Sophia's Financial Accounting Flashcards
(152 cards)
1
Q
What does Sarbanes-Oxley do besides tightening reporting standards?
A
SOX forces management to be individually responsible for the accuracy of their financial information.
All the CEOs and CFOs of these publicly traded companies are required to sign off that their financial information is complete and correct.
2
Q
What did Enron do?
A
reported higher profits and created fictitious companies to hide their debt.
3
Q
What did WorldCom do?
A
intentionally reported higher profits. In addition, they reported items that should have been expensed–and hence reduced the amount of profit reported–as assets.
4
Q
When was Sarbanes-Oxley?
A
2002
5
Q
What does the GAO do?
A
It’s the federal agency that investigates program spending related to the use of public funds
6
Q
What is the GASB?
A
Governmental Accounting Standards Board (GASB) establishes financial reporting standards for state and local governments in the United States.
Founded in 1984.
7
Q
What is the IFRS?
A
International Financial Reporting Standards (IFRS) are the global accounting standards
8
Q
Who is required to use GAAP?
A
Publicly traded U.S. companies are required to use U.S. GAAP
Any non-publicly traded companies– meaning non-SEC registrants–can use either U.S. GAAP or IFRS for non-U.S. SEC registrants.
9
Q
When was the AICPA founded?
A
American Institute of CPAs: 1887
10
Q
When was the SEC founded?
A
1934
11
Q
When was the FASB founded?
A
1973
12
Q
What does a bookkeeper do in an accounting sytem?
A
Data entry. They document an organization’s monetary transactions.
13
Q
What role does the accountant have in the accounting system?
A
Organizer
14
Q
What does the controller do in the accounting system?
A
Editor. They are responsible for all aspects of financial reporting and accounting, including verifying the completeness of facts and proper organization.
15
Q
What does an auditor do?
A
Verifier. They verify the work completed by the accounting department using regulatory and industry requirements.
can either be internal or external
must be objective
16
Q
Which is more flexible, publicly traded or privately held?
A
If publicly traded companies want to make a big decision, they must have shareholder approval, which can be a difficult and long process.
Privately owned companies, because they are more nimble, can focus more on growth and expanding the business, without being mired in the shareholder approval process.
17
Q
Which tax return would an LLC file?
A
It depends on what kind of legal entity they are. It could be a 1040, 1065, 1120S, or an 1120.
However most LLCs with more than one member file partnership returns (Form 1065).
(Note that they can file as corporations by submitting Form 8832)
18
Q
What’s the downside for privately owned companies compared to publicly traded ones?
A
Harder to raise capital.
They can’t sell shares and they are more limited in their bond choices (no convertible bonds, for example, because there is no stock for the bonds to convert to.)
19
Q
What’s the liability status for sole proprietorships?
A
Unlimited liability
20
Q
What’s the liability status for general partnerships?
A
Unlimited liability
21
Q
What’s the liability status for an S-corp?
A
Limited liability (only the amount of the investment)
22
Q
What’s the liability status for a C-corp?
A
Limited liability (only the amount of the investment)
23
Q
Is a sole proprietorship a pass-through entity?
A
Yes
24
Q
Is a partnership a pass-through entity?
A
Yes, all types of partnerships
25
Is an S-corp a pass-through entity?
Yes
26
Is a C-corp a pass-through entity?
No. The corporation is taxed, then distributed earnings are taxed.
27
What's the liability status for limited partnerships?
Limited liability in exchange for only having a minimal control over the business. (Sometimes called a silent partner)
28
What are the four types of partnerships?
General Partnership (default unless they have selected to be something else)
Limited Partnership
Limited Liability Partnership
Limited Liability Limited Partnership (not recognized in all states, though it is in MN and MO)
29
What does limited liability protection mean?
The owners’ personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.
30
What's the main difference between a limited partnership and a limited liability partnership?
An LP has at least one general partner
An LLP has no general partners. (Usually used for professionals like accountants and lawyers.) Also it has to file taxes as a partnership.
31
What is the difference between a general partner and a limited partner?
A GP participates in running the business. An LP does not.
32
Which form do non-profits file?
990
33
What are permanent accounts?
Accounts for assets, liabilities, and equity.
They are permanent because their balances carry over to the next accounting period.
34
What are temporary accounts?
Accounts for revenues and expenses
They are temporary because they are zeroed out at the end of each accounting period.
35
What is a Chart of Accounts?
A list of all the accounts that a company uses. It is organized by account type and categories.
36
What are the six steps of the accounting cycle?
1. Analyzing
2. Journalizing
3. Posting
4. Adjusting
5. Reporting
6. Closing
37
In the accounting cycle, what is analyzing?
Identifying business events--both internal and external--that need to be documented in the accounting or financial system
38
In the accounting cycle, what is journalizing?
Completing the journal entry (date, accounts affected, debits and credits)
39
In the accounting cycle, what is posting?
Moving transactions from the general journal into the general ledger. This is where they enter the accounting system.
40
In the accounting cycle, what is adjusting?
Done at the end of the period to correct mistakes, match revenues and expenses to the period, adjust for accruals and pre-paid expenses, unearned revenue, etc.
41
In the accounting cycle, what is reporting?
Creating the financial statements
42
In the accounting cycle, what is closing?
The temporary accounts (revenues and expenses) are closed to owner's equity or retained earnings.
43
A debit is made on the ______ side of the account.
Left
44
Credits are made on the _______ side of the accounts
right
45
What is a natural balance?
Expected type of balance for a specific account classification. In other words, is it a debit or a credit account? D-E-A-L-E-R
46
What are T-accounts?
a shorthand method of displaying journal entries and balances within individual accounts
47
General Journal
The original book of entry.
It serves as the initial documentation of a financial transaction
It contains transaction
detail and accounting events in a chronological order.
48
What are journal entries?
go in the general journal
detail the specific changes to accounts--the debits and credits.
49
Which pieces of info does a journal entry have?
Titles of the accounts involved
Date
Reference number*
Debits
Credits
*The reference number is a unique identifier for the account.
It's found in the chart of accounts
50
What is the General Ledger?
It aggregates all accounting records within an organization in preparation for financial
statements.
Includes:
date
description
reference number (in this case is going to refer back to the specific general journal and journal entry where the data points are coming from.)
updated balance
51
What's the difference between the General Journal and the General Ledger?
The general journal consists of raw accounting entries that record transactions, in sequential order, by date.
The general ledger is more formalized and tracks five key accounting items: assets, liabilities, owner’s capital, revenues, and expenses.
52
Why is unearned revenue a liability?
A liability is an obligation. You have an obligation to perform your services because you've been paid.
53
Which side of the debit sheet do prepaid expenses go on?
Assets. (It's not a liability because you don't owe anyone anything. In fact, they owe you.)
Prepaid accounts are gradually expensed over the period of use
or benefit.
54
How should you record supplies that will be used on an ongoing basis (i.e. longer than the current accounting period)
If the supplies will be used over for more than one accounting period, they should be recorded as a prepaid expense and expensed gradually over time.
They should NOT be recorded to Supplies Expense because that would be for immediate supplies.
(But you would use Supplies Expense if they were to be used during the current account period.)
55
What order do the account groups go in for the trial balance?
Assets (most liquid first)
Liab. (short-term first)
Equity
Revenue
Expenses
56
What is the order of closing out the temporary acconts?
Revenues
Expenses
Draws by Owner
all of the above are closed to the Income Summary
57
What kind of account is accumulated depreciation?
A contra asset account.
So it goes with the assets but is a negative balance.
58
Freight on Board (FOB)
(aka Free on Board)
The freight terms that designate:
whether the buyer or seller pays the freight
when ownership is transferred to the buyer.
59
FOB destination
the ownership of merchandise does not transfer until it arrives at the store and is possession of the merchandiser
Seller usually pays shipping
60
FOB Shipping point
(aka FOB Origin)
When the ownership transfers as soon as it leaves the shipper
Buyer usually pays shipping
61
COGS
Cost of Goods Sold is the cost of inventory that a company sold during a given period
only includes direct costs used to create the goods, excluding indirect costs like distribution and marketing.
62
Purchase Discount
the merchandiser pays for inventory in full within a specific period of time
The purchase is always recorded at the pre-discount price
63
If payment terms are 2%/15, net 30, what does that mean?
This is a purchase discount. The balance is due in 30 days, but if you pay within 15 days, you get a 2% discount
May also see it as 2%/15 n/30
64
If you use a purchase discount, where do you record the savings?
purchase discounts account
65
What is a Sales Discount?
Same as a Purchase Discount except from the perspective of the seller
66
What is an Allowance?
a deduction given to a customer when merchandise is flawed or inferior but the customer chooses to keep it
67
What’s the formula for Gross Profit?
Sales - COGS
68
What’s the difference between Revenue and Sales?
Revenue is the earnings from interest or from the sale of goods or services.
Sales is just the income from sales and does not include internet income
69
How do you calculate Net Sales?
Gross Sales
-Sales Returns and Allowances
-Discounts
=Net Sales
70
Sales returns and allowances is a ________ revenue account
Contra
71
Why do we use contra-revenue accounts?
To preserve our analysis capabilities, so we can compare our “sales returns and allowances” or “discounts” to our total sales to see what percentage they are.
72
What’s the formula for COGS?
Starting Inventory
+ purchases
- ending inventory
= COGS
OR
Starting Inventory + purchases
=
Ending Inventory + COGS
73
What’s the formula for Net Purchases?
Purchases
- discounts
- purchase returns and allowances
= Net Purchases
74
What’s the formula for Cost of Goods Purchased?
Net Purchases
+Freight-In
= cost of goods purchased
75
What’s the formula for Goods Available for Sale?
Beginning Inventory + Cost of Goods Purchased
76
subsidiary ledgers
groups of accounts that track the transaction detail and account balances for each individual customer or vendor
Customers with store credit cards also have their own subsidiary ledgers.
77
Do subsidiary ledgers work on both cash and credit accounts?
They only work if purchased on account, not cash, because a merchandiser can't track any information if the customer purchases the goods with cash.
78
Perpetual inventory
Inventory is automatically updated by computer each time a sale for a purchase happens
79
Periodic inventory
updates inventory with a physical count and calculates the Cost of Goods Sold at the end of the accounting period.
80
Weighted average (inventory)
Total cost
divided by
Total units
81
What kind of companies would use LIFO?
Those who experience inflation in their inventory costs.
It matches current costs to current revenues better
82
What is the benefit to using FIFO?
Resembles the physical flow of goods
83
What kinds of companies would use FIFO?
Grocery stores or electronics stores
84
What kinds of companies would use LIFO?
Oil and gas companies and manufacturers whose costs are tied closely to raw materials
85
In inventory, what’s the argument for using the weighted average method?
Inventory is very complex and it can be difficult to determine which exact units you’re selling
86
In inventory, what is the specific identification method?
You know exactly which item you are selling, so you can include the cost of that item. This works in very low volume businesses like real estate or yachts
87
When doing vertical analysis on an income statement, what is the denominator that you use?
Gross revenue
88
Formula for Days in Inventory
Number of days in period
Divided by
inventory turnover
89
Formula for gross margin ratio
Net sales minus COGS
Divided by net sales
90
Average value of inventory
value of inventory at the end of a period
+
the value of inventory at the end of the prior period
Divide the sum by 2
91
Book Value
The cost of a depreciable asset less its accumulated depreciation.
92
Are short-term assets depreciable?
No
93
Why don't we depreciate land?
Land is not depreciable because it doesn’t get “used up.”
94
That's another way to think of depreciation?
Essentially, what we are doing is matching expenses with revenue.
95
Accumulated depreciation
the total depreciation expense recorded to date in an asset's life
96
What kind of asset is accumulated depreciation?
a contra asset account
it has a credit balance that follows the asset account on the balance sheet
It offsets the asset account
97
Contra Asset
An account with a credit balance that follows the asset account that it offsets on the balance sheet
98
Straight line depreciation
depreciating the asset equally over its useful life
99
What about depreciation and taxes?
For taxes, businesses have to use:
MACRS (Modified Accelerated Cost Recovery System)
and ACRS (Accelerated Cost Recovery System)
100
Which method of depreciation do businesses have to use on their financial reports?
they're allowed to determine which depreciation method to use, unlike with taxes
101
Residual value
The fair value of an asset at the end of its useful life
102
How does residual value related to depreciation?
We cannot depreciate an asset beyond its residual value
103
Unearned Revenue
A liability account that records cash received before revenue is earned
104
What's a main benefit of accelerated depreciation?
reduced time period for writing off that asset's cost, which helps to reduce taxes.
105
When should you use accelerated depreciation?
For assets that are used more heavily in their earlier years
106
How do you calculate the depreciation method called "sum of the years' digits"?
Remaining life of the asset (at the beginning of the year)
divided by
the sum of the years of the useful life
(so 5 years of useful life = 5 + 4 + 3 + 2 + 1 = 15)
107
Which kind of asset is the depreciation method called "units of production" ideal for?
Machinery
108
In which ways is a machine's useful life often measured?
*hours
*number of units in can produce
109
How does the 'unit of production method' for calculating depreciation differ from straight-line or accelerated depreciation?
It considers an asset’s practical usage in the production process rather than considering its time in use
110
How do you calculate depreciation using the 'unit of production method'?
Figure out how much you are depreciating (cost - salvage value). This is your depreciation expense (DE)
Then figure out how many units the asset will make or hours it will work over its lifetime.
Divide the depreciation expense by the units/hours to determine a rate. In other words, what's the depreciation amount per unit/hour. This is your rate.
Then, multiply the rate by the number of units used during the current year.
111
Double Declining Balance
Twice the RATE of the straight-line depreciation
112
Carrying value
The book value of an asset. They are synonymous terms.
NOTE: The carrying value includes the cost of the asset and the cost incurred getting it ready for use, such as purchase price, fees, installation costs, etc.
113
Is the book value adjusted for depreciation?
Yes. It's the asset cost minus the accumulated depreciation.
114
Does the book value of an asset include loan interest and prepaid insurance?
Loan interest and prepaid insurance do not factor into the book value of the asset.
115
What is the journal entry to record depreciation?
DR Depreciation Expense
CR Accumulated Depreciation
116
Which financial statement shows depreciation expense?
Income statement
117
Which financial statement shows accumulated depreciation?
Balance sheet (as a contra asset)
118
What are some other names for long-term assets?
Fixed assets
Capital assets
119
What is asset disposal?
Selling, donating, or removing an asset from the business, so the business no longer owns or uses the asset.
120
What are the two methods used to record uncollectible accounts?
allowance method
direct write-off method (not used)
121
Allowance method
required for financial reporting
allows us to match our bad debts expense with the period in which the event occurred
the allowance accounts is a contra asset account, meaning it reduces the accounts receivable
122
What's the difference between the allowance method and the direct write-off method for uncollectable accounts?
While both debit a Bad Debts Expense account, the allowance method credits an allowance account while the direct write-off method credits AR
123
What are three ways to calculate uncollectable accounts?
Percentage of Net Credit Sales
Percentage of Receivables
Aging receivables
124
Where does unearned revenue on the balance sheet?
Current liability
125
Contingent liabilities may or may not happen. What are two examples?
lawsuits
guarantees or warranty costs
126
When would a contingent liability be recorded?
If the likelihood of the event is probable and the amount is estimable
127
When would a contingent lability be added to the notes instead of recorded?
If the likelihood of that future event taking place is possible and the amount is estimable
128
What happens with contingent liabilities that have a remote chance of occurring?
They are neither recorded nor disclosed in the notes to financial statements
129
Contingent Liability
A potential liability that has the possibility to become an actual liability dependent on some future event.
130
What is the base amount for Vertical Analysis?
Balance sheet: total assets or total liabilities
Income statement: gross or net revenue , e.g.
131
What is vertical analysis, essentially?
Expressing something as a percentage of the revenue (for the income statement) or the assets or liabilities (for the balance sheet)
132
What's the formula for the Asset Turnover ratio?
Net Sales
divided by
Total Assets
Measures the use of assets to make sales
To put it in perspective, if your ratio is 2, it signifies that you're producing $2 for every $1 invested, marking a commendably high turnover.
133
What's the formula for the Current ratio?
current assets
divided by
current liabilities
134
What's the formula for Inventory Turnover?
COGS
divided by
Average Inventory
Measures the number of times a company's inventory is sold and replaced
135
What's the formula for the Return on Sale ratio?
Net Income
divided by
Net Sales
Measures managerial efficiency, as well as profitability
136
What's the formula for the Return on Total Assets ratio?
Income before Interest, Expenses, and Taxes
divided by
Total Assets
Measures managerial efficiency, as well as the effective use of assets
137
What are two liquidity ratios?
Current Ratio
Inventory Turnover
138
What are three profitability ratios?
Rate of Return on Sales
Return on Total Assets
Asset Turnover
139
Where would you put an owner's draw on the Statement of Cash Flows?
Financing activities
140
Which category would you put net income in on the Statement of Cash Flows?
Operating activities
141
What's weird about the Statement of Cash Flows > Operating Activities section?
We have to reconcile net income to cash provided by operating activities
142
What are Internal Controls?
Systems to provide:
reasonable assurance of efficient operations
reliable financial statements
compliance with laws
143
What are the five elements of Internal Control?
the control environment (the policy and procedures of an organization)
risk assessment
Control activities (the protection of assets and records, as well as
client information)
information and communication systems
Auditing
144
Why is separation of duties important to Internal Control?
Avoids conflicts of interest
145
Why do we perform bank reconciliations?
to ensure that our internal financial systems match the bank balance
146
Indirect method
A method of preparing the statement of cash flows that involves adjusting net income with the changes in the balance sheet accounts to find the operating cash flows.
147
What’s the difference between the general journal and the general ledger?
The general journal is the book of original entry
The general ledger is the book of final entry
148
What’s my favorite difference between the general journal and the general ledger?
The journal captures information chronologically
The ledger summarizes information by account
149
Deferred means…
…the cash moves before the event happens
150
Accrued means…
the event happens before the cash moves
151
expanded accounting equation
Assets = Liabilities + (Common Stock - Dividends + Revenues - Expenses)
152
