Accounting Block #1

109 terms by fistera2 

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Sole proprietorship

Business owned by one owner
Simple to Establish
owner controlled
Tax advantages

Partnership

Business owned by 2 or more persons associated as partners
simple to establish
shared control
Broader skills and resources
tax advantages

corporation

Business organized as a separate legal entity owned by stockholders
easier to transfer ownership
Easier to raise funds
No personal liability

Accounting

the information systems that identifies, records, and communicates the economic events of an organization to interested users, internal and external.

Sarbanes-Oxley Act (SOX)

passed by Congress to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals

Liabilities

Amounts owed to creditors in the form of debt and other obligations

Common Stock

term used to describe the total amount paid in by stockholders for the shares they purchase

dividends

cash payments to stockholders

assets

resources owned by a business

Revenue

the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of a business

expenses

the costs of assets consumed or services used in the process of generating revenues

Net Income

When revenue exceeds expenses

Net Loss

When expenses exceeds revenues

Internal users

managers who plan, organize, and run a business
Marketing Managers, Production supervisors, finance directors, and company officers

Accounting information System

The process of transaction and processing transaction data and communicating financial information to decision-makers- keeps track of the results of each of the various business activities

Financial statements

Form the backbone of financial accounting

Income statement

shows how successful a business performed over a period of time (Revenue and Expenses)

Retained Earnings statement

Indicates previous income and that distributes to stockholders, and shows retained earnings to allow for future growth

Balance sheet

Presents a picture at a point in time of what the business owns, and what it owes. claims to assets are subdivided into 2 categories, claims of creditors (liabilities), and claims of owners (S/E)

Statement of cash flows

shows where your business obtained cash during a period of time and how cash was used for a specific period of time. Answers 3 Questions: 1) where did cash come from during the period? 2) how was cash used during the period? 3) what was the change in the cash balance during the period?

Retained earnings

Net Income retained in the corporation

Stockholder's Equity

The owner's claim to assets

Basic accounting equation

Assets=Liabilities+Stockholder's Equity

annual report

Always includes the financial statements and other information such as a management discussion and analysis section, notes to financial statements, and an independent auditor's report

Management discussion and analysis

presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and its results of operations. Must highlight favorable/unfavorable trends and identify significant events and uncertainties that affect these 3 factors

Notes to the financial statements

clarify the financial statements and provide additional detail

auditor's report

prepared by and independent outside auditor, and states the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles

certified public accountant

persons who have met certain criteria and can preform audits. issues an unqualified opinion... anything else would result by readers only using the financial statements with caution

Classified Balance sheet

groups together similar assets and similar liabilities, using a number of similar standard classifications and sections

current assets

assets that a company expects to convert to cash or use up within one year or its operating cycle

operating cycle

the average required time to go from cash to cash in producing revenue

Long-term investments

1)investments in stocks and bonds of other corporations that are held for more than one year 2) long-term assets such as land or buildings that a company is not currently using in its operating activities 3) long-term notes receivable

Property, Plant, Equipment

assets with relatively long useful lives that are currently used in operating the business

Depreciation

The allocation of the cost of an asset to an expense over its useful life

Intangible assets

assets that do not have physical substance and yet are very valuable

Current Liabilities

obligations that the company is to pay within the next year of operating cycle

Long-term liabilities

obligations that a company expects to pay after one year

Ratio analysis

expresses the relationship among selected items of financial statement data

ratio

expresses the mathematical relationship b/w 1 quantity and another

profitability ratios

measure the operating success of a company for a given period of time

Earnings per share

measures the net income earned on each share of common stock

statement of stockholder's equity

presents the causes of changes to stockholder's equity during the period

liquidity

the ability to pay obligations expected to become due within the next year. it is possible for a company to be too liquid

working capital

the difference b/w the amounts of current assets and current liabilities

liquidity ratios

measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash

current ratio

computed as current assets divided by current liabilities (liquidity ratio)

Solvency

its ability to pay interest as it comes due to repay the balance of a debt due at its maturity

Solvency ratios

measure the ability of the company to survive over a long period of time

debt to assets ratio

one measure of solvency-calculated by dividing total liabilities by total assets- measures the % of total financing provided by creditors rather than stockholder's

Free cash flow

describes the net cash provided by operating activities after adjusting for capital expenditures and dividend paid

Generally accepted accounting principles

accounting standards that have authoritative support

Securities and exchange commission

agency of US gov. that oversees financial markets and accounting standard-setting bodies

Financial Accounting Standards Board

The primary accounting standard-setting in the US

International Accounting Standards Board

issues standards called International Reporting Standards, which have been adopted by many countries outside of the US

Public Company Accounting Oversight Board

created as a result of the Sarbanes-Oxley Act- determines auditing standards and review the performance of auditing firms

Comparability

results when different companies use the same accounting principles

Consistency

means that a company uses the same accounting principles from year to year

verifiable

describes information that if independent observers, using the same methods, obtain similar results

timely

available to decision makers before it loses it capacity to influence decisions

understandability

quality of information that is presented in a clear and concise fashion, so that reasonably informed users of that information can interpret it and comprehend its meaning

accounting transactions

economic events that require recording in the financial statements

Transaction analysis

the process of identifying the specific effects of economic events on the accounting equation

account

an individual accounting record of increases and decreases in a specific asset, liability, stockholder's equity, revenue, or expense item

T-account

basic form of an account

debit

indicates the left side of an account

Credit

indicates the right side of the account

double-entry systems

provides a logical method of recording transactions- the two-sided effect of each transaction is recorded in appropriate accounts

Journals

where transactions are recorded in Chronological order

general journal

the most basic form of a journal that every company at least has

Journalizing

the action of entering data into journals

ledger

the entire group of accounts maintained by a company

general ledger

contains all the assets, liabilities, stockholder's equity, revenue, and expense accounts

Chart of accounts

a list of accounts

posting

the procedure of transferring journal entry amounts to ledger accounts

trial balance

lists accounts and their balances at a given time- usually prepared at the end of an accounting period- proves the mathematical equality of debits and credits after posting

Periodicity assumption

the assumption that accounting divides the economic life of a business into artificial time periods

revenue recognition principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

expense recognition principle (matching principle)

dictates that efforts (expenses) be matched with results (revenues)

Accrual-basis accounting

means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged

cash-basis accounting

companies record revenue when they receive cash, and they record expenses when they pay cash out- often produces misleading financial statements

adjusting entries

ensure that the revenue recognition and expense recognition principles are followed

Prepaid expenses (prepayments)

expenses paid in cash before they are used or consumed- expenses that expire either with the passage of time or through use

useful life

the period of service of an asset

Contra asset account

aka accumulated depreciation

Book value

the difference b/w the cost of any depreciable asset and its related accumulated depreciation

unearned revenues

cash received before services were performed

accrued revenues

revenues for services performed but not yet recorded at the statement date

accrued expenses

expenses incurred but not yet paid or recorded at the statement date

adjusted trial balance

a new trial balance after all adjusting entries have been made at the end of the accounting period

Earnings management

the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income

quality of earnings

indicated the level of full and transparent information that a company provides to users of its financial statements

temporary accounts

revenues, expenses, and dividends---relate only to a given accounting period

permanent accounts

all balance sheet accounts--- balances are carried forward into future accounting periods

closing entries

transfer net income (or net loss) and dividends to Retained Earnings so that the balance in Retained earnings agrees with the Retained Earnings Statement---produce a zero balance in each temporary account

Income summary

a temporary account used in closing revenue and expense accounts

post-closing trial balance

a list of all permanent accounts and their balances after closing entries are journalized and posted

worksheet

a multiple column form that may be used in the adjustment process and in preparing financial statements--- not a permanent account record

historical cost principle

dictates that companies record their assets at their cost

fair value principle

indicates that assets and liabilities should be reported at fair value (the price received to see an asset or settle a liability)

full disclosure Principle

requires that companies disclose all circumstances and events that would make a difference to financial state users

Cost constraint

weighs the costs that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available

Relevance

quality of accounting information where it would make a difference in a business decision. includes predictive value- helps provide accurate expectations about the future, Confirmatory value- confirms or corrects prior expectations

Materiality

a company-specific aspect of relevance---an item is material when its size make is likely to influence the decision of an investor or creditor

Faithful representation

means that information accurately depicts what really happened--- information must be complete, neutral (not biased), and free from error

Monetary Unit assumption

requires that only things that can be expressed in money are included in the accounting records

economic entity assumption

states that every economic entity can be separately identified and accounted for. Important not to blur a company's transaction with personal transactions or transactions with other companies

periodicity assumption

states that the life of a business can be divided into artificial time periods

Going concern Assumption

states that a business will remain in operation for the foreseeable future

deferrals

costs or revenues that are recognized at a date later than the point when cash was originally exchanged--- prepaid expenses and unearned revenues( a liability account)

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