Financial acctg Ch 1 & 2 Flashcards by C. David Harrison

Four basic accounting reports

Income statement

Balance sheet

Statement of Retained Earnings/Stockholders’ Equity

Statement of Cash Flows

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Four accounting assumptions

Economic entity
Time period
Monetary unit
Going concern

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What is the difference between revenues and assets?

Assets are resources

Revenue is an increase in assets, especially in a given accounting period

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What is an asset?

Simply, a resource

Technically, an economic resource that:
prior transaction
objectively measurable
future economic benefit

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Define accounting

Process of:
identifying
measuring &
communicating
economic info
to permit informed judgments and decisions

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What is the cost principle?

Assets
are recorded and maintained
at their historical costs

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What is the matching principle?

Expenses are recorded in the time period when they are incurred to generate revenues

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What is the revenue recognition principle?

Revenues are recorded when they are earned, not when payment is received

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What is the purpose of an income statement?

Shows net income or loss

Shows revenues and expenses over a period of time

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What is revenue?

An inflow of resources from providing services

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What is an expense?

An outflow of resources that were used for providing services

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What information do you need to create an income statement?

All the revenues and expenses

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What is the purpose of a balance sheet?

To report a company’s assets, liabilities, and equity accounts at a point in time

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What is a liability?

An obligation

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What’s the purpose of a statement of retained earnings?

To show whether the profits are being put back into the company or distributed to the owners

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What does the statement of retained earnings link?

The income statement and the balance sheet

Net income from the income statement is used to calculate the retained earnings balance that is then reported on the balance sheet

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What is the purpose of the statement of cash flows?

Shows a companies the sources and uses of cash over a period of time

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What are the categories on the Statement of Cash Flows?

Operating
Investing
Financing

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What is the formula for an income statement?

Revenues - expenses = net income or net loss

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What is the formula for a balance sheet?

Assets = liabilities + equity

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What is the formula for a statement of retained earnings?

Retained earnings, beginning

+/- Net income or loss

— Dividends

= Retained earnings, ending

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What is the formula for a statement of cash flows?

Cash flows from operating
+/- Cash flows from investing
+/- Cash flows from financing

= Net change in cash

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What are the qualitative characteristics of accounting?

Understandable
Relevant
Reliable
Comparable
Consistent
Material
Conservative

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What is the conceptual framework of accounting?

The collection of concepts that guide the practice of accounting

Includes:
Principles followed
Assumptions made
Qualitative characteristics
Terms and statements used to communicate accounting info

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Three accounting principles

Cost Matching Revenue recognition

What is the IASB?

International Accounting Standards Board

Under GAAP, do financial statements recognize inflation?

No, per the Cost Principle and the Monetary Unit Assumption

What order do you prepare financial statements in?

Income statement Retained earnings Then the balance sheet

In terms of the statement of cash flows, what are financing activities?

Related to cash from creditors and investors

In terms of the statement of cash flows, what are investing activities?

Buying and selling of the assets that generate revenue

In terms of the statement of cash flows, what are operating activities?

Purchasing supplies, paying employees, selling products, etc.

I’m terms of the statement of cash flows, what’s the difference between financing activities and investing activities?

Financing activity gets the money Investing activity spends the money

What are five types of adjusting journal entries?

Depreciation Unearned/deferred revenue Deferred/prepaid expenses Accrued revenue Accrued expenses

Prepaid expenses behave like an _________

Asset

When you pre-pay for something, you don’t debit the asset. You debit the _________

Prepaid asset Do not debit “car” and credit cash. Debit “prepaid car” and credit cash.

When are adjusting journal entries made?

At the end of the accounting period

What is the journal entry for depreciation?

Debit depreciation expense Credit accumulated depreciation (Accumulated Depreciation is a contra asset)

In adjusting entries, what does deferred mean?

It hasn’t been paid for yet. Technically, the cash exchange takes place in an accounting period prior to the service being done

Def. Contributed capital

The resources that investors contribute to a business in exchange for an ownership interest

Def. Equity

The portion of the assets that belong company’s owners

What are the two sources of equity?

Contributed capital Retained earnings through profitable operations

Def. Retained earnings

Equity generated from profitable operations and retained in the business

Net income is the same as ____ ________

Net earnings

Are net revenues, net earnings, and net income all the same thing?

Who enforces the rules and standards that the FASB and AICPA establish?

The SEC

Another name for fixed assets?

Property, plant, and equipment

What is the more advanced form of a balance sheet called?

Classified balance sheet

What’s the more advanced version of an income statement called?

Multi step income statement

On a classified balance sheet, what two major groups are assets and liabilities divided in to?

Current Long-term

What are some categories of current assets?

CARSHIP Cash and cash equivalents Accounts Receivable SHort term investment securitiesInventories Prepaid

What order are current assets listed in?

Most liquid to least liquid

What are long term investments and which financial statement are they on?

The companies investment in the common stock or death of another entity Expected to be held longer than one year Found on the balance sheet under Assets

What are fixed assets?

Tangible assets like property, plant & equipment They are not expected to be sold within a year

What does “net” mean next to fixed assets?

Depreciation has been applied

What are examples of intangible assets?

Trademarks patents franchise rights copyrights goodwill

Can you depreciate intangible assets?

Yes, but it is called amortization

What are the five main categories of assets?

CALFIO Current Assets Long-term investments Fixed assets Intangible assets Other assets

What are examples of current liabilities?

Accounts payable salaries taxes long-term debt (if maturing within the year)

What are examples of long term liabilities?

Notes payable mortgage payable bonds payable

What is contributed capital?

Equity generated through the sale of stock

What is treasury stock?

Stock of a company that the company itself owns, either because it bought it back or it never issued the stock

What are the two kinds of income statements?

Single step Multi step

Generally speaking, what are the four subtotals on a multi step income statement?

Gross profit Operating profit Income before taxes Net income

How do you calculate the gross profit?

Start with net sales and subtract the cost of goods sold (AKA cost of sales)

How do you calculate the operating profit?

Start with the gross profit and subtract operational expenses.

On a multi step income statement, what are operating expenses?

Recurring expenses Incurred during normal business ops Examples: Advertising Salaries Utilities Depreciation Insurance

How do you calculate the Income Before Taxes?

Add non-core revenues and expenses (netted) to the operating profit

Why do we have Income Before Taxes on a multi step income statement?

It accounts for revenues and expenses from non-core activities

How do you calculate Net income?

Income before taxes subtract Provision for income taxes = Net income

What does a full horizontal analysis include?

Both dollar and percentage changes for both the balance sheet and the income statement

What is vertical analysis?

Compares a part of the category to the entire category The base account changes depending on which financial statement is used.

Which financial statements are used in vertical analysis?

Balance sheets and income statements

In a vertical analysis, what is the base account for a balance sheet?

Total assets

In a vertical analysis, what is a base account for the income statement?

Net sales or revenue

What is a common size financial statement?

The result of performing a vertical analysis

What are the five columns on the Statement of Stockholders Equity?

**Common stock** Additional paid-in capital Retained earnings **Treasury stock** Accumulated other comprehensive income or loss

What items are included with the financial statements but are not a part of the statements?

Notes to the financial statements Auditors report Mgmt’s discussion and analysis (MD&A)

What does SGA expenses stand for on a multi step income statement?

Selling, general, & administrative