Exam 2 Flashcards
Assets, liabilities, Income, Expenses, and Equity, as represented by individual ledger pages, to which changes in value are chronologically recorded with debit and credit entries. There are different kinds of accounts, including permanent accounts, and temporary accounts that are talked about later in the guide.
Account
Entries made at the end of an accounting period to zero out all temporary accounts, and transfer their balances to permanent accounts. The debit amount entered must be exactly the amount of the credit balance prior to the closing entry.
Closing Entry
A way of calculating the income statement that uses multiple sub-totals (such as gross margin, operating expenses, and other income) which allows readers to understand more about where the money is going. Due to its higher informational content, it usually is preferred, but can still be misleading if expenses are not transferred precisely.
Multi-Step Income Statement
Similar to the multi step, but doesn’t use many subtotals. Instead, you present a single subtotal for all expense line items, and a single subtotal for all revenue line items, with a net gain or loss provided at the bottom. As was said above, there is less information in this kind of report.
Single-step Income Statement
A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash.
Current Assets
A company’s debts or obligations that are due within one year. Current liabilities appear on the company’s balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.
Current Liabilities
A measure of both a company’s efficiency and its short-term financial health.
Working Capital
The working capital is calculated as:
Working Capital=Current Assets-Current Liabilities
The ratio is mainly used to give an idea of the company’s ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point.
Current Ratio
The current ratio is calculated as:
Current Ratio= (Current Assets) / (Current Liabilities)
The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company’s gross margin. Also referred to as “cost of sales.” In the formula, Net Costs of Purchases also include freight in costs.
Cost of Goods Sold:
To calculate COGS, use this formula:
Beginning Inventory + Net cost of purchases- Ending Inventory = COGS
Inventory is merchandise purchased by merchants for the purpose of being sold to customers. The cost of the merchandise purchased but not yet sold is reported in the account Inventory or one called Merchandise Inventory. It is reported as a current asset on the company’s balance sheet.
Inventory
The recorded cost of inventory at the end of the immediately preceding accounting period, which then carries forward into the start of the next accounting period. It is an asset account, and is classified as a current asset.
Beginning Inventory
The recorded cost of inventory at the end of any accounting period. It is what carries over to the next period as the beginning inventory
Ending Inventory
