accounting test 1 vocab

accounting is the language of business...

"Accounting" is the words and formats used to present information to others outside the business. Business people need to understand the financial position and profitability of a company. Business people need to understand the factors that change the financial position and profitability of a company. Financial accounting is used by all business people (not just accountants).

5 common business transactions that change what is reported on a balance sheet

1) Receive cash from investors 2) Receive an asset and pay cash 3) Trade an asset for another asset (that is not cash) 4) Receive an asset and pay in the future (incur a liability) 5) Pay cash to reduce what is owed (a liability)

4 reports used to provide information

1. balance sheet 2. income statement 3. statement of stockholder's equity 4. statement of cash flows

2 steps

1. determine the common names of what changes with each transaction 2. quantify the economic impair of the change (dollar amount)

companies that sell goods use a multistep income statement

1. earnings from selling goods only (gross profit) 2. expenses required to operate the primary day to day business of providence goods and services to customers (operating expenses) 3. items not related to the primary day to day business of providing goods and services to customers 4. earnings expected to continue future years (income from continuing operations) 5. items that are not expected to impact earnings in future years (extraordinary items and discontinued operations)

income statement includes

1. the value of goods or services provided to customers during a period of time 2. the cost of providing goods or services to customers during a period of time 3. net earnings for a period of time net earnings is the value of goods and series minus the cost of providing to customers during a specific period of time. doesn't matter when its paid, matters when the transaction occurs.

questions to determine what is changing in the accounting equation

1. what does the company have more or less of? (changes an asset) 2. does the company owe more or less (changes a liability) 3. was there an exchange that involved the owners (changes owners equity)

investments and marketable securities (asset)

A financial instrument that is purchased for the purpose of earning money on the investment. either short term (1 year or less) or long term (more than 1 year) different from cash equivalents because they carry a risk that the money invested will be lost. CE have a history of returning the total amount invested

auditors report

A professional accounting firm examines a company's financial statements and gives an opinion on whether or not the financial statements are fairly stated in accordance with GAAP.

notes receivable (asset)

Amounts owed to the company; normally interest is charged and the note is repaid in longer than 3 months.

expenses

An expense is reported on the income statement during the period it is INCURRED; which occurs when: 1) a service is provided to the company that must be paid for 2) an asset is used (up) to provide goods or services to customers Important: The expense is reported in the period the company receives the service or the asset is used up, NOT when the company pays for the service or asset. services provided to the company during that period

property/plant/equipment

Assets used long-term in the day to day operations to generate revenues. The long-term assets have physical substance. (Land, Buildings, Equipment, Furniture, Computers, Vehicles)

intangible assets

Assets used long-term to generate revenues. The company has an exclusive right to do something and there is no physical substance.

statement of stockholder's equity includes

Details all transactions with the owners of the company during a specific period of time (month, quarter, year). This includes: A. money owners added to the company in exchange for ownership B. money repaid to owners (dividends) C. profits and losses of the company.

fasb

FASB is currently the primary accounting standard setting authority in the U.S. FASB guidance is part of U.S. Generally Accepted Accounting Principles (GAAP)

revenues

Goods or services are provided to customers in return for an asset The "revenue recognition principle" requires revenue to be reported on the income statement during the period it is EARNED; which occurs when: 1) Delivery of goods has occurred or a service has been provided; the earnings process is complete and nothing is owed to the customer 2) Customer payment is reasonably assured. Important: Revenue is reported in the period the goods or services are provided to the customer who is expected to pay for the goods or services, NOT when cash is received.

cash equivalent (asset)

Investments for 90 days or less, with no risk

inventory (asset)

Items held only for sale to the customer

supplies (asset)

Items that are used up in day to day operations; must be continuously replaced.

cash (asset)

Money or any instrument that banks will accept (cash, checks, money orders, etc.).

sec

The government agency that oversees U.S. financial markets and accounting standards for public companies. The SEC requires public companies to follow U.S. GAAP and comply with SEC reporting requirements. Private companies do not have to follow U.S. GAAP; however, it is difficult to raise funds from others if financial statements that follow U.S. GAAP are not provided to potential investors and creditors.

iasb

The primary current accounting standard setting authority for many countries outside of the U.S. The International Accounting Standards Board issues accounting guidance called International Financial Reporting Standards ("IFRS")

accumulated depreciation

a negative contra asset account, to reduce property, plant and equipment. the long term asset must continue to be reported at historical cost. the accumulated depreciation account issued to reduce the asset and represents the cost of using the asset for the total amount of time that has passed. the net cost is softened referred to as "book value"

gaap

a set of guidelines established by various accounting standard setting authorities in consultation with accounting professionals that give guidance on: 1) What type of financial information must be provided 2) What format to use to provide information 3) How to measure and quantify items reported on the financial statements

double entry system

accounting is called a double entry system because a minimum of 2 accounts change with each transaction

balance sheet

all amounts reported are cumulative, represent the net result of everything that has happened. reports how a company financed its operations (from owners of borrowings), items a company uses to operate the business (cash, inventory, equipment, etc) and the portion of the assets that are owed. the balance sheet is listed in order of liquidity (how fast an item is expected to turn into cash, be used up, or be paid.) The subtotals (total current assets, property/plant/equipment, net, intangibles, total current liabilities, total liabilities, total stockholder's equity) must be included on the balance sheet.

income tax expense

amount that must be paid to the government based a percentage of income before tax. percentage is set by IRS.

notes payable (liability)

amounts owed from borrowing from a bank or a financing company, expected to be repaid within one year or less - short term expected to be repaid after one year - long term

commercial paper (liability)

amounts owed to investors that must be repaid in less than a year, usually for inventory or to pay operating expenses. very short term borrowing, usually 10-90 days

accounts payable (liability)

amounts owed to suppliers; normally paid in 30-60 days. suppliers provide goods and services to a company repeatedly. occurs when the company doesn't not pay at the time the goods or services are received. decreases when company plays supplier

transaction

an exchange of one thing for another at least 2 items always change. the following common transactions change the amts reported on the balance sheet: 1. assets increase when purchased and decrease when sold 2. liabilities increase when funds are borrowed and decrease when debts are repaid 3. stockholders equity changes when funds are exchanged between the company and the owners and with profits and losses

dividends (owners equity)

are considered a return of the investment by owners and are not reported as an expense on the income statement. reduce retained earnings

equations

assets = liabilities + owners equity aka -- have = owe + own (includes profits & losses)

other long term assets

assets held for more than one year that do not fit into the other long-term asset categories.

creditors

borrowed money; must be rapid companies may also get money from operations or to purchase things necessary to run the company by borrowing.

sales

consists of the value of good (total price) provided to customers. sales value is the amount the customer is expected to pay the company for the goods and services

extraordinary items

different than unusual events. infrequent, things that can happen but usually done such as a tornado, theft, flood in desert, etc.

operating expenses

directly related to primary day to day business operations. the primary business is what the company does to provide to customers. operating expenses are often presenting in the following summary categories: 1. selling and marketing: related to acquiring new customers (advertising, shipping, sales ppl salaries, etc) 2. general and administrative (accounting salaries, corporate office rent, business insurance, etc) 3. research and development: expenses related to developing new products restructuring of operations: expenses incurred to reduce future operating expenses (consolidating facilities, laying off employees, closing unprofitable stores, etc)

operating income

earning from the primary day to day business that is expected to continue in the future

earnings

earnings for a particular period of time must be determined by comparing the value of goods and services provided to customers to the cost of providing those same goods and services during the same period of time

income from continuing operations

earnings related to activity that is expected to cotton to occur in future periods

statement of cash flows (financing)

financing activities: section reports cash related to the following: 1. borrowing and repaying debt. 2. payments to and from owners *statement of cash flows is for a period of time*

investors

funds contributed by owners; does not have to be rapid

patents (intangible asset)

give the exclusive right (from the U.S. Patent Office) to use a technology or drug for a period of 20 years. Patents are granted to protect the invention from imitators.

copyrights (intangible asset)

give the exclusive right from the U.S. Government to reproduce written work. A copyright is granted for 70 years past the life of the author.

trademarks (intangible asset)

give the exclusive right from the U.S. Government to use a symbol or name.

franchises (intangible asset)

give the exclusive right to operate or sell a specific branded product. The length of the franchise is negotiated between the franchisor and the franchisee.

common stock (owners equity)

has voting rights, money received from investors in exchange for ownership

the straight line method

historical cost - residual value / estimated useful life in years = annual depreciation expense

balance sheet includes

includes -- 1. what the company has (assets), what they owe (liabilities), and ownership; as of a specific date. 2. shows cumulative amounts from the first day the business started operations to the current date. 3. shows how the company finances operations (from owners or from borrowing), and how the funds are invested in business (inventory, property, etc.)

current assets

includes all assets expected to be used or collected in cash within one year or less

using inventory

inventory is purchased for the purpose of selling to customers. the expense, called cost of goods sold, is reported on the income statement when the inventory is provided to the customer. this is the same time period the revenue from the sale of goods is reported.

statement of cash flows (investing)

investing activities: section reports cash related to bring and selling assets used in the business for MORE than one year

goodwill (intangible asset)

is the amount that is paid when acquiring a company that is greater than the fair market value of net assets acquired. must be purchased to be reported on the balance sheet

bonds payable (liability)

long term amounts owed to investors, amount on the balance sheet for borrowing represents the principle amount only and does not include interest

long term debt (liability)

means the same thing as long term notes payable

liability

money borrowed that must be repaid. must have all three of the following characteristics to be reported on a balance sheet: 1. be owed to an outside party 2. be a result of a past transaction (an event that has occurred to create the debt) 3. be repaid with an asset (normally cash)

asset

money obtained from investors (owners) and creditors (lenders) is used to purchase items necessary to operate the business. must have all 3 of the following: 1. provide probably future economic benefit 2. be owned or controlled by company 3. be a result of a past transaction

long term

more than one year

preferred stock (owners equity)

no voting rights, purchased by investors to earn a constant return on their investment at the stated interest rate

net change in cash

not always a proper reflection of the earnings of the business during the period because: 1. cash is not always received in the same period of time the service or goods are provided to customers 2. cash is not always paid in the same period of time the service is received or assets are used to produce revenues

probably future economic benefit

occurs when the asset is sold for cash or is used to generate revenues that will be received in cash in a future period

short term

one year or less

statement of cash flows (operating)

operating activities: section reports amt. of cash generated from day to day operations 1. the amt of cash received 2. the amt of cash paid for services provided to company 3. the amt of cash paid for items used for day to day operations

footnotes

provide information not stated on the financial statements; including 1) a description of the accounting rules followed 2) details for significant items listed on the financial statements 3) information on relevant things not listed on the financial statements

financial accountants

provide information used to determine the use of excess money.

cash basis income statement

report the net change in chase for the period revenue (cash is received) - expenses (cash is paid for services provided to company) = chance in cash for a period of time

costs that do not provide future economic benefit

reported as expenses on income statement

using property, plant and equipment

reported on the balance sheet at cost when purchased. each long term, other than land, is assigned an estimated length of time in years the asset is expected to be used. a portion of the cost of the asset is expensed each year the asset is used. the expense related to using plant and equipment is called depreciation expense. land is not expensed. accountants estimate the annual expense of using an asset by spreading the net cost over the total estimates years the asset is expected to be used. met cost is equal to historical cost minus residual value divided by estimated useful life in years

stockholder's equity

reports all exchanges that occur directly with owners during the period. owners are entitles to the earnings. all earnings kept in the company are referred to as retained earnings

income statement

reports amounts earned from providing services to others (revenues) and the cost of living to supply the ability to work and provide to others

the income statement

reports the earnings of the company for a specific period of time

accrual basis income statement

reports the following for a period of time revenue (goods or services) - expenses (services provided to company) = earnings for a period of time

stock and capital

represent funds received from investors in exchange for ownership. the amt of stock reported on the balance sheet is the par value of one share multiple by the number of shares of stock issued to investors. par value is an arbitrary amount, typically set at a very small amount and does not represent the fair market value of the stock.

other revenues and expenses

result from transactions that are not part of the primary day to day business of providing to customers. ex -- interest expense: cost of borrowing $ gains or losses: result of selling assets for more or less than net cost rent income: earned from leasing excess space interest income: earned from investing excess cash dividend income: earned from investing excess cash

gain or loss on discontinue operations

results from selling or disposing of a significant separate part of the business

ex: multistep income statement

sales - cost of goods sold = gross profit - operating expenses: general and administrative selling and marketing research and development restructuring = operating income + or - other revenues and expenses: interest income or expense rent income gains or losses on sale of assets or unusual events = income before tax - income tax expense = income from continuing operations + or - gain or loss on extraordinary items + or - gain or loss on discontinued operations = net income

losses

sell an asset and receive less for the asset than the amount the asset was reported on the balance sheet.

gains

sell an asset and receive more for the asset than the amount the asset was reported on the balance sheet. the difference in the cash received from selling (or disposing of) an asset and the reported value of the asset sold.

using prepaid expenses

services paid before the service is provided to the company is an asset called prepaid expense. most common include rent and advertising. insure or rent expense occurs when time passes and the cost is no longer prepaid

outstanding shares (owners equity)

shares owned by stockholders other than the corporation are referred to as outstanding shares

single step income statement

software revenue + service rev = total rev - general and administrative - selling and marketing - research and development - restructuring total operating expenses =operating outcome + or - other rev. and expenses: interest income or expense rent income gains / losses in sales of assets or unusual events =income before tax - income tax expense = income from continuing operations + - gain or loss on extraordinary items + - gain or loss on discontinued operations = net income ** cost of goods sold and gross profit not reported on single step **

classified balance sheet

sorts and subtotals assets and liabilities into groups based on liquidity. liquidity is determined by how soon an asset is expected to convert into cash or a liability is expected to be paid. cash is more liquid than inventory which is more liquid than equipment

using supplies

supplies are purchased to use to operate the day to day business. supplies are reported as assets on the balance sheet until the supplies are used up. the expense of using the supplies, called supplies expense, is reported in the same time period the supplies are used to generate revenues

financial information

tells investors (owners) and creditors (lenders) how the business has performed and helps them determine potential future performance. Financial information is used to make decisions on what to do with excess money.

investing activities

the activities associated with buying and selling items used to operate the business (long-term assets)

financing activities

the activities associated with raising money to establish the operations of the business (sell ownership and borrow).

operating activities

the activities associated with the day to day operations of the business (provide goods or services to customers and associated costs)

residual value

the amount that the asset is expected to be sold for when the company finishes using the asset

treasury stock (owners equity)

the amount the company has paid to purchase and hold the companys own stock. it is common stock that is owned by the company rather than investors outside the company. issued common stock. common shares - treasury shares = outstanding shares

prepaid expenses (asset)

the company pays in advance before a service is provided to the company.

using intangible assets

the cost of using an intangible asset is determined similar to the cost of using property plant and equipment. always reported at historical cost (pg. 54 for more)

cost of goods sold

the cost the company paid for the goods that were sold. cost is the amount paid to the supplier when goods are purchased ready to sell from another supplier. this occurs with retailers or distributors. cost includes all material costs, labor costs, and costs to operate the manufacturing facility when the company manufactures goods.

shares authorized (owners equity)

the max number of shares a corporation can issue is referred to as shares authorized

owners

the owners (investors) who originally establish the business contribute money to the company in exchange for shares of ownership. the original owners may also sell shares to others in order to obtain more cash. the total amount of cash received from all owners is the "common stock and capital", under stockholders equity.

current maturities of long term debt (liability)

the portion of long term debt that will be repaid within 1 year or less

gross profit

the sales price minus the cost to buy or manufacture the goods that were sold. this is the profit earned directly from selling inventory

issued shares (owners equity)

the total number of shares that have been sold to investors to date is referred to as issued shares

retained earnings (owners equity)

total cumulative earnings of the company minus all amounts returned to stockholders to date since the first day of operations. the amount reported on the balance sheet for retained earnings is computed as follows -- beginning retained earnings + net income or - net loss - dividends paid to owners = ending retained earnings

net income

total earnings from operating the business during the period