VYC1 STUDY GUIDE
nonRecurring Expenditure
(high cost) improvements such as a new roof for your house or for purchases of items such as a refrigerator or a car
imprest fund
A cash account with two characteristics: (1) It is set at a fixed amount, such as $100; and (2) vouchers are required for every disbursement. At all times, the sum of cash plus vouchers should equal the preset fund balance.
State Income Tax Withheld (also referred to as SIT):
A different form than the W-4 applies to the state where you live or are required to file your state income tax return. Not all states have a state income tax. SIT will reduce your gross pay.
Income Statement
A financial statement showing the revenue and expenses for a fiscal period. Revenues > Expenses = Net Income Expenses > Revenues = Net Loss
Statement of Cash Flows
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time (cash inflows and outflows)
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date. Assets = Liabilities +Stockholders' Equity
Compound Journal Entry
A journal entry that is characterized by having multiple debits and/or multiple credits
source document
A paper prepared as evidence that a transaction occurred. bills received from suppliers for goods or services received, bills sent to customers for goods sold or services performed, and cash register tapes
Statement of Owner's Equity
A summary of the changes in owner's equity that have occurred during a specific period of time, such as a month or a year. (changes in capital stock and retained earnings)
General-Purpose Financial Statements
A type of financial accounting report providing information on a company's financial position, cash inflows and outflows, and the results of operations. Published in an annual reports which contains the independent auditor's opinion as to the fairness of the financial statements, as well as information about the company's activities, products, and plans.
four basic assumptions of GAAP
Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenues and expenses should be kept separate from personal expenses. Going Concern: assumes that the business will be in operation indefinitely. This assumption validates especially the carrying value of assets and liabilities. In cases when liquidation is certain, this assumption is not applicable. Monetary Unit Principle: assumes a stable currency is going to be the measurement unit of record. The FASB accepts the nominal value of the U.S. dollar as the monetary unit of record unadjusted for inflation for U.S.-based companies. This is also known as the stable dollar principle. Time-period Principle: implies that the economic activities of an enterprise can be divided into artificial time periods.
accounting year
An accounting period of one year. The accounting year may or may not coincide with the calendar year.
Simple journal entry
An entry with one debit and one credit
five types of general ledger accounts
Asset - always start with a 1 like 110 Liability - start with a 2 like 221 Owner's Equity - start with a 3 like 312 Revenues - start with a 4 like 402 Expenses - start with a 5 like 505
Independent Contractors
Behavioral: Worker decides how, when, or where to do the work; which tools to use; and where to purchase supplies. Financial: Worker has a significant investment in his or her work, are not reimbursed for expenses, and may incur profit or loss. Pays own income tax and unemployment insurance. Relationship of parties: Worker does not receive benefits. Written contract states worker is an independent contractor.
four types of accounting
Bookkeeping Managerial - (inside) to determine future expenses / decisions Financial -(outside) for others outside to determine if they will loan or invest in the company Tax
similarities between GAAP and IFRS
Both are guiding principles that help in the preparation and presentation of a statement of accounts Professional accounting bodies issue each of them, and that is why they are adopted in many countries of the world Both provide relevance, reliability, transparency, comparability, and understandability of the financial statement. Also, the financial statements are the same which is prepared using an accrued basis.
Current Liabilities
Clearly determinable liabilities: Estimated liabilities: Contingent liabilities
Earnings Per Share of Common Stock
Earnings available to common stockholders' / Weighted—average number of common shares outstanding Measure of the return to investors per share
Employers' Contributions
FICA Social Security Tax Federal Unemployment Tax (FUTA) - calculated as 0.6% of the first $7,000 of an employee's annual earnings. Once earned , the company no longer has to pay State Unemployment Tax (SUTA):
Percentage-of-receivables
Focuses on Balance Sheet estimates uncollectible accounts by determining the desired size of the Allowance for Uncollectible Accounts. multiply the ending balance in Accounts Receivable by a rate (or rates) based on its uncollectible accounts experience Amount of entry for uncollectible accounts = (Accounts receivable ending balance x percentage estimated as uncollectible) - Existing credit balance in allowance for uncollectible accounts or + existing debit balance in allowance for uncollectible accounts.
Key Differences between IFRS and GAAP
GAAP is rules-based, whereas IFRS is principles-based
GAAP Four Basic Principles
Historical Cost Principle: requires companies to account and report based on acquisition (original) costs rather than fair market value for most assets and liabilities. Revenue Recognition Principle: requires companies to record when revenue is (a) realized or realizable AND (b) earned, not when cash is received or when an order is received. Also, under this principle a company should establish an allowance for bad debts accounts. This way of accounting is called accrual-based accounting for both the recognition of revenues and expenses. Matching Principle: Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no direct connection with revenue can be established, cost may be charged as expenses to the current reporting period (e.g., office salaries and other administrative expenses). Full Disclosure Principle: Amount and kind of information disclosed should be decided based on cost-benefit or after trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes, or as supplementary information.
Profitability Ratios
Measures of the operating success of a company for a given period of time. Return on Assets Return on sales Earnings Per Share of Common Stock
Return on Sales
Net income / Net sales Indicator of the amount of net profit on each dollar of sales, measures the proportion of the sales dollar that remains after deducting all expenses.
Return on Assets
Net income / Total Assets (balance sheet) Effectiveness of the use of assets in generating income
five basic constraints of GAAP
Objectivity Principle: the company financial statements provided by the accountants should be based on objective evidence. Materiality Principle: the significance of an item should be considered when it is reported. Consistency Principle: the company uses the same accounting principles and methods from year to year. Conservatism Principle: when choosing between two solutions, the one that will be least likely to overstate assets and net income, or understate liabilities and net losses. Cost-Benefit Relationship: the company considers the costs necessary to prepare the information and what benefit users will get from it in making decisions, for example, about voluntary financial statement disclosures.
Failing to Prepare Adjusting Entries Consumption of the benefits of an asset (prepaid expense)
Overstates net income Overstates assets, overstates retained earnings
Failing to Prepare Adjusting Entries Accrual of liabilities
Overstates net income Understates liabilities, overstates retained earnings
Equity Ratio
Portion of total assets provided by equity, computed as total equity divided by total assets. From a creditor's point of view, a high proportion of stockholders' equity is desirable. A high equity ratio indicates the existence of a large protective buffer for creditors in the event a company suffers a loss. A lower percentage of equity may be desirable to owners if the business can use borrowed funds to generate income in excess of the net after-tax cost of the interest on such funds.
journalizing
Recording transactions in a journal
Contigent Liabilities
Remote—If the likelihood of the loss from a contingent liability is highly unlikely, Reasonably Possible—If the likelihood of a loss from a contingent liability is possible, Probable—If the likelihood of a loss from a contingent liability is likely and the amount of the loss can be reasonably estimated,
Federal Income Tax Withheld (also referred to as FIT)
The W4 when hired. allows you to claim allowances and a federal filing status (married, single, etc.) for tax purposes along with your gross pay, are used to calculate your federal tax withheld using withholding tables provided to your employer by the federal government.
matching concept
The matching of expenses to revenues in the period that revenues are recorded
bank reconciliation
The process of matching your checkbook register with the bank statement
financial statement horizontal analysis
This analysis detects changes in a company's performance and highlights trends including positive and negative trends, The calculation of dollar or percentage changes
FICA Medicare Tax (also referred to as HI: Hospital Insurance):
This tax helps fund Medicare and is calculated as gross pay x 1.45%. without limit.
FICA Social Security Tax (also referred to as OASDI):
This tax helps fund social security calculated as gross pay x 6.2% unless you make OVER $128,400 in 2018 then you are only responsible to pay 6.2% of $128,400 and nothing more.
Debt to Equity Ratio
Total Debt/Total Equity
Failing to Prepare Adjusting Entries Earning of previously unearned revenues
Understates net income Overstates liabilities, understates retained earnings:
Failing to Prepare Adjusting Entries Accrual of assets
Understates net income Understates assets, understates retained earnings
differences between horizontal and vertical analysis
Vertical analysis consists of a comparison of items on a single financial statement. Horizontal analysis calculates percentage changes in comparative statement items or totals over two or more periods.
cash budget
a budget that estimates cash inflows and outflows during a particular period like a month or a quarter to avoid running out of cash during a certain time or when a seasonal expense is due
Matching Principle example
a company purchased a three-year insurance policy costing $600 at the beginning of the year and debited $600 to Prepaid Insurance. At year-end, the company should remove $200 of the asset (as one-third of the $600 asset has expired) and record it as an expense. Failure to do so misstates assets and net income on the financial statements.
Liquidity Ratios
a company's short-term debt-paying ability Current Ratio Acid-Test or Quick Ratio
Trial Balance
a proof of the equality of debits and credits in a general ledger -The most liquid (closest to becoming cash) asset appears first. - You can prepare at any time—end of a day, week, month, quarter, or year. Typically, you would prepare before preparing the financial statements.
Current Ratio
ability to pay its current liabilities from current assets , shows the strength of the working capital position Working Capital = Current Assets - Current Liabilities > 1 is desirable
three elements of an internal control structure
control environment - overall attitude, awareness, and actions of the board of directors, management, and stockholders. accounting system - the methods and records that identify, assemble, analyze, classify, record, and report an entity's transactions to provide complete, accurate, and timely financial information control procedures - additional policies and procedures that management establishes to provide reasonable assurance that the company achieves its specific objectives
budget discrepancies
differences between budgeted amounts and actual financial performance
recurring income
earnings from wages, interest, dividends, social security benefits (including social security disability) and pension income
Percentage of Sales Method
estimates uncollectible accounts from the credit sales of a given period. The method is based on a percentage of prior years' actual uncollectible accounts to the prior years' credit sales. uncollectible accounts expense is matched against, Revenues of the accounting period. The method focuses on the income statement and the relationship of uncollectible accounts also it estimates the uncollectible accounts from the net credit sales or net sales of a given period.
micro factors
family structure, health, career choice, age easier to predict
Solvency
he ability to pay debts as they become due
Recurring Expenditure
living expenses, loan repayments, and regular savings or investment deposits.
differing accounting treatment for bank vs non-bank credit card sales
nonbank credit cards (such as American Express), charge a larger percent service charge. A bank credit cards (such as Visa or MasterCard) are treated as cash sales because the receipt of cash is certain. It credits the retailers account on a daily basis
Unearned Service Fees
not a revenue account but a liability. As the fees are earned, the amount in that account is transferred to a revenue account.
accounting
planning, recording, analyzing, and interpreting financial information
Formats to Communicate Accounting Information
report, presentation, memorandum, or spreadsheet depends on your audience
accrual basis of accounting
revenues are recorded when a company makes a sale or performs a service, regardless of when the company receives payment for the sale or the service expenses are matched to the revenues that are recorded, whether or not the company has paid for those expenses, yet, in cash or not
Financial Ratios: Leverage
show the relationship between debt and equity financing in a company. equity ratio the debt to equity ratio.
Acid-Test or Quick Ratio
the ratio of quick assets (cash, marketable securities, and net receivables) to current liabilities (Current Assets - Inventory) / Current Liabilities
Macro Factors
those factors that impact on the business and are outside the control of any one business. Examples include economic factors, government policy, changes in the law and global issues. more difficult to predict.
Special Budget
to save for a special circumstance such as to pay taxes or a vacation
posting
transferring information from a journal entry to a ledger account
accounting period
usually equal in length and may be one month, one quarter, or one year
nonrecurring income
windfalls" and should not be counted on or "budgeted for."
