fa Flashcards
Primary functions of accounting
Measure the activities of a company and communicate those measurements to help individuals make good decisions
Corporation
company that is legally separate from its owners
Sole proprietorship
business owned by one person
Partnership
business owned by two or more
income statement
reports the company’s revenues and expenses over an interval of time
Statement of stockholders equity
summarizes the changes in stockholders’ equity over an interval of time
Balance sheet
presents the financial position of the company on a particular date
statement of cash flows
measures activities involving cash receipts and cash payments over an interval of time
6 steps in measuring external transactions
1 use source documents to identify accounts affected by an external transactions
2 analyze the impact of the transaction on the accounting equation
3 assess whether the transaction results in a debit or credit to account balances
4 record the transaction in a journal using debits and credits
5 post the transaction to the general ledger
6 prepare a trial balance
Debits
left-hand side accounts
Dividend, expense, asset (DEA)
Credits
right hand side accounts
Liability, owner’s equity, revenue (LOR)
Accrual basis accounting
record transactions in the period in which the economic event actually occurs
revenue: The performance obligation is satisfied, meaning the goods are delivered or services are performed
Expenses must match the revenue they help generate. when they contribute to earning revenue
Cash basis accounting
record revenues only when cash is received; record expenses only when cash is paid
Accural basis accounting recordings
Assets - the time those resources are obtained
Liabilities - the time those obligations occur
Revenues - the time goods and services are provided to customers
Expenses - the time costs are used in running the company
Accounts that need to be adjusted
Prepaid expenses
Deferred revenues
Accrued expenses
Accrued revenues
Accrued expenses
occur when a company incurs costs, such as salaries, by the end of the current period but will not pay those salaries until the following period
Aje needed to record salaries payable for the amt to be paid and to recognize salaries exp
Accrued revenues
occur when a company provides goods and services and therefore generates the right to receive cash from a customer
Aje to record the amount receivable and to recognize revenue, even though that cash wont be received until a future period
Prepaid expenses
Prepaid expenses arise when a company pays cash (or has an obligation to pay cash) to acquire an asset that is not used until a later period
purchase of buildings, equipment, supplies, rent in advance
AJE is needed to decrease the asset’s balance to its remaining unused amt and recognize an expense for the cost of asset used
Depreciable assets
the process of allocating the cost of an asset, such as equipment, to expense over the asset’s useful life
Deferred revenues
arise when a company receives cash in advance from customers, but products and services won’t be provided until a later period
Key point about AJE
needed when cash flows or obligations occur before the revenue- or expense -related activity (prepayment) or when cash flows occur after the revenue- or expense-related activity (accural)
Temporary accounts
revenues, expenses, and dividends
Transfer to RE
closing revenue
credit income summary + debit revenue, -> transfer income summary to RE
closing expense
debit income summary + credit expense -> transfer income summary to RE
closing dividends
debit RE -> credit dividend, do NOT transfer to income summary
Invested capital
The amount of money paid into a company by its owners
Stockholder rights
Right to vote, right to receive dividends, and the right to share in the distribution of assets if the company is dissolved
Advantages of corporation
Limited liability
Ability to raise capital and transfer ownership
Disadvantages of corporation
Additional taxes
Double taxation: corporate incomed taxed once on earnings at the corporate level and again on the dividend level
More paperwork
Different types of shares
Authorized stock
Issued stock
types of issues stock
Outstanding stock: the number of issued shares held by investors. Only these shares receive dividends
Treasury stock: the number of issued shares repurchased by the company, Not an asset, decrease in SHE
Par value
the legal capital per share of stock that’s assigned when the corporation is first established
Additional paid in capital
the portion of the cash proceeds from issuing stock above par value
Preferred stock
“preferred over CS”
Preferred stockholders usually have first rights to a specific amount of dividends
most preferred stock does not have voting rights
Earned capital
The net assets of the company that have been earned for the stockholders rather than invested by the stockholders
Different between SHE in balance sheet and the statement of stockholder’s equity
Balance sheet: Preferred stock, common stock, APIC, RE, treasury stock, accumulated other comprehensive income
Statement of stockholders equity: Summarizes the changes in the balance in each account over time
Return on equity
the ability of company management to generate profits from the resources provided by owners
Net income / avg stockholders equity
Dividend yield
dividends per share/stock price
earnings per share
net income - dividends on preferred stock / avg shares of CS outstanding
Price earnings ratio
how the stock is trading relative to current earnings
Stock price/ earnings per share
