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Chapter 2 Flashcards

1
Q

What is the accounting equation

A

Assets= liabilities + equity

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2
Q

Balance sheet

A

info about resources available to management and claims against resources by creditors and shareholders

point in time

ending balance becomes beginning balance for next period

report yearly

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3
Q

Asset

A

Resource owned or controlled by a company and expected to provide economic benefits

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4
Q

What assets are reported on a balance sheet?

A

1) legal title, unrestricted access that are owned or controlled by company
2) future benefits (expected cash to sell product/service) that can be measured in monetary units

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5
Q

Liquidity

A

Ease of converting noncash assets into cash

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6
Q

Current asset

A

Most liquid assets, converted into cash or used in operations within the next year

Maintain liquidity to meet obligations and operate on daily basis but expensive to hold; maintain just enough to cover liquidity needs

Examples: cash/cash equivalent, marketable securities, accounts receivable, inventory, prepaid asset

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7
Q

Cash/cash equivalent asset

A

Current asset

currency, bank deposit, certificate of deposit, other

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8
Q

Marketable securities asset

A

Current asset

investments that can be quickly sold to raise cash

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9
Q

Accounts receivable asset

A

Current asset

amounts due to customers arising from past sale of product/service on credit

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10
Q

Inventory asset

A

goods purchased or produced for sale to customers, supplies for operating activities

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11
Q

Prepaid expense asset

A

Pay in advance for rent, insurance, other

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12
Q

Non-current assets

A

Long-term asset

Long term investments, property/plant/equipment (PPE), intangible and other

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13
Q

Long term asset

A

Non-current asset

debt securities or shares of other firms- management doesn’t plan to sell in the near term

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14
Q

Property, plant, and equipment (PPE) asset

A

Non-current asset

land, factory buildings, warehouses, office buildings, machinery, office equipment, other

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15
Q

Historical cost

A

Physical assets reported on balance sheet as reported on original acquisition cost

(+) reliability- amount paid to purchase asset is objective and accurately measured
(-) significantly undervalued, current value

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16
Q

Fair value cost

A

Current value obtained by quotes/sources; increases relevance- how useful is info

ex) marketable securities

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17
Q

Unrecognized internal asset

A

Logos, names- only reported if purchased by 3rd party; internally created

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18
Q

Liabilities

A

Firm’s obligation for borrowed funds from lenders or bond investors, obligation to pay suppliers, employees, tax authorities; interest bearing or non-interest bearing

probable future sacrifice resulting from current/past event; payment to creditor or promise to deliver good/service

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19
Q

When must a liability be reported

A

1) future sacrifice is probable
2) amount of obligation is known or easily estimated
3) transaction/event that caused obligation occurred

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20
Q

Executory contract

A

Future sacrifice is probable, amount of obligation is known or easily estimated BUT transaction hasn’t occurred yet

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21
Q

Equity

A

Capital that has been invested by shareholders directly or via purchase of stock or indirectly in the form of earnings reinvested in business and not paid out as dividends

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22
Q

Current liabilities

A

Due within 1 year or operating cycle

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23
Q

What kind of liability is accounts payable? What is accounts payable?

A

Current liability

amounts owed to suppliers for goods/services purchased on credit

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24
Q

What kind of liability is an accrued liability? What is an accrued liability?

A

Current liability

obligations for expenses that are recorded not paid; ex) wages owed but not paid, interest payable- interest in debt not yet paid, accrued taxes

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25
What kind of liability is short term borrowings? What is a short term borrowing?
Current liability short term debt payable to banks or creditors
26
What kind of liability is deferred (unearned) revenues? What is a deferred revenue?
Current liability obligation created when company accepts payment in advance for future goods/services
27
What kind of liability is current maturities of long term debt? What is current maturities of long term debt?
Current liability current portion of long term debt due to be paid in one year
28
Non current liabilities
Obligations after 1 year
29
Long term debt
Non current liability amounts borrowed from creditors scheduled to be repaid in more than one year
30
Stockholders equity (SE) definition and types
Capital provided by shareholders Common stock, additional paid in capital, treasury stock, retained earnings, accumulated other comprehensive income/loss
31
SE common stock
Contributed capital Capital received from primary owners of company, divided into shares
32
SE additional paid in capital
Contributed capital received from common shareholders in addition to stated value of common stock
33
SE treasury stock
Contributed capital amount paid for common stock that company re-acquires, reduces contributed capital
34
SE retained earnings
Earned capital accumulated earnings that haven't been distributed to stockholders as dividends
35
SE accumulated other comprehensive income/loss
Earned capital charges in equity not reported in income statement
36
Contributed capital
Net funding company received from issuing and re-acquiring shares- funds received less funds paid to repurpose
37
How do you calculate ending retained earnings?
``` Beginning retained earnings +/- net income or net loss - dividends ___ ending retained earnings ```
38
Earned capital
Cumulative net income (or losses) retained by company- not paid as dividends, includes retained earnings and comprehensive income/loss
39
Account
Mechanism for accumulating effects of transactions/events, record if increase or decrease for asset, liability, equity, revenue, or expense
40
What are the 5 groupings of double entry accounting?
1) assets 2) liabilities 3) equity 4) revenues/income 5) expenses
41
What things are included in asset category?
Cash, accounts receivable, other receivables, inventory, prepaid insurance, security deposit, fixtures/equipment, accumulated depreciation- fixtures/equipment
42
What things are included in liability category?
Accounts payable, interest payable, wages payable, taxes payable, unearned revenue, notes payable
43
What things are included in equity category?
Common stock, retained earnings
44
What things are included in revenue/income?
Sales revenue, interest revenue
45
What things are included in expenses?
Cost of goods sold, wages expense, rent expense, advertising expense, depreciation expense- fixtures/equipment, insurance expense, interest expense, tax expense
46
What question is income statement trying to answer?
Did the business generate more resources than they used? *must have proper timing of revenue/expense
47
What do revenues result in an increase of?
Net assets (asset-liabilities) caused by transferring goods/services to customers
48
What do expenses result in a decrease of?
Net assets (asset-liabilities) caused by revenue-generating activities (COGs, depreciation, wages, debt interest)
49
What is the difference between revenues and expenses?
Net income or let loss
50
Operating expenses
Support the business- COGs, selling expense, depreciation, amortization, R&D; not all expenses are recognized in period in which cash is dispersed depreciation: recognize when asset is used, not purchased compensation: recognized when services are performed- before employees are paid
51
Non-operating expenses
company's financing/investing activities including interest revenue/interest expense
52
Revenue recognition
Record when company transfers good/service to customer (expected value) even if no immediate increase in cash
53
Expense recognition
Recognized when assets diminish (or liabilities increase) as a result of earning revenue or supporting operations, even if no immediate decrease in cash
54
Accrual accounting
recognize revenue when earned through company's operations and recognizing expenses as assets used and obligations incurred in carrying out operations - balance sheet depicts resources and cash and obligations company must fulfill in the future - required by GAAP - exchange of cash is not the essential ingredient
55
Cost of goods sold
Cost of products delivered to customers during a period
56
Gross profit
Difference between revenues (@ selling price) and cost of goods sold (@ purchase price); remaining money to cover overhead and other expenses
57
Credit (on account)
sell product on account rather than for cash, seller still reports revenue; revenues reported when company "earned" sales- company has done everything under sales agreement during sale: seller reports AR, revenue is recognized before cash collection during cash collection: AR decreases, cash increases
58
How are net income and retained earnings related?
Net income is the change in returned earnings resulting from business activities during accounting period
59
Articulation
linkage between income statement and beginning/end of period balance sheets, achieved by tying net income to retained earnings
60
Executory contract
Doesn't require entry, no earned revenue because hasn't delivered product yet
61
Is revenue or income recorded from stock issuance?
No
62
Is expense recorded from dividend?
No
63
Statement of stockholders equity
Reconciliation of beginning and ending balances of selected stockholders equity accounts
64
Which side is debit on the t account?
Left
65
What side is credit on the t account?
Right
66
Compound entry
More than one debit/credit, total debits=total credits
67
Ledger
Listing of all accounts and dollar balances
68
Net working capital equation
Current assets- current liabilities
69
Cash operating cycle
Time between paying for goods and employee services and receipt of cash from sales/on creit
70
Current ratio
Current asset/current liabilities If >1, positive net working capital Higher ratio desirable if firms have difficulty predicting sales
71
Quick ratio
Cash+short term securities+accounts receivable/current liabilities More restrictive form of current ratio- excludes inventories, only cash or near cash considered

Accounting (9 decks)

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