midterm Flashcards
what are activities in the accounting process?
identifying economic events -> record economic events -> communicate info via financial experts
who are internal users of financial statements?
marketing/sales managers, human resources, production supervisors, c-suite executives
who are external users of financial statements?
investors, creditors, customers, tax authorities, regulators, labor unions
what is GAAP?
generally accepted accounting principles which is the common set of accounting standards in the US
who overseas GAAP?
FASB (financial accounting standards board), nongovernmental
who overseas FASB?
the SEC (securities and exchanges commission)
what is the historical cost principle?
record assets at cost
what is the fair market principle?
assets or liabilities are reported at current market price
what is the monetary unit assumption?
only data that can be expressed in monetary terms should be included
what is the economic entity assumption?
activities of the entity should be separate from its owner
what is the accounting equations?
assets = liabilities + stockholders’ equity
what are assets?
resources that a business owns (cash, building, equipment, inventory)
what are liabilities?
claims against assets (notes payable, wages payable)
what is stockholders’ equity?
ownership claim on a corporation’s total assets; made up of common stock and retained earnings
what is retained earnings made up of?
revenues - expenses - dividends
what are transactions?
economic events recorded by accountings; what needs to be identified is the specific items affected & the amount of the change
what is the income statement?
recorded for a specific period of time (annual); summarizes all revenues and expenses and net income/loss for the period
what is the retained earnings statement?
shows R/E balance during period of time; shows cumulative earnings of the business
what is the balance sheet?
shows assets, liabilities, and stockholders’ equity as of a specific date (snapshot)
what is the statement of cash flows?
provides information about cash receipts and cash payments; indicates an increase/decrease in cash balance as well as an ending cash balance
what is the relationship between statements?
income statement (net income) -> statement of retained earnings (ending R/E) -> balance sheet (cash balance) -> statement of cash flows
what is a t-account?
an individual record of increases and decreases in a specific asset, liability, or stockholders’ equity item
what happens when debits > credits?
the account has a debit balance
what happens when debits < credits?
the account has a credit balance
what is the general journal?
where transactions are recorded in chronological order; includes a complete list of all transactions, a chronological record of transactions
cash basis accounting
revenue is recognized when cash is received, expense are recognize only when paid; leaves out revenues that have been earned but not received and expenses that have been incurred but not paid
what is journalizing?
the act of entering the transaction data into an entry
accrual basis accounting
recognize revenues when earned, not when cash is received; recognize expenses when incurred, not when paid in cash
revenue recognition principle
required that companies recognize revenue in the accounting period in which the performance obligation is satisfied
expense recognition principle
requires that companies recognize expenses in the period in which they made efforts to generate revenue (consume assets/incur liabilities) regardless of when cash is paid
what are adjusting entries?
adjusting entries are needed to follow the revenue recognition and expense recognition principle; needed to record revenues/expenses in their proper time period
what are characteristics of adjusting entries?
they are recorded at the end of the accounting period and have no affect on the cash account
what types of adjusting entries are there?
deferrals (cash change hands first) and accruals (cash changes hands later)
what type of deferrals are there? what type of accruals are there?
D: prepaid expenses & unearned revenue
A: accrued revenues & accrued expenses
what are prepaid expenses?
expenses paid before they are used or consumed (supplies, insurance, rent (renter), depreciation)
ASSETS OVERSTATED, EXPENSES UNDERSTATED
what are unearned revenues?
cash received before the service is performed (subscription, customer deposit, rent (landlord))
LIABILITIES OVERSTATED, REVENUES UNDERSTATED
what are accrued revenues?
revenue for services performed but not yet paid in cash or records (interest (revenue), services)
ASSET UNDERSTATED, REVENUES UNDERSTATED
what are accrued expenses?
expenses that are incurred but not yet paid in cash or recorded (interest (expense), wages & salaries, tax)
LIABILITIES UNDERSTATED, EXPENSES UNDERSTATED
what are temporary accounts?
revenues, expenses, dividends
what are permanent accounts?
assets, liabilities, stockholders’ equity
what are closing entries?
entries that transfer net income/loss and dividends to retained earnings
what steps are there in closing entries?
- determine the ending balance in each revenue, expense, and dividend account
- debit each revenue account and credit the amount in income summary
- debit income summary and credit each expense account
- debit income summary and credit retained earnings for net income (flip this for net loss)
- debit retained earning and credit dividends
what is the post-closing trial balance?
prepared after all closing entries are complete; proves debits=credits for permanent accounts ONLY, these are carried forward to the next period
what are current assets?
assets the company expects to convert to cash or use up within one year
what are long term investments?
investments in stocks and bonds of other companies that are held for many years
what is property, plant, and equipment?
assets with long useful lives that a company uses in its operations
what are intangible assets?
assets without physical substance
what are current liabilities?
obligations the company expects to pay within one year
what are long term liabilities?
obligations the company expects to pay after one year
how do you calculate net sales?
revenue - sales returns & allowances - sales discount
what are sales returns and allowances?
accept the goods back or give a reduction in the purchase price (contra-revenue account)
what is a sales discount?
incentive offered for prompt payment on credit sales (contra-revenue account)
what is cost of goods sold?
total cost of merchandise sold
how is gross profit calculated?
net sales - cost of goods sold
what are operating expenses?
expenses incurred in the process of earning revenue
how is income from operation calculated?
gross profit - operating expenses
