Midtermreview Flashcards
What is the formula for net worth?
What you own - what you owe = net worth
What is the accounting equation?
Assets = liabilities + equity
What do creditors do?
Give loans and make money on those loans by changing interest rates
What are dividends?
Cash that stockholders make off of a company’s success
Who are internal decision makers in a business?
Managers
Who are external decision makers in a business?
Stockholders and creditors
What are the three main business activities?
- Financing
- Investing
- Operating
What does the balance sheet represent?
What we have and owe
What does the income statement show?
How much we made and spent
What is the purpose of the cash flow statement?
Where the cash is going
What does the personal equity statement indicate?
The change in net worth from the beginning to end of the year
What does retained earnings represent?
Net income reinvested in the business or paid to stockholders with dividends
What is the purpose of financial reporting?
To record financial info that is useful for investors and lenders
What are the four assumptions used to produce financial reports?
- Separate entity assumption
- Going concern assumption
- Monetary unit assumption
- Time period assumption
What is the mixed attribute measurement model?
Assets are recorded at historical costs
What do liabilities represent?
Probable sacrifices of economic benefits arising from present obligations
What is liquidity?
How easily an asset can be turned into cash
What is a healthy current ratio?
Between 1.2 and 2
What is the formula for net income?
Revenue - expenses
What causes equity to change?
- Contributed capital
- Retained earnings
What is cash basis accounting?
Recognize revenue when cash is received and record expenses when cash is spent
What is accrual accounting?
Recognize revenue when earned and expenses when incurred
What is the goal of adjusting entries?
To ensure assets, liabilities, and equity are measured properly as of the ‘hard stop’
What is depreciation expense?
The allocation of the cost of equipment over its period of use
What is a trial balance?
A listing of ending balances in each account in the general ledger
What are contra-revenue accounts?
Accounts that reduce revenue, such as sales returns and discounts
What is bad debt expense?
Expense associated with accounts receivable that will not be collected
What does the allowance method account for?
Bad debts by writing off accounts receivable to an allowance account when deemed uncollectable
True or False: Write-offs affect net income.
False
