Financial Accounting

FOB Destination

When title changes hand on delivery, and the seller normally pays for shipping.

Temporary Accounts

"Nominal" are Income Statement accounts that are closed to Retained earnings at the end of the accounting period.

Permanent Accounts

"Real" are the Balance Sheet accounts that carry their anding balances into the next accounting period.

Operating cycle

"Cash-to-cash" is the time it takes for a company to pay cash to suppliers, sell goods and services to costumers, and collect cash from costumers.

Notes

"Footnotes" provide supplemental information about the financial condition of a company.

Deferred Revenues

"Unearned revenues" are previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned. Example, when cash was received and previously recorded: Unearned revenue xxx Revenue xxx

Sales Discount

(Cash discount) is a cash discount offered to encourage prompt payment of an account receivable.

The Cash Flow Statement Equation

+/- Cash flow from Operating Activities (CFO) +/- Cash flow from Investing Activities (CFI) +/- Cash flow from Financing Activities (CFF) ---------------------------------------- Change in Cash

The four basic statements:

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

The three steps in the transaction analysis process

1. Identify the accounts affected and classify them by type of account. 2. Determine the direction of the effect on each account. 3. Verify that the accounting equation remains in balance.

Treasury Stock

Is a corporation's own stock that has been issued but subsequently reacquire and is still being held by that corporation.

Stock Dividend

Is a distribution od additional shares of a corporation's own stock.

Perpetual Inventory System

A detailed inventory record is maintained, recording each purchase and sales during the accounting period.

Trial Balance

Is a list of all accounts with their balances to provide a check on the equality of the debits and credits.

Trading Securities

Are all investments in stock or bonds held primarily for the purpose of active trading (buying and selling) in the near future (classified and short term).

Securities Available for Sale

Are all passive investments other than trading securities and debt held to maturity (short or long term).

Long-Term Liabilities

Are all the entity's obligations not classified s current liabilities.

Unrealized Holding Gains or Losses

Are amounts associated with price changes of securities that are currently held.

Natural Resources

Are assets that occur in nature, such as minerals deposits, timber tracts, oil and gas.

Current Assets

Are assets that will be used or turned into cash within one year.

Bonds Payable

Are both stocks and bonds issued by corporations to raise money for long-term purposes.

Losses

Are decreases is assets or increases in liabilities from peripheral transactions.

Dividends In Arrears

Are dividends on cumulative preferred stock that have not been declared in prior years.

Adjusting Entries

Are entries necessary at the end of the accounting period to measure all revenues and expenses of that period.

Accrued Liabilities

Are expenses that have been incurred but have not been paid at the end of the accounting period.

Gains

Are increases in assets or decreases in liabilities from peripheral transactions.

Held-to-Maturity Investments

Are investments in debt securities that management has the intent and ability to hold until maturity.

Passive Investments

Are investments made to earn a return on funds that may be needed for future short-term or long-term purposes (less than 20% of the outstanding voting shares).

Factory Overhead

Are manufacturing costs that are not raw material or direct cost labor. Example, cost of light, supervisor's salary.

Current Liabilities

Are obligations that will be settle by providing cash, goods, or services within the coming year.

Accounts Receivables

Are open accounts owned to the business by trade costumers.

Deferred Expenses

Are previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expenses incurred in using the asset to generate revenue. Example, if cash was paid and previously recorded: Expense xxx Prepaid Expense xxx

Accrued Expenses

Are previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account. Example, if cash will be paid: Expense xxx Payable xxx

Accrued Revenues

Are previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account. Example, cash will be received: Receivable xxx Revenue xxx

Cash Equivalents

Are short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change.

Long-Lived Assets

Are tangible and intangible resources owned by a business and used in its operations over several years.

Liabilities

Are the company's debts or obligations. Which will be paid with assets or services.

Assets

Are the economic resources owned by the company. Each of these economic resources is expected to provide future benefits to the firm.

Internal Controls

Are the process by which a company safeguards its assets.

Non-cash Investing and Financing Activities

Are transactions that do not have direct cash flow effects; they are reported as a supplement to the statement of cash flow in narrative or schedule form.

Notes Receivables

Are written promises that require another party to pay the business under specified conditions (amount, time, interest).

Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

Tangible Assets

Assets have physical substance.

Intangible Assets

Assets have special rights but not physical substance.

FIFO First-in, First-out Method

Assumes that the first goods purchased are the first goods sold.

LIFO Last-in, First-out Method

Assumes that the most recently purchased units are sold first.

Bank Statement

Is a monthly report from a bank that shows deposits recorded, checks cleared, other debits and credits and a running bank balance.

Contingent Liability

Is a potential liability that has arisen as the result of a past event.

Sales Returns and Allowances

Is a reduction of sales revenues for return of or allowances for unsatisfactory good.

Residual Value

Is the estimated amount to be recovered by the company at the end of the asset's estimated useful life.

Materiality

Exception suggest that small amounts that not likely to influence a user's decision can be accounted for in the most beneficial manner.

Allowance Method

Bases bad debt expenses on an estimate of uncollectible accounts.

Percentage of Credit Sales Method

Bases bad debt expenses on the historical percentage of credit sales that result in bad debts.

Cash Flow from Financing Activities, and examples

CFF- Are cash flow directly related to the financing of the enterprise itself. Example, the payment of money to investors and creditors.

Cash Flow from Investing Activities, and examples

CFI- Are cash flow related to the acquisition or sale of the company's productive assets. Example, the purchase of additional equipment.

Cash Flow from Operating Activities, and examples

CFO- Are cash flow that are directly related to earning income. Example, collecting cash from costumers, pay salaries, pay bills, pay to suppliers.

Cost of Goods Sold Equation

CGS = Beginning Inventory + Purchases of merchandise - Ending Inventory

Direction of Transactions

Debit (dr) is on the LEFT side of an account. Credit (cr) is on the RIGHT side of an account.

Operating Lease

Does not meet any of the four criteria establish by GAAP and does not cause the recording of an asset and liability.

Revenues

Earnings from the sale of goods or services to costumers. Revenues are reported whether or not have yet been paid for.

Economic Return from Investing formula

Economic Return from Investing = (Dividends and Interest Received + Change in Fair Value) / Fair Value of Investments

Retained Earning Equation

Ending Retained Earnings = (Beginning of Retained Earnings + Net Income) - Dividends

Periodic inventory System

Ending inventory and cost of good sold are determined at the end of the accounting period based on a physical count.

Aging of Accounts Receivable Method

Estimates uncollectible accounts based on the age of each account receivable.

Transaction Analysis

Every transaction affects at least two accounts (dual effect), and the accounting equation MUST remain in balance after each transaction.

Conservatism

Exception suggest that care should be taken not to over state assets and revenues or understate liabilities and expenses.

FASB

Financial Accounting Standards Board, is the private sector body given the primary responsibility to work out the detailed rules that become GAAP.

GAAP

Generally Accepted Accounting Principles, are the measurement rules used to develop the information in financial statements.

Current Ratio and formula

Helps measure the ability of the company to pay its short-term obligations with short-term assets. Current Ratio = Current Assets / Current Liabilities

Specific Identification Method

Identifies the cost of the specific item that was sold.

Net Loss

If total expenses exceed total revenues.

Effective-Interest Amortization

Is a method of amortizing a bond discount or premium on the basis of effective-interest rate; is the theoretically preferred method.

Merchandise Inventory

Includes goods held for sale in the ordinary course of business.

Work In Proces Inventory

Includes goods in the process of being manufactured.

Raw Materials Inventory

Includes items acquire for the purpose of processing into finish goods.

Finished Goods Inventory

Includes manufactured good that are complete and ready for sale.

Order of the financial statements.

Income statement, statement of retained earnings, balance sheet, and statement of cash flows.

Time Period Assumption

Indicates that the long life of a company can be reported in shorter time periods.

Stockholders' Equity (Owners' Equity)

Indicates the amount of financing provided by owners of the business and earnings. Is the sum of the contribute capital + the retained earnings.

Qualitative Characteristics of Financial Information

Information should be Relevant and Reliable.

Indenture

Is a bond contract that specifies the legal provision of a bond issue.

Bond Certificate

Is a bond document that each bondholder receives.

General Journal

Is a bookkeeping system, that records transactions in chronological order.

Allowance for Doubtful Accounts

Is a contra-asset account containing the estimated uncollectible account receivable.

Annuity

Is a series of periodic cash receipts or payments that are equal in amount each interest period.

Cash Equivalent

Is a short-term, highly liquid investment with an original maturity of less than three months.

Straight-Line Amortization

Is a simplify method of amortizing a bond discount or premium that allocates an equal dollar amount to each interest period.

Accounts

Is a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item. "Chart of account"

Preferred Stock

Is a stock that has specified rights over common stock.

Depletion

Is a systematic and rational allocation of the cost of a natural resource over the period of its exploitation.

T-Account

Is a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities.

Contra-Account

Is an account that is an offset to, or reduction of, the primary accout.

Journal Entry

Is an accounting method for expressing the effects of a transaction on accounts in debits-equal-credits format.

Audit

Is an examination of the financial reports to ensure that they represent claim and comfort with GAAP.

Transaction

Is an exchange of assets or services to pay between a business and one or more external parties to a business or a measurable internal event such as the use of assets in operations.

Trademark

Is an exclusive legal right to use a special name, image, or slogan.

Stock Split

Is an increase in the number of authorized shares by a specific ratio; it does not decrease retained earnings.

Trustee

Is an independent party appointed to represent the bondholder.

Debenture

Is an unsecured bond; no assets are specifically pledged to guarantee repayment.

Face Amount

Is another name for bond principal, or the maturity amount of the bond.

Par Value

Is another name for bond principal, or the maturity of a bond.

No-Par Value Stock

Is capital stock that has no par value specified in the cooperate charter.

Patent

Is granted by the federal government for a period of 20 years for an invention.

Cash

Is money or any instrument that banks will accept for deposit and immediate credit to a company's account, such as check, money, or bank draft.

Inventory

Is tangible property held for sale in the normal course of business or used in producing goods or services for sale.

Stock for Control

Is the ability to determine the operating and financing policies of another company through ownership of voting stock (company owns more than 50% of the outstanding voting shares).

Stock for Significant Influence

Is the ability to have an important impact on the operating, investing and financing policies of another company (from 20% to 50% of the outstanding voting shares).

Liquidity

Is the ability to pay current obligations.

Net Book Value

Is the acquisition cost of an asset less accumulated depreciation.

Bond Principal

Is the amount (a) payable at the maturity of the bond and (b) on which the periodic cash interest payments are computed.

Common Stock

Is the basic voting stock issued by a corporation.

Bond Discount

Is the difference between the selling price and par when the bond is sold for less than par.

Bond Premium

Is the difference between the selling price and par when the bond is sold for more than par.

Working Capital

Is the dollar difference between total current assets and total current liabilities.

Goodwill and formula

Is the excess of the purchase price of a business over the fair value of the business's assets and liabilities. Goodwill = Purchase Price - Fair value of identifiable assets and liabilities.

Net Income ("the bottom line")

Is the excess of total revenues over total expenses.

Copyrights

Is the exclusive right to publish, use, and sell a literary, musical, or artistic work.

Estimated Useful Life

Is the expected service life of an asset to the present owner.

Bad Debt Expense

Is the expense associated with estimated uncollectible account receivable. Bad debt expense xxx Allowance for doubtful accounts xxx

Current Dividend Preference

Is the feature of preferred stock that grants priority on preferred dividends over common dividends.

Credit Card Discount

Is the fee charged by the credit card company for its services.

Time Value of Money

Is the interest that is associated with the use of money over time.

Authorized Number of Shares

Is the maximum number of shares of a corporation's capital stock that can be issued as specified in the charter.

Modified Accelerated Cost Recovery System (MACRS)

Is the method similar to the Declining-Balance method and is applied over relatively short asset live to yield high depreciation expense in the early years.

Straight-Line Depreciation and formula

Is the method that allocates the cost of an asset in equal periodic amounts over its useful life. Depreciation Expense = (Cost - Residual Value) x (1 / Useful life)

Declining-Balance Depreciation and formula

Is the method that allocates the cost of an asset over its useful life based on a multiple of the straight-line rate (often two times). Depreciation Expense = ((Cost - Accumulated Depreciation) x ( 2 / Useful Life))

Units-Of-Production Depreciation and formula

Is the method that allocates the cost of an asset over its useful life based on the relation of it periodic output to its total estimated output. Depreciation Expense = ((Cost - Residual Value) / Estimated total production) x Actual Production

Acquisition Cost

Is the net cash equivalent amount paid or to be paid for the asset.

Par Value

Is the nominal value per share of capital stock specified in the charter; servers as the basis for legal capital.

Accounting entity

Is the organization for with financial data are to be collected.

Legal Capital

Is the permanent amount of capital defined by state law that must remain invested in the business; serves as s cushion for creditors.

Cumulative Dividend Preference

Is the preferred stock feature that requires specific current dividends not paid in full to accumulate for every year in which they are not paid. These cumulative preferred dividends must be paid before any common dividends can be paid.

Accounting Cycle

Is the process followed by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle.

Depreciation

Is the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method. Depreciation Expense xxxx Accumulated Depreciation xxxx

Bank Reconciliation

Is the process of verifying the accuracy of both the bank statement and the cash accounts of a business.

Stated Rate

Is the rate of cash interest per period stated in the bond contract.

Earnings Per Share and formula

Is the ratio that evaluates the operating performance and profitability of a company. EPS = Net Income / Average number of shares of common stock outstanding during the period

Coupon Rate

Is the stated rate of interest on bonds.

Future Value

Is the sum to which an amount will increase as the result of compound interest.

Amortization

Is the systematic and rational allocation of the acquisition cost of an intangible asset over its useful life.

Accounting Period

Is the time period cover by the financial statements.

Primary objective of external financial reporting

Is to provide useful economic information to help external parties make financial decisions.

Fair Value Method

Is used to report securities at their current market value.

Equity Method

Is used when an investor can exert significant influence over an affiliated; the method permits recording the investor's share of the affiliate's income.

Callable Bond

May be called for early retirement at the option of the issuer.

Convertible Bond

May be converted to other securities of the issuer (usually common stock).

Gross Profit Percentage and formula

Measures a company's ability to charge premium prices and produce goods and services at low cost. Gross Profit Percentage = Gross Profit / Net sales

Total Assets Turnover Ratio and formula

Measures the sales generated per dollar of assets. TATR = Sales Revenue / Average Total Assets *average* (beginning balance + ending balance)/2

Capital Lease

Meets a least one of the four criteria establish by GAAP and results in the recording of an asset and liability.

Gross Profit

Net sales revenue minus cost of sales.

Merger

Occurs when one company purchase all of the assets and liabilities of another and the acquired company goes out of existence.

Net Book Value

Of an asset is the difference between its acquisition cost and accumulated depreciation, its related contra-account.

Indirect Method

Of presenting the operating activities section of the cash flow statement adjust net income to compute cash flow from operating activities.

Direct Method

Of presenting the operating activities section of the cash flow statement reports components of cash flow from operating activities as gross receipts and gross payments.

Investments in Affiliates

Or Associated companies, are investments in stock held for the purpose of influencing the operating and financing strategies of the entity for the long term.

Market Interest Rate

Or Yield, is the current rate of interest on debt when incurred.

Order of the steps in the accounting cycle at the end of the accounting period

Prepare a trial balance, journalize and post adjustments, prepare financial statements, and journalize and post the closing entries.

Inventory Turnover and formula

Ratio reflects how many times average inventory was produced and sold during the period. Inventory Turnover = Cost of Goods Sold / Average Inventory

Quick Ratio Formula

Ratio suggests good liquidity. Quick Ratio = Quick Assets / Current Liabilities

Accounts Payable Turnover Formula

Ratio that measures how quickly management is paying trade accounts. Average Payable Turnover = Cost of Good Sold / Average Accounts Payable

Quality of Income Ratio and formula

Ratio that measures the portion of the income that was generated in cash. Quality of Income Ratio = Cash Flow from Operating Activities / Net Income

Fixed Assets Turnover and formula

Ratio that measures the sales dollar generated by each dollar of fixed assets used. Fixed Asset Turnover = Net Sales / Average Net Fixed Assets

Capital Acquisition Ratio and formula

Ratio that reflects the portion of purchases of property, plan, and equipment financed from operating activities. Capital Acquisition Ratio = Cash Flow from Operating Activities / Cash Paid for Property, Plant, and Equipment

Debt-to-Equity and formula

Ratio that suggests that the company relies on fund provided by creditors. Debt-to-Equity = Total liabilities / Stockholders' Equity

Purchase Method

Record assets and liabilities acquired in a merge or acquisition at their fair value on the transaction date.

Accrual Basis Accounting

Records revenue when earned and expenses when incurred, regardless of the timing of cash receipts or payments.

Cash Basis Accounting

Records revenues when cash is received and expenses hen cash is paid.

Direct Labor

Refers to the earnings of employees who work directly on the products being manufactured.

Goods Available For Sale

Refers to the sum of beginning inventory and purchases for the period.

Outstanding Shares

Refers to the total number of shares of stock that are owned by stockholders on any particular date.

Receivables Turnover Ratio and formula

Reflects how many times average trade receivables are recorded and collected during the period. Receivables Turnover = Net sales / Average net trade account receivables

Statement of Cash Flows

Reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

Amortized Cost Method

Reports investments in debt securities held to maturity at cost minus any premium or plus any discount.

Balance Sheet

Reports the amount of assets, liabilities and stockholders' equity of an accounting entry at a point in time.

Income Statement

Reports the revenues less the expenses of the accounting period.

Statement of Retained Earnings

Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

Expenses

Represent the dollar amount of resources the entity used to earn revenue during the period.

Issued Shares

Represent the total number of shares of stock that have been sold.

Cost Principle

Requires assets to be recorded at historical cost-cash paid plus the current dollar value of all none cash considerations given on the date of the exchange.

Matching Principle

Requires that expenses be recorded when incurred in earning revenue.

Dividend Yield and formula

Return on investments based on dividends. Dividend Yield = Dividend per Share / Market Price per Share.

FOB Shipping Point vs FOB Destination

Revenues from good shipped FOB Shipping Point are normally recognized at shipment. Revenues from goods shipped FOB destination are normally recognized at delivery.

Elements of the Income Statement

Revenues, Expenses and Net Income.

SEC

Security and Exchange Commission, is the U.S government agency that determines the financial statements that public companies must provide to stockholders, and the rules that they must use in producing those statements.

Post-Closing Trial Balance

Should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.

Separate-Entity Assumption

States that a business transactions are accounted for separately from the transactions of owners.

Unit-Measure Assumption

States that accounting information should be measure and reported in the national monetary unit.

Continuity Assumption

States that businesses are assumed to continue to operate into the foreseeable future.

Revenue Principle

States that revenues are recognize when: 1. Good or services are delivered. 2. There is persuasive evidence of an arrangement for costumer payment. 3. The price is fixed or determinable. 4. Collection is reasonably assured.

Accounting

System that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers.

Times Interest Earned and formula

The ratio shows the amount of resources generated for each dollar of interest expense. Times Interest Earned = (Net Income + Interest Expense + Income Tax expense) / Interest Expense

Closing Entry

Transfers balances in temporary accounts to Retained Earnings and establishes zero balances in temporary accounts.

Average Cost Method

Uses the weighted average unit cost of the goods available for sale for both cost of goods and ending inventory.

FOB Shipping Point (free on board)

When goods are shipped, title changes hands at shipment, and the buyer normally pays for shipping.

Writing Off Uncollectible Accounts

Writing off of an individual bad debt is recorded through a journal entry. Allowance for doubtful accounts xxx Accounts Receivables xxx

Present Value and formula

is the current value of an amount to be received in the future; a future amount discounted fro compound inters. PV = ((1 / (1 + I)N ) x Amount