Finla Exam accounting
Goodwill
the portion of the purchase price that exceeds the fair value of identifiable net assets Recorded only when one company acquires another company Net assets = Assets acquired less liabilities assumed
Partial-Year Depreciation
when a plant asset is acquired during the year, depreciation is calculated for the fraction of the year the asset is owned
Periodic Inventory System
-Does not maintain a continual record of inventory -Periodically adjusts for purchase and sale of inventory
Write-Off
-reduces the balance of accounts receivable -reduces the balance of the allowance for uncollectible accounts
errors in financial statements
Accidental errors in recording transactions or applying accounting rules
Amortizing of Intangible Assets
Allocating the cost of intangible assets to expense Most intangible assets have a finite useful life that can be estimated
Sarbanes-Oxley Act of 2002
Also known as the Public Company Accounting Reform and Investor Protection Act of 2002, it established guidelines related to internal control procedures and Auditor-Client Relations
Liabilities
Amounts owed
Accounts Payable
Amounts owed to suppliers of merchandise or services
Land Improvements
Amounts spent to improve the land -Parking lots, side walks, driveways, landscaping -have limited useful lives and are recorded separately from the Land account
Contra Revenue Account
An account with a balance that is opposite, or "contra," to that of its related revenue account
International Accounting Standards Board (IASB)
An accounting standard-setting body that issues standards adopted by many countries outside of the United States.
Sales Returns
Customer returns goods previously purchased (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account
Long-Term Liabilities
Payable in more than one year from the balance sheet date
Assets
Resources of the company
Revenue Recognition Principle
Revenue is recorded in the period in which goods and services are provided to the customer
temporary accounts
Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.
Net Income
Revenues - Expenses
Net Loss
Revenues < Expenses
Net Income
Revenues > Expenses
Increase stockholders' equity
Revenues have what effect on the accounting equation
Links among financial statements
any transaction that affects the income statement ultimately affects the balance sheet through the balance of retained earnings
Prepaid Expenses
arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period
Long-Term Assets
assets that are expected to be used in business operations for longer than one year 2 major categories. Tangible and Intangible
Weighted-average cost
assumes each unit of inventory has a cost equal to the weighted average unit cost of all inventory items -equals cost of goods available for sale divided by the number of units available for sale
Internal Controls
attempt to eliminate the opportunity element of fraud by safeguarding company assets and improving the accuracy and reliability of accounting information
Stages of equity financing
1) investment by the founders of business 2) investment by friends and family of founders 3) outside investment by "angel" investors and venture capital firms 4) initial Public Offering (IPO)
Deferred Revenue
A liability created when a business collects cash from customers in advance of completing a service or delivering a product.
Allowance Method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Management Discussion and Analysis (MD&A)
A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.
Preferred stock
A special type of stock whose owners, though not generally having a say in running the company, have a claim to profits before other stockholders do.
Internal Control: Risk Assessement
identifies and analyzes internal and external risk factors that could prevent a company's objectives from being achieved
Debt Analysis
long-term debt is one of the first places decision makers look when trying to get a handle on risk
Equipment
machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixtures Cost includes sales tax, shipping, assembly, and any other costs to prepare the asset for use Recurring costs such as annual insurance or property tax is expensed as incurred
What is the disadvantage of a sole proprietorship or partnership
neither offer limited liability
Return on Assets
net income/average total assets
Accrued Revenues
occur when a company provides products or services but hasn't yet received cash
Sales Discount
offer a customer a reduction if payment is made within a specified period of time
E-commerce controls
passwords should be required to conduct electronic business transactions, and firewalls and antivirus software should be kept current
Financial Statements
periodic reports published by the company for the purpose of providing information to external users
Basket Purchase
purchase of more than one asset at the same time for one purchase price
Statement of Stockholders' Equity
Common Stock (external source) + Retained Earnings (Internal Source)
Core Principle
Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods and services
Debt to Equity Ratio
Total liabilities/stockholders' equity The higher the debt to equity ratio, the higher the risk of bankruptcy
Financing Activities
Transactions the company has with investors and Creditors
Credit Sales
Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.
Current Liabilities
Usually payable within one year form the balance sheet date
Angel Investors
Wealthy investors, like those featured on the television show shark tank
cash decreases and dividends increase
When cash payments are made to stockholders, what is the effect on the company's accounts
Writing Off Accounts Receivable
When it becomes clear the customer will not pay, the company writes off the customer's account balance as uncollectible
Liabilities, Stockholders' equity, and revenues
Which accounts are decreased on the debit side and increased on the credit side
Dividends, Expenses, Assets
Which accounts are increased on the debit side and decreased on the credit side
stock dividends
additional shares of a company's own stock given to stockholders as dividends
Matching expenses with revenues
allows net income to provide a more useful measure of a company's operating performance
Leases
Contractual arrangement by which the lessor provides the lessee the right to use an asset for a specified period of time Leases are recorded by the lessee as a debit to lease asset and a credit to lease payable
Cost of goods sold
Cost of the inventory that was sold during the period -reported as an expense in the income statement
Working Capital
Current Assets - Current Liabilities
Current Ratio
Current Assets / Current Liabilities
Sales Allowances
Customer does NOT return a product (a) Seller issues a cash refund if original sale was for cash (b) Seller reduces balance of accounts receivable if original sale was on account
Installment Payment
Includes both interest on borrowed amount and reduction of outstanding loan balance
Inventory
Includes items a company intends for sale to customers in the ordinary course of business -also includes items that are not yet finished products -Generally reported as a current asset in the balance sheet
Multi-Step Income Statement
Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.
Investing Activities
Increase or decrease in investments increase in decrease in long-term assets such as: -property -plant -Equipment
Assets
Increase with debit and decrease with credit
Average Days in Inventory
Indicates the approximate number of days the average inventory is held. Equals 365 divided by inventory turnover ratio
Profit Margin
Indicates the earnings per dollar of sales
Revenues
Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.
Wholesalers
Intermediaries who help to move goods between producers and retailers by buying goods from producers and selling them to retailers
Convertible
Investor can convert bonds to common stock
Callable
Issuing company can pay off bonds early
Specific Identification Method
Matches each unit of inventory with its actual cost
Dividend yield
Measures how much a company pays out in dividends relative to its share price Dividends per share divided by stock price
What roles does accounting play in society
Measuring economic activity and communicating useful information to help investors and creditors make good decisions
Tangible Assets
Physical Assets -Land -Land Improvements -Buildings -Equipment -Natural Resources
Balance Sheet
Presents the financial position of the company on a particular date
Bad Debt Expense
The amount of the adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period.
Residual Value
The amount the company expects to receive from selling the asset at the end of its service life
Revenues
The amounts recognized when the company sells products or provides services to customers
Collection of Accounts Previously Written Off
The collection has no effect on total assets or net income
Employee Management
The company should provide employees with appropriate guidance in how to perform their jobs as well as in their responsibilities for internal control
Net Income
The difference between revenues and expenses, also known as earnings or profit. Revenues - Expenses
Financial Reporting
process of providing financial statement information to external users
venture capital firms
provide additional funding and business expertise
General Ledger
provides, in a single collection, each account with its individual transactions and resulting account balance
Acid-Test Ratio (quick ratio)
quick assets/current liabilities
Nontrade Receivables
receivables that originate from sources other than customers -Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees
Purchased Intangibles
record at their original cost plus all other costs necessary to get the asset ready for use. Similar to reporting purchased property, plant, and equipment
Account
record of all transactions related to a particular item over a period of time
Estimated Uncollectible Accounts
reduce assets (accounts receivable) and increase expenses (bad debt expense)
Liquidity
refers to having sufficient cash or other current assets to pay currently maturing debts
Expenditures After Acquisition
repairs and maintenance, additions, improvements, litigation costs Expense - if they benefit only the current period Capitalize - if they benefit the future period as well
Income Statement
reports the company's revenues and expenses over an interval of time
Trade Discounts
represent a reduction in the listed price of a product or service -Used to provide incentive3s to larger customers or certain consumer groups (seniors, military) -Recognized by recording revenue for lower amount
Realization principle
requires that revenue be recognized when both the earnings process is virtually complete and there is reasonable certainty as to the collectability of the assets to be received
Performance Reviews
reviews of actual vs. expected results, which can be applied to the employees as well as business processes
Three Methods of Asset Disposal
sale, retirement, exchange
Internal Control: Control Activities
the policies and procedures that help ensure that management's directives are being carried out. Includes authorizations, reconciliations, and separation of duties
Posting
the process of transferring the debit and credit information from the journal to individual accounts in the general ledger
Credit
the right side of an account
Fraud Triangle: Opportunity
the situation allows the fraud to occur
Occupational Fraud
the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources
Investing Activities
transactions involving the purchase and sale of resources that provide benefit for several years
Operating Activities
transactions that relate to the primary operations of the company
Closing Entries
transfer the balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the retained earnings account
Collusion
two or more people acting together to circumvent internal controls
Not Material
typically recorded as an expense regardless of its expected period of benefit
Enron Scandal
used questionable accounting practices to avoid reporting billions in debt and losses
relative fair value
used to allocate transaction price to more than one performance obligation
Aging Method
using a higher percentage for "old" accounts than for "new" accounts when estimating uncollectible accounts
Stockholders rights
vote, dividends, liquidation, preemption
Three Liquidity Measures
working capital, current ratio, acid-test ratio
Direct Write-Off Method
write off bad debts only at the time they actually become uncollectible -generally not allowed by GAAP
Quick Assets
includes only cash, current investments, and accounts receivable
Land
includes the cost of the land and all expenditures necessary to get the land ready for its intended use Costs usually include -real estate commission and fees -back property taxes or other obligations -Clearing, Filling, and leveling the land -Cash received from selling salvaged building materials is reduced from cost of land
Effects of changes in current assets and current liabilities on cash from operating activities
increase in current asset - decrease in cash decrease in a current asset - increase in cash increase in a current liability - increase in cash decrease in a current liability - decrease in cash
Price-Earnings Ratio (PE ratio)
indicates how the stock is trading relative to current earnings stock price/earnings per share
Line of Credit
informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and prepare paperwork
Fraud Triangle: Rationalization
justification for the deceptive act by the one committing the fraud
total assets decrease
liabilities or stockholders' equity decreases
Total assets increase
liabilities or stockholders' equity increases
Adjusted Trial Balance
lists all account balances after updating them for adjusting entries, prepared after posting the adjusting entries to the general ledger
Average Collection Period
number of days the average accounts receivable balance is outstanding. It equals 365 days divided by the receivable turnover ratio
Equity financing
obtaining investment from stockholders
Accrued Expenses
occur when a company has used costs in the current period, but the company hasn't yet paid cash for those costs
Note Disclosures
offer additional information either to explain the information presented in the financial statements or to provide information not included in the financial statements
Natural Resources
oil, natural gas, timber, salt Distinguished from other assets by the fact that they are physically depleted Recorded at cost plus all other costs necessary to get the asset ready for use
Cash return on assets
operating cash flows/average total assets or cash flow to sales * asset turnover measures the operating cash flow generated per dollar of assets
Cash flow to sales
operating cash flows/net sales measures the operating cash flows generated for each dollar of sales
Sole Proprietorship
A business owned by one person
Debt Financing
Borrowing money
Accounts Receivable
-Cash owed to the company by its customers from sales or services on account -Recorded at the time of the sale or service -Also called trade receivables
Times Interest Earned Ratio
(Net Income + Interest Expense + Income Tax Expense) / Interest Expense An indication to creditors of how many "times" greater earnings are the interest expenses
Straight-Line Depreciation
(asset cost - Residual value) / service life
Change in Depreciation Estimate
(book value - revised salvage value) / revised remaining useful life
Summary of adjustments to net income
+depreciation expense +amortization expense +loss on sale of assets -gain on sale of assets -increase in a current asset +decrease in a current asset +increase in a current liability -decrease in a current liability
Responsibilities for Internal Control
-CEO & CFO: Sign a report each year certifying adequacy of internal controls. -Auditors: Provide an opinion on management's assessment of internal control over financial reporting & Provide their own opinion on company's internal control over financial reporting
Gross Profit Ratio
-Indicator of the company's successful management of inventory. -Measures the amount by which the sale price of inventory exceeds its cost per dollar of sales =Gross profit/Net Sales
Operating cash flows adjustments to income
-Noncash items (convery accrual basis to cash) depreciation expense -Non-operating items, gains and losses on sale of assets -Changes in current assets and current liabilities, increase in accounts receivable in the amount of revenue reported in the income statement but not yet collected in cash
Examples of Significant noncash investing financing activities
-Purchase of ling-term assets by issuing debt -purchase of long-term assets by issuing stock -conversion of bonds payable into common stock -exchange of long-term assets
Manufacturing Company Inventory
-Raw materials -Work in process -Finished goods
Problems with applying the realization principle
-Revenue recognition was poorly tied to the FASB's conceptual framework -Focus on the earnings process led to similar transactions being treated differently in different industries -Difficult to apply to complex arrangements that involved multiple goods or services
Inventory Cost Methods
-Specific Identification -First In, First Out (FIFO) -Last In, First Out (LIFO) -Weighted Average Cost
Merchandising Company Inventory
-Wholesalers -Retailers Only one category of inventory
Components of the total cash balance
-coins and currency -checks received -savings accounts -checking accounts -credit card sales -debit card sales -cash equivalents
Operating Income
-gross profit - operating expenses -Reflects profitability from normal operations -a key performance measure for predicting the future profit-generating ability of a company
Perpetual Inventory System
-maintains a continual record of inventory -helps a company better manage inventory levels -Most often used in practice
What are the three types of business structures
1. Corporation 2. Sole Proprietorship 3. Partnership
Reasons for Incorrect Financial Statements
1. Errors 2. Fraud 3. Occupational Fraud
3 types of Business Activities
1. Financing Activities 2. Investing Activities 3. Operating Activities
Roles of Auditors
1. Help ensure that management has in fact appropriately applied GAAP in preparing the company's financial statements 2. Play a major role in investors' and creditors' decisions by adding credibility to the financial statements
5 Steps to Recognizing Revenue
1. Identify the contract 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) each performance obligation is satisfied
Primary Financial Statements
1. Income Statement 2. Statement of Stockholders' Equity 3. Balance Sheet 4. Statement of Cash Flows
Important components of the annual report
1. Management's Discussion and Analysis (MD&A) 2. Note Disclosures to the financial statements
2 Functions of Financial Accounting
1. Measure business activities of a company 2. Communicate those measurements to external parties for decision-making purposes
3 types of cash flows
1. Operating Cash Flows 2. Investing Cash Flows 3. Financing Cash Flows
3 criteria for revenue recognition over time
1. The Customer consumes the benefit of the seller's work as it is performed (ex cleaning) 2. The customer controls the asset as it is created (ex. constructing a building extension) 3. the seller is creating an asset that has no alternative use to the seller and the seller has the legal right to receive payment for progress to date (ex an order of jets customized for the U.S. Air Force)
3 Transaction questions
1. What is one account affected by the transaction? 2. What is a second account affected by the transaction 3. Do assets equal liabilities plus stockholders' equity? (they must every time)
Reasons companies buy back their own stock
1. boost underpriced stock 2. to distribute surplus cash without paying dividends 3. to boost earnings per share 4. to satisfy employee stock ownership plans
Components of Internal Control
1. monitoring 2. control activities 3. risk assessment 4. control environment
Three Common Depreciation Methods
1. straight-line 2.declining balance 3. Activity-based
Acquiring Intangible Assets
:(1) produce or develop them or (2) purchase them. Recorded in the books of the firm only if it is purchased from another party. Costs to develop internally are expensed in the year incurred to the Research and Development Expense account. Similarly, costs related to software development by a company are expensed in the year incurred.
Interest
=Face Value * Annual Interest Rate * Fraction of the year
Treasury stock
A corporation's own stock that has been reacquired by the corporation and is being held for future use.
Lower of cost and net realizable value (LCNRV)
A basis for stating inventory at the lower of its original cost and its net realizable value at the end of the period.
Tax Depreciation
Accelerated methods reduce taxable income more in the earlier years of an asset's life Straight line for financial reporting Accelerated for tax reporting -called MACRS
Financial Accounting
Accounting information provided to external users (e.g. investors and creditors)
Liability Accounts
Accounts Payable, Salaries Payable, Utilities Payable, and Taxes Payable
Direct Method of Cash Flows
Adjust the items in the income statement to directly show the cash inflows and outflows from operations If used, the company must also report eh indirect method either with the statement of cash flows or in the notes
Buildings
Administrative offices, retail stores, manufacturing facilities, and storage warehouses Costs include items such as: -Realtor Commissions and Legal Fees -Remodeling Costs Unique accounting issues arise when a firm constructs a building rather than purchasing it
Advantages and disadvantages of a corporation
Advantages include limited liability raise capital through stock sales, looks more professional, and easy to trade ownership. Disadvantages include cost to organize, difficult to organize, double taxation, and gov regulations
Contingent Gains
An existing uncertain situation that might result in a gain
Contingent Liabilities
An existing uncertain situation that might result in a loss depending on the outcome of a future event
Material
An item that is large enough to influence a decision
Expense Recognition (Matching Principle)
Any costs used to generate revenues are recorded as expenses in the same period as those revenues
Expanded Accounting Equation
Assets = Liabilities + Common Stock + Revenues - Expenses - Dividends
The Accounting Equation
Assets = Liabilities + Stockholders' Equity
Physical Controls
Assets and accounting records must be kept safe and accessible only to authorized personnel.
First-in, First-out (FIFO)
Assumes first units purchased are first ones sold
Last-In, First-Out (LIFO)
Assumes last units purchased are first ones sold
Balance Sheet Method
Base the estimate of bad debts on a balance sheet amount—accounts receivable
Cost of Goods Sold
Beginning inventory + net purchases - ending inventory
Serial
Bond issue matures in installments
Term
Bond issue matures on a single date
Secured
Bonds are backed by collateral
Unsecured
Bonds are not backed by collateral
Assets increase and liabilities increase
Borrowing cash from the bank would have what effect on the accounting equation
Retailers
Buy goods from wholesalers or directly from the manufacturers and resell to the consumer
Distinct Goods or Services
Capable of being distinct and separately identifiable from other goods or services in the contract (construction contracts fail the criterion)
Timing Difference
Cash is paid now and then later the expense is recognized.
Asset Accounts
Cash, Supplies, Equipment
Cost of Financing
Debt: Interest expense Equity: Dividends
Depreciation
Decrease in value of an asset Allocation of an asset's cost to expenses over time
Liabilities + Stockholders' Equity
Decreases with debit and increases with credit
Double-Declining-Balance Depreciation
Depreciation computations that produce larger amounts of depreciation in the early years of an asset's life and progressively smaller amounts as the asset ages.
Dividends
Distributions to stockholders, usually in the form of cash payments (not considered expenses)
Financing Activities
Examine changes in long-term liabilities and stockholders' equity accounts from the balance sheet cash transactions with a company's creditors and shareholders
Copyrights
Exclusive right of protection given to the creator of a published work granted for the life of the creator plus 70 years Allows holder to pursue legal action against anyone who attempts to infringe the copyright Accounting is virtually identical to that of patents
Patent
Exclusive right to manufacture a product or to use a process Granted for a period of 20 years Purchased as an intangible asset plus other costs such as legal fees If developed internally capitalize legal and filing fees only, research is expensed as incurred
Intangible Assets Developed Internally
Expense in the income statement most of the costs for internally developed intangible assets in the period we incur those costs. Difficult to determine portion of the expense that benefits future periods
Notes Receivable
Formal credit arrangements evidenced by a written debt instrument, or note
Audits
Hire an independent auditor to assess the internal control procedures to detect any deficiencies or fraudulent behavior of employees
Limitations of Internal Control
Human error Collusion Management override Cost/benefit analysis
Intangible Assets
Lack Physical Substance, often based on legal contracts -Patents -Trademarks -Copyrights -Franchises -Goodwill
Deferred Revenues
Liability account used to record cash received in advance of the sale or service
Franchises
Local outlets that pay for the exclusive right to use the franchisor company's name and to sell its products within a specified geographical area The franchisee records the initial fee as an intangible asset Additional periodic payments to the franchisor are usually expensed as incurred
Property, plant, and equipment (PP&E)
Long-lived, tangible assets, such as land, buildings, and equipment, used in the operation of a business. Recorded at the original cost of the asset plus any expenditures necessary to get the asset ready for use
Liquidity Management
Management can influence the ratios that measure liquidity to some extent
Reconciliations
Management should periodically determine whether the amounts of physical assets of the company match the accounting records.
Capital Structure
Mixture of liabilities and stockholders' equity a business uses
Installment Notes
Most car loans and home loans call for payment in monthly installments rather than by a single amount at maturity
Notes Payable
Note Signed by a firm promising to repay the amount borrowed plus interest
Receivables Turnover Ratio
Number of times during a year that the average accounts receivable balance is collected (or "turns over"). It equals net credit sales divided by average accounts receivable.
Cash Flow Ratios
Often used to supplement analysis of a company substitute cash flow from operations in place of net income positive cash flow from operations is important to a company's survival in the long run
adjusting entries
Only necessary for transactions involving revenue or expense activities
Accounting Standards Update (ASU) No. 2014-09 "Revenue from Contracts with Customers
Provides a unified approach that replaces more than 200 different pieces of specialized guidance that had developed over time in U.S. GAAP for revenue recognition under various industries and circumstances
Journal entry
Recording business transaction in a journal
Cash Basis Accounting
Reporting income when the cash is received and expenses when the cash is paid.
Financial Position
Resources (Assets) = Claims to Resources (Liabilities & Stockholders' Equity)
Internal Control: Control Environment
Sets the overall ethical tone of the company with respect to internal control. Includes formal policies related to management's philosophy, assignment of responsibilities, and organization structure
Indirect Method of Cash Flows
Starts with net income and adjusts it by eliminating the effects of noncash items Most popular, easier and less costly
steps in preparing the statement of cash flows
Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the balance sheet. Step 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the balance sheet. Step 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders' equity accounts from the balance sheet. Step 4. Combine the operating, investing, and financing activities, and make sure the total from these three activities equals the amount of cash reported in the balance sheet this year versus last year (the change in cash).
Measuring External Transactions
Step 1: Use source documents to identify accounts affected by an external transaction. Step 2: Analyze the impact of the transaction on the accounting equation. Step 3: Assess whether the transaction results in a debit or credit to account balances. Step 4: Record the transaction in a journal using debits and credits. Step 5: Post the transaction to the general ledger. Step 6: Prepare a trial balance.
Multiple Performance Obligations
Steps 2 and 4 of the revenue recognition process are important for these types of contracts. Step 2 identify the performance obligations. Step 4 Allocate the transaction price to each performance obligation
What is the advantage of being a corporation
Stockholders have limited liability
Net Accounts Receivable
The amount of cash that is actually expected to be collected on accounts receivable
Service Life
The estimated use the company expects to receive from the asset before disposing of it
Adjusting Entries
The journal entries that bring the accounts up to date at the end of the accounting period.
Stockholders' Equity
The owners' claim to assets.
Depreciation Method
The pattern in which the asset's depreciable cost is allocated over time
Payment Terms
The period of time that a supplier allows for an invoice to be settled
Financial Accounting Standards Board (FASB)
The primary accounting standard-setting body in the United States. Governed by the Securities and Exchange Commission (SEC)
Fraud Triangle
The three factors that contribute to fraudulent activity by employees: opportunity, Motivation, and rationalization.
Operating Cycle
The time it takes to produce revenue
Flow of Inventory Costs
[Raw materials + Direct Labor + Overhead] -> [Work in Process] -> [Finished Goods] -> [Inventory] -> [End Users]
Partnership
a business owned by two or more people
Corporation
a company that is legally separate from its owner
private corporation
a corporation owned by just one or a few people who are closely involved in managing the business fewer stockholders Not regulated by the SEC
Public corporation
a corporation whose stock anyone may buy, sell, or trade more stockholders regulated by SEC
organization chart
a diagram that shows the structure of an organization, classifications of work and jobs, and the relationships among those classifications
Bond
a formal debt instrument that obligates the borrower to repay a stated amount, referred to as the principal or face amount, at a specified maturity date
stock split
a large stock dividend that includes a reduction in the par or stated value per share
Chart of accounts
a list of all account names used to record transactions
Adjusted Trail Balance
a list of all accounts and their balances after we have updated account balances for adjusting entries
Post-closing trial balance
a list of all accounts and their balances at a particular date after we have updated account balances for closing entries
Trial Balance
a list of all accounts and their balances at a particular date, showing that total debits equal total credits
Fraud
a person intentionally deceives another person for personal gain or to damage that person
Generally Accepted Accounting Principles (GAAP)
a set of accounting standards that is used in the preparation of financial statements
Invoice
a source document that identifies the date of sale, the customer, the specific items sold, the dollar amount of the sale, and the payment terms
Accounting
a system of maintaining company records in an organized fashion
Auditor
a trained individual hired by a company as an independent party to express a professional opinion of the extent to which financial statements are prepared in compliance with GAAP and are free of material misstatement
Par value
a value assigned to a share of stock and printed on the stock certificate
Trademarks
a word, slogan, or symbol that distinctively identifies a company, product, or service Renewable for an indefinite number of 10-year periods Capitalize legal, registration, and design feeds Advertising costs expensed as incurred
Commercial Paper
borrowing from another company rather than from a bank Interest rate is usually lower than on a bank loan
Outstanding stock
capital stock that has been issued and is being held by stockholders
Investing Cash Flow
cash transactions for the purchase and sale of investments and long-term assets
Operating Cash Flow
cash transactions involving revenue and expense activities
Financing Cash Flow
cash transactions with lenders and stockholders, such as borrowing debt, repaying debt, issuing stock, and paying dividends
Stockholders' equity accounts
common stock and retained earnings
Detective Controls
controls designed to discover control problems that were not prevented 1. Reconciliations 2. Performance Reviews 3. Audits
Preventitive controls
controls that deter problems before they arise 1. Separation of Duties 2. Physical Controls 3. Proper Authorization 4. Employee Management 5. E-commerce Controls
Features of Preferred Stock
convertible, redeemable, cumulative
Expenses
costs of providing products and services and other business activities during the current period
payment date
date of the actual cash distribution
Declaration date
date on which board of directors declares the cash dividends to be paid
DEALOR
debit and credit effects on each account type Dividends Expenses Assets Liabilities Owners' Equity Revenue
Current portion of long-term debt
debt that will be paid within the next year
Activity-Based Depreciation
depreciable cost/total units expected to be produced
Cash dividends
distributions by a corporation to its stockholders
Retained earnings
earnings retained in the corporation and not paid out as dividends equals all net income less all dividends, since the company began operations
Internal Control: Monitoring
formal procedures for reporting control deficiencies
Separation of Duties
fraud is prevented by not allowing the same person to be responsible for both controlling the asset and accounting for the asset
proper authorization
fraud is prevented when unauthorized individuals are not allowed to use company resources
Accounting Cycle
full set of procedures used to accomplish the measurement/communication process of financial accounting
Statement of Cash Flows
measures activities involving cash receipts and cash payments over an interval of time
Earnings per share
measures net income earned per share of common stock (net income - dividends on preferred stock)/Average shares of common stock outstanding
Return on equity (ROE)
measures the ability of company management to generate earnings from the resources that owners provide Net income divided by average stockholders' equity
Asset Turnover
measures the sales per dollar of assets invested
WorldCom Scandal
misclassified expenditures to overstate assets and profitability
Gross Profit
net sales - cost of goods sold
asset turnover
net sales/average total assets measures the sales revenue generated per dollar of assets
Market interest rate
not specified in the bond contract
Sales Tax Payable
sales taxes collected from customers by the seller
Convertible
shares can be exchanged for common stock
Redeemable
shares can be returned to the corporation at a fixed price
Cumulative
shares receive priority for future dividends if dividends are not paid in a given year
Classified Balance Sheet
shows subtotals for current assets and current liabilities
Inventory Turnover Ratio
shows the number of times the firm sells its average inventory balance during a reporting period. It equals the cost of goods sold divided by average inventory
Noncash activities
significant investing and financing activities that do not affect cash, reported after the cash flow statement or in a note to the financial statements
Fraud Triangle: Motivation
someone feels the need to commit fraud, such as the need for money
Record date
specific date on which the company will determine who will receive the dividend
Stated interest rate
specified in the bond contract
Legal capital
the amount of capital that must be retained in the business for the protection of corporate creditors
Authorized stock
the amount of stock that a corporation is authorized to sell as indicated in its charter
Income statement
the amount recognized from providing goods and services to customers compared to the cost of doing so
Transaction Price
the amount the seller expects to be entitled to receive from the customer in exchange for providing goods and services
Accrued expense
the expense is recognized before the payment of cash
Initial public offering (IPO)
the first time a corporation issues stock to the general public
Debit
the left side of an account
Accural Basis Accounting
the method of accounting that recognizes revenue when it is earned and matches expenses to the revenues they helped produce
Issued Stock
the number of shares sold to investors; includes treasury shares