An unincorporated business owned by a single person who is responsible for its liabilities and entitled to its profits. - But for accounting, a proprietorship is distinct from it's proprietor. Thus, the business records do not include the proprietors personal finances.

Capital

Another name for the owners' equity of a business

Appropriate Accounting Method

Appropriate Accounting Method: 1. Double-entry 2. Accrual basis

Basic Financial Statement

Basic Financial Statement: - Income statement (the statement of operations)] - Statements of retained earnings - Balance sheet (the statement of financial position) - Statement of cash flows