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financial accounting test 1 > Test1 > Flashcards

Test1 Flashcards

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0
Q

Income statement components

A

Revenues
Expenses
Net income for period

Reports success or failure of the company’s operations during a specific period

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1
Q

Order of financial statements

A

Income statement
Retained earnings statement
Balance sheet

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2
Q

Retained earnings statement

A

For point in time

Total net income or loss over life of company minus dividends paid out

Use previous retained earnings and add net income from income statement. Or subtract net loss from income statement.

Distinguished equity earned from that originally invested by owners

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3
Q

Balance sheet

A

Represents a specific date

Assets = liabilities plus owners equity

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4
Q

Assets

A

In order of liquidity

Cash
Accts receivable
Notes receivable
Equipment
Plant
Property
(Accumulated depreciation)

Has useful life of more than one year

Resources owned by the business

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5
Q

Liabilities

A

Accts payable
Notes payable
Salaries payable
Unearned revenue

Creditors claims on total assets

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6
Q

Stockholders (owners) equity

A 
Capital stock
Retained earnings (from retained earnings statement)

Ownership claim on total assets

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7
Q

Liquidity

A

Ability to pay near-term obligations

How easily readily can convert to cash

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8
Q

Capital resources

A

Ability to fund operations

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9
Q

Current asset

A

Something that you own that can turn to cash in less than one year.

Has useful lifetime of greater than one year

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10
Q

Current liability

A

What you expect to pay off within one year.

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11
Q

Goodwill

A

Fair market value - book value = goodwill.

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12
Q

Contra asset

A

Listed as asset but causes overall assets to decrease

Ex accumulated depreciation

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13
Q

GAAP

A

Generally accepted accounting principles

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14
Q

FASB

A

Financial accounting standards board

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15
Q

Relevant and reliable

A

Relevant to many audiences and free of error.

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16
Q

Comparability and consistency

A

Compare different companies

Compare from year to year

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17
Q

Materiality

A

Doesn’t make a difference financially.

Relative importance of an item or event. If immaterial do not need to do adjusting entries

Ex. Small items expense no need for depreciation. Utilities.

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18
Q

Conservatism

A

In gray areas. Do not overstate assets or income

Provide estimate that gives lowest net income

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19
Q

Full disclosure principle

A

Must include information that would effect how investors or creditors view the company

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20
Q

Economic entity principle

A

Economic events traced to an individual entity

Has to do with subsidiaries

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21
Q

Stable dollar assumption

A

Not adjusted for inflation or deflation

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22
Q

Going concern assumption

A

Business will continue to operate

Not headed for bankruptcy

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23
Q

Cost principle

A

Assets are recorded at cost

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24
Q

Objectivity principle

A

Values are factual and can be verified

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25
Q

Revenues

A

Increase in assets that result from sale of a product or service

Results in cash or accounts receivable

26
Q

Expenses

A

Using up of assets or services to generate revenue

Ex. Salary (uses cash asset)

27
Q

Net income

A

Derived number

Doesn’t really exist in any financial system.

Created number.

28
Q

Classified balance sheet

A 
Generally contains standard classifications:
Current assets
PPE
other assets
Current liabilities
Long-term liabilities
29
Q

Depreciation

A

Allocating an assets cost over the useful life of the asset instead of expensing full cost of asset in year of purchase

Arbitrary
Linear

30
Q

Elements of financial annual reports

A 
Income statement
Statement if retained earnings
Balance sheet
Statement of cash flow
Management discussion and analysis
Notes to financial statement
Auditors report
31
Q

Management discussion

A

Covers
Liquidity
Capital resources
Results of operation

32
Q

Notes to financial statements

A 
Additional info
Not necessarily numerical
Description of accounting policies
Explanations
Statistics
33
Q

Auditors report

A

Independent examination

Unqualified opinion that all in accordance with GAAP

34
Q

Ratio analysis

A

Relationship among selected items

Percentage
Rate
Proportion

35
Q

Liquidity ratio

A

Short term ability to pay maturing obligations

Working capital = current assets-current liabilities

Current ratio=current assets/current liabilities. (Good to be 2:1). Good for external conparison

36
Q

Solvency ratio

A

Ability of company to survive over long period if time

Total debt to total assets ratio
Ratio> 50% means creditors have more at risk than owners

37
Q

Transaction analysis

A

External and internal events. Only need to record external transactions

Exchange of assets liabilities or owners equity between company and outside party

38
Q

Revenue recognition principle

Realization principle

A

Revenue recognized in accounting period in which it is earned

When service provided or goods delivered

Remainder is a liability known as unearned revenue

39
Q

Matching principle

A

Requires that expenses be recorded in same period in which the revenues they helped produce are recorded

40
Q

Steps in transaction process

A

Analyze transaction
Journalize each transaction
Post each transaction to an account (T account)

Each transaction must balance equation A=L+OE

41
Q

Recording of a transaction

A

Debits always written first. (This is assets, expenses, dividends)

Credits written second and always indented (liabilities, owners equity, revenue)

42
Q

Note vs account receivable

A

Account is interest free

Note need to pay interest. Usually longer term

43
Q

Dividends

A

Not an expense. Separate category called dividend that decreases stockholder equity

44
Q

4 basic types of adjustments

A

Convert assets to expenses
Convert liabilities to revenue
Accrue unpaid expenses
Accrue uncollected revenue

45
Q

Accrual basis accounting

A

Revenue recorded only when earned not when cash is received

Expense recorded when incurred not when cash paid

46
Q

Rule for adjusting entries

A

Adjusting entry effects income statement account and balance sheet account.

47
Q

Expenses cause Owners equity to decrease

A

Expenses cause owners equity to decrease

48
Q

Prepaid expense

A

Depreciation
Insurance

Assets

49
Q

Unearned revenue

A

Cash collected but not earned

Magazine
Year cleaning service

Liability

50
Q

Revenue increases owners equity

A

Revenue increases owners equity

51
Q

Accrued revenue

A

Revenues earned but not received

Adjustment results in revenue which increases owners equity

52
Q

Accrued expense

A

Expenses incurred but not paid. No original entry

Need to add adjusted expense which decreases owners equity

53
Q

Temporary accounts

A

Revenues accounts
Evidences accounts
Dividends

54
Q

Permanent accounts

A

Asset accounts
Liability accounts
Owners equity accounts

55
Q

Return on assets

A

Net income/total assets

56
Q

Evaluating profitability

A

Net income percentage

Return on equity

57
Q

Net income percentage

A

Net income/total revenue

Measure of profitability

Managements ability to control costs

58
Q

Return on equity

A

Net income/avg owners equity

Measure of profitability

59
Q

Evaluating liquidity

A

Working capital

Current ratio

60
Q

Working capital

A

Current assets-current liabilities

Measure of liquidity

61
Q

Current ratio

A

Current assets/current liabilities

Measure of liquidity

62
Q

Adequate disclosure

A

Must disclose all information for financial statements to be interpreted properly

Need to disclose accounting methods used

And due dates of major liabilities

63
Q

Sarbanes oxley act of 2002

A

Rules for reporting

Hmmmm

financial accounting test 1 (2 decks)

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