Chapter 2 Flashcards
name of the 4 financial statements
balance sheet
income statement
statement of change of stockholder´s equity
statemenet of cash flow
what does the balance sheet include
assets = liabilities + common stock + ending retained earnings
what does an income statement include
revenue - expenses = Net income (loss)
what does a statment of change of stockholder´s equity include
beginning retained earnings + net income - dividends + beginning common stock + additional contribution received from owners = total stockholder´s equity
what does a statement of cash flow include
cash inflow and outflow of operations, investments and financial actions
what are the two formats to prepare an income statement
simple income statement
multiple step income statement
what is the difference between balance sheets and the other 3 financial statements
balance sheet shows assets, liabilites and stockholder´s equity at one specific date
the other 3 finanical statements show a beginning and ending period
what does on account mean
buying or selling something on credit
what are account payable
amounts that the company owes to a vendor
und which category of a balance sheet do accounts payable fall
liabilities
what are credit payments called to somebody else except a vendor
other payables
what is prepaid insurance
an insurance the comapny paid in advance for but didn´t make use of it yet
what are accounts receivable
amounts customers owe a company for good purchased on credit
what does adjusting the books in relation to an finincail statement mean
make changes in accounting records, just before fin. statements are prepared
why do adjustments need to be made
to reflect the correct financial conditions of a company at the time
what part of retained earnings is not included in an income statement
devidends
what are the categoeries as which transactions are listed in a statement of cash flow
operating
investing
financing
what are dividends categorized as in a statement of cash flow
financing cash flow
what is part of a complete fniancial statement in addition to 4 statements
notes
what are current assets
assets that are used and turned into cash within a year
what is liquidity
measure of how quickly assets can be turned into cash
what are noncurrent assets
assets that a company will not be used within a year
also called long-tern assets
current liabilities
liabilities the company will pay off within the next fiscial year
noncurrent - longturn liabilites
paying off of liabilities takes longer than a year
what does a classified balance sheet show
subtotals for many items (e.g. current assets and liabilities)
what are the two ways owners can create equity in a company
making a capital contribution - buying stock
create profit - increases equity
what principle does accrual accounting follow
matching principle
what does accrual accounting refer to
companies recognize revenue whne it is earned and expences when they are incurred - no matter when the cash is receiverd or disturbed
what are the two different types of accrual basis accounting
accruals
deferrals
what can be understood as accrual
action first - money later
revenue is earned or expense is incurred before exchange of cash
what form of assets is often recorded related to accruals
accounts receivable
what are deferrals
money first - action later
exchange of cash before revenue is earned or expense is incurred
example for a deferral
payment of insurance
what is another type of accounting called
cash basis accounting
main idea of cash basis accounting
revenue only recognized when cash is collected
expenses are recognized when cash is disbursed
problem with cash basis accounting
it is not accepted by GAAP and SEC
most common ratio to measure company´s short term obligations
current ratio
equation of current ratio
current assets/current liabilities
internal controls
company´s policies to protect assets and to ensure accuracy of accounting records
major contol types in company´s accounting system
preventive control - stop errors before they happen
detective control - find errors before they damage anything
corrective control - fix errors
