Financial Accounting Ch 2 Flashcards
what are the 2 characteristics an asset must possess?
- it must be owned or controlled by the company
2. it must possess probable future benefits that can be measured in monetary units
define current asset.
what accounts make up current assets?
Assets used up or converted into cash within one year:
- Cash
- accounts receivable
- inventory
- other current assets
define non-current asset.
what accounts make up non- current assets?
Assets not used up or converted to cash in one year:
- PPE
- goodwill
- intangible assets
- Equity method investments
- other non current assets
define current liabilities.
what accounts make up current liabilities?
Liabilities requiring payment within one year:
- Short term borrowings
- trade accounts payable
- accrued expenses
- income taxes
define non current liabilities.
what accounts make up non current liabilites?
Liabilities not requiring payment within one year:
- Long term debt
- deferred income taxes
- other
- Shareholders Equity ( common stock, paid in capital, retained earnings)
define historical cost
refers to original acquisition costs.
Physical tangible assets that are intended to be used (inventory, PPE) are reported as historical cost
What are some examples of current liabilities?
Accounts payable, accrued liabilities and short term borrowings
define accrual accounting (GAAP)
accounting method where revenue or expenses are recorded when a transaction occurs rather than when payment is received or made
what are the 5 categories of account titles?
Assets, liabilities, equity, expenses, Revenue and income
What is income and how is it measured?
The profit or loss determined by taking all revenues and subtracting all expenses from both operating and non-operating activities.
Describe Revenue impact on income measurement
- Primary source of income
- referred to as the “top line”
- revenues increase net income
- recorded when company sells goods or service
Describe expenses impact on income measurement
- expenses decrease net income
* Decreases in stockholders equity due to delivery of good and services to customers, cost of doing business
What is the net income equation?
Net income = [revenues – expenses] + [gains – losses]
what is a permanent account?
- also known as stock accounts
- accumulate all changes to date
- Assets, liabilities, equity
What is a temporary account?
- also known as flow accounts
- Closed at each period
- income statements revenues, expenses, gains and losses
Why is the income statement/income useful?
Measures performance and shows firms weatlth and how its changed.
summarizes sales and expenses in one period in order to measure the profit of a company in one period
How do you calculate Ending retained earnings?
RE end = Beginning RE +-(net income/loss) - Dividends
What accounts link the balance sheet and the income statement?
Net income and retained earnings
What are the advantages of Accrual Basis accounting?
Accrual recognized transaction in the time period when revenue and expenses occur not necessarily when cash changes hands.
Costs are matched to revenues providing a better measure of performance in a period.
In a cash sale when is revenue recognized?
At the point of sale - the company has fulfilled its responsibilities in the exchange with the customer
In a credit sale, when is revenue recognized?
Under GAAP, revenues are reported when a company has earned those sales at delivery. Earned means that the company has done everything required under the sales agreement—no material contingencies remain
what is the matching principle?
record expenses in the same period that associated revenues recognized or in period of benefit.
What is the “bottom line”
Bottom line is the net income (earnings) for the period
What is the “top line”
Top line are Gross sales/profit of a company
