accounting chapters 3-4

pro forma financial statements

The pro forma accounting is a statement of the company's financial activities while excluding "unusual and nonrecurring transactions" when stating how much money the company actually made.

work sheet

a useful tool for preparers in working with accounting information. It is usually not available to external decision makers such as investors

fiscal year

a year as reckoned for taxing or accounting purposes.

expense recognition (matching)

aims to record expenses in the same accounting period as the revenues are earned as a result of those expenses

straight line depreciation

allocates equal amounts of the asset's net cost to depreciation during its useful life.

temporary accounts

also called nominal. accumulate data related to one accounting period. They include all income statement accounts, the withdrawal accounts, and the income summary accounts. They are ______ because the accounts are opened at the beginning of the period, used to record transactions and events for that period and then closed at the end of the period.

permanent accounts

also called real accounts. report on activities related to one or more future accounting periods. They carry their ending balances into the next period and generally consist of all balance sheet accounts. These asset, liability, and equity accounts are not closed (balance sheet accounts are _____

current assets

are cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle. ex; cash, short term investments, accounts receivable, short term notes receivable, goods for sales, prepaid expenses.

intangible assets

are long term resources that benefit business operations, usually lack physical form, and have uncertain benefits. ex; patents, trademarks, copyrights, franchises, and goodwill.

current liabilities

are obligations due to be paid or settled within one year or the operating cycle. ex; accounts payable, notes payable, wages payable, taxes payable, and unearned revenues

long term liabilities

are obligations not due within one year or the operatin cycle, whichever is longer. ex; note payable, mortgages payable, bonds payable, and lease obligations.

reversing entries

are optional. they are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. the purpose of_____________ is to simplify a company's record keeping.

plant assets

are tangible assets that are both long lived and used to produce or sell products and services. ex; equipment, machinery, buildings, and land.

interim financial statements

covering one, three, or six months of activity. Covering less than one year

working papers

internal documents are often called

adjusting trial balance

is a list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger

unadjusted trial balance

is a list of accounts and balances prepared before adjustments are recorded

post closing trial balance

is a list of permanent accounts and their balances from the ledger after closing entries have been journalized and posted.

income summary

is a temporary account (only used for the closing process) that contains a credit for the sum of all revenues (and gains) and a debit for the sum of all expenses (and losses).

contra account

is an account linked with another account, it has an opposite normal balance and it is reported as subtraction from that other account's balance.

closing process

is an important step at the end of an accounting period after financial statements have been completed. It prepares accounts for recording the transactions and the events of the next period. 1-identify accounts for closing 2- record and post the closing entries 3- prepare a post closing trial balance

adjusting entry

is made at the end of an accounting period to reflect a transaction or event that is not yet recorded. each ________ affects one or more income statement accounts and one or more balance sheet accounts

current ratio

is one measure of the company's ability to pay its short term obligations. current assets/current liabilities

unclassified balance sheet

is one who items are broadly grouped into assets, liabilities, and equity.

equity

is the owner's claim on assets.

depreciation

is the process of allocating the costs of these assets over their expected useful lives

accounting periods

is the time period for which a company or organization reports financial performance and financial position.

operating cycle

is the time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services.

plant assests

long term tangible assets used to produce and sell products or services. ex; buildings, machines, vehicles, and fixtures.

long term investments

notes receivable and investments in stocks and bonds are long term assets when they are expected to be held for more than the longer of one year or the operating cycle.

book value

or net amount, is the difference, which equals the asset's costs less its accumulated depreciation

profit margin

or return on sales. net income/netsales

classified balance sheet

organizes assets and liabilities into important subgroups that provide more information to decision makers.

natural business year

period of 12 months and ends on the saturday nearest dec 31 when sales activities are at their lowest level for the year

time period assumption

presumes that an organization's activities can be divided into specific time periods such as a month, a three month quarter, a six month interval, or a year.

Why are closing entries necessary

question- revenues, expense, and withdrawal accounts must begin each period with zero balances. owner's capital must reflect prior period's revenues, expenses, and withdrawals.

cash basis accounting

recognizes revenue when cash is received and records expenses when cash is paid

unearned revenues

refer to cash received in advance of providing products ad services. Also called deferred revenues, are also liabilities.

accrued expenses

refers to costs that are incurred in a period but are both unpaid and unrecorded. Must be reported on the income statement for the period when incurred.

prepaid expenses

refers to items paid for in advance of receiving their benefits

accrued revenues

refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets). example; when a technician who bills customers only when the job is done

accounting cycle

refers to the steps in preparing financial statements. It is called a cycle because the steps are repeated each reporting period.

annual financial statement

reports covering a one year period are known as

revenue recognition principle

revenue recongition principle provides guidance on when a company must recognize revenue. To recognize it means to record it. If revenue is recognized too early, a company would look more profitable than it is. If a revenue is recognized too late, a company would look less profitable than it is. 1) Revenue is recognized when earned. 2) Proceeds from selling products and services not to be in cash. 3) Revenue is measured by the cash received plus the cash value of any other items received.

closing entries

to record and post ________ Is to transfer the end of period balances in revenue , expense, and withdrawals accounts to the permanent capital account

accrual basis accounting

uses the adjusting process to recognize revenues when earned and expenses when incurred (matched with revenues)