Exam 2 Flashcards
What order are Financial Statements prepared in? (4)
- Income Statement
- Statement of Retained Earnings
- Balance Sheet
- Statement of Cash Flows
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.
Define the Accrual Method of Accounting
records revenues when services and products are delivered. records expenses when used.
What are adjusting entries?
General ledger entry at end of period to record unrecognized income and expenses
What are the rules of adjusting entries? (4)
- Never involve cash
- Always affect income statement
- Always affect Balance Sheet
- Entry is made after the end of the accounting period and posted back into the accounting period.
What is the formula for the Straight Line Method?
Depreciable Base /
Estimated Useful Life = Annual Depreciation Expense
How do you calculate the BOOK VALUE of a depreciable asset? (formula)
___minus ____
Cost minus accumulated depreciation
What is a Contra Asset account? (Define)
negative account that matches to a positive asset account.
What account is accumulated depreciation a contra-asset account of?
Equipment
What are the components of a Classified Balance sheet? [Hint: Assets (4) = Liabilities (2) + Equity (1)]
Assets
1. Current Assets
2. Long term investments
3. Plant Assets
4. Intangible assets
Liabilities
1. Current Liabilities
2. Long-term Liabilities
Equity
1. Shareholders Equity
What are the steps in the Accounting Cycle? (9)
- Analyze Transactions
- Journalize
- Post
- Prepare unadjusted trial balance
- Adjust and post accounts
- Prepare adjusted trial balance
- Prepare Financial Statements
- Close Accounts
- Post-Closing trial Balance
Which accounts are temporary? (4)
- Revenues
- Expenses
- Dividends
4.Income Summary
What accounts are permanent?
All Balance Sheet Accounts
Which accounts are included in a Post-Closing Trial Balance? (5)
Asset Accounts
Equipment and Accumulated Depreciation
Liabilities Accounts
Common Stock
Retained Earnings
What is the formula for the Current Ratio?
Current Assets / Current Liabilities
What is the formula for the Gross Profit?
(not margin)
Net Sales minus Cost of goods sold
What is the formula for the gross profit margin?
gross profit / net sales
What is the formula for the Profit margin?
net income / net sales
What accounts are included in the cash and cash equivilants?
All cash, and short-term liquid assets
What are the system of internal controls? (Define)
All policies and procedures used to protect assets, and ensure employees don’t commit fraud
What are the rules of SOX? (4)
- effective internal controls
- auditors evaluate controls
- violators receive harsh penalties (25 years in prison)
- auditors work overseen by board
What are the 5 Ingredients of Internal Control?
- Control Environment
- Control Activities
- Risk Assesment
- Information and Communication
- Monitoring
What are the 7 Principles of Internal Control?
- responsibility
- records
3 insure assets - separate recordkeeping
- divide responsibility
- technological controls
- performance reviews
What are the risk factors of the fraud triangle? (3)
opportunity, pressure, rationalization
What is the formula for the Days Sales Uncollected Ratio?
(Accounts Receivable / Net Sales) * 365 days
Define Accrued Revenues
Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets);
What is increased when an adjusted entry for an accrued revenue is recorded? (2 things)
assets and revenues.
Define deferred (or unearned) revenues
Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.
