Chapter 1 - Basic Financial Accounting Review Flashcards
What is the purpose of financial accounting?
To communicate to parties outside of the firm
What is the purpose of managerial accounting?
To plan, choose and implement courses of action
What kind of reports do financial accounting and managerial accounting use
Managerial: detailed reports
Financial: summary reports
What is a direct cost
Direct cost includes all materials and labor costs directly traceable to the product manufactured
What is an indirect cost
Indirect cost generally refers to manufacturing or factory overhead and include salaries, wages, utilities, depreciation, etc.
What is the difference between cash basis and accrual basis accounting?
Cash basis accounting recognizes sales revenue and operating expenses only when cash changes hands.
Accrual accounting recognizes revenue and operating expenses when earned or incurred.
How much time does a balance sheet cover? Income statement?
Balance sheet: a point in time
Income statement: a period of time
What is the Cost Principle and what is it based on?
The value of transactions are recorded at actual cost. It is based on the going concern assumption
What is the Revenue Recognition Principle?
Sales earned must be recognized
What is the Matching Principle?
all sales revenue must be recognized, whether payment is received or not. The timing of revenue and expense is matched.
What are International Financial Reporting Standards?
A principles based accounting standard that does not allow LIFO but allows higher earnings
What is Original Cost?
The price you paid for the asset. It is the figure recorded on the balance sheet’s asset account
What is Book value?
Original cost - accumulated depreciation
What is Residual Value?
Book value at the end of the asset’s life, a special case of book value
What is Market Value?
The value of a product based on what people are willing to pay for it
