Financial Accounting Final Flashcards

Terms Definitions
Depreciation
Process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational allocation of the cost of property, plant, and equipment (but not land) over their useful lives.
Depreciation
7
Present Value
The current value of an amount to be received in the future; a future amount discounted for compound interest.
Present Value
10
INTEREST PAYABLE
CURRENT LIABILITIES
Equity Accounts (2)
-common stock
-RE
bearer bonds
bonds not registered
Liabilities
Obligations to sacrifice reasonably definite amounts of cash or goods/services at reasonably certain times in the future, in exchange for past or current benefits.
Net Book (or Carrying) Value
of an asset is the acquisition cost of the asset less accumulated depreciation, depletion, or amortization.
Net Book (or Carrying) Value
9
Materiality
The magnitude of an accounting information omission or misstatement that will affect the judgment of somoen relying on the information.
balance sheet
financial statement that summarizes the assets, liabilities, and owners' equity at a specific point in time
Profit
The objective of most businesses, other than not-for-profits.
($ received from customers for goods or services) - ($ paid for the inputs used to provide the goods or services)
TRUE/FALSE - INVENTORY is always considered an asset, regardless of how long it takes to produce and sell the inventory.
TRUE
stockholder's equity
contributed capital and retained earnings
accounting
The information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers.
all businesses are involved in the following types of activity
Operating
Investing
Financing
debt-to-equity ratio
measures the amount of financing provided by creditors relative to that provided by owners.
audit
an examination of financial reports to ensure they represent what they claim and conform
Revenue expenditures
expenditures that maintain the the usefulness of a companys operating assets.
Matching Principle
requires that expenses be recorded when incurred in earning revenue
Cash
Money of any instruments that banks will accept for deposit and immediate credit to a companys account, such as check, money order, or bank draft
a presentation of the financial statements of a company for more than one year
comparative statements
Deferred Expenses
Previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred in using the asset to generate revenue. (Cash paid before expense incurred; e.g., supplies, prepaid expenses, and buildings and equipment.)
Deferred Expenses
6
Transactions in a journal are initially recorded in
Chronological Order
Dividends in arrears
Preferred dividends that were supposed to be declared but were not declared during a given period.
Disadvantages of partnership
•owners personally liable for all business debts
• transfer of ownership may be difficult
The Cost Principle
a company records its transactions based on the dollars exchanged (the cost) at the time the transaction occurred
Manufacturing
A type of business that changes basic inputs into products that are sold to individual customers.
Business Entity
Assumes that the business is separate from its owners or other businesses. Revenue and expenses should be kept separate from personal expenses.
on account
on credit, the expression applies to either buying or selling on credit
Investing Activities
Buying or selling items used in producing the product
Temporary (Nominal) Accounts
Income statement accounts that are closed to Retained Earnings at the end of the accounting period
cumulative divident preference
the preferred stock feature that requires specified current dividends not paid in full to accumulate for every year in which theyre not paid. These must be paid before any common dividends can be.
Discounted cash flow
a system for evaluating investment opportunities that discounts or reduces the value of future cash flow. (See present value.)
Free Cash Flow
Cash Flows from Operating Activities – Dividends – Capital Expenditures
Free Cash Flow
7
current ratio
a measure of a company's liquidity; computed as current assets divided by current liabilities
fixed assets
Another name for property, plant, and equipment.
order to complete financial statements
1. Income Statement
2. Retained Earnings Statement
3. Balance Sheet
4. Statement of Cash Flows
Long-term investments (p. 50)
Generally, (l) investments in stocks and bonds of other corporations that companies hold for more than one year, and (2) long·term assets, such as land and buildings, not currently being used in the company's operations.
preferred stock
Like a bond, will pay a set dividend
current liabilities
Liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets.
replacement cost
the cost to buy simular items in inventory from the supplier to replace the inventory
Unqualified audit opinion (clean)
An auditors statement that the financial statements are fair presentations in all material respects in conformity with GAAP
Purchase Allowance
A reduction made in the selling price of the merchandise, granted by the seller so that the buyer will keep the goods.
Write-off
the total reduction in the value of an asset, recognizing that it no longer has any value. Write-downs and write-offs are non-cash expenses that affect profits.
accounts payable
the purchase of goods or services from suppliers on credit without a formal written contract (or a note). notes payable.
Debit/Credit
Expense
Debit

You can pay for it right there and there
Public Company Accounting Oversight Board(PCAOB) (p. 65)
The group charged with determining auditing standards and reviewing the performance of auditing firms.
GAAP (Generally accepted accounting principles)
various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements
purchase returns and allowances
amounts that decrease the cost of inventory due to returned or damaged merchandise
Gross Profit (Gross Margin)
net sales less cost of goods sold
economic entity assumption
One of the four basic assumptions that underlie accounting that assumes each company is accounted for separately from its owners.
time period assumption
indicates that the long life of a company can be reported in shorter time periods
Cash Flows from Financing Activities
cash received and paid in obtaining and repaying bank loans and owner's investment
Operating Cycle
the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers
In United States, the ________ has the power to set accounting rules for publicly-traded companies.
Securities and Exchange Commission
accounts receivable turnover ratio
a measure of the liquidity of accounts receivable; computed by dividing net credit sales by average net accounts receivable
What is Authorized Capital Stock?
The maximum number of shares of stock that can be sold and issued as specified in the charter of the corporation.
A: Cash (+$400); L: Unearned Franchise Fees (+$300); SE: Franchise Fee Revenue (+$100)
Papa John's sold new franchises for $400 cash, earning $100 immediately by performing services for franchisees; the rest will be earned over the next several months
What are prepaid expenses? What financial statements do they appear on?
Expenses paid by a company before the corresponding service or right is actually used. Insurance premiums, rent, etc. Considered an ASSET- represents a benefit to be enjoyed by the company in the future (not considered an expense appearing on the income statement until it is used). Originally recorded on balance sheet at cost.
What is the income statement and how is it used?
Consists of two basic categories - revenues and expenses. Revenues represent asset inflow (or liability decreases) associated with operating transactions during a given period (sales, fees earned, service revenues, other revenues - interest, book gains)
Expenses represent the asset outflows (liability increases)required to generate revenues include costs of goods sold, operating expenses, other expenses.

Revenues less expenses= net income.
a
a
Cash Basis Accounting
Records revenues when cash is received and expenses when cash is paid.
Cash Basis Accounting
3
Accrued Revenues
Dr Assets
Cr Revenues
Assets
Resources owned by a business
book value
cost - accumulated depreciation
True
Current maturities of long-term debt refer to the amount of debt service on a note payable that must be paid in the current year.
Expense
an expenditure which is chargeable against revenue during an accounting period. An expense results in the reduction of an asset. All expenditures are not expenses. For example, a company buys a truck. It trades one asset - cash - to acquire another asset. An expenditure has occurred but no expense is recorded. Only as the truck is depreciated will an expense be recorded. The concept of expense as different from an expenditure is one reason financial reports do not show numbers that represent spendable cash. The distinction between an expenditure and an expense is important in understanding how accounting works and what financial reports mean. (To expense is a verb. It means to charge an expenditure against income when the expenditure occurs. The opposite is to capitalize.)
Relevance
A feature of financial information that allows it to influence a decision
contra account
an account that offsets another account
common stock
the stock that conveys primary ownership rights in a corporation
Convertible bonds
contain a conversion feature that allows bondholders (or the
company) to convert the bonds to equity shares (i.e. stock) in the company
Revenue
Inflows of assets from selling goods or providing services
Impairment
A permanent decline in the market value of an asset.
Objectivity concept
acounds recorded in the accounting records be based on objective evidence. In exchanges, buyers and sellers both try to get best price; only final agreed-upon amount is objective enugh to be recorded.
Inventory obsolescence
inventory no longer salable. Perhaps there is too much on hand, perhaps it is out of fashion. The true value of the inventory is seldom exactly what is shown on the balance sheet. Often, there is unrecognized obsolescence.
Example Liabilities
Accounts payable, notes payable, other liabilities
Comparability (p. 66)
Ability to compare the accounting information of different companies because they use the same accounting principles.
unit of measure assumption
states that accounting information should be measured and reported in the national monetary unit.
Historical Cost
The price originally paid to acquire an asset.
net income
equals all revenues minus all expenses for a specific period of time
Finished Goods inventory
manufactured items that are completely finished and ready for sale
Extraordinary Item
An item unusual in nature and infrequent of occurrance
In regard to Purchase Discounts, if the invoice is paid within the discount period, then the amount of the discount decreases ______________
Merchandise Inventory
Sunk costs
money already spent and gone, which will not be recovered no matter what course of action is taken. Bad decisions are made when managers attempt to recoup sunk costs.
financial leverage ratio equation
financial leverage ratio=average total assets/average stockholders' equity
Cash-Basis Accounting
Revenues are recognized when cash is received.

Expenses are recognized when cash is paid.

Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP).
general ledger
the primary ledger a company uses to record its account balances
operating expenses
costs of resources consumed as part of operating activities during a fiscal period and that are not directly associated with specific goods or services
Sole proprietorship (p. 4)
A business owned by one person.
Generally accepted accounting principles (GAAP)
Rules for how financial statements should be prepared.
Net Profit Ratio
Net Profit/Net Sales Amount of income generage
prepaid insurance
the name of insurance a business has purchased but not yet used, it is an asset
Future Value
The sum to which an amount will increase as the result of compound interest
Specific Identification Method
Identifies the cost of the specific item that was sold
What is Legal Capital?
The permanent amount of capital defined by state law that must remain invested in the business; serves as a cushion for creditors.
What category is and what statement does it belong contributed capital?
Asset, Balance Sheet
statement of cash flows
Reports cash receipts and cash payments classified according to the entity's major activities: operating, investing, and financing.
Net loss (p. 11)
The amount by which expenses exceed revenues.
Assumption - Economic Entity
Keep affairs of Corp separate from persons. Limited Liability
Units-of-Production depreciation
A method to allocate the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output
Bad debts
amounts owed to a company that are not going to be paid. An account receivable becomes a bad debt when it is recognized that it won't be paid. Sometimes, bad debts are written off when recognized. This is an expense. Sometimes, a reserve is set up to provide for possible bad debts. Creating or adding to a reserve is also an expense.
2nd View of Inventory Equation?
Beginning Inventory + Additions - Ending Inventory = Withrawals
Profitability ratios (p. 55)
Measures of the operating success of a company for a given period of time.
Weighted Average Unit Cost
average cost that is weighted by the number of units purchased at each unit cost
What are Issued Shares?
The total number of shares of stock that have been sold.
Times Interest Earned Ratio
Net income + Interest Expense + Tax Expense/ Interest Expense
A: Cash (-$14,000); SE: Salaries Expense (-$14,000)
Papa John's paid $14,000 cash to employees for their work in January
What information does the balance sheet provide?
1)Balance sheet - lists assets , liabilities and stockholder equity of a company at a given time.
what is the point of CLOSING AN ACCOUNT?
Closing an account transfers balances in temporary accounts (revenue, expense, gain, loss) to RETAINED EARNINGS and establishes ZERO BALANCES in temporary accounts.
Diagram of Cost Flow Inventory Accounts
Raw Materials to WIP to Finished Goods to Cost of Goods Sold
How does the Cost Principle govern the measurement of the ending inventory amount?
The ending inventory is determined in units and the cost of each unit is applied to that number. Under the cost principle, the unit cost is the sum of all costs incurred in obtaining one unit of the inventory item in its present state.
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