ACC 201 UKY Pearson - Exam 1
earnings per share equation
Net Income - Preferred Dividends / weighted-avg. common shares outstanding
understandability
presented in a clear and concise fashion
Statements of cash flows
provides financial information about the cash receipts and cash payments of a business for a specific period of time
Income Statement
reports a company's revenues and expenses and resulting net income or loss for a period of time
Balance Sheet
reports assets and claims to assets at a specific point in time
full disclosure principle
requires that companies disclose all circumstances and events that would make a difference to financial statement users
monetary unit assumption
requires that only those things that can be expressed in money are included in the accounting records
Assests
resources owned by a business
Credit
right side of an account
generally accepted accounting principles (GAAP)
set of rules and practices as a guide for financial reporting
Retained Earnings Statement
shows the amounts and causes of changes in retained earnings for a specific time period
Benefits of Sole Proprietorship
simple to establish owner controlled tax advantages
Benefits to a Partnership
simple to establish shared control tax advantages broader skills and resources
Economic Entity Assumption
states that every economic entity can be separately identified and accounted for
Going Concern Assumption
states that the business will remain in operation for the foreseeable future
Periodicity Assumption
states that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business
accounting information system
system of collecting and processing transaction data and communicating financial information to decision-makers
Securities and Exchange Commission (SEC)
the agency of the U.S. government that oversees U.S. financial markets and accounting standard setting bodies
Expenses
the cost of assets consumed or services used in the process of generating revenues
Revenue
the increase in assets or decrease in liabilities from the sale of goods or the performance of services
Financial Accounting Standards Board (FASB)
the primary accounting standard-setting body in the United States
analyzing transactions
the process of identifying the specific effects of economic events on the accounting equation
Relevance
will it make a difference in the business decision, predictive, confirmatory
working capital equation
working capital = current assets - current liabilities
Examples of current liabilities
accounts payable, salaries and wages payables, notes payable, interest payable, and income taxes payable
Liabilities
amounts owed to creditors (in form of debt or other obligations)
Current Assets
assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer
Property, plant and equipment
assets with relatively long useful lives that are currently used in operating the business
Assets in a Classified Balance sheet
current assets, long-term investments, ppe, intangible assets
Liabilities in a classified balance sheet
current liabilities, long-term liabilities and stockholder's equity
current ratio equation
current ratio = current assets / current liabilities
debt to assets ratio equation
debt to assets ratio = total liabilities / total assets
Common Stock
describes the total amount paid in by stockholder's for the shares they purchase
Historical Cost principle
dictates that companies record assets as their cost (land, buildings)
Intangible Assets
do not have physical substances and yet are very valuable. Patents, copyrights and trademarks
Benefits to a Corporation
easier to transfer ownership easier to raise funds no personal liability
accounting transactions
economic events that require recording in the financial statements
Current Liabilities
obligations that the company is to pay within the next year or operating cycle, whichever is longer
verfiable
if independent observers, using the same methods, obtain similar results
Fair Value principle
indicates that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)
Faithful Representation
information accurately depicts what really happened
IFRS
international financial reporting standards
Long-term investments and their order of liquidity
investments in stocks and bonds, long term assets such as land or buildings, long term notes receivable
cost constraint
it weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available
PPE and their order of liquidity
land, buildings, equipment, delivery vehicles and furniture
Debit
left side of an account
Long-Term Liabilities
obligations that a company expects to pay after one year
Sole Proprietorship
A business owned by one person
Corporation
A business owned by stockholders
Partnership
A business owned by two or more persons
Basic Accounting Equation
Assets = Liabilities + Stockholder's Equity
How do you calculate retained earnings?
Beginning Retained Earnings Add: Net Income Less: Dividends Total: Retained earnings at end of period
IASB
International Accounting Standards Board
External Users
Investors (people who buy, sell and share stock) and Creditors (banks)
What is the order of what will go on a statement of cash flows
Operating Activities, Investing Activities, financing activities
PPE formula
PPE - Accumulated Depreciation
How do you get the Net Income/ Loss
Revenues - Expenses
consistency
a company uses the same accounting principles and methods from year to year
examples of long term liabilities
bonds payable, mortgages payable, long-term notes payable, lease liabilities, pension liabilities
Dividends
cash payments to stockholders
Assets of a balance sheet
cash, accounts receivable, supplies, prepaid insurance, equipment
What are current assets and their order of liquidity
cash, investments, receivables, inventories and prepaid expenses
Stockholder's Equity of a balance sheet
common stock, retained earnings
Enhancing Quality
comparability, verifiability, timeliness, understandability, consistency
Stock Holder's Equity on a Classified Balance sheet
consists of common stock and retained earnings
Ratio Analysis
expresses the relationship among selected items of financial statement data
statement of cash flows
free cash flow = net cash provided by operating activities - capital expenditures - cash dividends
Classifies Balance Sheet
groups together similar assets and similar liabilities, using a number of standard classifications and sections
Internal Users
managers, finance directors, company officers (HR), marketing managers
Liquidity ratio
measure short term ability of the company to pay its maturing obligations and to meet unexpected needs for cash
Solvency Ratios
measure the ability of the company to survive over a long period of time
Profitability Ratios
measure the income or operating success of a company for a given period of time
earnings per share
measures the net income earned on each share of common stock
timely
must be available to decision makers before it loses its capacity to influence decisions
Retained Earnings
net income retained in the corporation
Liabilities of a balance sheet
notes payables, accounts payable, unearned service revenue, salaries and wages payable, interest payable
comparability
when different companies use the same accounting principles