Midterm 1 Flashcards
Accounting
A system of maintaining records of a company’s operations and communicating that information to decision makers
Managerial accounting
Info that is provided for internal users (managers)
Financial accounting
Provided to external users
- what we focus on
Functions of financial accounting
- Measure business activities of a company
2. Communicate those measurements to external parties for decision making purposes
Investors
Want to make good decisions related to buying and selling stock
Creditors
Make decisions related to lending money to the company
Corporation
Company that is legally seperated from its owners
An advantage stockholders have
Double taxation
Limited liability
Prevents stockholders from being personally responsible for the financial obligations of the corporation
- they only lose their investments not their personal assets
Sole proprietorship
Business owned by 1 person
Partnership
Owned by 2+ persons
Assets
The resources of the company
Ex: cash and equipment
Liabilities
Amounts owed to creditors
Stockholders equity
Owners claims to resources
Common stock + retained earnings
Basic accounting equation
Assets = liabilities + stockholders equity
- must always be in balance
Value of a company
Total resources - amounts owed to creditors
Revenues
Amounts earned from selling products or services to customers
Expenses
Cost of providing goods and services
Net income
Revenues - expenses
Net loss
If expenses exceed revenues
Dividends
Cash payments or stockholders
Income statement
A financial statement that reports the company’s revenues and expenses
- company name
- title of financial statement
- time period covered
- 3 captions are : revenue, expenses, net income
Statement of stockholders equity
Summarizes the changes in stockholders equity over an internal of time
2 components: common stock and retained earnings
Common stock
amount stockholders have in the company
Retained earnings
Cumulative amount of net income earned over the life of the company that has been kept in the business rather than as dividends
Revenues- expenses- dividends
Or
Net income - dividends
What are dividends considered
A distribution of net income NOT expenses
balance sheet
Presents the financial position of the company on a particular date
- shows assets, liabilities, and S. equity
accounts receivable
Money expected to receive in the future
Statement of cash flows
Measures activities involving cash receipts and cash payments over an interval of time
3 categories of cash transactions
Operating cash flows
Investing cash flows
Financing cash flows
Operating cash flows
Cash receipts and cash payments for transactions involving revenues and expenses
Investing cash flows
Cash transactions for the purchase and sale of investments and productive long term assets
Financing cash flows
Cash transactions with lenders, such as borrowing money and repaying debt, and with stockholders such as issuing stock and paying dividends
Change in cash
Operating cash flows + investing cash flows + financing cash flows
What best explains a company’s stock price performance
Their net income
GAAP
generally accepted accounting principles
Rules of financial accounting all companies use
auditors
Makes sure financial statements are being prepared in compliance with the rules
accounting cycle
The full set of procedures used to accomplish this two step measurement/ communication process
External transactions
Transactions the firm conducts with a seperate economic entity
Ex: selling products to a customer, purchasing supplies from a vendor, paying salaries, borrowing from bank
Internal transactions
Events that affect the financial position of the company but do not include an exchange with a seperate entity
Ex: using the supplies on hand, earning revenues after receiving cash in advance from a customer
** recorded at end of the period
Account
Summarizes all transactions related a particular item over a period of time
- asset accounts, liability accounts, SE accounts
Chart of accounts
A lit of all account names used to record transactions of a company
Revenue recognition principle
Companies record revenue at a time EARNED even if it’s not paid right away
DEALOR
d- dividends E- expenses A- assets L- liabilities O- owners equity R- revenues
Rules of DEALOR
RIGHT SIDE: (DEA)
- debit means increase and credit means decrease
LEFT SIDE: (LOR)
- debit means increase
- credit means increase
journal
Provides a chronological record of all transactions affecting a firm
journal entry
Used to describe the format for recording a transaction
- debits must equal credits
- credits are indented
General ledger
All accounts used to record the company’s transactions
Posting
The processing of transferring the debit and credit information from the journal to individual accounts in the general ledger
T account
A simplified form of a general ledger account with space at the top for the account title and two sides for recording debits and credits
Trial balance
A list of all accounts and their balances at a particular date, showing that total debits = total credits
Accrual basis accounting
Record revenues when we EARN them (revenue recognition) and record expenses with related revenues (expense recognition)
- more accepted in major companies
matching principle
Companies report expenses in the same period as the revenues they help to generate
Cash basis accounting
Record revenues at the time we receive cash and expenses at the time we pay cash
during the year we
Record/post external transactions
At the end of the year we
Record/post adjusting entries
Prepare financial statements
Record/post closing entries
adjusting entries
To record events that have occured but that we have not yet recorded
Two categories of adjusting entries
Deferrals (prepayments): prepaid expenses, unearned revenues
accruals: accrued expenses, accrued revenues
Prepaid expenses
The cost of assets acquired in one period that will be expenses in a future period
- adjusting entry includes a debit to an expense account and a credit to an asset account
Depreciation
The process of allocating the cost of an asset to expense over the assets useful life
Contra account
An account with a balance that is opposite to that of its related accounts
- accumulated depreciation account
Book value
Original cost - accumulated depreciation
unearned revenues
When a company receives cash in advance from a customer for products or services to be provided in the future
- adjusting entry includes a debit to the liability account and a credit to a revenue account
accruals
the opposite of prepayments
- occur when the cash flow occurs after either the expense is incurred or the revenue is earned
accrued expense
When a company has a cost but hasn’t yet paid cash or recorded an obligation to pay for that cost, it should still record the cost as an expense and also a liability for the amount
accrued Revenue
When a company has earned revenue but hasn’t yet received cash or recorded the amount receivable, it should still recorded the revenue and asset for the amount expected to be received
when will we not require an adjusting entry
Transaction in which we receive cash at the same time we earn revenue or pay cash at the same time we incur an expense
accounts payable
Gonna pay it in the future
adjusted trial balance
A list of all accounts and their balance after we have updates account balances for adjusting entries
Classified balance sheet
Groups a company’s asset and liabilities accounts into standard categories: current assets (provide benefit within a year and listed in order of liquidity)
Long term assets: provide benefit in more than 1 year
Liquidity
How quickly it is converted to cash
Operating cycle
The average time it takes to provide a service to a customer and then collect the customers cash
Temporary accounts
TRED : revenues, expenses, dividends
- we will keep them for each period and then transfer balance to the retained earnings
Permanent accounts
PALS: assets, liabilities, SE
all accounts that appear in the balance sheet
- we carry forward their balances from period to period
Closing entries
Transfer the balances of all temporary accounts to the balance of the retained earnings
Post closing trial balance
A list of all accounts and their balance at a particular date after we have updated account balances for closing entries
Occupational fraud
The use of ones occupation for personal enrichment through the deliberate misuse of the employers resources.
Fraud triangle
3 elements for fraud: motive, rationalization, and opportunity
Internal controls
A company’s plan to safeguard the company’s assets and improve the accuracy and reliability of accounting info
Sarbanes Oxley act
Established guidelines to reform public company accounting and investor protection
Components of internal control
Monitoring
Control activities (preventative and detective)
Risk assessment
Control environment
Preventative controls
Separation of duties Physical controls Proper authorization Employee management E commerce controls
Detective controls
Reconciliations
Performance reviews
Audits
Collusion
When 2 or more people act in coordination to circumvent internal controls
Cash
Currency, coins, and balances in savings and checking accounts as well as items acceptable for deposits
Cash equivalents
Short term investments that have a maturity date no longer than 3 months from the date of purchase
Ex: money market funds, treasury bills, certificates of deposit
What do a company’s purchases with a credit card go under
Accounts payable
Bank reconciliation
Matches the balance of cash in the bank account with the balance of cash in the company’s own records
When do timing differences occur
When the company records transactions either before or after the bank records the same transaction
Deposits outstanding
Cash receipts of the company that have not been added to the banks record of the company’s balance
Checks outstanding
Checks the company has written that have not been subtracted from the banks record of the company’s balance
NSF checks
Customers checks written on nonsufficient funds, bad checks
Petty cash funds
Where comps is keep a small amount of cash on hand for minor expenses
Statement of cash flows
How investors know a company’s cash inflows and outflows related to operating activities, investing activities, and financing activities
Earnings quality
The ability of current net income to help us predict the future performance of a company
Financial statements
Periodic reports published by the company for the purpose of providing info to external users
- what investors base their decisions on buying and selling stocks
- income statement
- statement of stockholders equity
- balance sheet
- statement of cash flows
