Financial Accounting Flashcards

Terms Definitions
Stockholders' Equity
The financing provided by the owners and the operations of the business.
Stockholders' Equity
Expresses the mathematical relationship between one quantity and another.
Financial Accounting Standards Board
accounting equation
(balance sheet equation) assets=liabilities+stockholders' equity
Aging of Accounts Receivable Method
Estimates uncollectible accounts based on the age of each account receivable.
Aging of Accounts Receivable Method
The constraint of determining whether an item is large enough to likely influence the decision of an investor or creditor.
system that collects and processes financial information about an organization and reports the info to decision makers
FOB Destination
freight terms indicating that ownership of goods remains with the seller until the good reaches the buyer
Internal Control
Methods and Measures adopted to:
Safeguard assets
Enhance accuracy and reliability of accounting records
Increase efficiency of operations
Ensure compliance with laws and regulations
sales revenue, fee revenue, interest revenue, rent revenue
Comparative statements
A presentation of the financial statements of a company for more than one year.
Assets (p. 10)
Resources owned by a business.
separate-entity assumption
Activities of the business are separate form activities of the owners.
Current Assets
Cash and other resources that companies reasonably expect to convert to cash or use up within one year or the beginning of the operating cycle, whichever is longer
Contributed Capital
Results from owners providing cash (and sometimes other assets) to the business
Return on Equity (ROE)Ratio
Net Income/Average stockholders equity
a business owned by one person
solo proprietorship
Bond Premium
The difference between selling price and par when a bond is sold for more than par.
Bond Premium
Asset Turnover Ratio
Net Sales/ Average Total Assets
Payment date
The date cash dividend payments are made to stockholders.
Balance sheet
A financial statement that reports the assets and claims to those assets at a specific point in time.
Profitability ratios
measure the operating success of a company for given period of time.
Primary market
common stock is sold to underwriter (investment banker), investment banker sells to clients, IPO
Reliability - Verifiability
Several individuals would arrive at same conclusion, independently
Inventory Turnover
Cost of Goods Sold ÷ Average Inventory
declining balance deprecation
an accelerated depreciation method in which depreciation expense is based on the declining book value of the asset
Current Liabilities
Obligations that will be settled by providing cash, goods, or services within the coming year
Claim that business owner's have to assets of their business. Also CAPITAL, STOCKHOLDER'S EQUITY, NET ASSETS
Intangible Assets
are items such as patents, copyrights, trademarks, licenses, franchises, and other kinds of rights or things of value to a company, which are not physical objects. These assets may be the most important ones a company owns. Often they do not appear on financial reports.
Coupon Rate
The stated rate of interest on bonds.
Coupon Rate
notes receivable
claims for which formal instruments of credit are issued as proof of the debt
common stock
The most basic form of capital stock.
two types of users of financial statements are
internal users
external users
Cost principle (p. 68)
An accounting principle that states that companies should record assets at their cost.
improper revenue recognitions
revenues are recorded before they are actually earned
Indirect method
A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities.
accumulated depreciation
the reduction to the cost of the asset, it is a contra-asset, deducted from the cost of the asset for the balance sheet
Adjusting Entries
Entries necessary at the end of the accounting period to measure all revenues and expenses of that period
Accrued Expenses
Expenses incurred but not yet paid in cash
Breakeven point
the amount of revenue from sales which exactly equals the amount of expense. Breakeven point is often expressed as the number of units that must be sold to produce revenues exactly equal to expenses. Sales above the breakeven point produce a profit; below produces a loss.
continuity (going-concern) assumption
states that businesses are assumed to continue to operate into the foreseeable future
Current Liabilties
A balance sheet item which equals the sum of all money owed by a company and due within one year
Notes to the financial statements
Clarify the financial statements and provide additional detail.
Statement of Cash Flows
A schedule that presents a "moving picture" of the change in cash over a given time period as a result of operating, investing, and financing activities
cash from financing activities
transactions related to how a business is financed
Primary Objective of external financial reporting
To provide useful economic information about a business to help external parties, primarily investors and creditors; make sound financial decisions
d. Inventory, which was recently damaged by a flood, is reported at the lower of its cost or market value.
conservatism principle -A principle which states that when more than one equally acceptable accounting method exists, the method that results in the lower assets and revenues or higher liabilities and expenses should be selected.
last-in, first-out (LIFO) cost (method)
inventory costing method b which the last costs into inventory are the first costs out to cost of goods sold. this method leaves the oldest costs-those of beginning inventory and the earliest purchases of the period-in ending inventory
FOB (free on board) destination
the vendor (selling firm) pays the shipping costs, so the buyer has no freight-in cost.
What is the last EXPENSE listed on the INCOME STATEMENT before determining the NET INCOME?
Describe the "Specific Identification" inventory costing method?
This views each specific item at the unit cost of that specific item. This method usually requires that each item be marked, often with a code that indicates its cost. When it is sold, that unit cost is the cost of goods sold amount.
Gross Profit Method of Valuing Inventory
Assumes the gross profit rate will remain the same for the current year as it has in the past year or so
What is Distributed Profit?
Part of the profit paid out for tax and in dividends to shareholders.
A: Cash (-$3,000), Notes Receivable (+$3,000)
Papa John's lends $3,000 cash to new franchisees who sign notes agreeing to repay the loans in five years
What is the fiscal period assumption?
States that the operating life of an economic entity can be divided into fiscal periods over which the performance and financial position of the entity can be measured.
What is the charter of a corporation?
A legal document from the state that authorizes its creation as a separate legal entity. The charter specifies the name of the entity, its purpose, and the kinds and number of shares of capital stock it can issue.
Increases in assets or decreases in liabilities from peripheral transactions.
Revenue Expenditure
Expenditures that maintain the productive capacity of an asset during the current accounting period only and are recorded as expenses.
Revenue Expenditure
Current Assets/Current liabilities
Allowance for Doubtful accounts
an obligation of a business
cash, accounts receivable, notes receivable, inventory, supplies, prepaid expenses, investments, equipment, buildings, land, intangibles
Profit margin
Net income divided by sales.
financial accounting
provides external users with information. Object is to provide relevant and timely infomration fo rthe decision-making needs of users outside of the business.
TRUE/FALSE: In general, revenues are to be recorded when earned, and expenses are to be recorded when incurred.
list assets
cash, accounts receivable, notes receivable, inventory, supplies, prepaid expenses, investments, equipment, buildings, land, intangibles
Advantages of corporation
•easier to transfer ownership
•easier to raise funds
•lower legal liability - no personal liability for stockholders
significant influence investment
20%-50% of outstanding voting shares
income statement
a statement that summarizes revenues and expenses
Shareholders of a corporation have a limited liability for the debts of a corporation
Costs for computer software and web development
a business organized as a seperate legal entity having ownership divided into tranferable shares of stock.
Earliest goods purchased are first to be sold.

Often parallels actual physical flow of merchandise.

Generally good business
practice to sell oldest units first
a record of increases and decreases in the dollar amount associated with a specific resource or activity
Basic accounting equation
Assets = Liabilities + Stockholders' Equity.
a business owned by two or more persons
Net Income
A positive result in the equation: revenue - expenses
accounts payable
amounts that a company owes its vendors, they are liabilities and are shown on the balance sheet
Transaction Analysis
the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation
Par Value
Legal amount per share established by board or directors. Establishes the minimum amount a stockholder must contribute and isnt related to the stock's market price
preferred stock
stock that has specified rights over common stock
Revenue Principle
Revenues are recognized when goods or services are delivered, there is evidence of an arrangement for customer payment, the price is fixed or determinable and collection is reasonably assured.
Revenue Principle
additions and improvements
costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
net loss
Excess of total expenses over total revenues.
Double-entry system
A system that records the dual effect of each transaction in appropriate accounts.
Reliability (p. 66)
The quality of information that gives assurance that it is free of error, is factual, and is neutral.
capitalizing current operating expenses
reduces current expense and increases profits
accrual transaction
the revenue is earned or the expense is incurred before the exchange of cash
Sales discount
A reduction given by a seller for prompt payment of a credit sale
Mom and Pop prefer LIFO. Good for Tax, Bad for Net Income. Used to track low cost and plentiful items
The date which a cash dividend becomes a binding legal obligation
Declaration date
Working capital (p. 59)
The difference between the amounts of current assets and current liabilities.
SEC (securities and exchange commission)
federal agency with ultimate authority to determine the rules for preparing statements for companies whose stock is sold to the public
purchase order
a record of a companies request to a vendor for goods or services
Earnings Per Share Ratio
Net Income/Average number of shares of common stock oustanding during period
Accrued expenses, accruals
an expense which has been incurred but not yet paid for. Salaries are a good example. Employees earn or accrue salaries each hour they work. The salaries continue to accrue until payday when the accrued expense of the salaries is eliminated.
historical cost principle
requires assets to be recorded at the historical cash-equivalent cost, which on the date of the transaction is cash paid plus the current dollar value of all noncash considerations also given in the exchange
Operating cycle (p. 50)
The average time required to go from cash to cash in producing revenues.
A: Cash (-$1,000), Investments (+$1,000)
Papa John's purchases the stock of other companies as a long-term investment, paying $1,000 in cash
80 - 20 rule
a general rule of thumb in business that says that 20% of the items produce 80% of the action -- 20% of the product line produces 80% of the sales, 20 percent of the customers generate 80% of the complaints, and so on. In evaluating any business situation, look for the small group which produces the major portion of the transactions you are concerned with. This rule is not exactly accurate, but it reflects a general truth, nothing is evenly distributed.
cash (net) realizable value
the net amount a company expects to receive in cash
FOB (free on board) shipping point
the buying firm pays the shipping costs, the amount is called freight-in and is included in the cost of the inventory
What are the advantages of a Corporation?
(a) Transferability of ownership (b) limited liability to the owners, and (c) the ability to accumulate large amounts of resources.
"fees earned on account" NEWLINE "sales on account"
a busines accepts payment at a later date for a good or service
How are things like property, plant and equipment valued on the balance sheet?
Original cost reduced by an amount that approximates the asset's lost usefulness or deterioration over time. (accumulated depreciation) This give you the NET value or NET book value of the assets.
How are the three basic activities of a business reflected in the financial statements?
The balance sheet lists assests (goods and producing assets) and financing sources (debt, equity, and reinvestments from net earnings) at a particular point in time. The income statement is a measure of operations, the activities (revenues and expenses) involved in selling the goods and services. The statement of shareholders' equity measures the changes in contributed capital and the extent to which the business reinvests its net earnings and pays dividends. The statement of cash flows contains the cash inflows and outflows associated with the operating, investing and financing activities of the business.
Accrued Revenues
Previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and its related receivable account. (Cash to be received after being earned; e.g., interest receivable, rent receivable.)
Accrued Revenues
Net Realizable Value
The expected sales price less selling costs (e.g., repair and disposal costs).
Net Realizable Value
Conceptual Framework (third level)
Representational faithfulness
Information is representationally faithful when it corresponds to an actual event.
Fees earned
revenue from providing services
Cuz you pay it later
A contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to provide specific services, or to use certain trademarks or trade names, usually within a designated geographic area.
Financial information that can be compared over time because similar accounting methods have been applied
refers to financial resources in the form of coins and currency, bank deposits, and short-term investments that can be converted easily into currency and that can be used to pay for resources and obligations of a company
a fixed obligation/ liability of the business that must be paid back.
Market value
Stock price multiplied by outstanding shares
Plant assets
Tangible resources that have physical substance, are used in the operations of the business, and are not intended for sale to customers.
Financial Statements
accounting reports which record and summerize transactions.
to capitalize means to record an expenditure on the balance sheet as an asset, to be amortized over the future. The opposite is to expense. For example, research expenditures can be capitalized or expensed. If expensed, they are charged against income when the expenditure occurs. If capitalized, the expenditure is charged against income over a period of time usually related to the life of the products or services created by the research.
merchandise inventory
an asset account and identifies the cost of goods a company has purchased that are available for sale to customers
liquid assets
resources that can be converted to cash in a relatively short period
Materiality (p. 69)
The constraint of determining whether an item is large enough to likely influence the decision of an investor or creditor.
permanent account
the balance sheet accounts that carry their ending balances into the next accounting period
Investing activities
Cash flow activities that include (a) purchasing and disposing of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans.
matching principle
expenses should be recognized in the same period as the revenue they helped generate
Total Asset Turnover Ratio
Sales (or operating) Revenues/Average Total Assets
the supply or stock of goods and products that a company has for sale. A manufacturer may have three kinds of inventory: raw materials waiting to be converted into goods, work in process, and finished goods ready for sale.
Systematic transaction analysis includes these steps:
1.Accounts and effects
-identify the accounts (by title) affected and classify them by type of account, making sure that at least two accounts change (A,L, SE)
-determine the direction of the effect (an increase + or decrease - on each account)
-verify that the accounting equation remains in balance (A=L+SE)
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting?
Merchandise Inventory
Publicly held corporation
A corporation that may have thousands of stockholders and whose stock is traded on a national securities market.
historical cost
the purchase or exchange price of an asset or liability at the time it is acquired or incurred
Comparative statements (p. 19)
A presentation of the financial statements of a company for more than one year.
cash basis accounting
records revenues when cash is received and expenses when cash is paid
Operating Activities
Section in Statement of Cash Flow that includes cash in/out for revenues/expenses of ongoing business
outstanding shares
the total number of shares of stock that are owned by stockholders on any particular date
Raw Materials Inventory
Items acquired for the purpose of processing into finished goods
What is an equity investment?
EI involve purchasing ownership interests in a company. Equity owners of corporations are called stockholders. Returns come in the form of dividends (or stock price appreciation) which tend to be large if the company performs well. Primary concern of stockholders is the performance of management - specifically its ablility to generate and mantain earning power in the future.
What category is and what statement does it belong selling and administrative expenses?
Expense, Income Statement
limited liability company
A business corporation in which the business not the owner is liable for the company's debts.
Expenses (p. 1 1)
The cost of assets consumed or services used in the process of generating revenues.
Quick Ratio or Acid Test
= liquid assets / total liabilities
financial accounting standards board (FASB)
the group that sets accounting standards and gets its authority from the sec
Time value of Money
Interest that is associated with the use of money over time
What is Treasury Stock?
A corporations own stock that had been issued but was subsequently reacquired and is still being held by that corporation. These shares have no voting, dividend, or other stockholder rights while held as treasury stock.
Common stock (p. 10)
Term used to describe the total amount paid in by stockholders for the shares they purchase.
Post-Closing Trial Balance
Should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed
What is Current Dividend Preference?
The feature of preferred stock that grants priority on preferred dividends over common dividends.
Debit Memorandum
A form used at a bank to inform its customer that the customer's account is being reduced for a fee or other charge.

Bank service charge
NSF (not sufficient funds)
Securities and Exchange Commission (SEC)
US gov agency which has authority over the accounting and financial disclosures for companies whose stock is traded and sold to the public.
What information does the statement of cash flows provide?
4)Statement of cash flows reconciles the cash amount from one period to the next. It lists net cash flows from operating activities, investing activities and financing activities.
What equation is used to provide information about a company's EFFECTIVENESS AT MANAGING DEBT AND EQUITY FINANCING?What is the equation?
1. Financial Leverage Ratio2. FLR = Average Total Assets / Average Stockholders' EquityAverage means (beginning balance + ending balance) / 2
Which of the following statements is incorrect concerning the adjusted trial balance?

A An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made.
BThe adjusted tr
C,The adjusted trial balance lists the account balances segregated by assets and liabilities.
Return On Investment vs Return of Investment
Return On = Interest / Return Of = Principal
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