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accounting 100 > Exam 1: Chp 1-5 > Flashcards

Exam 1: Chp 1-5 Flashcards

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1
Q

Sole proprietorship

A

A business owned by one person

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2
Q

Pros of a sole proprietorship (3)

A

(1) Simple to establish
(2) Owner controlled
(3) Tax advantages

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3
Q

Cons of a sole proprietorship (3)

A

(1) Proprietor is personally liable
(2) Financing may be difficult
(3) Transfer of ownership difficult

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4
Q

Examples of a sole proprietorship

A

Bakeries, barbershops, small restaurants, bike repair shops

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5
Q

Partnership

A

A business owned by two or more persons

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6
Q

Pros of a partnership (4)

A

(1) Simple to establish
(2) Shared control
(3) Tax advantages
(4) Broader skills and resources

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7
Q

Cons of a partnership (2)

A

(1) Partners personally liable
(2) Transfer of ownership may be tough

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8
Q

Examples of a partnership

A

Most service type organizations, like law firms, doctors, and architects

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9
Q

Corporation

A

A business organized as a separate legal entity owned by stockholders

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10
Q

Pros of a corporation (3)

A

(1) Easy to transfer ownership
(2) Greater capital raising potential
(3) Lower legal liability

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11
Q

Cons of a corporation (2)

A

(1) Unfavorable tax treatment
(2) Harder to establish

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12
Q

Examples of a corporation

A

Amazon, Coca-Cola, Target, and Home Depot

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13
Q

Other forms of businesses

A

Hybrid forms of businesses; combine tax advantages of partnership with limited liability of corporations
–> Limited Liability Corporations (LLC’s), Limited Liability Partnerships (LLP’s), Subchapter S Corporations (S-Corps’s)

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14
Q

Internal users

A

Inside the company- plan, organize, and run a business
Types: general managers, production supervisors, marketing managers, directors, and other officers

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15
Q

External users

A

Outside the company
Types: investors, creditors, suppliers, bankers, and regulatory authorities

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16
Q

Sarbanes Oxley Act of 2002 (SOX)

A

Passed to reduce the unethical corporate behavior and decrease the likelihood of future corporate scandals
- Required top management to certify the accuracy of reports
- Increased the severity of punishment for corporate executives
- Increased the independence needed for external auditors
- Increased the oversight role for Board of Directors

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17
Q

3 types of business activities

A

Financing, investing, and operating

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18
Q

Financing (stocks & bonds)

A
  • Raising money from outside sources
  • Issuing bonds (debt financing) or issuing stock (equity financing)
  • An amount owed to a creditor or lender: liability (notes payable & bonds payable)
  • Issuing stock is giving ownership rights (equity) to a shareholder for money
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19
Q

Investing (PPE, long-term assets)

A
  • Purchase or sale of resources in order to operate long-term
  • Assets: resources owned by company and provide benefits
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20
Q

Operating (revenues, expenses, current assets, current liabilities)

A
  • Day to day actions to produce/sell a product
  • Expenses: costs consumed in the process of generating revenue. Costs of goods sold, selling expenses, liabilities may arise
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21
Q

The four financial statements

A

Income statement, retained earnings statement, balance sheet, and statement of cash flows

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22
Q

Revenues

A

Amounts received from normal business operations

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23
Q

Expenses

A

Costs incurred to arrive at sales

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24
Q

Assets

A

Resources that the business owns

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25
Q

Liabilities

A

Obligations owed to outside parties

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26
Q

Stockholder’s Equity

A

Amount of claims from investors and earnings kept in the business

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27
Q

The Income Statement

A

Shows how successful a business performed over a period of time
Revenues - Expenses = Net Income
Can help investors predict future net income

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28
Q

The Retained Earnings Statement

A

Shows the amounts and causes of changes in retained earnings for a period of time.
Retained Earnings is the net income retained and kept within the business.
Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings

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29
Q

The Balance Sheet

A

Reports assets and claims on assets at a specific point of time. A snapshot of what we “own” (assets) and what we “owe” (liabilities and equity).
Assets = Liabilities + Stockholder’s Equity

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30
Q

The Statement of Cash Flows

A

Provides financial information on the cash receipts and cash payments of a business for a period of time. Breaks down into operating, investing, and financing.
Questions:
Where did cash come from during the period?
How was cash used during the period?
What was the change in the cash balance during the period?

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31
Q

Interrelationships of the Financial Statements

A
  • The retained earnings statement uses the net income amount from the income statement
  • The balance sheet has the retained earnings total from the retmained earnings statement in the equity section
  • The statement of cash flows has the ending cash balance from the balance sheet
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32
Q

Creditors

A

Persons or entities to whom you owe money

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33
Q

Note payable

A

Money borrowed to purchase

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34
Q

Bonds payable

A

Debt securities sold to investors that must be repaid at a particular date (in the future)

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35
Q

Common stock

A

The total amount paid in by stockholders for the shares they purchase

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36
Q

Dividends

A

Payments of cash from a corporation to its stockholders

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37
Q

Supplies

A

Assets used in day-to-day operations

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38
Q

Inventory

A

Goods available for future sales to customers

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39
Q

Account receivable

A

The right to receive money in the future

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40
Q

Accounts payable

A

The obligation to pay for goods purchased on credit from suppliers

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41
Q

Interest payable

A

Amounts owed to the bank

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42
Q

Basic accounting equation

A

Assets = Liabilities + Stockholders Equity

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43
Q

Liquidity

A

How quickly something could be converted to cash

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44
Q

Classified Balance Sheet

A

Groups together similar assets and similar liabilities.
Assets:
1. Current assets
2. Long-term investments
3. Property, plant, and equipment
4. Intangible assets
Liabilities and Stockholders’ Equity
1. Current liabilities
2. Long-term liabilities
3. Stockholders’ equity

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45
Q

Current Assets

A

Assets that a company expects to convert to cash or use up within one year or its operating cycle (the average time required to go from cash to cash producing revenue), whichever is longer
Listed in order of liquidity, from most liquid at the top and illiquid near the bottom

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46
Q

Order of Liquidity

A
  1. Cash
  2. Investments (short-term US government securities or trading securities)
  3. Receivables (accounts receivable, notes receivable, interest receivable)
  4. Inventory
  5. Prepaid Expenses (supplies, insurance, etc)
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47
Q

Long-Term Investments

A

Investments planned to be held for most of the year or held until the investment’s maturity.
Includes:
- Investments of stocks and bonds of another corporation that are held for more than one year
- Long-term assets such as land or buildings that a company is NOT currently using in operations
- Long-term notes receivable

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48
Q

Property, Plant, and Equipment (PPE)

A

Includes assets with relatively long useful lives that are currently used in operating the business.
EX: land, buildings, equipment, delivery vehicles, furniture.
also called fixed assets or plant assets

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49
Q

Accumulated Depreciation

A

Shows the total amount of depreciation that the company has expensed thus far in the asset’s life. Deducts from the total value of PPE.
Shown after “Less:” on the balance sheet

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50
Q

Intangible Assets

A

Do not have physical substance but still offer value to the business. Can have a finite useful life or an indefinite life.
EX: patents, copyrights, trademarks and trade names, Goodwill
also called other assets

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51
Q

Assets Review

A

Current Assets
- cash, short term investments, receivables, inventory, prepaid assets
Long-term Investments
Property, Plant, and Equipment
- land, buildings, equipment, furniture
Intangible Assets
- patents, copyrights, trademarks, Goodwill

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52
Q

Current Liabilities

A

Obligations that the company is to pay within the next year or operating cycle (whichever is longer).
EX: accounts payable, salaries and wages payable, notes payable, unearned revenue, interest payable, income taxes payable

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53
Q

Long-term Liabilities

A

Obligations that a company expects to pay after one year.
EX: bonds payable, mortgages payable, long-term notes payable, lease liabilities, pension liabilities

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54
Q

Stockholders’ Equity

A

(1) Common Stock: the investment of assets into the business by shareholders
(2) Retained Earnings: the income retained for use in the business

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55
Q

Major Balance Sheet Classifications

A
  • Current assets (CA)
  • Long-term investments (LTI)
  • Property, plant, and equipment (PPE)
  • Intangible assets (IA)
  • Current liabilities (CL)
  • Long-term liabilities (LTL)
  • Stockholders’ equity (SE)
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56
Q

Profitability Ratios

A

Measures the income or operating success of a company for a given period of time.
EX: Earnings per share

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57
Q

Earnings per Share (EPS) Equation

A

Earnings per Share = [Net Income - Preferred Dividends] / Weighted Average Common Shares Outstanding

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58
Q

Liquidity Ratios

A

Measures the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
EX: Working Capital & Current Ratio

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59
Q

Working Capital Equation

A

Working Capital = Current Assets - Current Liabilities.
(the higher/more positive the number, the better)

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60
Q

Current Ratio Equation

A

Current Ratio = Current Assets / Current Liabilities.
(the higher/more positive the better)
(more dependable indicator of liquidity than working capital)

61
Q

Solvency Ratios

A

Measures the ability of the company to survive over a long period of time.
EX: Debt to Assets Ratio

62
Q

Debt to Assets Ratio

A

Total Liabilities / Total Assets.
(measures the percentage of total financing provided by creditors rather than stockholders)
(higher - more liabilities, lower - no loans)
(higher ratio means its financed more with debt/leveraged more. this may be undesirable)

63
Q

Generally Accepted Accounting Principles (GAAP)

A

A set of accounting standards that have authoritative support

64
Q

Security and Exchange Commission (SEC)

A

The agency of the US government that oversees US financial markets and accounting standard-setting bodies

65
Q

The Financial Accounting Standards Board (FASB)

A

The primary accounting standard-setting board in the US - write rules to become GAAP

66
Q

The Public Company Accounting Oversights Board (PCAOB)

A

Determines US public company auditing standards and reviews the performance of auditing firms - separate from FASB, worry about public companies

67
Q

Relevance

A

Accounting information has relevance if it would make a difference in a business decision.
(1) Predictive value: helps provide accurate expectations about the future
(2) Confirmatory value: confirms or corrects prior expectations
(3) Materiality: a company-specific aspect of relevance. An item is material when omitting it or misstating it could influence the decision of a financial statement user ($100 example with Ginger Root vs Walmart)

68
Q

Faithful Representation

A

Information accurately depicts what really existed or happened.
(1) Completeness: nothing important has been omitted
(2) Neutral: is not biased toward one position or another
(3) Free from material error

69
Q

Comparability

A

The ability to compare two different sets of statements that use the same accounting principles

70
Q

Consistency

A

Company uses the same accounting principles and methods from year to year

71
Q

Verifiable

A

An independent observer uses the same methods and obtains similar results

72
Q

Timely

A

Must be available to decision-makers before it loses its capacity to influence decisions

73
Q

Understandability

A

Presented in a clear and concise fashion, so that reasonable users can interpret it and comprehend the meaning

74
Q

Monetary Unit Assumption

A

Items not easily quantified in dollar terms are not reported in the financial statements

75
Q

Economic Entity Assumption

A

Personal transactions are not mixed with the company’s transactions

76
Q

Periodicity Assumption

A

The life of a business can be divided into artificial segments of time

77
Q

Going Concern Assumption

A

Assumes a business will remain in operation for the foreseeable future

78
Q

Historical Cost Principle

A

Assets are recorded and reported at original purchase price

79
Q

Full Disclosure Principle

A

The reporting of all information that would make a difference to financial statement users

80
Q

Materiality

A

The judgement concerning whether an item’s size makes it likely to influence a decision-maker

81
Q

Cost Constraint

A

The cost to provide information should be weighed against the benefit that users will gain from having the information available. Don’t do it if cost > benefit

82
Q

Fair Value Principle

A

Indicates that assets and liabilities should be reported at fair value (the price that would be received if an asset was sold or the amount that would be required to be paid to settle a liability)

83
Q

Accounting for Transactions EXAMPLE: Purchasing Equipment
A company buys a brand-new piece of equipment for $5,000

A

The asset Equipment increased by $5,000; the asset Cash is decreased $5,000

84
Q

Accounting for Transactions EXAMPLE: Issuing Common Stock
An outside investor purchases $10,000 worth of our common stock

A

The asset Cash is increased $10,000; stockholders’ equity (common stock) is increased $10,000

85
Q

Accounting for Transactions EXAMPLE: Providing Services
The company performed services for $10,000 cash

A

The asset Cash is increased $10,000; stockholders’ equity (retained earnings- revenue) increased $10,000

86
Q

Accounting for Transactions EXAMPLE: Paying Rent
The company paid their monthly rent of $900

A

The asset Cash is decreased $900; the expense Rent Expense is increased $900 because the payment pertains only to the current month

87
Q

Accounting for Transactions EXAMPLE: Paying a Dividend
The company paid dividends totaling $500 cash to their investors

A

Dividends is increased $500; the asset Cash is decreased $500

88
Q

Account

A

An individual accounting record of increases and decreases in a specific asset, liability, stockholders’ equity, revenue, or expense item.
Contains a title, a left (debit Dr.) side, a right (credit Cr.) side

89
Q

4 parts of stockholders’ equity

A

Stock, dividends, revenues, and expenses

90
Q

Natural Account Balances mnemonic

A

D - debits are
E - expenses
A - assets and
D - dividends

91
Q

Journal Recording Process

A
  1. Analyze each transaction in terms of its effects on the accounts
  2. Enter the transaction information in a journal
  3. Transfer the journal information to the appropriate accounts in the ledger
92
Q

The Journal

A

The journal makes three significant contributions to the recording process:
1. It discloses in one place the effect of a transaction
2. It provides a chronological record of transactions
3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared

93
Q

The Journal Entry

A

Making an entry into a journal is called journalizing or making a journal entry.
Every entry needs:
- The date of the event
- The accounts debited on the left and accounts credited on the right
- The amounts associated with the accounts involved
- A brief explanation of the transaction

94
Q

The Journal Entry EXAMPLE: Purchasing Equipment
A company buys a brand-new piece of equipment for $5,000

A

Debit Equipment for $5,000 and credit Cash for $5,000

95
Q

The Journal Entry EXAMPLE: Issuing Common Stock
An investor purchases $10,000 worth of common stock

A

Debit Cash for $10,000 and credit Common Stock for $10,000

96
Q

The Journal Entry EXAMPLE: Providing a Service
The company performed services for $10,000 cash

A

Debit Cash for $10,000 and credit Service Revenue for $10,000

97
Q

The Journal Entry EXAMPLE: Paying Rent
The company paid their monthly rent of $900

A

Debit Rent Expense for $900 and credit Cash for $900

98
Q

The Journal Entry EXAMPLE: Paying a Dividend
The company paid dividends totaling $500 cash to their investors

A

Debit Dividends for $500 and credit Cash for $500

99
Q

The Ledger

A
  • Provides the balance in each of the accounts and keeps track of changes
  • Record of all accounts maintained by a company and their amount
  • Subsidiary ledger: record of a specific account only
  • Chart of accounts: used to group subsidiary ledgers together (ex: all asset accounts or all liability accounts)
100
Q

Posting to the Ledger

A

The process of transferring journal entry amounts to ledger accounts. Take the amounts and numbers from the journal entries and filling in the debit or credit sides of T-Accounts for their respective ledger

101
Q

The Trial Balance

A

Lists accounts and their balances at a given time. Accounts are listed in the order in which they appear in the ledger.
Helps prove mathematical equality of debits and credits after posting - then used to prepare the financial statements

102
Q

Steps to Create a Trial Balance

A
  • List the account titles and their balances
  • Total the debit column and total the credit column
  • Verify the equality of the two columns
103
Q

Limits of the Trial Balance

A

The trial balance isn’t a perfect error catcher. It can still balance in these scenarios:
- a transaction is not journalized
- a correct entry is not posted
- a journal entry is posted twice
- incorrect accounts are used in journalizing or posting

104
Q

The Revenue Recognition Principle

A

Requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied.
Revenue is recognized when the performance obligation is satisfied

105
Q

Five-step revenue recognition process

A
  1. Identify the contract with customers (know who you’re dealing with)
  2. Identify the separate performance obligations in the contract (separately split them out)
  3. Determine the transaction price (what you will get paid ahead of time)
  4. Allocate the transaction price to the separate performance obligations (assign to each job)
  5. Recognize revenue when each performance obligation is satisfied
106
Q

The Expense Recognition Principle

A

Requires companies to recognize expenses in the period they arise, from either using up assets or incurring liabilities to create revenues
Recognize expenses in the period when the company makes efforts to generate revenue
EX: salaries. you don’t get paid every day, but more likely on a bi-weekly basis

107
Q

Accrual-basis accounting

A

Transactions that change a company’s financial statement are recorded in the periods in which the events occur, even if cash was not yet exchanged
(Revenue rec. and expense rec.)

108
Q

Cash-basis accounting

A

Companies record revenue at the time they receive cash - not in accordance with GAAP

109
Q

Adjusting Entries

A

They ensure that the revenue recognition and expense recognition principles are followed.
- some events aren’t recorded daily because it isn’t efficient to do so
- some costs aren’t recorded during the accounting period because these costs expire with the passage of time
- some items may be unrecorded because documents giving rise to an entry have not yet been received
*Includes one income statement account and one balance sheet account

110
Q

Two Types of Adjusting Entries

A

Deferrals and Accruals

111
Q

Deferrals

A

Expenses of revenues that are recognized at a later date than when cash was originally exchanged

112
Q

Two types of deferrals

A
  1. Prepaid expenses: expenses paid in cash before they are used or consumed (asset)
  2. Unearned revenues: cash received before services are performed (liability)
    EXAMPLES: rent, insurance, supplies, depreciation, and subscriptions
113
Q

Depreciation

A

The process of allocating the cost of a long-term asset to expense over its useful life
Cost / Useful Life = Depreciation

114
Q

Contra-asset

A

Negative asset

115
Q

Accruals

A

Expenses or revenues that are recognized at an earlier date than the point when cash was exchanged (recognized early)

116
Q

Two types of accruals

A
  1. Accrued revenues: revenues for services performed but not yet received in cash or recorded
  2. Accrued expenses: expenses incurred but not yet paid in cash or recorded
    EXAMPLES: interest (paid or received) and salaries & wages
117
Q

Interest Calculation

A

Face Value * Annual Interest Rate * Time in Terms of One Year

118
Q

Wages Equation

A

Number of Employees * Wage Rate * Time Worked

119
Q

Adjusted Trial Balance

A
  • Gives an updated and true balance on all accounts
  • Proves the equality of the total debit and credit balances
  • Creates the basis to prepare the financial statements
120
Q

Temporary (nominal) Accounts

A

Income statement and Expenses and revenues.
Accounts only relate to a given period of time

121
Q

Permanent (real) Accounts

A

Balance sheet.
Balances are carried forward

122
Q

Closing the Book

A

Closing entries transfer net income and dividends to retained earnings so the balance reported on the balance sheet agrees with the retained earnings statement.
Closing entries produce a zero balance in temporary accounts.
Only temporary accounts (revenue, expense, dividends) are closed.

123
Q

Process of Closing the Book

A

Close the revenue and expense accounts to Income Summary- the net income/loss for the period.
Then, Income Summary is closed to the retained earnings.
Lastly, dividends are closed to retained earnings.

124
Q

How to close a revenue account

A

Debit revenue and Credit income summary

125
Q

How to close an expense account

A

Credit that expense and Debit the income summary

126
Q

How to close dividends

A

Credit the dividends and Debit retained earnings

127
Q

Summary of the accounting cycle

A
  1. Analyze business transactions
  2. Journalize the transactions
  3. Post to the ledger accounts
  4. Prepare a trial balance
  5. Journalize and post adjusting entries
  6. Prepare an adjusted trial balance
  7. Prepare financial statements
  8. Journalize and post closing entries
  9. Prepare a post-closing trial balance
128
Q

Merchandiser

A

A company that sells products to another party instead of providing a service

129
Q

Retailers

A

Merchandising companies that purchase and sell directly to consumers
EX: Walgreens

130
Q

Wholesalers

A

Merchandising companies that sell to retailers
EX: McKesson

131
Q

Two main categories of expenses

A
  1. Cost of goods sold (COGS): total cost of merchandise sold during the period
  2. Operating expenses: incurred in the process of earning sales revenue
132
Q

Gross Profit Equation

A

Sales Revenue - COGS

133
Q

Net income (Loss) Equation

A

Gross Profit - Operating Expenses

134
Q

Service Company operating cycle

A

receive cash -> Cash -> perform services -> SERVICE -> Accounts receivable -> money transfer

135
Q

Merchandising Company operating cycle

A

receive cash -> Cash -> buy inventory -> Inventory -> sell inventory -> Accounts receivable -> money transfer

136
Q

Flow of Costs

A

Beginning Inventory + Goods Purchased = Goods Available for Sale - Ending Inventory (goods not sold by the end of the period) = Goods Sold

137
Q

Perpetual Systems

A

A company keeps detailed records of the cost of each inventory purchase and sale continuously. They always show the amount of inventory on hand. A company determines the COGS each time a sale occurs

138
Q

Advantages to a perpetual system

A
  • Provides better control over inventories
  • A company can get quantities on hand at any time
  • If shortages are present, a company can immediately order new inventory
  • With more computerized systems, companies tend to use perpetual systems since it’s easier to track details
139
Q

Periodic Systems

A

A company does not maintain a detailed inventory record of goods on hand. They determine the cost of goods sold only at the end of the accounting period

140
Q

Perpetual System: Freight Costs

A

Freight costs are agreed between the buyer and seller. It is to determine who will pay for the shipping and who will maintain the risk of damage or loss.
FOB shipping point: ownership passes when the public carrier accepts the goods. The BUYER will pay for the costs (freight-in)
FOB destination: ownership passes when the goods arrive to the agreed upon destination. The SELLER will pay for the costs (freight out)

141
Q

Perpetual System: Purchase Returns and Allowances

A

Purchase return: returning goods to the seller for credit if the sale was made on credit, or for a cash refund
Purchase allowance: purchaser keeps the merchandise if the seller is willing to grant an allowance/deduction from the price

142
Q

Perpetual System: Purchase Discount

A

2/10, n/30 “two-ten, net thirty”. If the buyer pays within 10 days, they get a 2% discount. Otherwise, they have 30 days to pay and receive no discount.

143
Q

Single-Step Income Statement Inclusions

A

REVENUES (net sales; other)
EXPENSES (cogs; payroll-related expenses; occupancy, general, and administrative; patronage refunds and other; income taxes)
NET INCOME

144
Q

Multi-Step Income Statement

A

More useful to see how a company reached certain components of net income
- Gross Profit = Net Sales - COGS
- Income from Operations = Gross Profit - Operating Expenses
- Net Income = Income from Operations - Non-Operating Items

145
Q

Operating Expenses

A

Selling and administrative costs.
Salaries, rent, insurance, etc

146
Q

Multi-Step Income Statement Inclusions

A

SALES (sales revenue; less: sales returns and allowances, sales discounts; net sales)
COGS, Gross Profit
Operating Expenses
Income From Operations
Other Revenues and Gains (interest revenue; gain on disposal of plant assets)
Other Expenses and Losses (interest expense; casualty loss from vandalism)
Income before Income Taxes
Net Income

147
Q

Periodic Systems Equation

A

Beginning Inventory + Goods Purchased = Goods Available for Sale - Ending Inventory = Cost of Goods Sold

AP:
beg. balance + purchases - end balance = $ cash

148
Q

Gross Profit Rate

A

Expresses a relationship between gross profit and net sales
Gross Profit / Net Sales
OR
(Net Sales - COGS) / Net Sales

149
Q

Profit Margin

A

Measures the percentage of each dollar of sales that results in net income
Net Income / Net Sales

accounting 100 (1 decks)

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