Lesson 2 & 3 (Transaction Analysis) Flashcards
What is Accrual Accounting based on?
GAAP (Generally Accepted Accounting Principles)
The two foundation accounting principles as it relates to according transactions are?
Realization principle & Matching concept
The Realization Principle states?
when revenues should be recorded
What do you do when the earnings process is complete or virtually complete?
Record revenue
What do you do when There is reasonable certainty as to the collectibility of the asset to be received (usually cash)?
Record Revenue
The earnings process is considered complete when ?
When goods are sold or when services are performed
What is this a key point of?
It is not necessary to recieve cash in order to record revenue (i.e., sell goods to a customer who agrees to pay in the following month).
Key point of Realization Principle
What is this a key point of?
The receipt of cash does not always indicate that a revenue has been earned (i.e., a customer pays in advance for a service that will be performed later).
Key point of Realization Principle
What is this a key point of?
Record revenue independent of the exchange of cash.
Key point of Realization principle
What is this a key principle of ?
It is required that the receipt of cash be relatively assured in order to record revenue
Key point of Realization principle
The Realization principle states that you should recognize revenue when ?
When the product or service has been delivered to the customer and cash has been received or a receivable has been generated that has reasonable assurance of collectibility
The matching concept tells us ?
When we should record expenses
Record Expenses in ?
In the same accounting period that the related revenue is earned
The determining factor in the timing of recording expenses is the
generation of revenue and not the payment of cash
For most expenses, it is difficult to trace to a specific revenue so they are recorded when ?
When they are incurred
Cash accounting does not follow ?
GAAP
Record revenues when ?
Cash is received & Cash is paid
Accrual accounting must be used by all companies who sell ?
Securities(stock) to the public
Cash accounting can be used by any company who does not sell ?
Stock to the public
(also used by individuals to account for their personal finances)
If a company who does not sell stock to the public attempts to get a bank loan, they are typically required to present ?
Their financial statements using accrual accounting
(this is typically required bc cash accounting can be easily manipulated and thus leading to misleading financial statements)
Account definition ?
Place where all increases and decreases in financial statements items are recorded
We use what to analyze these accounts ?
T-account
Account name goes where on the T-account ?
The top (heading)
Debit goes where on the T-account ?
Left side
Credit goes where on the T-account ?
Right side
If debits are greater than credits, the account will have a ?
Debit balance
If credits are greater than debits, the account will have a ?
Credit balance
Increases for Asset & Expense will be on the ?
Debit side of account
Increase of Liability, Equity, & Revenue will be on the ?
Credit side of the account
Normal balance of an account is the same as what ?
Increases the account
What Are economic events that require recording in the financial statements ?
Accounting transactions
Transactions are recorded in the financial statements because they result in a change to ?
Assets, liabilities, and/or equity accounts
All accounts of the company taken together is a ?
Ledger (think of ledger as all the T-accounts of the company)
The place where all accounting transactions are initially recorded is a ?
Journal
The means used to record transactions in the journal is the ?
Journal Entry
I’m every Journal entry what must happen ?
The debits = credits
Every transaction must be recorded with at least one debit and at least one credit with the total dollar debits always equaling the total dollar credits is what ?
Double-entry accounting
The process of transferring debit and credit amounts from the journal to the ledger (i.e., transferring the amount i. the journal entries to the T-accounts is what ?
Postinf
Posting to the t-account allows us to ?
Determine the ending balance in each account (something that would be very difficult to do by just looking at journal entries)
I’m each entry you must have ?
at least one credit and at least one debit
The process of identifying the specific effects of economic events on the accounting elements is what ?
Analyzing transactions
What is recorded when you sell an asset other than inventory for more than its costs ?
A Gain
selling price - cost = ?
Gain
A gain is classified as a ?
Revenue account
What is recorded when you sell an asset other than inventory for less than its costs ?
A Loss
cost - selling price = ?
The Loss
A loss is classified as an ?
Expense account
What type of account is dividends ?
contra equity account (since it reduces equity)
What equity account does dividends reduce ?
retained earnings
Decreases on Assets and Expenses will be on what side ?
Credit side of the account
Decreases for Liability, Equity, & Revenue go on what side ?
Debit side of the account
What are these the basic steps of ?
1. Record transactions in the journal (use journal entries)
2. Post debit and credit amounts from the journal to the ledger (done to determine ending balance in each account).
3. Prepare a trial balance
The Accounting Cycle
What is a list of accounts and their balances at a given time ?
Trial balance
What is the primary purpose of a trial balance ?
Price debits = credits after posting
What involves the examination of both the relationships among financial statement numbers and the trends in those numbers over time ?
Financial Statement Analysis
What are these the purposes of ?
1. Use the past performances of a company to predict how it will do in the future
2. Evaluate the performance of a company with an eye toward identifying problem areas
Purposes of financial statement analysis
What are relationships between financial statement amounts ?
Financial ratios
Radio said user in decide if whether to ?
Invest in, or loan money to a company
A single ratio by itself is not very ?
meaningful
What are these examples of ?
1. Other companies that operate in the san industry (i.e., competitors)
2. Industry averages
3. Past years (trend analysis)
Typical benchmarks or comparison points
All of these ratios are referred to as ?
1. Workimg capital
2. Current ratio
3. Acid-test ratio
Liquidity ratios
What measures the short-term ability of the company to pay its debts as they come due ?
Liquidity ratios
Liquidity ratios are meant for ?
Short term creditors such as bankers and suppliers
Current assets - Current liabilities = ?
Working capital
Current assets / Current liabilities = ?
Current ratios
Working capital and current ratio both give a user a feel for the ?
Companies ability to pay its debts as they come due (working capital in form of a dollar amount and current ratio in the form of number of times)
(Cash + Accounts Receivable) / Current liabilities = ?
Acid-test ratio
What does the same as current ratio but more conservative estimate of the company’s liquidity by using only the most liquid current assets in the numerator.
Acid-test ratio
The acid-test ratio is also known as the ?
Quick ratio
