Assets, Liability, Owners Equity, Revenue, and Expense Accounts
indirect method
reports cash flows from operating activities by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash
direct method
reports operating cash inflows (receipts) and cash outflows (payments)
fees earned
revenue from providing services
cash balances of accounting
revenue is recorded when it is received in cash and expenses are recorded when they are paid in cash
accounts payable
short term obligations or charge accounts usually due within 30 days
preferred stock
stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.
discount
stock that is issued (sold) for a price that i less than its par, Many states do not permit this.
Book value or carrying value
the cost of an asset minus the accumulated depreciation
expenses
the costs of operating a business
Liquidity
the ease with which an asset can be converted into cash
horizontal analysis
the percentage analysis of increases and decreases in related items in comparative financial statements
vertical analysis
the percentage analysis of the relationship of each component in a financial statement to a total within the statement
outstanding stock
stock in the hands of stockholders
retained earnings
the stockholders' equity created from business operations through revenue and expense transactions
restrictions
the use of retained earnings for payment of dividends may be restricted by action of a corporations board of directors.
closing entries
to close out or zero revenue, expense, and drawing accounts.
capital stock
total shares of ownership in a corporation
leverage
using debt to increase the return on an investment.
Accounts Receivable analysis
A company's ability to collect its accounts receivable.
inventory analysis
A company's ability to manage its inventory effectively.
financial statement
Financial reports that summarize the financial condition and operations of a business
Cash flow from operating activities
cash flows directly related to sale and production of the firm's products and services. affects net income from transactions.
cash flows from investing activities
cash flows from transactions that affect investments in the non-current assets of the company
profitability
ability to provide financial rewards sufficient to attract and retain financing
cash flows from financing activites
cash flows from transactions that affect the debt and equity of the company.
source documents
checks, invoices, receipts, letters, and memos
average daily cost of goods sold
cost of goods sold/365 days
inventory turnover
cost of goods sold/average inventory
ledger accounts
accounting records showing all the transactions that affect a particular item
current ratio
current assets divided by current liabilities
Extraordinary Item
an event that is (1) unusual in nature and (2) infrequent in occurrence
adjusting entries
Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.
accrual basis of accounting
reporting income when it is earned and expenses when they are incurred. when they occur of when the bill is received
objectivity concept
requires that the amounts recorded in the accounting records be based on objective evidence
net income
the difference between total revenue and total expenses when total revenue is greater. revenue minus expenses
transposition
the digits have been transposed or switched around
Managerial Accounting
the internal use of accounting statements by managers in planning and directing the organization's activities
common stock
the most basic form of ownership, including voting rights on major issues, in a company
Accured wages
unpaid wages owed to employees for the time between the end of the last pay period and the end of the fiscal period
report form
A balance sheet format that lists classifications one under another.
Sole Proprietorship
A business owned by one person
merchandising business
A business that purchases and sells goods
matching concept
A concept of accounting in which expenses are matched with the revenue generated during a period by those expenses.
treasury stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use.
stock dividend
A distribution of shares by a corporation of its own stock to its stockholders.
post-closing trial balance
A list of permanent accounts and their balances after a company has journalized and posted closing entries.
cost principle
A principle that states that acquired assets and services should be recorded at their actual cost.
stock
A share of ownership in a corporation.
double-entry accounting
Accounting system in which each transaction affects at least two accounts and has at least one debit and one credit.
Nominal (temporary-equity) accounts
Accounts that apply to only one fiscal period and that are to be closed at the end of that fiscal period. These are the revenue, expense, and Drawing accounts. This category may also be described as all accounts except assets, liabilities, and the Capital account.
mixed accounts
Accounts with balances that are partly income statement amounts and partly balance sheet amounts.
matching principle
Guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period.
Interest Revenue
Money received for interest.
rent revenue
Money received for rent.
earnings per common share (EPS)
Net income per share of common stock outstanding during a period.
financial position
Status of assets, liabilities, and owners equity of an individual business or other organization as shown in its financial statements.
cumulative preferred stock
Stock that has a right to receive regular dividends that were not declared (paid) in prior years.
premium
Stock that is issued (sold) for a price that is more than its par.
Owner's Equity
The owner's right to or investment in the business.
Accounting Cycle
The sequence of steps in the accounting process completed during the fiscal period
sales
The total amount charged customers for merchandise sold, including cash sales and sales on account.
journal
a book of transactions recorded as they happen
services business
a business that performs an activity for a fee
cash dividend
a cash distribution of earnings by a corporation to its shareholders
statement of stockholders' equity
a financial statement that summarizes the changes in stockholders' equity over an interval of time. changes in stock and and paid in capitol accounts
depreciation
a lessening in value
fiscal period
a period of time covering a complete accounting cycle
cost concept
amounts are initially recorded in the accounting records at their cost or purchase price
slide
an error in placing the decimal point
business
any activity that seeks to provide goods and services to others while operating at a profit
manufacturing business
change basic inputs into products that are sold to customers
liabilities
debts that you owe
business entity concept
limits the economic data in an accounting system to data related directly to the activities of the business
creditor
one to whom money is owed
stockholders
people or entities that own stock in a corporation and therefore are its owners
journaling
recording a business transaction in the journal in the journal
unit measure of concept
requires that economic data be recorded in dollars
stock split
the division of a single share of stock into more than one share. reduces par value proportionate to the number of additional shares.
statement of cash flows
the financial statement that identifies a firm's sources and uses of cash in a given accounting period. company's inflows and outflows
equity
the owner's claims to the assets of the business
normal balance
the side of the account that is increased (plus side)
posting
transferring information from a journal entry to a ledger account
in arrears
(n.,pl.) unpaid or overdue debts; an unfinished duty
common sized statement
A standardized financial statement presenting all items in percentage terms. Balance sheet items are shown as a percentage of assets and income statement items as a percentage of sales.
Management's Discussion and Analysis (MD&A)
An annual report disclosure that provides management's analysis of the results of operations and financial condition.
number of days' sales in receivables
Average Accounts Receivable / Average Daily Sales
number of days sales in inventory
Average Inventory / Average Daily Cost of Goods Sold
quick assets
Cash and other current assets that can be quickly converted to cash, such as marketable securities and receivables.
dividends per share
Measures the extent to which earnings are being distributed to common shareholders. dividends on common stock/shares of common stock outstanding
earnings per share (EPS) on common stock
Measures the share of profits that are earned by a share of common stock. GAAP requires the reporting of earnings per share in the income statement.
accounts receivable turnover
Net Sales / Average Accounts Receivable
cash flow per share
Normally computed as cash flow from operations per share.
solvency
The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
Income Summary Account
The general ledger account used to summarize the revenue and expenses for the period. does not have plus or minus signs. does not have a normal balance just debit and credit.
cross reference
The ledger account number in the Post. Ref. column of the journal and the journal page number in the Post. Ref. column of the ledger account.
normal balances
The normal balance of an account can be either a debit or a credit depending on whether increases in the account are recorded as debits or credits.
account numbers
The numbers assigned to accounts according to the chart of accounts
footings
The totals of each side of a T account
price earnings (P/E) ratio
measures a company's future earnings prospects. market price per share of common stock/earnings per share on common stock
ratio of liabilities to stockholder's equity
measures how much of the company is financed by debt and equity. total liabilities/total stockholders equity
ratio of net sales to assets
measures of how effectively the company uses its assets. net sales/average total asserts
ratio of fixed assets to long-term liabilities
measures of whether note-holders or bondholders will be paid. Fixed Assets (net) / Long-Term Liabilities
rate earned on total assets
measures the profitability of total assets, without considering how the assets are financed. net income + interest expense/average total assets.
rate earned on common stockholder's equity
measures the rate of profits earned on the amount invested by the common stockholders. net income - preferred dividends/ average common stockholders equity
dividend yield
measures the rate of return to stockholders based on cash dividends. dividends per share of common stock/market per share of common stock
number of times interest charges are earned
measures the risk that interest payments will not be made if earnings decrease. income before income tax + interest expense/interest expense
quick ratio
quick assets/current liabilities
Fundamental Accounting Equation
Assets = Liabilities + Owner's Equity
revenues
Amounts recorded when the company sells products or services to customers
contra accounting
An account that always has a companion account and whose normal balance is opposite that of the companion account.
straight line depreciation
(cost - salvage value) / useful life Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.
profit
A financial gain, esp. the difference between the amount earned and the amount spent in buying, operating, or producing something
income statement
A financial statement showing the revenue and expenses for a fiscal period. Revenue minus expenses. yields net income or loss
balance sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
T account form
A form of account shaped like the letter T in which increases and decreases in the account may be recorded. One side of the T is for entries on the debit or left side. The other side of the T is for entries on the credit or right side.
two-column general journal
A general journal in which there are two amount columns, one used for debit amounts and one used for credit amounts.
general ledger
A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts.
real (permanent) accounts
The accounts that remain open (assets, liabilities, and the Capital account in owner's equity) and have balances that will be carried over to the next fiscal period.
Separate Entity Concept
The business is treated as a separate entity, separated from its owners, creditors and customers.
net loss
The difference between total revenue and total expenses when total expenses are greater
financial accounting
The field of accounting that focuses on providing information for external decision makers.
public accounting
The field of accounting where accountants and their staff provide services on a fee basis.
private accounting
The field of accounting whereby accountants are employed by a business firm or a not-for-profit organization.
par value
a value assigned to a share of stock and printed on the stock certificate
work sheet
a working paper used to collect information from the ledger accounts in one place
chart of accounts
an official list of accounts tailor made for the business
Prior period adjustments
corrections of material errors in prior period financial statements
withdrawal
decrease owners equity
dividends
earnings distributed to stockholders
prepaid expenses
expenses paid in cash before they are used or consumed
Business Entity
financial information is recorded and reported separately from the owner's personal financial information
interim statements
financial statements, covering a period that is less than 12 months, that are prepared during the fiscal year
fair market value
present worth of an asset
Assets
properties or things of value, such as cash, equipment, copyrights, buildings, and land, owned and controlled by an economic unit or a business entity
accural
recognition of an expense or a revenue that has been incurred or earned but has not yet been recorded