CFA 23: Financial Reporting Mechanisms Flashcards
assets
Accounts and Financial Statements
Assets are the economic resources of a company.
liabilities
Accounts and Financial Statements
Liabilities are the creditors’ claims on the resources of a company.
owners’ equity
Accounts and Financial Statements
Owners’ equity is the residual claim on assets.
revenues
Accounts and Financial Statements
Revenues are inflows of economic resources to the company.
expenses
Accounts and Financial Statements
Expenses are outflows of economic resources or increases in liabilities.
accounts
Accounts and Financial Statements
Accounts are individual records of increases and decreases in a specific asset, liability, component of owners’ equity, revenue, or expense. For financial statements, amounts recorded in every individual account are summarized and grouped appropriately within a financial statement element.
chart of accounts
Accounts and Financial Statements
Chart of accounts are the actual accounts used in a company’s accounting system.
allowance for bad debts
Accounts and Financial Statements
Allowance for bad debts is an account for the estimated uncollectible amount. Because the effect of the allowance for bad debts account is to reduce the balance of the company’s accounts receivable, it is known as a “contra account”.
contra account
Accounts and Financial Statements
A contra account is any account taht is offset or deducted from another account.
accumulated depreciation
Accounts and Financial Statements
Accumulated depreciation is an offset to property, plant, and equipment (PPE) reflecting the amount of the cost of PPE that has been allocated to current and previous accounting periods.
sales returns and allowances
Accounts and Financial Statements
Sales returns and allowances are an offset to revenue reflecting any cash refunds, credits on account, and discounts from sales prices given to customers who purchased defective or unsatisfactory items.
noncurrent assets
Accounts and Financial Statements
Noncurrent assets are assets that are expected to benefit the company over an extended period of time (usually more than one year).
current assets
Accounts and Financial Statements
Current assets are those that are expected to be consumed or converted into cash in the near future, typically one year or less.
inventory
Accounts and Financial Statements
Inventory is the unsold units of product on hand.
accounts receivable
Accounts and Financial Statements
Accounts receivable are amounts customers owe the company for products that have been sold as well as amounts that may be due from suppliers (such as for returns of merchandise). Also called commercial receivables or trade receivables.
other receivables
Accounts and Financial Statements
Other receivables represent amounts owed to the company from parties other than customers.
cash
Accounts and Financial Statements
Cash refers to “cash on hand” (e.g. petty cash and cash not yet deposited into the bank) and in the bank.
cash equivalents
Accounts and Financial Statements
Cash equivalents are very liquid short-term investments, usually maturing in 90 days or less.
balance sheet
Accounts and Financial Statements
The balance sheet represents a company’s financial position at a particular point in time. It provides a listing of a company’s assets and the claims on those assets (liabilities and equity claims). The equation that underlies the balance sheet is also known as teh “basic accounting equation”. Acompany’s financial position is reflected using the following equation:
Assets = Liabilities + Owner’s equity
residual claim
Accounts and Financial Statements
Owners’ equity is the residual claim of the owners (i.e. the owners’ remaining claim on the company’s assets after the liabilities are deducted). The concept of the owners’ residual claim is well illustrated by the slightly rearranged balance sheet equation, roughly equivalent to the structure commonly seen in the balance sheets of UK companies:
Assets - Liabilities = Owners’ equity
statement of retained earnings
Accounts and Financial Statements
Statement of retained earnings is a financial statement that reconciles beginning-of-period and end-of-period balance sheet values of retained income; shows the linkage between the balance sheet and income statement.
double-entry accounting
Accounts and Financial Statements
Double-entry accounting is the accounting system of recording transactions in which every recorded transaction affects at least two accounts so as to keep teh basic accounting equation (assets = liabilities + owners’ equity) in balance.
unclassified balance sheet
Accounts and Financial Statements
An unclassified balances sheet is one that does not show subtotals for current assets and current liabilities. Assets are simply lsited in order of liquidity (how quickly they are expected to be converted into cash).
unearned revenue
Accounts and Financial Statements
Unearned revenue arises when a company receives cash prior to earning the revenue
direct format
The Accounting Process
Direct format refers to the operating cash section of statement of cash flows appearing simply as operating cash receipts less operating cash disbursements.
indirect format
The Accounting Process
The indirect format is an alternative format for the operating cash section, which begins with net income and shows adjustments to derive operating cash flow.
accrued revenue (unbilled revenue) The Accounting Process
Accrued revenue arises when a company earns revenue prior to receiving cash but has not yet rognized the revenue at the end of an accounting period.
prepaid expense
The Accounting Process
Prepaid expense arises when a ompany makes a cash payment prior to recognizing an expense. The accounting treatment involves an originating entry to record the payment of cash and the prepaid asset reflecting future benefits, and a subsequent adusting entry to record the expense and eliminate the prepaid asset. In other words, prepaid expenses are assets that will be subsequently expensed.
accrued expenses
The Accounting Process
Accrued expenses arise when a company incurs expenses that have not yet been paid as of the end of an accounting period. Accrued expenses result in liabilities that usually require future cash payments.
