concept summary for exam 1 Flashcards
what are GAAP
measurement, revenue recognition, expense recognition, and full disclosure
the accounting equaiton is
asset = liability + equity
if you change one part of the accounting eq, what must happen to keep accounting eq in balance
change the other parts, so both sides equal each other
what are the two priamry pieces of owners equity
common stock and dividends
equity is
owners claim on assets and is = to assets minus liabiltiies
how does corporation calculate retained earnings
statement of retained earnings
retained earnings process
-inc net income
-dec by dividends and net loss
-put on statment of retained earnings
what are four financial statements
balance sheet, profit + loss statement, statement of change in equity, cash flow statement
what are differences and similarities between sole propieterships, partnerships (and LLCs), and corporations
-sole propietership: non incorporated, hard to sell
LLC: things can go wrong with more than one person. set agreement about distributions
General partnership: default. if sued you or partner can be attacked (risky). get around it with LLC. complicated to sell
Corporations: limited liability, transferability is easy ie buying/selling stoock
different corporation types
C-corporation and S corporations
c corpoation
taxed separately from their owners. can issue both common and preferred stock
s corporation
These are pass-through entities that file an informational return and pay taxes at the individual level. limited to offering one class of stock
how do you calculate return on assets ratio
net income/average total assets
how do you interpret return on assets ratio
if competition is risky, you want a higher %. compare to other companies, which will influence the decision
what are the common accounts you will find in assets, liabilities, and equity
assets: cash, receivable, equipment, prepaid expenses
liabilities: payables
equity: common stock, retained earnings
what is a debit
on left side of t account
-though of as inc in asset accounts
-dec in liability and equity accounts
what is credit
on right side of T account
-devreases in asset accounts
-inc in liability and equity accounts
how is a journal entry written
date, enter titles and amounts (first in debit)
can you make journal entries from common transactions
yes
can you create income statement, the statement of changes in equity, and the balance sheet if you have year-end balances in T accounts
yes
what is debts to asset ratio
total liabilities/total assets (liability + equity)
what do you do after you add up each account at end of accounting period
summarize in trial balance
-prepare financial statements
-closing entries to bring nominal accounts back to zero
how do you interpret the debt to assets ratio
if you have higher return on asset w/out knowinh anything else, it means choose the highest return on assets. but have to see what others are to decide if good or bad
what is cash method of accounting
-records revnues when they are collected
-records expenses when they are paid
what is accrual method of accounting
-records revenues when they are earned - whether collected or not
-records expenses when they are used - whether paid or not
do example on chapter three slides
ok
practice writing adjusting journal entries
ok
what is the current ratio
current assets/current liabilities
when do you recognize revenue
-for services it is when service is performed
-for sale of property, it is when title transfers to buyer
what is SEC guideline of recognizing revene
for when did these occur:
-an agreement
-product delivered or service performed
-price is set
-collectivilty is reasonable certain
net profit margin
net income/net sales revenue
how do you interpret current ratio
A higher current ratio indicates that a company has a stronger liquidity position and can more easily pay off its short-term debts. A current ratio of less than one means the company doesn’t have enough current assets to cover its current liabilities.
