Topic 1: Important Definitions Flashcards
1
Q
Accounting Equation
A
Assets = Liabilities + Owner’s Equity
2
Q
Assets =
A
Liabilities + Owner’s Equity
3
Q
Owner’s Equity =
A
common stock (contributed by owner’s) + retained earnings
4
Q
What are current assets?
A
Assets the company expects to use or convert to cash within one year
5
Q
Is a copyright a current asset?
A
No, it is an intangible asset therefore it is a long-term asset
6
Q
What is a liability?
A
This is the amount the company owes to others. These are claims creditors have on the company’s assets.
7
Q
What is a current liability?
A
A debt that is to be paid within one year
8
Q
Is a mortgage payable long-term or short-term liability?
A
Long-term
9
Q
Are bonds payable long-term or short-term liability?
A
Long-term
10
Q
What is owner’s equity?
A
It is capital that has been invested in the company by its shareholders (its owners). It is the owners’ claims on the company’s assets.
11
Q
What is contributed capital?
A
The total dollar amount of money (or other assets) the owners have paid (“contributed”) to the company in exchange for stock (shares of ownership)
12
Q
What is another name for contributed capital?
A
Paid-in capital
13
Q
What are the two components of contributed capital?
A
Common stock and preferred stock
14
Q
What is another name for common and preferred stock?
A
Capital stock
15
Q
What are retained earnings?
A
the total dollar amount the company has earned and retained. Net income (earnings)increases this amount; dividends decrease this amount.
16
Q
What is revenue?
A
It is money earned from the sale of merchandise or services to customers (from normal business operations)
17
Q
When you earn revenue, what happens to your company’s assets?
A
They increase. If they pay immediately, cash increases. If they’re planning to pay later, accounts receivable increases.
18
Q
What is an expense?
A
Cost incurred by a company to conduct its normal business operations (i.e. the cost of doing business)
19
Q
What do expenses do to your company’s assets?
A
Expenses decrease your company’s assets.
20
Q
Net income =
A
Revenue - Expenses, net income is also known as profits and earnings
21
Q
Dividends
A
distributions of a corporation’s earnings to stockholders
22
Q
Are wages payable current or long-term liabilities?
A
Current liabilities
23
Q
Are expenses cash payments for costs incurred to earn revenues?
A
No, they are not always paid off immediately. They are costs (whether paid or not) incurred to earn revenue)
24
Q
Do the difference between assets and liabilities increasing indicate that the company is becoming more profitable?
A
No, the owner could’ve just added in more money into the company. Retained earnings increasing is an indicator that the company is becoming more profitable.
25
Are retained earnings assets, liabilities, or stockholder's equity?
Stockholder's equity
26
Is common stock an asset, a liability, or a stockholder's equity?
Stockholder's equity
27
Do accounts receivable count as revenue?
Yes
28
What is another name for owner's equity?
Stockholder's equity
29
Owner's equity =
Assets - liabilities
30
What is another name for a company's net worth or net value?
Owner's equity
31
What are the two components of owner's equity?
Contributed capital + retained earnings
32
Retained earnings =
Revenues - expenses - dividends
33
Net income =
revenues - expenses
34
What is the left side of a T account?
It is debit
35
What is the right side of a T account?
It is credit
36
What is the pneumonic device you should know for left side debit, right side credit?
After Eating Dinner, Let's Rest on a Comfortable Sofa
37
What does debit increase?
Assets, expenses, and dividends
38
What does credit increase?
Liabilities, Revenue, Common stock (also known as owner's equity)
39
What is accounts payable categorized as?
It is a liability
40
What comes first, recording a transaction in a journal or a ledger?
First you record a transaction in a journal, then transfer it to a T ledger
41
When is revenue recorded under accrual based accounting?
It is recorded when the action transpires, e.g. if you buy a flight, it is recorded when the flight occurs
42
What is the revenue recognition principle?
Revenue should be recognized in the same period in which it is EARNED
43
What is the expense recognition principle?
This is also called the matching principle, it requires that expenses be recorded in the same period as the revenue by those expenses. Expenses are recorded when incurred, not paid.
44
What is a financing activity?
It involves stocks. Borrowing money or selling stock to raise money; paying cash dividends to stockholders.
45
What is an investing activity?
Buying or selling relatively permanent resources the company needs to operate (these resources are called long-term assets)
46
What is an operating activity?
Once a company has the resources ("assets") it needs, it can begin operating. This usually involves generating revenue and incurring expenses.
47
What type of business activity is buying inventory?
Operating Activity
48
What type of business activity is buying equipment to be used to manufacture goods?
Investing Activity
49
What type of business activity is selling goods to customers?
Operating Activity
50
What type of business activity is issuing shares of common stock?
Financing Activity
51
What type of business activity is paying a utility bill for electricity used in the production of goods?
Operating Activity
52
What type of business activity is receiving cash from customers?
Operating Activity
53
What type of business activity is paying cash to stockholders?
Financing Activity
54
What type of business activity is receiving cash from issuing new stock?
Financing Activity
55
What type of business activity is paying cash to suppliers of inventory?
Operating Activity
56
What type of business activity is buying a new office building?
Investment Activity
57
What types of transactions are recorded on an Income Statement?
Revenue and expenses
58
What is net income?
Revenue - expenses
59
What is shown on the statement of retained earnings?
Retained earnings is increased by net income and decreased by dividends
60
Which do you prepare first, income statement or statement of retained earnings?
Income statement
61
What are the four types of Financial Statements?
Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows
62
What is a balance sheet?
A list of the companies assets, liabilities, and owner's equity
63
What time frame does a balance sheet show?
It shows a snapshot of the company's current assets, liabilities, and owner's equity on that current day
64
What is shown first on a balance sheet?
Assets
65
What order are assets listed on a balance sheet?
In order of liquidity, so cash first
66
What is the first step of the accounting cycle?
Obtain and analyze data about a transaction from a document
67
What is the second step of the accounting cycle?
Record the transaction in a journal
68
What is the third step of the accounting cycle?
Post the transaction from the journal to accounts in ledgers (general ledger & subsidiary ledger)
69
What is the fourth step of the accounting cycle?
Prepare unadjusted trial balance
70
What is the fifth step of the accounting cycle?
Record and post adjusting journal entries
71
What is the sixth step of the accounting cycle?
Prepare adjusted trial balance
72
What is the seventh step of the accounting cycle?
Prepare financial statement
73
What is the eighth step of the accounting cycle?
Record and post closing entries
74
What is the ninth step of the accounting cycle?
Prepare post-closing trial balance
75
What is the purpose of a trial balance?
It ensures that debits = credits
76
What are fixed assets?
Called PPE, properties, plant, and equipment, they are expected to benefit the business for a number of years, used in the operations of business, not intended for sale to customers, have physical substance
77
When the company records a fixed asset, what's the price they record it at?
They record it at cost. Later the cost is depreciated; land is never depreciated.
78
What is depreciation called on an income statement?
It's called depreciation expense, listed as an expense
79
What is depreciation called on a balance sheet?
It's called accumulated depreciation, listed as a deduction from Fixed Assets (it is a contra-asset account)
80
What is book value and market value?
The book value is the value of the asset listed in the financial reports, and the market value is how much the asset is worth on the market. These values can significantly differ.
81
What is an asset's depreciable cost?
It is cost - minus any residual value
82
What is an asset's book value?
It is cost minus accumulated depreciation
83
Is depreciation a process of cost allocation of asset valuation?
Cost allocation
84
Depreciation applies to what and is excluded from what
It applies to buildings, equipment, machinery, vehicles, furniture & fixtures, and land improvements, but not land
85
What are the factors used in calculating depreciation?
Cost (fixed assets are recorded at their original cost), useful life (an estimate of the expected productive life, also called service life, of the asset), and residual value (an estimate of the asset's value at the end of it's useful life, this is also called salvage value)
86
Straight life depreciation is what we will use, what is the formula for yearly depreciation expense?
It is (cost minus residual value) / useful life
87
What is the formula for Goods available for sale?
Beg inv + purchases = G.A.S.
88
What is the formula for Ending inventory?
G.A.S. - COGS = EI
89
What is specific identification method?
It is tracking the individual cost of each particular unit sold, e.g. car dealership, jewelry store
90
What is FIFO?
It assumes that the first goods received were the first goods sold
91
What is LIFO?
It assumes that the last goods received are the first goods sold
92
What is the average cost method?
It is assuming that each unit of good sold is valued by the average cost of all goods available for sale
93
Under the perpetual inventory system, purchases of merchandise for sale are recorded in an account called:
Inventory
94
A purchaser, dissatisfied with merchandise received, may return the goods to the seller for credit. This transaction is known, by the seller, as a:
sales return
95
Under the perpetual inventory system, freight costs paid for by the buyer on incoming merchandise are considered:
Part of inventory
96
Freight costs incurred by the seller on outgoing merchandise are considered
Operating expenses to the seller
97
If a sales invoice shows credit terms of 2/10, n/30, the discount period is:
10 days. 2% off if paid within 10 days. If not paid within ten days, the entirety is due in 30 days.
98
Sales returns and allowances and sales discounts are:
Contra-revenue accounts
99
If you are a buyer and you pay off freight costs, what account is debited and credited?
Debited: Inventory Credited: Cash
100
If you are a seller and your buyer pays off freight expenses, what is your journal entry?
There is no journal entry for when your buyer pays off freight expenses.
101
In a period of rising prices, what are the differences between LIFO and FIFO reporting methods?
FIFO reports the highest net income, tax expense, and inventory at the end of the year, LIFO the lowest, FIFO reports the lowest COGS, and LIFO the highest
102
What is LIFO reserve?
It is the amount by which the inventory would be increased (or decreased) if the firm had instead been using FIFO
103
Net realizable value =
Estimated selling price - direct costs of disposal
104
What is LIFO?
An inventory costing method that assumes the cost of the latest goods purchased are the first to be allocated to the costs of goods sold
105
What is days to sell inventory? What is the formula?
Days to sell inventory is the measure of the average number of days inventory is held; calculated as 365 divided by the inventory turnover ratio
106
What are consigned goods?
Goods held for sale by one party (the consignee) although ownership of the goods is retained by another party (the consignor), artist using a gallery to sell his art, artist is consignor and the gallery is the consignee
107
What is market value?
Another term for the current cost to replace an item of inventory
108
What is another term for the current cost to replace an item of inventory
Market value
109
What is lower of cost or market basis?
A basis whereby inventory is stated at the lower of either its replacement cost of its historical cost
110
When LIFO is used, do you use lower of cost or market rule or the net realizable value rule?
LCM rule
111
When FIFO, average cost, or specific identification are used, do you use net realizable value or LCM rule?
Net Realizable Value
112
What is net realizable value?
Estimated selling price - direct costs of disposal
113
What is average cost method?
An inventory costing method that uses the weighted average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold
114
What is LIFO reserve?
For a company using LIFO, the difference between inventory using LIFO and inventory using FIFO
115
What is merchandise inventory?
Goods in a form ready for sale to customers and owned by the company
116
What are raw materials?
Basic parts used in production but have not yet been placed into production
117
What is work in process?
Inventory that has been placed in the production process but is not yet complete
118
What are finished goods?
Items that have been completed and are ready for sale
119
Which account do inventories fall under?
Current Assets
120
What is the formula for ending inventory?
Beginning inventory + Purchases = Goods Available for Sale - Cost of Goods Sold = Ending Inventory
121
What are the four methods of determining the cost of ending inventory?
Last in First out, First in First out, Average Cost Method, Specific Identification
122
Is it true that LIFO assumes the latest goods purchased are the first ones to be sold?
Yes
123
Is it true that LIFO seldom coincides with the actual physical flow of inventory?
Yes
124
Is it true that LIFO's ending inventory is based on the price of the most recent units purchased?
No
125
Is it true that with LIFO, ending inventory is obtained by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed?
Yes
126
What is a perpetual inventory system?
Records for inventory are updated with each sale and purchase, COGS is determined each time a sale occurs, at the end of the year employees make a count of physical inventory to verify the accuracy of inventory records
127
What is a periodic inventory system?
Purchases and sales are not updated with each transaction, at the end of the year employees count inventory and calculate ending inventory and COGS
128
When you purchase goods, what does the journal entry look like?
You debit inventory and credit accounts payable
129
When you are returning goods, what does the journal entry look like?
You debit accounts payable and credit inventory
130
When you receive a purchase discount 2/10, n/30, what does the journal entry look like?
Debit accounts payable whole amount
| Credit cash the amount minus the discount and credit the amount discounted as Inventory
131
What does 2/10, n/30 mean?
You get a 2% discount if paid off in ten days, there is a 30 day due date on payment
132
If the goods have been paid after the discount period, what would the journal entry have been?
Debit Accounts Payable and Credit Cash
133
If you received damage goods and then agreed to keep them for a $50 discount, what journal entry would you, the buyer, make?
Debit Accounts Payable and Credit inventory
134
In a perpetual inventory system, a return of defective merchandise is recorded by the buyer by crediting:
Inventory
135
When you are the seller, how do you record the sales of inventory?
Two journal entries, first one debit Accounts Receivable and Credit Sales Revenue, second one debit Cost of Goods Sold and credit and Inventory
136
What is a contra revenue account?
Sales Returns and Allowances
137
What is a contra asset account?
Depreciation
138
If a buyer returns goods to you, the seller, what are the two journal entries you should record?
You want to debit inventory and credit cost of goods sold and then debit Sales Returns and Allowances and credit Accounts Receivable
139
If you offered a buyer a sales discount, 2/10, net/30, how would you record that in a journal entry?
You would debit cash for the amount owed minus the discount, debit Sales Discounts for 2% off the amount owed, and then credit Accounts Receivable for the entirety of the amount owed, excluding the discount
140
The term "sold on account" will always involve a debit and credit to which accounts?
It will involve a debit to accounts receivable and a credit to Revenue
141
With a payment from your customer, which accounts will be debited and credited?
Cash will be debited and accounts receivable will be credited
142
Under a perpetual inventory system, purchases of merchandise for sale are recorded in an account called:
Inventory
143
A purchaser, dissatisfied with merchandise received, may return the goods to the seller for credit. This transaction is know, by the seller, as a:
Sales Return
144
Under the perpetual inventory system, freight costs paid for by the buyer on incoming merchandise are considered:
Part of inventory
145
Freight costs incurred by the seller on outgoing merchandise are considered:
Operating expenses to the seller
146
If a sales invoice shows credit terms of 2/10, n/30, the discount period is:
10 days
147
Sales returns and allowances and sales discounts are:
Contra revenue accounts
148
Bolen Corporation, which uses a perpetual system, purchased on account $4,500 of inventory on June 25. Which of the following entries is required on June 29 when Bolen returned $800 of inventory to the seller?
Debit accounts payable and Credit inventory
149
In a period of rising prices, FIFO reports:
Lowest cost of goods sold and highest income tax expense, net income, and inventory balance at year-end
150
In a period of inflation, the cost flow method that results in the lowest income taxes is the:
LIFO method
151
The cost flow method that often parallels the actual physical flow of merchandise is the:
FIFO method
152
On December 31, year 2, a company reports inventory of $250,000 using LIFO. If the company had used FIFO, its inventories would have been higher by $40,000 at the end of year 2 and by $30,000 in year 1. It's LIFO reserve in year 2, therefore, is:
$40,000
153
In a period of increasing prices, the inventory system that will yield the highest net income is:
FIFO
154
In a period of inflation, the cost flow method that results in the highest ending inventory is the:
FIFO
155
What is market value?
It is the current placement cost of inventory (not your company's selling price)
156
How do you record a write down, replacing inventory in a journal?
You debit Loss on Inventory (this is similar to an expense) and credit Inventory
157
Under the LCM (lower of cost or market) rule, market is defined as:
The cost of replacing inventory, not the inventory's selling price
158
What happens to cost of goods sold and net income if beginning inventory is understated?
Cost of goods sold is understated and net income is overstated
159
If beginning inventory is overstated, what happens to cost of goods sold and net income?
COGS is overstated and net income is understated
160
If ending inventory is understated, what happens to cost of goods sold and net income?
Cost of goods sold is overstated, and net income is understated
161
If ending inventory is overstated, what happens to COGS and net income?
Cost of goods sold is understated and net income is overstated
162
If ending inventory is understated, what happens to assets, liabilities, and SoE?
Assets are understated, liabilities no change, and SoE is understated
163
If ending inventory is overstated, what happens to assets, liabilities, and SoE?
Assets are overstated, liabilities no change, and SoE is overstated
164
Understating ending inventory will overstate:
Cost of Goods Sold, understate net income, understate assets, and and understate SoE
165
What is the inventory turnover ratio?
The inventory turnover ratio is cost of goods sold divided by average inventory, it is the amount of times a company sells its entire inventory per year
166
What is average inventory?
It is beginning inventory plus ending inventory divided by two
167
When do you use physical turnover ratio?
When using LIFO, where you calculate by the units of goods instead of the cost of goods
168
What is the physical inventory turnover ratio formula?
Units sold divided by average units in inventory
169
What are days to sell inventory?
365 divided inventory turnover ratio
170
Days to sell inventory can also be interpreted as:
The average age of the inventory
171
What does a high inventory turnover ratio mean?
It means the company sells all of its inventory frequently, it could mean the company is efficient in minimizing storage costs or the company is losing out on money by not having enough inventory to meet demand
172
What does a low inventory turnover ratio mean?
It can indicate the company is incurring unnecessary, avoidable costs with having too much inventory such as storage and inventory insurance and damage or obsolescence.
173
Who are the users in financial accounting?
People who are external to the company, investors, lenders
174
Who are the users in managerial accounting?
Internal users, managers, consultants
175
What is the subject of financial accounting?
General purpose financial statements, primary focus is on the whole organization
176
What is the subject of managerial accounting?
Special-purpose reports, focuses on segments of the organization
177
What is the timeliness of reports in financial accounting?
Reports are prepared periodically(e.g. quarterly, annually)
178
What is the timeliness of managerial accounting reports?
Emphasis on timelines (reports are prepared as needed)
179
What is the time focus of financial accounting?
Historical perspective
180
What is the time focus of managerial accounting?
Future emphasis
181
What are the GAAP requirements for financial accounting?
Must follow GAAP and prescribed formats
182
What are the GAAP requirements for managerial accounting?
Need not follow GAAP or any prescribed format
183
What is the verifiability vs relevance for financial accounting?
Emphasis on verifiability and objectivity of financial data
184
What is the verifiability vs relevance for managerial accounting?
Emphasis on relevant data to assist management in deciison making
185
What is the required vs option for financial accounting?
Mandatory for external reports
186
What is the required vs option for managerial accounting?
Not mandatory
187
What are merchandising companies?
such as Wal-Mart, purchase finished goods from suppliers for resale to customers
188
What are manufacturing companies?
such as Cemex and General Motors, purchase raw materials from suppliers and convert those raw materials to finished goods, which are sold to customers. Thus, manufacturing companies produce ("manufacture") their own products
189
What are raw materials inventory?
The basic parts that will be used in production but have not yet
190
Work-in-process inventory?
the portion of inventory that has been placed into the production process but is not yet complete
191
Finished goods inventory
Items that are completed and ready for sale
192
What are direct materials?
Raw materials that become part of the finished product or provided as part of a service and that can be physically and conveniently traced directly to the product or service
e.g. an engine or a radio installed in a car, food provided by a wedding catering company
193
What is direct labor?
Labor costs that can be easily traced to individual units produced or to a service provided to a client.
e.g. Wages paid to automobile assembly workers "touch labor" - labor costs paid to those who directly touch the product, doesn't include things like janitors
194
What is overhead?
Also called factory overhead, it's indirect materials and indirect labor.
It's all production costs (or costs of providing services) except direct materials and direct labor. It only includes costs with operating the factory or providing services to clients.
E.g. the cost of the factory's rent or lease, utilities (e.g. electricity for lighting and heating/air conditioning), property taxes, depreciation (on both the factory and equipment in the factory), and insurance
195
What are product costs?
Direct materials, direct labor, overhead
196
What are period costs?
Selling and administrative costs
197
What are non-production costs?
Selling and administrative and selling and administrative expenses
198
What are indirect materials?
Materials used to support the production process
Examples: lubricants and cleaning supplies used in the automobile assembly
199
What is indirect labor?
Wages paid to employees who are not directly involved in production work.
E.g. maintenance workers, janitors, and security guards
200
What are selling costs?
Advertising/marketing costs, shipping (freight out), sales salaries & commission, costs related to billing your customers, warehousing of finished goods
201
What are administrative costs?
Salaries for executives, accountants, secretaries, and human resources personnel (HR), depreciation on buildings & equipment (and autos) NOT used in the production process
202
What are prime costs?
Direct labor, direct material
203
What are conversion costs?
Manufacturing overhead, direct labor
