account test 1 Flashcards
the language of business
accounting
the building block of any business is
transactions
the classification, grouping, and summarization of these business transactions in a generally accepted manner is
accounting (systematic)
collects and processes financial information about an organization and reports that information to decision makers
Accounting system
accounting for internal decision makers
managerial
accounting for external decision makers
financial
two main decision makers
creditors and shareholders
owners of the company
shareholders
lenders to the company
creditors
the four basic financial statements
balance sheet, income statement, statement of retained earnings, statement of cash flows
reports the amount of assets, liabilities, and stockholders equity of an accounting entity of a point in time
balance sheet
organization for which financial data are to be collected; must be precisely defined
accounting entity
basic accounting equation
assets= liabilities stockholders equity
represents the economic resources of a business
assets
_____represents the sources of financing for economic resources from creditors
liabilites
______represents the sources of financing for economic resources from stockholders
stockholder’s equity
the investment of cash and other assets in the business by the owners
contributed capital
the amount of earnings reinvested in the business (not distrubted to stockholders in the form of dividends)
retained earnings
reports the revenues and the expenses of the accounting period
income statement
income statement formula
revenues- expenses = net income
what are the elements of an income statement
revenues, earnings, net income
earned from sale of goods or services to customers
revenues
dollar amount of resources the entity used to earn revenues during the period
expenses
excess of total revenues over total expenses
net income
when is net loss reported
if total expenses exceed total revenues
reports the way that net income and distribution of dividends affected the financial position of the company during the accounting period
statement of retained earnings
statement of retained earnings
beginning retained earnings + net income - dividends = retained earnings
what does the statement of retained earnings begin with?
the beginning of the year retained earnings
what is added on the statement of retained earnings?
current year net income
what is subtracted on the statement of retained earnings
current year dividends
what is the ending retained earnings the same as?
its the same as reported on balance sheet
reports the inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing
statement of cash flows
cash flows that are directly related to earning income
operating activities
cash flows related to the acquisition or sale of the company’s productive assets
investing activities
cash flows directly related to the receipt or payment of money to investors and creditors
financing activites
what does net income from the incomes statement result in
an increase in ending retained earnings on the statement of retained earnings
what is one of the components of stockholders equity on the balance sheet
ending retained earnings
provide supplemental information about the financial condition of a company, without which the financial statements cannot be fully understood
notes
measurement rules used to develop the information in financial statements
generally accepted accounting principles
how are GAAP determined
FASB develops gaap, SEC oversees implementation of gaap
what is FASB
financial accounting standards board
the private sector body given the primary responsibility to work out the detailed rules that become gaap
financial accounting standards board
what is SEC
securities and exchange comission
us government agency that determines the financial statements that public companies must provide to stockholders and measurement rule that they must use in producing those statements
securities and exchange commission
What is IFRS
international financing reporting standards
who develops international financing reporting standards
IASB, international accounting standards board
primary responsibility for the information in the financial statements lies with management (prepare the financial statements
management responsibility
some responsibility for the information in the financial statements( verify the financial statements)
auditor responsibility
what are the three important steps to assure investors that the company’s records are accurate?
a system of controls, outside independent auditors, audit committee
a system of _______ is maintained over both the records and the assets within the company
controls
outside independent _____ are hired to verify the fairness of the financial statements
auditors
examination of the financial reports to ensure that they represent what they claim and conform with GAAP
audit
the private sector body given the primary responsibility to work out detailed auditing standards
public company accounting oversight board
a committee of the board of directors is formed to oversee the integrity of these other two safeguards
audit committee
if financial statements are to be of any value……..
users must have confidence in the fairness of the information presented
users will have a greater confidence if they know the auditors were….
required to meet professional standards of ethics and competence
requires all members to adhere to a professional code of ethics and professional auditing standards
american institute of certified public accountants (APICPA)
types of business entities
sole proprietorship, partnership, corporation
the primary objective of external financial reporting is to provide useful economic information about a business to help external parties make sound financial decisions
objective of financial reporting
traits of useful accounting information
relevance and faith representation
influence decisions making= providers
relevance
requires that information to be complete, neutral, and free from error
faithful representation
qualitative characteristics that influence the usefulness of information
comparability, verifiability, timeliness, understandibility
accounting information should be measured and reported in the national monetary unit without any adjustment for changes in purchasing power
monetary unit assumption
assumes economic events can be identified with a particular unit of accountability. requires economic activities of an entity be kept separate from those of owner and separate from all other economic entries
separate entity assumption
assumes busines will be in existence in the foreseeable future
continuity assumption
requires assets to be recorded at the cash-equivalent value on the date of the transaction(original acquisition
historical cost
two constraints in accounting
materiality and conservatism
economic resources with probable future benefits owned by the entity as a result of past transactions
assets
to be reported, assets must have a _____,______, usually based on the purchase price
measurable, verifiable value
assets are measured initially under the
historical cost
assets are listed in _____
order of liquidity
order of liquidity
how soon an asset is expected by management to be turned into cash or used
will be used or turned into cash within 1 year
current assets
will be used or turned into cash greater than 1 year
long-term assets
probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services
liabilities
entities that a company owers money
creditors
liabilities are usually listed on the balance sheet in ____
order of maturity
obligations that will be settled by providing cash, goods, or services 1 year
current liabilities
obligations will be settled greater than 1 year
long term liabilities
the financing provided by the owners and business operations
stockholders equity
results from owners providing cash to the business
contributed capital
owners invest in the business and _______ as a evidence of ownership
receive shares of stock
owners who invest in a company hope to benefit in two ways:
receipt of dividends and gains from selling the stock
this is earned capital. refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business
retained earnings
two principles underlying analysis:
- every transaction affects at least 2 accounts
- accounting equation must remain balanced
an exchange of assets or services for assets, services, or promise to pay to between and one or more external parties to a business
transaction
not reflected in the financial statements
not a transaction
identify the accounts, start by thinking of
what was given and what was recieved
a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item
account
a list of all account titles and their unique numbers; are usually organized by financial statement element(asset accounts first, followed by liability, stockholders equity, revenue, and expense accounts in order)
chart of accounts
every transaction affects what
at least two accounts
a tool for summarizing effects for each account, determining balances, and drawing inferences about a company’s activities
T-account
as a group, the accounts are called a
general ledger
_____ is a listing of all accounts in the general ledger
trial balance
what is the purpose of a trial balance
to ensure the debits and credits are equal before we prepare the balance sheet
the time it takes a company to go from cash to cash
the operating cycle
what occurs when a purchase was made on credit
pay supplies
sell product or provide service to customers
for cash or on credit
if sale was made on credit
receive payment from customers
at the end of the accounting period net income gets _____ to _____
booked, retained earnings
records revenues when earned,
regardless of timing of cash receipts
specifies both the timing and amount of revenue to be recognized during an accounting period
revenue recognition principle
when are revenues recognized?
- when the company transfers promised goods or services to customers
- in the amount it expects to receive
expenses are recorded when cash is paid
cash accounting
expenses are recorded when incurred, regardless of the timing of cash payments
accrual accounting
in the period in which the good or service is received. requires that costs incurred to generate revenues be recognized in the same period (matching of costs with benefits
this is when expenses are incurred
list of all accounts with their ending debits or credit balances indicated in the appropriate column
trial balance
when are revenues recorded
when they are earned
when are expenses recorded
when they are incurred to generate revenue
when are assets recorded
amounts that represent the probable future benefits remaining at the end of the period
when are liabilities reported
when they represented the probable future sacrifices of assets or services owed at the end of the period
why do companies wait until the end of the accounting period to do this?
- adjusting the records daily would be time-consuming and expensive
-the company does the adj entries when a company wants to prepare financial statements for external users
unearned rent revenue, unearned franchise fees
deferred(unearned) revenues
interest receivable, rent receivable, royalties receivable, franchise fee receivable
accrued revenues
prepaid expenses, such as prepaid supplies, prepaid rent, prepaid insurance, prepaid advertising
deferred prepaid expense
wage payable, interst payable, income tax payable, rent payable
accrued expenses
accumulated depreciation
depreciation expense
either- revenue earned/ expense incurred, or cash paid/received
inception
compute the amount of revenue earned or expense incurred for the period and prepare the adjusting entry
adjusting entry
account for the transaction (opposite to “inception”) either- revenue earned/expense incurred,or cash paid/recieved
conclusion
accumulated depreciation is a ____
contra account
all long-term assets incur a cost of use except for this
land
two categories of assets found on the balance sheet
current assets and noncurrent assets
collecting 30,000$ in cash from customers for service performed in a prior period changes assets by this much
$0
according the recognition principle, revenues arises (is earned) when this happens
when the company transfers promised goods or services to customers
the characteristic that means that the numbers and descriptions match what really existed or happened
faithful representation
in a purchase of supplies on account
supplies payable
because of the matching principle, when a company records a sale of a product, it must also record this type of journal entry
entry recording the associated expense
when receiving cash for service not yet performed
unearned revenue
in a closing entry….
expense and potentially retained earnings
in a t-account
right side
what is the contributed capital formula?
contributed capital= common stock + additional paid-in capital
lending money to another company creates this
a note receivable
when at the end of a period: beginning supples= $100, purchases during the year =$50, end supplies = $125
supplies is $25
when cash will not be paid until after a cost is incurred to generate revenue, initially this type of account must be recorded
payable account
unlike revenues or expenses which are closed out at the end of the period, assets accounts are this
permanent accounts
primary purpose of financial reporting is to provide information to these parties
investors and creditors
assets are listed on the balance sheet in this order
liquidity
According to the revenue recognition principle, revenue arises when this happens
when the company transfers promised goods or services to the customer
