Chapter 1 - Basic Financial Accounting Review Flashcards
What is the purpose of financial accounting?
To communicate to parties outside of the firm
What is the purpose of managerial accounting?
To plan, choose and implement courses of action
What kind of reports do financial accounting and managerial accounting use
Managerial: detailed reports
Financial: summary reports
What is a direct cost
Direct cost includes all materials and labor costs directly traceable to the product manufactured
What is an indirect cost
Indirect cost generally refers to manufacturing or factory overhead and include salaries, wages, utilities, depreciation, etc.
What is the difference between cash basis and accrual basis accounting?
Cash basis accounting recognizes sales revenue and operating expenses only when cash changes hands.
Accrual accounting recognizes revenue and operating expenses when earned or incurred.
How much time does a balance sheet cover? Income statement?
Balance sheet: a point in time
Income statement: a period of time
What is the Cost Principle and what is it based on?
The value of transactions are recorded at actual cost. It is based on the going concern assumption
What is the Revenue Recognition Principle?
Sales earned must be recognized
What is the Matching Principle?
all sales revenue must be recognized, whether payment is received or not. The timing of revenue and expense is matched.
What are International Financial Reporting Standards?
A principles based accounting standard that does not allow LIFO but allows higher earnings
What is Original Cost?
The price you paid for the asset. It is the figure recorded on the balance sheet’s asset account
What is Book value?
Original cost - accumulated depreciation
What is Residual Value?
Book value at the end of the asset’s life, a special case of book value
What is Market Value?
The value of a product based on what people are willing to pay for it
What are proceeds?
The cash you receive when selling the asset = market value
What is the equation for Gain/loss on sale
proceeds - book value when asset is sold
How do you calculate Straight-Line Depreciation?
(Cost - Residual)/ Useful lifetime = depreciation expense per period
What is the Modified Accelerated Cost Recovery System (MACRS)?
The current tax depreciation method in the US that allows higher tax deductions in early years and lower deductions later
What is the effect of an accelerated depreciation system?
It records higher expenses in earlier years, thus creating lower operating income and taxes which equals higher PV of saved taxes
Why does a business need accounting?
Businesses need a reliable internal system of accountability.
What are the unique characteristics of the hospitality industry?
Seasonality, inseparability of of production and consumption, Capital intensive, Reliance on Discretionary income
What are the GAAP principles and what do they mean?
Cost Principle, Revenue Recognition Principle, Matching Principle
What is the difference between GAAP and IFRS
GAAP is rules based.
IFRS is principles based with higher earnings and LIFO is not allowed.
What are the benefits of accrual accounting?
It is a more accurate picture of the real situation
What is depreciation?
A systematic expensing of the cost of a long-lived physical asset
Should we depreciate an idle property?
yes, ‘depreciation begins when the asset is available for use and continues until the asset is derecognized, even if the asset is not in use.’
