Unit 3 Flashcards
Cash basis accounting
records only busines transactions involving the reciept or payment of cash. All other business transactions are ignored
Accrual Accounting
the receipt or payment of cash is irrelevant to deciding whether a business transaction should be recorded. What matters is whether the business has acquired an asset, earned revenue, taken on a liability or incurred an expense.
IFRS
define revenue as “the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increase in equity, other than increases relating to contributions from equity participants.
What happens when a business delivers goods to a customer who pays cash for them?
Cash asset increases and so does Shareholders equity
What happens when a shareholder purchases additional shares?
Increases cash and shareholders’ equity, no revenue is earned
Deferrals
Prepaid expense
Adjustment relsted to a transaction for which a business has received or paid cash in advance of delivering or receiving goods or services
Unearned revenue
A liability that arises when a business receives cash from a customer prior to providing the related goods
Depreciation
An expense to recognize the portion of a capital assets econ benefits that has been used up during an accounting period
Accumulated Depreciation
The account showing the sum of all depreciation expense from the date of acquiring a capital asset
Carrying amount
The assets cost minus the accumulated depreciation
Accrual
An adjustment related to revenues earned or expenses incurred prior to any cash or invoice changing hands
Accrued Expense
An expense that has been incurred but not yet paid or invoiced
Accrued Revenues
A revenue that has been earned but not yet collected
Net Working Capital
Total current assets
- Total current liabilities
———————-
Net working capital
Current ratio
Total current assets / Total current liabilities
Debt ratio
total liabilities / total assets
To avoid default
-increase sales to enhance both net income and current assets
-Decrease expenses to improve net income and reduce liabilities
-Sell additional shares to increase cash and shareholders equity
