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Accounting 284 Flashcards

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1
Q

What is the objective of financial accounting?

A

A system of analyzing, recording, and summarizing the results of a business activities and then reporting the results to decision makers

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2
Q

Purpose of financial statements?

A

Shows a corporations financial insight to its performance, operations, and cash flow.

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3
Q

Content of Balance Sheet?

A

-reports the financial position of an accounting entity at a point of time.
-reports assets, liabilities, and stockholders’ equity. (also owners equity)
-separate entity assumption.

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4
Q

Content of the Statement of Retained Earnings?

A

-reports how net income and the distribution of dividends affected the financial position of the company this accounting period. (Sum of all past earnings, not paid out in dividends)

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5
Q

Content of Income Statement?

A

-Reports revenues less expenses for the accounting period.
-Shows net income (net profit, net earnings, the bottom line)
-Unit of measure assumption

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6
Q

Content of Statement of Cash Flows?

A

-Reports inflows and outflows of cash during the accounting period.
-provides information about cash flows not provided by accrual-based net income.
-Reports cash flows from operating, investing, and financial activities.

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7
Q

FASB

A

The private body that actually writes the rules.

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8
Q

SEC

A

The federal agency with the power to determine the rules. (Never used power)

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9
Q

GAAP

A

Generally Accepted Accounting Principle
The measurement rules use to develop the information in the financial statements in the United States

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10
Q

Balance Sheet Equation

A

Assets = Liabilities + Owners’ Equity

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11
Q

Retained Earnings Equation

A

Beginning RE + Net Income - Dividends = Ending RE

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12
Q

Income Statement Equation

A

Revenues - Expenses = Net Income

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13
Q

Transaction Analysis

A

-Determining the economic effect of a transaction on the accounting equation
Two rules
1-every transaction affects at least 2 accounts.
2-the accounting equation must remain in balance after each transaction.

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14
Q

Steps in Transaction Analysis

A

1-Identify the accounts affected (what did I give/what did I get)
2-Determine the effect on each account (+/- & $)
3-Determine that the accounting equation remains in balance

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15
Q

T-Accounts

A

-Summarize transaction effects for each account
-determine account balance
-draw inferences about a company’s activities
Dr=Debit, left side
Cr=Credit, right side

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16
Q

Journal Entry

A

-An accounting method for expressing the effects of a transaction on accounts in debits equal credits formal
Characteristics-
-Recorded in a journal in chronological order
-Debits are written first
-Credits are indented below debits
-Debits equal credits Dr=Cr

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17
Q

Balance sheet accounts

A

Assets-Resources, cash, A/R, inventory, prepaid expense, PPE, investments.
Liabilities-AP (_payable or accrued), unearned revenue (customer pays in advanced)
Stockholders equity-Contributed Capital, Retained Earnings

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18
Q

Income Statement accounts

A

Revenues-Sales Revenue*, interest revenue, dividend revenue, rent revenue (all earned)
Expenses-COGS, salaries and wages exp., utilities exp, repairs and maintenance exp, insurance exp, advertising exp, transportation exp, tax expense, interest exp, (used up)

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19
Q

Relationship of 3 basic equations

A

(IS) Net Income = Revenues - Expenses
(RE) BRE +Net Income - Dividends = ERE
(BS) Assets = Liabilities + Stockholders Equity (Contributed Capital and Retained Earnings)

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20
Q

Statement of Cash flows equation

A

Cash Flows from Operating activities + cash flows from Investing activities + cash flows from Financing activities=Change in cash

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21
Q

Financing Activities

A

-Borrowing money (loans)
-Issuing stock
Liabilities and Stockholders equity

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22
Q

Investing Activities

A

-Purchasing PP&E
-Purchasing the securities of other company’s (investment)
Assets

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23
Q

Cost Principle

A

-Assets are recorded at their original cost of transaction date (cash equivalent value)
—Exchange value-What is given?What is received
Cost does not represent market or current value

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24
Q

Type of T-Accounts

A

Assets, Expenses, and Dividends all increase on the debit side
Liabilities, Revenue, and Equity all increase on the credit side

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25
Cash Basis
Revenues are recognized when cash is collected Expenses are recognized when cash is paid
26
Accrual Basis
Revenues are recognized when earned, regardless of when cash is received Expenses are recognized when incurred, regardless of when cash is paid (Required by GAAP for external reporting)
27
Element of the Income statement
Revenues and expenses result primarily from operating activities Revenues and expenses only increase
28
Time period assumption (IS)
The long life of a company can be reported in shorter time periods. (Qtr or Yr)
29
Income Statement Principles (Revenue)
Revenues are recognized when (or as) the seller provides goods or services to customers, in the amount the seller expects to be entitled to receive.
30
Income Statement Principles (Expense)
Expenses are recorded when incurred in earnings revenue (When item is used up)
31
Deferral
Cash comes before the recognition of revenue or expense (Revenue Prepaid exp)
32
Accrual
Cash comes after the recognition of revenue or expenses (Receivable Payable)
33
Deferral Adjusting Entries
When the cash happens first 1- Deferred Expense Expense + Prepaid Expense (asset) - 2 - Deferred Revenue Unearned revenue (liability) + Revenue -
34
Accrual Adjusting Entries
When the cash is after the fact 1-Accrued expenses Expense + Payable (liability) + 2-Accrued Revenue Receivable (asset) + Revenue +
35
General Rules for Adjustments
-Adjustment never involve cash -Adjustments always affect both the balance sheet and the income statement
36
Contra-Account
-An account that is an offset to, or deduction from, the primary account -Book value (net book value, carrying value): the difference between an asset's acquisition cost and it's contra-account
37
Deprecation
A deferred Expense -Capitalize the fixed asset purchased (buildings, equipment, vehicles, computers, and office furniture) -Apply the matching principled:record a potion of the assets cost as depreciation each accounting period -New Account: accumulative depreciation (contra-account)
38
Principles of Control Activities
-Establish responsibility -Segregate duties -Restrict access -Document procedures -Independently verify
39
Internal control
Actions taken to promote efficient and effective operations, protect assets, enhance accounting information, and adhere to laws and regulations. Control Components: -Control environment -Risk Assessment -Control activities -Information and communication -Monitoring activities
40
Internal Control for cash (cash receipts)
-Cashers held individually responsible for cash received -Different individual be assigned to receive, maintain custody, and record cash -Cash be stored in a locked safe until deposited at bank -Document cash reveived -Match register receipts to cash count and deposit slips.
41
Internal Control for cash (Cash payments)
-Limit individuals initiating purchases -different individuals order, receive and pay for purchases -Access to checks and valuable property restricted -Purchases requisitions, purchase orders, receiving reports, and pre-numbered checks used to document -Each step in payment process independently verified
42
Bank Reconciliation
Adjustment to books: - Bank service charges -NSF checks +EFT +Interest Adjustment to banks: -Outstanding checks +Deposits in transit
43
Cost of Goods Sold (COGS)
Beginning Inventory + Purchases = Costs of Goods available for sale - Ending inventory = Cost of Goods sold (COGS is an expense) (Inventory shrinkage: the cost of inventory lost to theft, fraud, and error damage)
44
Inventory Shrinkage
1- Compute what El (solve) should be using the cogs equation 2- Compute inventory shrinkage as: shrinkage = El should be (Step 1) - Actual El (given)
45
Perpetual vs. Periodic Inventory Systems
Perpetual Periodic Buy Inventory. + inventory + purchases Sell Inventory + Cogs - Inventory. No entry Count Inventory Adjust bal to count Record inventory close purchases and create cost of goods sold COGS = BI + P - EL Calc LY Account closed Count
46
Purchase Adjustment
Gross Purchase + transportation in (FOB Shipping/FOB destination) - Purchase returns and allowances - Purchase discount = Net purchase
47
FOB Shipping vs FOB destination
Shipping- in transit belongs to the buyer Destination - in transit belongs to the seller
48
Sales Adjustments
Gross sales - Sales returns and allowances (contra-revenue) - Sales discounts (c-r) = Net Sales
49
Multistep Income Statement
Net sales - COGS = Gross profit - selling, general and admin expenses = income from operation +/- other revenues (expenses), net = income before taxes - tax expense (t*PTI) = net income (1-t) * PTI EPS- do not calculate (primary or basic
50
Inventory
Goods that are held for sale in the course of normal business or will be used in producing other goods Retailers-Merchandise Inventory Manufacturers- raw materials inventory work-in-process inventory finished goods inventory
51
Consignment Inventory
Belongs to the owner
52
Inventory Costing FIFO and LIFO
1- Calculate number of units sold and number of units in ending inventory #AFS 2-Create "warehouse" containing beginning inventory and purchases only (no dates) 3-Pull sold units from "warehouse"to compute COGS FIFO : Top down LIFO : Bottom up 4-Remaining units in "warehouse" = ending inventory
53
Inventory Costing Weighted Average
1-Calculate number if units sold and number of units in ending inventory #available for sale 2-Create "warehouse" containing beginning inventory and purchase only 3-Compute weighted average cost/unit (WAC) = COGAFS / # units available for sale 4- COGS = WAC * # units in ending inventory COGS : FIFO < WAC < LIFO El: FIFO > WAC > LIFO
54
Effect of LIFO vs FIFO - Rising Prices
LIFO- Highest COGS Lowest net income Lowest ending inventory cost FIFO- Lowest COGS Highest net income Highest ending inventory cost
55
LIFO Rule
If we use LIFO on our tax return, we must use LIFO on our financial statements IFRS does not allow LIFO
56
Ending Inventory Overstated
This Year Next Year COGS Understated Overstated Net Income Overstated Understated
57
Ending Inventory Understated
This year Next year COGS Overstated Understated Net Income Understated Overstated
58
Bad Debt Expense
-If a company extends credit to customers, it is inevitable that some of then will not pay -The company will not know until often much later who is not going to pay
59
Types of Receivables
Accounts receivable -Arise from sales of goods or service on credit Notes Receivable -A formal written contract outlining the terms by which a company will receive the amount owed, including a due date (maturity date) -Typically includes interest
60
Bad Debt (issue and solution)
The accounting issue- how to charge the cost of these bad debts (customers who default on AR), to the same period in which the sales are generated. The solution- estimate the amount of accounts that will ultimately be uncollectible and match against revenues in the period the sale is made.
61
Credit sales method
1-Estimate the amount by multiplying the appropriate rate times net credit sales (given/assume all sales on credit unless said) 2- increase bad debt expense and the allowance for doubtful accounts by the amount calculated BD exp = % * net credit sales (income is reduced when bad debt expense is recorded)
62
Writing off a specific bad debt
-Reduce the allowance for doubtful accounts -reduce the account receivable that has been identified to be uncollectible -No effect on income, assets, liabilities, or equity from the actual write-off
62
Aging Method
1- Compute totals for each aging category and estime loss % for each category 2- determine how much should be in the allowance for doubtful accounts 3-determine the current balance in the allowance for doubtful accounts 4-increase the allowance to the desired balance by increasing bad debt expense and the allowance for doubtful accounts by the difference between what it is and what it should be. (income is reduced when bad debt expense is recorded)
62
What if a customer pays after the account is written off?
1-Reverse the write-off entry 2-Record the cash Receipts as usual: - increase cash -Decrease A/R
62
Acquisition Cost
All reasonable and necessary costs to acquire and prepare and asset for use (Purchase price, taxes paid at time of purchase, transportation charges, purchase costs/fees, installation costs, setup costs to prepare for us) Capital expenditures: expenditures that are added to the acquisition cost of an asset (change value) Revenue Expenditures: expenditures that are expense as incurred (general repairs & maintenance)
63
Interest on Notes receivable
Interest = P * IR (Rate) * T (time)
64
Cost of operational assets
-Depreciation (fixed asset) (ppe) -Amortization (intangibles) (Land is not depreciated)
65
EBITDA
Earnings before interest, taxes, depreciation, and amortization
66
Depreciation (3 methods)
1- Acquisition cost (c) 2-Estimated useful life 3-Estimated residual value (rv) C-RV is the total amount of depreciation expense to be recognized over the life of the asset (under all methods)
67
Straight Line Method
Evenly over life, same amount each year Depreciation exp./year = Cost -RV/Life in years
68
Units of production method
According to usage More usage > More Deprecation less usage > less depreciation Depreciation expense/units = C-RV/Life in units
69
Disposal of Assets
1- record depreciation up to the date of sale 2-Record a gain or loss on disposal
70
Double-Declining balance method
More depreciation early in life, less depreciation later in life (accelerated) Step 1 calclate DDR = 1/life * 2 Step 2 DDR* beginning of year
71
Intangible assets
Definite life-Record amortization expense (patent) Indefinite life-review annually for impairment, but don't amortize (goodwill)
71
Long term liabilities
Notes payable (long term) Bonds bayable (traded security, bond market, raised capital)
72
Bond returns
-interest expense is the balance (CV) times the market rate -cash is the face amount times the sate rate -amortization is the difference between the two
73
The sale of bonds
Selling Price > Par = Bond Premium Selling Price < Par = Bond Discount Selling price = Par = Bond issued at par
74
Shares of Captial Stock
Authorized-Approved to be sold by BOD Issued-Sold Treasury-Repurchased Outstanding-Issued and still held in Market = Issued - Treasury
75
What is par value
The minimum amount to be contributed by stockholders -legal requirement (state) -specified in the charter -no relationship to market price of stock
76
Treasury Stock
Results when a company buys its own stock in the market The purchase of treasury stock reduce assets and equity The reissuance increase assets and equity Note-No gain or loss is recorded when stock is reissued
77
Cash Dividends
Declaration date > record date > payment date (pay dividends on outstanding shares only) Dividends are not an expense on the income statement. They reduce retained earning and are a distribution on income.
78
Stock Dividends
Reduces retained earning and increase stock outstanding with no effect on income assets Small < 20-25% of outstanding shares recorded at market value Large >20-25% of outstanding shares recorded at par value
79
Stock Splits
No entry is recorded Therefore nothing is affected expect the par value and number of shares outstanding
80
Stockholders equity
Contributed Capital= Preferred stock common stock additional paid in capital Retained Earnings Minus:Treasury stock = Total stockholders equity
81
Operating Section
-Adjusts net income to a cash basis Indirect adjusts net income to ash basis by looking at what affected income that didn't not affect cash
81
Purpose of statement of cash flows
The balance sheet reports-static cash balance, cash at the end of the period The balance sheet does not report-sources or inflows of cash, uses or outflows of cash The income statement is accrual based
82
Classifying cash flows
Operating adjusts net income to cash from operations (core operations) Investing shows buying and selling of PPE and intangibles as well as investments Financing is issuing and repaying debt, issuing and reacquiring stock and paying dividend
83
Investing Section
Shows cash flows from buying and selling noncurrent assets including, PPE (capital expenditures), investments Compare to cash flow from operations to see how much of investment funds are internally generated
84
Financing Section
Shows cash flows from: issuing and maintaining debt, issuing and repurchasing stock (our own), paying dividends Provides the bridge between the amount used in investing activities and the amount generated by operations
85
Horizontal Analysis
Also called time series analysis shows year to year changes as a percentage of the base year To calculate the % change: Current year - Prior Year / Prior year
86
Verital (Common-size) analysis
Express each financial statment amount as a percentage of the base On the income statment, the base is sales. Express the rest of the income statement as a percentage of sales On the balance sheet the base is total assets, express the rest of the balance sheet as a percentage of total assets
87
Ratio Analysis for Chapter 13
Compares items in the financials (ad certain external items) to each other to look for relationships Three main categories of ratios Profitability-measures the overall success of a company Liquidity-measures the ability to meet currently maturing debts Solvency-Measures the ability to meet long-term obligations

Accounting Exam (1 decks)

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