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actg exam 2 Flashcards

1
Q

A/R

A

Accounts Receivable
Amounts customers owe on account.
asset
Cash collection of A/R does not affect income!

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2
Q

A/R balance increases (debit) when

A

Additional sales are made on account

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3
Q

A/R balance decreases (credit):

A

Cash is collected from customers who owe
* Customer accounts are written off as uncollectible

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4
Q

Revenue is recognized (recorded) when:

A

The service obligation has been performed (earned).
* The seller has delivered the goods or performed the service.
* Payment is reasonably assured (realizable).
* The seller is confident that payment will occur in the future.

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5
Q

Companies set credit policies to balance:

A

Desire for greater revenues vs.
* Assurance of collectibility

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6
Q

Accounting for Bad Debt

A
  1. Record sales on account (current period)
  2. Record adjusting entry for bad debt expense (current period) 3. Record write-offs (future periods)
  3. Record recoveries, if they occur (future periods)
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7
Q

net accounts receivable.

A

ccounts receivable minus allowance
Net A/R represents the amount the company actually expects to collect from the total A/R that customers owe.

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8
Q

bad debt expense

A

We do not decrease A/R directly.
* Instead we credit the Allowance for doubtful accounts (Allowance, ADA), a contra-asset
* Net A/R = Gross A/R - Allowance

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9
Q

write-off

A

accounts that are deemed to be uncollectible.
* These write-offs reduce accounts receivable and the allowance.
does not affect net income or net A/R.

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10
Q

allowance

A

a contra-asset, so it is reduced with a debit.
we defined the allowance as a place to record
“potential” or “expected” bad debts.

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11
Q

recording recoveries

A

In the first step, reverse the write-off transaction.
* This restores the amount previously written off to both accounts receivable and the allowance.
* In the second step, record the cash receipt.

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12
Q

recoveries

A

the customer may pay some or all of an account that has been written off.

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13
Q

Sales Discount

A

is a contra-revenue account.
It is paired with revenue.
* It has a debit balance (opposite to the credit balance of revenue).
* The difference between revenue and contra-revenue is the net sales.

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14
Q

A reduction to net revenue is classified as a sales discount if:

A

The sale is made on account (i.e., not cash or credit card) and
* There are time-based discount terms associated with the sale.

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15
Q

Sales Returns

A

is a contra-revenue account, allowing the seller to track sales and returns separately.

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16
Q

factor

A

A bank or finance company
* Buys receivables from businesses and then collects the payments directly from the customers.
* Typically “high quality” receivables with very low credit risk

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17
Q

Credit Card Sales

A
  • Companies can allow customers to use bank-issued credit cards to make purchases
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18
Q

Fees

A

paid to credit card companies and to factors are expenses.

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19
Q

operating liabilities

A

obligations related to the company’s core business.
must be repaid within a year.

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20
Q

Accounts payable

A
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21
Q

accrued expense

A
  • An expense that is incurred in one period but paid in the next
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22
Q

Incurring an expense

A

means the company receives the benefit of the resource being used.

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23
Q

Accruing an expense

A

means the company records the expense through an adjusting entry even though cash has not yet been paid.

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24
Q

Unearned revenue

A

Cash is received, but revenue is deferred until the company earns it.

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25
Q

Pre-tax income

A

ncludes all operating revenues, operating expenses,
and non-operating items.

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26
Q

If pre-tax income is positive

A

the company will owe taxes.

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27
Q

If pre-tax income is negative

A

we’ll assume income tax is zero.

28
Q

Funding or financing a business

A

means obtaining cash or other means of paying for activities and resources in the business: PPE, inventory, employee salaries, dividends, etc

29
Q

internal funds

A

the profits (net income) generated by the company’s operations

30
Q
  • External funds have two sources
A

Equity investment arises when an investor contributes money to the business in exchange for ownership.
* Companies can also borrow money.
* Known as debt financing.
* Recorded as financial liabilities that must be repaid.

31
Q

financial liabilities.

A

The obligations from Borrowing
* They arise in the course of business, not through a formal borrowing arrangement,
e.g., wages payable, accounts payable.
* They almost never have explicit interest terms.

32
Q

Current financial liabilities

A

include any financial obligation that must be repaid in one year or less.

33
Q

Current assets

A

are expected to convert to cash or be used to generate
revenues within the coming year.

34
Q

Liquidity

A

is the ability to pay short-term obligations as they come due.

35
Q

current ratio is used to assess liquidity:

A

Current assets / Current liabilities

36
Q

quick ratio is a more conservative measure of liquidity:

A

(Current assets – inventory) / Current liabilities

37
Q

The proceeds of the loan

A

is the amount of cash that the borrower receives when the loan begins, which we term the initiation date.

38
Q

interest expense

A

This is the amount the lender is charging the borrower

39
Q

Accounting for Current Financial Liabilities

A
  1. On the initiation date: Record the receipt of proceeds from borrowing
  2. Over the life of the loan: Record interest expense / interest payments
  3. At the maturity date: Record repayment of the loan
40
Q

Non-Current Financial Liabilities

A

borrowing and financial obligations last longer than one- year,

41
Q

The steps for bond accounting

A

Record receipt of proceeds
2. Record coupon payments and interest expense 3. Record repayment of principal

42
Q

Bond Accounting Notes

A

If they are semi-annual (twice per year), the annual coupon rate must be divided in half.
* If they are quarterly (four times per year), the annual coupon rate must be divided by four

43
Q

Common stock

A

is issued in shares.
ach represents a pro rata portion of the company’s total ownership.

44
Q

par value.

A

is typically low relative to the price of the stock.
affects the accounting for common stock issuance.

45
Q

common stock of private companies

A

held by founders, their family members, employees, and other insiders.

46
Q

common stock of public companies

A

can be purchased by any investor.
Public companies tend to have more shares and investors than private companies.

47
Q

over the counter

A

the shares are not traded on an organized stock exchange but through a broker-dealer network

48
Q

Common Stock Issuance

A

multiply the number of shares issued by the price per share
multiply the number of shares by the par value.
This amount will be credited to the common stock account.
* Any proceeds in excess of par value are credited to additional paid-in capital (APIC)

49
Q

declaration date

A

when the company’s board of directors decides to issue the dividend to investors.

50
Q

date of record

A

is the date used to determine who should receive the dividend payments.

51
Q

payment date

A

cash is paid to investors.

52
Q

Treasury Stock

A

repurchase stock, the company must find an investor who is willing to sell.
is a contra-equity account.
Consequently, it has debit balance (opposite to OE).

53
Q

outstanding shares

A

shares that are issued and
currently held by investors
Outstanding shares: Issued – Treasury

54
Q

Authorized shares

A

maximum that can be issued.

55
Q
  • Treasury shares
A

hose that have been repurchased.

56
Q

Issued shares:

A

the number that have been issued at some time in the past.

57
Q

two-for-one stock split

A

Doubles the number of shares; * Cuts the per-share value in half.

58
Q

three-for-one stock split

A

Triples the number of shares;
* Reduces the per-share value to one-third of the original.

59
Q
  • Earnings per share (EPS)
A

expresses a company’s net income on a per share basis
EPS = Net income / average # of common shares outstanding

60
Q
  • Return on equity
A

rate of return on investment

ROE = (net income / average owners’ equity) x 100
.

61
Q

Return on assets

A

is a rate of return on resources.

62
Q
  • Asset turnover
A

Asset turnover = (Sales revenue / average total assets)

63
Q

Operating cash flows

A

nclude any cash flows related to the core operations of the business.

64
Q
  • Investing cash flows
A

are related to purchase and sale of PP&E, or purchase and sales of investments, such as common stock or bonds issued other companies.

65
Q

Financing cash flows

A

result from external financing transactions: issuance or repayment of debt (principal, not interest); issuance and repurchase of common stock; and dividends.

66
Q

Operating Cash Flows
Implementing the indirect method

A
  1. Start with net income
  2. Make adjustments for depreciation
  3. Make adjustments for non-operating gains and losses
  4. Make adjustments for changes in operating accounts on the balance sheet

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