Chapter 4 Flashcards
(19 cards)
What is a accounting period ?
the time period covered by the financial statements; could be any time frame used for financial reporting
What is the business operating cycle ?
The business operating (or cash-to-cash) cycle is the time it takes for a company to purchase goods or services from suppliers; pay cash to suppliers; sell those goods and services to customers; and collect cash from customers.
What are the steps of the accounting cycle ?
Duringthe accounting period, transactions that result in exchanges of benefits and obligations between the company and other external parties are analyzed and recorded in the general journal in chronological order (journal entries), and the related accounts are updated in the general ledger (T-accounts)
Theend-of-periodsteps starts with the preparation of the trial balance and focus primarily on adjustments to record revenues and expenses in the proper period and to update the statement of financial position accounts for reporting purposes.
When are adjusting entries used ?
When the cash part of a transaction occurs at a different point in time, so adjustments are required.
What is the purpose of adjustments ?
- Revenues are recorded when earned (therevenue recognition principle)
- Expenses are recorded when incurred to generate revenue during the same period (thematching process)
- Assetsare reported at amounts that represent the probable future benefits remaining at the end of the period
- Liabilitiesare reported at amounts that represent the probable future sacrifices of assets or services owed at the end of the period.
What are the two types of adjustments ?
Accruals = Cash will be received or paid in the future; Revenues earned, or expenses incurred that have not been previously recorded
- Accrued revenue
- Accrued expense
Deferrals = Receipts of assets or payments of cash in advance of revenue or expense recognition
- Deferred revenue
- Deferred expense
What is a deferred revenue ?
When a customer pays for goods or services before the company delivers them.
What is accrued revenue ?
When companies perform services or providegoods (i.e., earn revenue)beforecustomers pay.
What is a deferred expense ?
Many assets are used over time to generate revenues, including supplies, prepaid rent, prepaid insurance, buildings, equipment, and intangible assets, such as patents and copyrights. These assets aredeferred expenses.
What is a contra account ?
Acontra accountis an account that is an offset to, or reduction of, the primary account. It isdirectly related to another account but has a balance on the opposite side of the T-account.
What are 2 important rules of adjustments ?
- The cash account is never adjusted
- Each adjusting entry always includes at least one account on the statement of earnings and at least one account on the statement of financial position
What are the steps at the end of an accounting period ?
- Prepare a trial balance
- Analyze account balances
- Record and post adjustments
- Prepare an adjusted trial balance
How to prepare an Adjusted Trial Balance ?
- Before preparing a complete set of financial statements, update the trial balance to reflect the adjustments and to provide adjusted ending balances for the statements
- The ending balances are taken from the T-accounts following each adjustment
- Total debits = total credits
In what order are the financial statements made ?
- Statement of earnings
- Statement of change in equity
- Statement of financial position
- Statement of cash flows
What is a permanent and temporary account ?
Permanent accounts are accounts on Statement of Financial Position. Example assets, liabilities, etc.
Temporary accounts are accounts on statement of earnings and dividends. Example Revenues, expenses, gains, etc.
What are the purposes of closing the books ?
- To transfer the balances in the temporary accounts to retained earnings
- To establish a zero balance in each of the temporary accounts to start the accumulation in the next accounting period
- To prepare statement of earnings accounts for the next accounting cycle
What is the account cycle steps ?
- Record transactions in the journal entry
- Unadjusted Trial Balance
- Adjusted Trial Balance
- Prepare F.S.
- Prepare Closing Entries
What is the Earnings per share ratio and what is its equation ?
EPS evaluates the operating performance and profitability of a company.
EPS = Net earnings available to common shareholders / Weighted average number of common shares outstanding during the period
What is the net profit margin ratio and its equation ?
How much profit is earned as a percentage of revenues generated during the period.
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