Dump from Midterm Prep Sheet Flashcards
What entities can companies have business transactions with?
Suppliers, consultants, vendors, customers, creditors (e.g. banks, bondholders).
What supports business transactions?
Source documents like Purchase orders, invoices, contracts, promissory notes, etc.
When should transactions that have an economic impact on the company be measured and recorded?
Transactions with an economic impact must always be measured and recorded.
What equation provides a deeper understanding of equity?
The Expanded Accounting Equation.
What happens to company transactions during the month?
A company records all of its transactions that are naturally occurring, based on activities and source documents.
What are ‘Preliminary’ financial statements?
Statements on the last day of the month that don’t fully reflect accrual accounting as required by GAAP.
Why are ‘adjustments’ necessary for financial statements?
To ensure they reflect accrual accounting as required by GAAP.
What is the main principle of accrual-basis accounting?
Recording assets, liabilities, revenues, and expenses at the time of the true economic event.
What arises when a company pays for an asset not used until a later period?
Prepaid expenses.
Define depreciation in the context of long-lived assets.
The allocation of cost for long-lived assets over the expected useful life.
What occurs when a company receives cash in advance but services are provided later?
Deferred revenues arise.
How are accrued expenses characterized?
They occur when a company has used costs in the current period but hasn’t yet paid cash for those costs.
When do accrued revenues occur?
When a company provides products or services but hasn’t yet received cash.
What is prepared after adjustments are posted?
A ‘trial balance’.
What happens after final financial statements are prepared?
The accounting records can be ‘closed’ to start the new period.
What does closing the accounts involve?
Transferring the balances of temporary accounts (revenues, expenses, and dividends) to Retained Earnings.
What are typical adjustments in the accounting cycle?
Prepaid Expenses, Unearned (Deferred) Revenue, Accrued Revenue, and Accrued Expenses.
What results from delivering goods or services as part of an entity’s core operations?
Revenues
When should revenue recognition typically occur according to GAAP?
When control of a good or service is transferred to the customer on a specific date.
Name some indicators that transfer has occurred for revenue recognition.
The seller’s right to payment, legal title transferred to the customer, physical possession by the customer, customer’s formal acceptance, and customer assuming risks and rewards of ownership.
What is the core principle of revenue recognition under GAAP?
Companies recognize revenue when goods or services are transferred to customers for the amount they expect to receive in exchange.
What is a performance obligation in the context of revenue recognition?
It’s likely satisfied if the customer has an obligation to pay the seller, received legal title, physical possession, assumed risks and rewards, or accepted the goods or service.
What arises when a company receives cash before providing services to customers?
A liability called deferred revenue or unearned revenue.
When is revenue recognized over a period of time?
If the customer consumes the benefit as it’s performed, controls the asset as it’s created, or if the seller creates an asset with no alternative use and has a right to payment for progress.
List the steps in the revenue recognition process.
1) Identify the contract, 2) Identify performance obligations, 3) Determine transaction price, 4) Allocate transaction price to performance obligations, 5) Recognize revenue when obligations are satisfied.
What does net revenues account for?
Total revenues less any amounts for returns and discounts.
How is ‘accounts receivable’ defined?
It exists when companies make sales ‘on credit’, transferring goods or services today while bearing the risk of collecting payment in the future.
How does GAAP require companies to account for uncollectible accounts from credit sales?
Using the allowance method, where companies estimate the amount of current accounts receivable that will prove uncollectible in the future and report this as a contra asset.
What is bad debt expense categorized under?
Operating expenses.
Describe the write-off process for uncollectible accounts.
When it’s clear a customer won’t pay, the company writes off the customer’s account balance. This decreases both Accounts Receivable and the Allowance for Uncollectible Accounts.
How are accrued revenues characterized?
They occur when a company provides products or services but hasn’t yet received cash.
What is a performance obligation in the context of revenue recognition?
It’s a duty or responsibility to either deliver a good or provide a service to a customer.
What is the result of giving customers time to pay, and how is this risk accounted for?
Allowing customers time to pay introduces credit risk. This risk needs to be estimated and recorded in the financial statements using the allowance method as prescribed by GAAP.
Which types of companies typically have inventory?
Merchandisers and Manufacturers
What does COGS represent?
Cost of Goods Sold represents the value of the inventory that has been sold to customers.
What is subtracted from Revenues to derive Gross Profit?
Cost of Goods Sold (COGS)
How is the ‘cost’ in inventory typically conceptualized?
It can be thought of as the ‘‘Purchases during the Year’.
What is the purpose of inventory costing?
To allocate the total value between Cost of Goods Sold (what was sold) and Ending Inventory (what remains).
List the four methods for inventory costing.
Specific identification, Weighted-average cost, First-in, first-out (FIFO), and Last-in, first-out (LIFO)
How are assets typically listed in terms of inventory?
In order of liquidity, starting with the most liquid, such as cash.
In what order are liabilities typically listed?
In order of maturity, starting with the one with the shortest maturity, like accounts payable.
What are current liabilities?
Obligations that are due within one year, such as Accounts Payable, Deferred Revenues, and Accrued Liabilities.
How is stockholders’ equity calculated?
Stockholders’ equity is simply total assets minus total liabilities.
What are the two primary sources of equity?
Contributed capital (from external parties) and retained earnings (generated by the company).
Over what time frame does an income statement typically measure activity?
It measures activity over a period of time, such as one year or one quarter.
What are the sub-totals in a multi-step income statement?
Gross profit, Operating income, Nonoperating income, Pre-tax income, and Net income.
What does the Statement of Cash Flows provide information about?
The cash receipts and cash disbursements of a company.
What are the components of inventory cost?
The components include purchase price, shipping costs, customs duties, and any costs to ready the inventory for sale.
