Chapter 2 Flashcards
Intracompany
comparing company results across 2+ periods
ex: comparing Apple’s income to it’s prior-year income
Intercompany
comparing results across competitors
ex: comparing Apple’s income to Samsung’s
Industry
comparing results to industry norms
ex: comparing Apple’s profit margin to the industry’s
Guidelines (rule of thumb)
comparing results to standards based on experience
ex: the 2:1 level for the current ratio
4 Building Blocks of Analysis
- Liquidity (meeting short term obligations and generate rev)
- Solvency (meeting long term obligations and generate future rev)
- Profitability (providing financial rewards to attract/retain financing
- Market Prospects (generating positive market expectations)
Source Documents
identify and describe transactions and events entering the accounting system
ex: sales receipts, checks, bank statements
Account
record of increases and decreases in a specific asset, liability, equity, rev, or exp
General Ledger/Ledger
a record of all accounts used by a company
Unclassified Balance Sheet
broadly groups accounts into assets, liabilities, and equity
Examples of Asset Accts
- anything receivable
- cash
- land
- prepaid accts
- equipment/supplies
Examples of Liability Accts
- anything payable
- unearned revenue
- accrued liabilities
Examples of Equity Accts
- owner investments
- dividends
- revenue (not unearned)
- expenses
Chart of Accounts
list of all ledger accounts; each acct is assigned an identification number
T-Account
ledger account used to show the effects of transactions
debits on left, credits on right
Does debit/credit mean increase/decrease?
No. Whether it increases/decreases depends on the account.
Account Balance
difference between total debits and total credits for an account
Debit Balance
total debits > total credits
Credit Balance
total credits > total debits
Zero Balance
total debits = total credits
Double-Entry Accounting
demands the acct equation remain in balance. this means two things:
- 2+ accts are involved, 1+ debit, 1+ credit
- total amt debited MUST equal total amt credited
Accounts for which debit is the normal balance side
Debit (+) / Credit (-)
- expenses
- assets
- dividends
think “DrEAD”
Accounts for which credit is the normal balance side
Debit (-) / Credit (+)
- liabilities
- common stock
- revenues
Steps of Processing Transactions
- identify transactions and source documents
- analyze transactions using the acct equ
- record journal entries chronologically
- post/transfer entries to ledger
Journal
complete record of each transaction in one place; shows debits and credits for each transaction
Journalizing
recording transactions in a journal
Posting
transferring journal entry info to the ledger
General Journal
journal used to record any transaction; used by every company
Posting Reference (PR) Column
part of journal; left blank initially, then filled in w/ acct number
Balance Column Account
similar to T-acct, but includes transaction date, explanation column, and a running balance column
Steps to Posting a Journal Entry
- identify ledger acct debited
- in ledger, enter the entry date, journal and page in PR, debit amt, and new balance of ledger acct
- enter ledger acct number in PR column
- repeat steps 1&2 for credited acct
Trial Balance
list of all ledger accts and their balance at a point in time; not a financial statement
Process of Preparing a Trial Balance
- list each acct title and its amt (from ledger) in the trial balance
- compute the total of debit balances and total of credit balances
- verify (prove) total debit balances = total credit balances
Balance sheet reports a company’s financial position at a ___ ___ ___.
point in time
Income statement, statement of retained earnings, and statement of cash flows all report a company’s financial performance over a ___ ___ ___
period of time
Are dollar signs used in journals/ledgers?
No.
Are dollar signs used in financial statements and trial balances?
Only beside the first and last numbers in a column.
Higher Financial Leverage
when a company finances a relatively large portion of its assets with liabilities; means greater risk for the company
Debt Ratio Definition
used to measure risk associated with liabilities
Debt Ratio Equation
(Debt Ratio) = (Total Liabilities) / (Total Assets)
