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Accounting > Chapter 2 > Flashcards

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
Q

What kind of liability is short term borrowings? What is a short term borrowing?

A

Current liability

short term debt payable to banks or creditors

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26
Q

What kind of liability is deferred (unearned) revenues? What is a deferred revenue?

A

Current liability

obligation created when company accepts payment in advance for future goods/services

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27
Q

What kind of liability is current maturities of long term debt? What is current maturities of long term debt?

A

Current liability

current portion of long term debt due to be paid in one year

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28
Q

Non current liabilities

A

Obligations after 1 year

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29
Q

Long term debt

A

Non current liability

amounts borrowed from creditors scheduled to be repaid in more than one year

30
Q

Stockholders equity (SE) definition and types

A

Capital provided by shareholders

Common stock, additional paid in capital, treasury stock, retained earnings, accumulated other comprehensive income/loss

31
Q

SE common stock

A

Contributed capital

Capital received from primary owners of company, divided into shares

32
Q

SE additional paid in capital

A

Contributed capital

received from common shareholders in addition to stated value of common stock

33
Q

SE treasury stock

A

Contributed capital

amount paid for common stock that company re-acquires, reduces contributed capital

34
Q

SE retained earnings

A

Earned capital

accumulated earnings that haven’t been distributed to stockholders as dividends

35
Q

SE accumulated other comprehensive income/loss

A

Earned capital

charges in equity not reported in income statement

36
Q

Contributed capital

A

Net funding company received from issuing and re-acquiring shares- funds received less funds paid to repurpose

37
Q

How do you calculate ending retained earnings?

A 
Beginning retained earnings
\+/- net income or net loss
- dividends
\_\_\_
ending retained earnings
38
Q

Earned capital

A

Cumulative net income (or losses) retained by company- not paid as dividends, includes retained earnings and comprehensive income/loss

39
Q

Account

A

Mechanism for accumulating effects of transactions/events, record if increase or decrease for asset, liability, equity, revenue, or expense

40
Q

What are the 5 groupings of double entry accounting?

A

1) assets
2) liabilities
3) equity
4) revenues/income
5) expenses

41
Q

What things are included in asset category?

A

Cash, accounts receivable, other receivables, inventory, prepaid insurance, security deposit, fixtures/equipment, accumulated depreciation- fixtures/equipment

42
Q

What things are included in liability category?

A

Accounts payable, interest payable, wages payable, taxes payable, unearned revenue, notes payable

43
Q

What things are included in equity category?

A

Common stock, retained earnings

44
Q

What things are included in revenue/income?

A

Sales revenue, interest revenue

45
Q

What things are included in expenses?

A

Cost of goods sold, wages expense, rent expense, advertising expense, depreciation expense- fixtures/equipment, insurance expense, interest expense, tax expense

46
Q

What question is income statement trying to answer?

A

Did the business generate more resources than they used? *must have proper timing of revenue/expense

47
Q

What do revenues result in an increase of?

A

Net assets (asset-liabilities) caused by transferring goods/services to customers

48
Q

What do expenses result in a decrease of?

A

Net assets (asset-liabilities) caused by revenue-generating activities (COGs, depreciation, wages, debt interest)

49
Q

What is the difference between revenues and expenses?

A

Net income or let loss

50
Q

Operating expenses

A

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
Q

Non-operating expenses

A

company’s financing/investing activities including interest revenue/interest expense

52
Q

Revenue recognition

A

Record when company transfers good/service to customer (expected value) even if no immediate increase in cash

53
Q

Expense recognition

A

Recognized when assets diminish (or liabilities increase) as a result of earning revenue or supporting operations, even if no immediate decrease in cash

54
Q

Accrual accounting

A

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
Q

Cost of goods sold

A

Cost of products delivered to customers during a period

56
Q

Gross profit

A

Difference between revenues (@ selling price) and cost of goods sold (@ purchase price); remaining money to cover overhead and other expenses

57
Q

Credit (on account)

A

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
Q

How are net income and retained earnings related?

A

Net income is the change in returned earnings resulting from business activities during accounting period

59
Q

Articulation

A

linkage between income statement and beginning/end of period balance sheets, achieved by tying net income to retained earnings

60
Q

Executory contract

A

Doesn’t require entry, no earned revenue because hasn’t delivered product yet

61
Q

Is revenue or income recorded from stock issuance?

A

No

62
Q

Is expense recorded from dividend?

A

No

63
Q

Statement of stockholders equity

A

Reconciliation of beginning and ending balances of selected stockholders equity accounts

64
Q

Which side is debit on the t account?

A

Left

65
Q

What side is credit on the t account?

A

Right

66
Q

Compound entry

A

More than one debit/credit, total debits=total credits

67
Q

Ledger

A

Listing of all accounts and dollar balances

68
Q

Net working capital equation

A

Current assets- current liabilities

69
Q

Cash operating cycle

A

Time between paying for goods and employee services and receipt of cash from sales/on creit

70
Q

Current ratio

A

Current asset/current liabilities

If >1, positive net working capital
Higher ratio desirable if firms have difficulty predicting sales

71
Q

Quick ratio

A

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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