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54 terms

forms of business organizations

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sole proprietorship
business owned by 1 person, simple to establish, owner controlled, tax advantages, owner personally liable, financing difficult
partnership
2+ owners, simple to establish, shared control, broader skills and resources, tax advantages, personal liability
corporation
separate legal entity owned by stockholders, easy to transfer ownership, greater capital raising potentioal, lower legal liability, unfavorable tax treatment
DEAD
Debit Expenses Assets Dividends
CLER
Credit Liabilities Equity Retained Earnings
monetary unit
include in the accounting records only those things that can be expressed in terms of money
economic entity
every economic entity can be separately identified and accounted for
time period
the economic life of a business can be divided into artificial time periods
going concern
the enterprise will continue in operation long enough to carry out its existing objectives
cost
record assets at cost
full disclosure
disclose circumstances and events taht make a difference to financial statement users
debt to total assets ratio
total liabilities/total assets
current ratio
current assets/current liabilities
accounting equation
assets=liabilities+stockholder's equity
debit and credit
[assets: increase dr./decrease cr.] [liabilities: decrease dr./increase cr.] [stockholders equity: decrease dr./increase cr. (common stock: decrease dr./ increase cr. retained earnings: decrease dr./increase cr dividends: increase dr./decrease cr.)] [revenue: decrease dr./increase cr.] [expense: increase dr./decrease cr.]
normal balances for all types of accounts
cash-debit; acct payable-credit; acct receivable-debit; service revenue-credit; common stock-credit; salaries expense-debit; dividends-debit; building-debit; taxes patable-credit; unearned revenues-credit; prepaid insurance;debit; rent expense-debit
matching principle
requires taht expenses be recorded in the same period which the revenues they helped produce are recorded.
revenue recognition
dictates taht revenue be recognized in the accounting period where it was earned (earnes=when the service has been provided, or when goods are delivered)
cash basis accounting
transactions are only recorded when cash is paid or when cash is received; does not follow GAAP
acccrual based accounting
the main difference has to do with timing of the transactions; adjusting journal entries are needed to record revenues and expenses in their proper time period because sometiems: cash is paid or collected before transaction (prepaid) or transaction occurs before cash is paid or collected (accrual)
prepaid expenses
(paid in cash and recorded as assets before they are used or consumed) dr. expense/cr. asset; increase exp; decrease asset; increase exp=decrease net income and decrease equity
annual depreciation expense
(cost-salvage value)/useful life
COGS
purchases - purchases returns - purchase discounts + freight in costs - ending inventory
Gross profit rate
gross profit/net sales
gross profit
sales - returns - discounts - COGS
net income
gross profit - expenses + interest income
ending retained eaernings
biginning - dividends + net income
current assets
acct. receivable, supplies on hand, prepaid insurance (anything that can be paid within the year)
long term assets
equipment, furniture, acc. depreciation (anything that takes longer then a year to pay off)
long term liabilities
notes and bonds payable
freith out is...
operating expenses
freight in is...
inventory
total operating expenses
operating exp + insurance exp + rent exp + supplies exp + wages exp
income from operations
gross profit - operating expenses
income befoer taxes
income from operations - interest exp + interest income
FIFO
First In First Out - earliest goods purchased are the first to be sold. in a period increasing prices FIFO will approximate current costs dring rising prices FIFO will produce the hightest net income
LIFO
Last In First Out - latest goods purchased are the first to be sold in a period of increasing prices LIFO will be significantly understated during rising prices companies use LIFO (higher cogs, lower net income, lower income taxes)
weighted average
(cost of goods available for sale)/(total units available for sale)
F.O.B. shipping points
ownership transfers to buyer before in truck
F.O.B. desination
after signing for good the ownership transfers
lower of cost or market
when the value of inventory is lower than its cost, companies "write down" the inventory to its market value in the period where the price decline occurs. *market value = colst of replacing good
inventory turnover ratio
COGS/average inventory
days in inventory
365/inventory turnover ratio
steps in bank reconciliation
1. determine deposits in transit 2. determine outstanding checks 3. note any errors discovered 4. make adjustments for items reported on the bank statement but not recorded on the company's books
net accounts receivable
accounts receivable - allowance for douabtful accounts
business sells merchandise to a customer on account...
accounts receivable is debited, and sales credited
business receives returned merchandise previously sold to a customer on account...
sales returns and allowances is debited and accounts receivable is credited
collection of accounts receivable if...
if a customer pays off balance due
calculation of interest for full and partial year
(face value of note)(annual interest rate)(time in terms of one year)
receivables turnover ratio
(net credit sales)/(average net receivables) *use net sales if net credit sales is not provided
average collection period
(365)/(receivables turnover ratio)
straight line method
(cost-salvage value)/(assets useful life in years)
return on assets ratio
(net income)/(average total assets)
asset turnover ratio
(net sales)/(average total assets)