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What is an expenditure?
An outlay of cash (which could result in either recording an asset
or an expense)
What is "matching"?
it is the process of making sure that all the costs incurred in
generating the revenues recognized in a period are taken as
expenses in that period.
When are adjusting entries made and why are they necessary?
Adjusting entries are recorded just before the end of the
accounting period. They are necessary in order to properly
record revenues and expenses (and to update related assets and
liabilities on the balance sheet).
What adjusting entry is made if the payroll date was not the
last day of the accounting period? (Employees worked the last
few days of the period but have not yet been paid for them).
+ Salaries Expense; + Salaries Payable
Accounting
System that collects and processes (analyzes, measures, and
records) financial information about an organization and reports
that information to decision makers.
Accounting entity
Is the organization for with financial data are to be collected.
Balance Sheet
Reports the amount of assets, liabilities and stockholders' equity
of an accounting entry at a point in time.
Income Statement
Reports the revenues less the expenses of the accounting period.
Assets
Are the economic resources owned by the company. Each of
these economic resources is expected to provide future benefits
to the firm.
Liabilities
Are the company's debts or obligations. Which will be paid with
assets or services.
Accounting Period
Is the time period cover by the financial statements.
Revenues
Expenses
Represent the dollar amount of resources the entity used to earn
revenue during the period.
Net Loss
If total expenses exceed total revenues.
Notes
"Footnotes" provide supplemental information about the
financial condition of a company.
GAAP
Generally Accepted Accounting Principles, are the measurement
rules used to develop the information in financial statements.
SEC
Security and Exchange Commission, is the U.S government
agency that determines the financial statements that public
companies must provide to stockholders, and the rules that they
must use in producing those statements.
FASB
Financial Accounting Standards Board, is the private sector body
given the primary responsibility to work out the detailed rules
that become GAAP.
Audit
Is an examination of the financial reports to ensure that they
represent claim and comfort with GAAP.
Separate-Entity Assumption
States that a business transactions are accounted for separately
from the transactions of owners.
Unit-Measure Assumption
States that accounting information should be measure and
reported in the national monetary unit.
Continuity Assumption
States that businesses are assumed to continue to operate into
the foreseeable future.
Cost Principle
Requires assets to be recorded at historical cost-cash paid plus
the current dollar value of all none cash considerations given on
the date of the exchange.
Current Assets
Are assets that will be used or turned into cash within one year.
Current Liabilities
Are obligations that will be settle by providing cash, goods, or
services within the coming year.
Materiality
Exception suggest that small amounts that not likely to influence
a user's decision can be accounted for in the most beneficial
manner.
Conservatism
Exception suggest that care should be taken not to over state
assets and revenues or understate liabilities and expenses.
Transaction
Is an exchange of assets or services to pay between a business
and one or more external parties to a business or a measurable
internal event such as the use of assets in operations.
Accounts
Is a standardized format that organizations use to accumulate
the dollar effect of transactions on each financial statement item.
"Chart of account"
Transaction Analysis
Every transaction affects at least two accounts (dual effect), and
the accounting equation MUST remain in balance after each
transaction.
Direction of Transactions
Debit (dr) is on the LEFT side of an account.
Credit (cr) is on the RIGHT side of an account.
General Journal
Is a bookkeeping system, that records transactions in
chronological order.
Journal Entry
Is an accounting method for expressing the effects of a
transaction on accounts in debits-equal-credits format.
T-Account
Is a tool for summarizing transaction effects for each account,
determining balances, and drawing inferences about a company's
activities.
Operating cycle
"Cash-to-cash" is the time it takes for a company to pay cash to
suppliers, sell goods and services to costumers, and collect cash
from costumers.
Gains
Are increases in assets or decreases in liabilities from peripheral
transactions.
Losses
Are decreases is assets or increases in liabilities from peripheral
transactions.
Revenue Principle
States that revenues are recognize when:
1. Good or services are delivered.
Matching Principle
Requires that expenses be recorded when incurred in earning
revenue.
Accounting Cycle
Is the process followed by entities to analyze and record
transactions, adjust the records at the end of the period, prepare
financial statements, and prepare the records for the next cycle.
Trial Balance
Is a list of all accounts with their balances to provide a check on
the equality of the debits and credits.
Adjusting Entries
Are entries necessary at the end of the accounting period to
measure all revenues and expenses of that period.
Deferred Revenues
"Unearned revenues" are previously recorded liabilities that need
to be adjusted at the end of the accounting period to reflect the
amount of revenue earned. Example, when cash was received
and previously recorded:
Unearned revenue xxx
Revenue xxx
Accrued Revenues
Are previously unrecorded revenues that need to be adjusted at
the end of the accounting period to reflect the amount earned
and the related receivable account. Example, cash will be
received:
Receivable xxx
Revenue xxx
Deferred Expenses
Are previously acquired assets that need to be adjusted at the end
of the accounting period to reflect the amount of expenses
incurred in using the asset to generate revenue. Example, if cash
was paid and previously recorded:
Expense xxx
Prepaid Expense xxx
Accrued Expenses
Are previously unrecorded expenses that need to be adjusted at
the end of the accounting period to reflect the amount incurred
and the related payable account. Example, if cash will be paid:
Expense xxx
Payable xxx
Contra-Account
Is an account that is an offset to, or reduction of, the primary
accout.
Permanent Accounts
"Real" are the Balance Sheet accounts that carry their anding
balances into the next accounting period.
Temporary Accounts
"Nominal" are Income Statement accounts that are closed to
Retained earnings at the end of the accounting period.
Closing Entry
Transfers balances in temporary accounts to Retained Earnings
and establishes zero balances in temporary accounts.
Gross Profit
Net sales revenue minus cost of sales.
FOB Destination
When title changes hand on delivery, and the seller normally
pays for shipping.
Sales Discount
(Cash discount) is a cash discount offered to encourage prompt
payment of an account receivable.
Accounts Receivables
Are open accounts owned to the business by trade costumers.
Notes Receivables
Are written promises that require another party to pay the
business under specified conditions (amount, time, interest).
Allowance Method
Bases bad debt expenses on an estimate of uncollectible
accounts.
Cash
Is money or any instrument that banks will accept for deposit
and immediate credit to a company's account, such as check,
money, or bank draft.
Cash Equivalents
Are short-term investments with original maturities of three
months or less that are readily convertible to cash and whose
value is unlikely to change.
Internal Controls
Are the process by which a company safeguards its assets.
Bank Statement
Is a monthly report from a bank that shows deposits recorded,
checks cleared, other debits and credits and a running bank
balance.
Bank Reconciliation
Is the process of verifying the accuracy of both the bank
statement and the cash accounts of a business.
Inventory
Is tangible property held for sale in the normal course of
business or used in producing goods or services for sale.
Merchandise Inventory
Includes goods held for sale in the ordinary course of business.
Direct Labor
Refers to the earnings of employees who work directly on the
products being manufactured.
Factory Overhead
Are manufacturing costs that are not raw material or direct cost
labor. Example, cost of light, supervisor's salary.
Long-Lived Assets
Are tangible and intangible resources owned by a business and
used in its operations over several years.
Tangible Assets
Assets have physical substance.
Intangible Assets
Assets have special rights but not physical substance.
Acquisition Cost
Is the net cash equivalent amount paid or to be paid for the asset.
Depreciation
Is the process of allocating the cost of buildings and equipment
over their productive lives using a systematic and rational
method.
Depreciation Expense xxxx
Accumulated Depreciation xxxx
Residual Value
Is the estimated amount to be recovered by the company at the
end of the asset's estimated useful life.
Natural Resources
Are assets that occur in nature, such as minerals deposits, timber
tracts, oil and gas.
Depletion
Is a systematic and rational allocation of the cost of a natural
resource over the period of its exploitation.
Amortization
Is the systematic and rational allocation of the acquisition cost of
an intangible asset over its useful life.
Trademark
Is an exclusive legal right to use a special name, image, or slogan.
Copyrights
Is the exclusive right to publish, use, and sell a literary, musical,
or artistic work.
Patent
Is granted by the federal government for a period of 20 years for
an invention.
Liquidity
Is the ability to pay current obligations.
Accrued Liabilities
Are expenses that have been incurred but have not been paid at
the end of the accounting period.
Contingent Liability
Is a potential liability that has arisen as the result of a past event.
Working Capital
Is the dollar difference between total current assets and total
current liabilities.
Long-Term Liabilities
Are all the entity's obligations not classified s current liabilities.
Operating Lease
Does not meet any of the four criteria establish by GAAP and
does not cause the recording of an asset and liability.
Capital Lease
Meets a least one of the four criteria establish by GAAP and
results in the recording of an asset and liability.
Annuity
Is a series of periodic cash receipts or payments that are equal in
amount each interest period.
Future Value
Is the sum to which an amount will increase as the result of
compound interest.
Bond Principal
Is the amount (a) payable at the maturity of the bond and (b) on
which the periodic cash interest payments are computed.
Par Value
Is another name for bond principal, or the maturity of a bond.
Face Amount
Is another name for bond principal, or the maturity amount of
the bond.
Stated Rate
Is the rate of cash interest per period stated in the bond contract.
Bonds Payable
Are both stocks and bonds issued by corporations to raise money
for long-term purposes.
Debenture
Is an unsecured bond; no assets are specifically pledged to
guarantee repayment.
Callable Bond
May be called for early retirement at the option of the issuer.
Part 3
Net Income
Revenue - Expenses
Stockholders' Equity
Retained Earnings + Common Stock
Retained Earnings
Beginning Balance + Net Income - Dividends
Gross Profit
Revenue - COGS
Net Sales
Revenue - (Allowances+Discounts+Returns)
Current Ratio
Current assets / Current liabilities
Higher is better. Measures Liquidity.
Debt-to-total-assets Ratio
Average Inventory
(Beginning Inventory + Ending Inventory) / 2
Working Capital
Current assets - Current liability
Interest
Principal X Interest Rate X Time
Return on Assets
Net income / Average total assets
Asset Turnover
Net Sales / Average total assets
Quick ratio
(Cash + short-term investments + accounts receivable) / Current
Liabilities