Chapters 1-6 Flashcards
1
Q
Qualities of useful information
A
- relevance
- faithful representation
2
Q
relevance
A
- quality of useful info
- info that would make a difference in a business decision
- has predictive value – helps provide accurate representation about the future
- confirmatory value – confirms or corrects prior expectations
3
Q
faithful representation
A
- quality of useful info
- info that accurately depicts what really happened
- complete – nothing important has been omitted
- neutral - not biased
4
Q
enhancing qualities of useful info
A
- comparability
- consistency
- timeliness
- verifiability
- understandability
5
Q
comparability
A
- enhancing quality
- difference companies use the same acct. prnciples - you can compare them
6
Q
consistency
A
a company uses the same acct. pronciples and methods form year to year
7
Q
verifiability
A
able to prove its free form error
8
Q
timeliness
A
info must be available to decision makers in time to influence decisions
- annual reports must be submitted within 60 days of year end
9
Q
understandability
A
presented in a clear and concise manner so users can interpret it
10
Q
assumptions in financial reporting
A
- monetary unit assumption – only things that can be expressed in money are included in the financial statements
- economic entity assumption – keep separate personal transactions and company transactions
- going concern assumption – assume that the company will remain in operation for the forseeable future
- accrual basis – company records transactions in the period in which they actually took place
- periodicity assumption–the life of a business can be divided into artificial time periods
11
Q
measurment principles
A
- cost principle — record assets at their cost (what they purchased them at)
- fair value principle– record assets and liabilities at fiar value (what they have depreiciated or risen to – what you will sell them at) – ex: stock
**FASB says that most things must follow the cost principle
*fair value is only used when assets are actively traded (ex: investments)
12
Q
full disclosure principle
A
requires that companies disclose all events that would make a difference to financial statement users.
13
Q
constraints in financial reporting
A
- materiality constraint – item is material when its size is likely to influence the decision of investor/creditor — it is immaterial if it wont affect a decision maker
*if item doesnt make a difference, company doesnt have to report it
-cost constraint – providig info is costly – weigh cost companies wil incurr by providing it against the benefit the financial users will gain from having the info available
14
Q
intracompany comparisons
A
comparing the same company over 2 years
15
Q
industry-average comparisons
A
based on average ratios for particular industries
16
Q
intercompany comparisons
A
based on comparisons with a competitor within the same industry
17
Q
source document
A
evidence of a transaction (sales slip, check, bill, cash register tape, etc.)
18
Q
steps in recording process
A
- analyze each transaction
- enter transaction info in journal
- transfer journal information to the appropriate accounts in the ledger
19
Q
benefits of general journal:
A
- it discloses in one place the complete effect of a transaction
- it provides chronoligcal record of transactions
- it helps prevent or locate errors because the debit and credit amounts for each entry can be easily compared
20
Q
trial balance
A
- prepared at the end of the acct. period
- proves eqaulity of debits and credits
- accounts are listed in the order in which they appear in the ledger
- can uncover errors
- useful in the preparation of financial statements
but DOES NOT proves everything has been recorded or that it is correct
21
Q
revenue recognition principle
A
companies recognize revenue in the accounting period in which it is earned (service is provided, sale is made)
22
Q
expense recognition principle (matching principle)
A
efforts (expenses) must be matched with revenues
23
Q
accrual basis accting
A
transactions that change a company’s financial statements are recorded in the periods in which the events occur - even if cash was not exchanged
- also recognize expenses when incurred
24
Q
cash basis accting
A
companies record revenue when cash is recieved
- and record expense only when cash is paid
- PROHIBITED under GAAP
- because it violates the revenue recognition principle
25
adjusting entries
ensure that the revenue recognition and expense recognition principles are followed
- w/o these entries, trial balance may not include up to date data
- required every time a company prepares its financial statements
- every entry will include one income statement acct and one balace sheet acct
26
useful life
the period of service of an asset
27
depriciation
the process of allocating the cost of an asset to expense over its useful life
- allocates the asset's cost to the period in which it was used
- DOES NOT attempt to report the actual change in value of an asset
28
book value
the difference between the cost of any depriciable asset and its related accumulated depreciation
ex: equipment minus accumuated depreciation of equipment = book value
29
steps
1. journalize
2. post to t-accounts in ledger
3. prepare trial balance
30
temporary accounts
- revenue accounts
- expense accounts
- dividends
- because these only relate to a specific accounting period
31
permanent accounts
- all balance sheet accounts (assets, liabiiities, SE)
(because their balances are carried forward into the next accounting period)
32
closing entries
transfer net income (or loss) and dividends into Retained Earnings -- to update RE to its correct ending balance
1. companies close revenue and expense accounts in Income Summary
2. then transfer this balance to RE
\*dividends just go stright to RE
33
summary of accounting cycle (9 steps)
- for a whole year
1. analyze transactions
2. journalize them
3. post to ledger (T accounts)
4. prepare a trial balance
5. journalize and post adjusting entries (deferrals and accruals)
6. prepare adjusted trial balance
7. prepare financial statements (IS, RE, BS)
8. journalize and post closing entries
9. prepare a post-closing trial balance
34
earnings management
the planned timing of revenues, expenses, gains, losses to smooth out the bumps in net income
35
quality of earnings
a company that has high quality of earnings will provide full and transparent info that will not confuse or mislead its users of financial statements
36
ways companies manage earnings
- use one-time items to prop up earnings numbers
- inflate revenue in teh short run to the detriment of the long run
- improper adjusting entries
- sarbanes-oxley act is working to improve this
37
categories of expenses for a merchandising company
1. operating expenses
2. costs of goods sold
38
operating cycle
operating cycle of merchandising company is longer than that of a service company
39
companies purchases in perpetual inventory system
- cash payments should have support of a cancelled check or cash register receipt
- each purchase should be supported by a purchase invoice, which indicates the total purchase price and other releant information
- purchaser uses copy of service invoice sent by seller
40
FOB shipping point
seller places the goods free on board the carrier, and the buyer pays the freight costs
--ownership passes to buyer when the item is shipped
41
FOB destination
-seller places the goods free on board to the buyer's place of business, and the seller pays the freight
-- ownership transfers when the buyer recieves the good
42
recording sales of merchandise in perpetual system
Accts Recievable - debit
sales revenue - credit
cost of goods sold - debit
inventory - credit
43
reasons to use single step income statement
- simple and easy to read
- a company does not realize any type of profit until revenues exceed expenses
44
gross profit
Net sales - COGS
- represents merchandising profit, NOT overall profit
45
COGS (under periodic inventory system)
Beginning Inventory + Purchases = Cost of goods availale for sale
COGAFS - ending inventory = COGS
46
gross profit rate
GPR = gross profit / net sales
- more meaningful than gross profit amount because it shows direct relationship b/w gross profit and net sales
Gross profit rate is a profitability measure. It measures how much a company profits off the sale of its inventory. Under most circumstances, the higher the number the better, as long as the company can sustain their sales levels. Gross profit rate shows how much a company is able to mark up their inventory when selling it, as well as how cheaply they can purchase their inventory. Gross profit rate is used to both compare year-to-year performance, as well as compare two companies within the same industry. Dayton’s GPR was slightly better in 2010 than 2011.
47
profit margin ratio
PMR = net income/net sales
- the percentage of each dollar of sales that results in net income
- can increase this by increasing gross profit or controlling its opperating expenses or other costs
48
quality of earnings ratio
net cash provided by operating activies / net income
- shows earnings quality
- a lotless than 1 = aggressive account practices to accelerate income recognition
- a lot greater than 1 = conservative accounting techniques
49
merchanidising company inventory
= merchandise inventory
50
manufacturing company types of inventory:
1. raw materials - basic goods that will be used in production but are not in production yet
2. work in progress- portion of manufactured inventory that has begun the production process but is not complete
3. finished goods - manufactured items that are completed and ready for sale
- by looking at these levels, financial statement users can gain insight into a managers produciton plan
51
just-in time inventory
companies manufacture or purchase goods just in time for use
-need reliable suppliers
52
specific identification method
identifying which particular untis were sold and costing those at what they actually costed
- limited # of high cost items
- rare
53
cost flow assumptions
FIFO
LIFO
Average Cost
- assume flows of cost that may be unrealated to actual flow of goods
- many companies use periodic,
- very few perpetual users use LIFO FIFO or Avg cost (they use standard cost)
54
lower of cost-or-market
value inventory at lower of cost or market in the period in which a price decline occurs
- apply LCM after using one of the cost flow methods
= current replacement cost (not selling price)
