Exam 1 Flashcards
Objective of Financial Accounting (4)
Identifying, recording, reporting, and analyzing economic transactions to help interested parties make decisions.
Financial verses Managerial Accounting
financial: aimed at serving external users
managerial: aimed at serving internal users
Users of Financial vs managerial accounting
Financial: shareholders, lenders
Managerial: purchasing, marketing, CEOs, etc
Primary Users of financial information
Internal and External users
Internal Vs External Users
internal: directly manage business ops
External: don’t run business and have limited access to acct info (lenders and shareholders)
Components of the Fraud Triangle
opportunity, pressure, rationalization
Purpose of internal controls within a company
To help prevent fraud
Define Ethics
codes of conduct by which actions are judged as good or bad
Measurement/Cost Principle
Accounting info based on actual cost.
-cash given = cash
-Assets = the value of the asset
Revenue Recognition Principle
Record revenue in the period in which it’s earned
Expense recognition principle (matching principle)
Match expenses with revenues in the period business tries to make those revenues
Full Disclosure Principle
A company reports details behind financial statements that would impact users’ decisions.
Basic Accounting Equation (Balance Sheet Equation) (BALE)
Assets = Liabilities + Stockholders’ Equity (they balance)
What are the four financial Statements in the order they are prepared?
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
How do you compute retained earnings? (RID)
Beginning Balance of Retained Earnings PLUS or minus Net income MINUS Dividends declared EQUALS Ending Balance ofa Retained Earning
How do you compute the net income of a company?
revenues(income), minus expenses
How do you compute a company’s Return on Assets? (ROA)
-average total assets
-net income
net income divided by average total assets
What is included in an Income Statement (RISEN)
Revenues
MINUS Expenses
Net Income or Loss
When is an expense recorded?
After it is used
What account does pre paid expenses fall into?
Asset account
double-entry accounting
The recording of debit and credit parts of a transaction
Define account balance
the difference between the total debits and the total credits in an account
General Ledger
record containing all accounts - amounts included - for a business.
Steps in the Accounting Cycle (9 steps)
- Analyze business transactions
- Journalize the transactions
- Post to ledger accounts
- trial balance
- Journalize and post adjusting entries
- adjusted trial balance
- Prepare financial statements
- Journalize and post closing entries
- trial balance
What are the preliminary financial statements? (Source)
initial document that serves as a basis for the actual statements
debt ratio (equation)
total liabilities/total assets
par value stock
capital stock that has been assigned a value per share in the corporate charter
stated value stock
No-par stock assigned a stated value per share
Authorized shares
shares of common stock that a firm’s corporate charter allows it to sell
issued shares
represent the total number of shares of stock that have been sold (includes those owned by company)
treasury shares
Issued shares that have been repurchased by the corporation. Treasury shares may not be voted by the corporation. Treasury shares may be resold by the corporation.
outstanding shares
shares that are owned by all stockholders (does not include company owned shares)
Rights of Shareholders (5)
- to sell their stock
- vote in the general meeting
- know certain information about the company
- can sue the managers for (alleged) misconduct
- Certain residual rights in case of the corporation’s liquidation
Basic Earnings Per Share (EPS)
-basic weighted shares outstanding
-net income
Net Income / Basic Weighted Average Shares Outstanding
Price/Earnings (P/E) Ratio
-earnings per share
-market price per share
market price per share/earnings per share
Components of Statement of Cash Flows (FOI)
operating activities, investing activities, financing activities
Define operating activities
activities that involve buying and selling goods and expenses related to admin
Define Investing Activities
activities that involve buying and selling long term assets, notes receivable and other cash investments are included
Define Financing Activities
transactions with owners and creditors that include obtaining cash from issuing debt, repaying amounts borrowed, and getting and giving cash to owners.
examples of operating activities (inflow and outflow)
Inflow: cash from sales, cash for interest revenue and dividend revenue
Outflow: operating and salary expenses, taxes, interest owed, paying suppliers
examples of investing activities (inflow and outflow)
Inflow: selling assets, collecting principal on notes receivable, selling investments
Outflow: buying assets, buying investments, loaning money for notes rec.
examples of financing activities (Inflow and outflow)
Inflow: issuing stock,. contributions by owners
Outflow: paying dividends, withdrawls from owners, paying off notes payable
no par value stock
a stock not assigned an amount per share by the corporate charter
