103 terms

Financial Accounting I Final Exam

Text: Fundamental Accounting Principles McGraw Hill Ch 1-10
Accounting is an information measurement system that...
Identifies, records and communicates information about business activities by interpreting info and designing info systems to allow business to make better decisions
The Accounting Equation is...
Assets=Liabilities + Owner's Equity
$100 = $10 + $90
Everything a company owns
Accounts Receivable
Assets created by selling goods/services on credit
Debts created by purchasing goods/services on credit
Accounts Payable
liabilities created by purchasing goods/services on credit
Unearned Revenue
Liabilities created when a customer pays before the revenue is earned
Owner's Equity
Owner's claims against assets
Business Entity(assumption)
Every business accounted for separately from other entities, to include its owners
Cost Principle
Accounting info based on actual cost
Full Disclosure
Report all details of financial statements that could impact user's decisions;often in the footnotes
Going-concern Principle
Info that reflects a presumption a business will continue operating
Matching Principle
Requires expenses to be reported in the same period as the revenues earned
Monetary unit Principle
Transactions to be expressed in monetary(money) units
Objectivity Principle
Statement info must be supported by Unbiased evidence
Revenue Recognition Principle
Revenue is recognized when Earned ie.selling products/providing service for cash/credit
Time Period(assumption)
Life of a company divided into time periods with Useful reports for each ie. monthly, quarterly, fiscal/calendar years
Income Statement
Revenues - Expenses = Net Income
Net Income=excess revenues over expenses(profit)
Net loss=excess expenses over revenues
Statement of Owners Equity
Shows beginning OE(capital), events that increase it(owner investments and Net Income), events that decrease it(withdraws and net loss)
Balance Sheet
Lists types/amounts of Assets, Liabilities and Equity as of a specific date (AKA accounting equation)
The accounting process begins with...
Analysis of transactions and source documents
Record of (+/-) in an asset, liability, equity, revenue or expense
Chart of Accounts
List of all company accounts with corresponding identification #s
General Journal records...
Transaction date,Account names, Amount of each debit/credit, and explanation
Collection of all accounts and their balances
(left side) I (right side)
Debit I Credit
Trial Balance
Vertically lists accounts and balances
Total Dr should = Total Cr
Accrual basis of accounting
Preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues
Accumulated Depreciation
Total amount of depreciation recorded throughout the life of an asset
Adjusting Entries are done at the end of an accounting period in order to...
-Assure the statement reflects Revenues earned and the Expense incurred in the appropriate period
-Update liability and asset accounts to proper balance
Adjusted Trial Balance
Is the trial balance prepared once adjustments have been recorded and contains totals of all general ledger accounts
Allocating costs of plant assets over expected their useful lives
Accounting Cycle is the recurring steps performed each reporting period...
In order...Analyze, Journalize, Post, Trial Balance, Adjust, Adjusted Trial Balance, Financial Statements, Close, Post-Closing Trial Balance, Reverse entries(optional)
Capital calculation
Revenues - Expenses = Net Income - Withdraws = Ending Capital
Classified Balance Sheet
Organizes Assets and Liabilities into subgroups providing more info to decision makers
Classified Balance Sheet order...
Assets- Current(used within a year or ops cycle)
Long-term investments(year+)
Plant assets(tangible long lived revenue producing)
Intangible(long term resources ie. patent,TM)
Liabilities-Current(due within a year or ops cycle)
Long-Term(Due outside a year or ops cycle)
Equity- Owners claim on the assets
Closing Process
Ensures Net Income/Net Loss and owners withdraws are closed into the owner's capital account
Income Summary account
Special account to temp hold the amounts of revenues and expenses before net difference is added/subtracted from owner's capital account. Also used to close temp accounts ie.revenues, expenses, net income and withdraws
Permanent(Real Account)
Assets, Liabilities and Equity
Temporary(Nominal Account)
Revenues, Expenses, and withdrawl accounts that are closed at the end of each accounting period
Post-Closing Trial Balance
Trial balance prepared after closing entries have been journalized and posted. Reports all ledger accounts except temporary accounts
(Optional tool)10 Column spreadsheet used to draft unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements
A Merchandise company
Earns Net Income by buying and selling merch.
can buy from manufacturers and sell to retailers
can buy from manufacturers and sell to customers
can be a wholesaler or a retailer
Merchandise inventory is a...
Current asset
Credit terms (2/10, n/30) is interpreted as...
2% cash discount if the amount is paid within 10 days(from date of invoice), If not then the balance is due within 30 days
Trade Discount
Is a reduction in price below the list price
Cost of Goods Sold(expense)
Is the term used for the cost of buying and preparing merchandise for sale
Sales Returns (contra-revenue)
Merchandise that customers return to the seller after the sale
Sales allowances(contra-revenue)
A credit to the buyer for defective merchandise or goodwill
Credit Memo
Advises the buyer that a return or allowance has been credited to the Account Receivable
Debit Memo
Is the document a buyer issues to inform the seller of a debit made to the seller's account in the buyer's records.
Multiple Step income statements...
contain more detail of revenues and expenses listing than a single-step
Inventory Shrinkage
-Comparing a physical count of inventory with recorded inventory counts
-refers to the loss of inventory
-can be caused by theft or deterioration
-is recognized by debiting Cost of Goods Sold
The amount recorded for merchandis inventory includes..
any purchase discounts, returns and allowances, necessary freight cost, and any trade discounts
Costs included in the Merchandise Inventory account can include...
Invoice price minus any discount, transportation-in, storage and insurance
Goods on Consignment
Goods shipped by the owner to the consignee who sells the goods for the owner
Damaged and Obsolete goods
Included in inventory at their net realizable value
Merchandise inventory
includes all goods owned by a company and held for sale
Physical counts of inventory...
necessary to measure and adjust for inventory shrinkage
Internal Controls for Physical Count
-pre-numbered inventory tickets
-counters of inventory should not be those who are responsible for the inventory
-counters must confirm the validity of inventory existence, amounts and quality
-second counts by a different counter
If a period-end inventory amount is reported in error...
it can cause a misstatement in Cost of Goods Sold, Net Income, Gross Profit, and Current Assets
First In First Out(FIFO)
Inventory valuation method that assigns a value to the inventory on the balance sheet that approximates current cost. Ir also mimics the actual flow of goods for most businesses
Last In First Out(LIFO)
Used during a period of steadily rising costs, this valuation method yields the lowest reported net income
Weighted Average
Inventory valuation method that tends to smooth out erratic changes in costs
Consistency Concept
Requires that the same valuation method stays constant unless another method becomes preferable
Generally Accepted Accounting Principles(GAAP) require that the inventory of a company...
be reported at lower of cost or market
An Overstatement of ending inventory will...
Cause an overstatement of assets and equity on the balance sheet
An Understatement of ending inventory will...
cause an understatement of assets and equity on the balance sheet
Accounting Information Systems
Collect and process data from transactions and events, organize data in useful forms, communicate crucial info to business decision makers
Internal Control Procedures
to ensure reliable financial reports, safeguards to protect assets, policies to direct operations toward common goals and methods to achieve compliance with laws and regulations
Control Principle
requires that internal controls aid managers in controlling and monitoring business activities
Relevance Principle
requires and accounting info system to report Useful, understandable, timely, and pertinent info for effective decision making
Source Documents provide...
The basic info processed by and accounting system
Information Processors
interpret,transform, and summarize info for use in analysis and reporting
Accounts Payable Ledger
subsidiary ledger that contains a separate account for each supplier (creditor) to the company
Accounts Receivable Ledger
is a subsidiary ledger that contains an account for each credit customer
5 Fundamental Principles of Accounting info systems are...
Control, relevance, compatibility, flexibility and cost benefit
Includes currency and coins along with the amounts on deposit in bank accounts, checking accounts, and many savings accounts, cashier's checks, certified checks and money orders
Cash Equivalents
short term, highly liquid investment assets meeting 2 criteria; (1) readily convertible to a known cash amount and (2) sufficiently close to their due date so that their market value is not sensitive to interest rate changes
a company's ability to pay for its near term obligations
Bank Account
a record set up by a bank for a customer
Deposit Ticket
lists items such as currency, coins, and checks deposited along with their corresponding dollar amount
Used to withdraw money from an account, a document signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient
Bank Statement
sent once a month to each depositor showing the activity in the account
Bank Reconcilliation
a report explaining(reconciling) any differences between the checking account balance according to the depositors records and the balance reported on the bank statement
Outstanding Checks
checks written (or drawn) by the depositor, deducted on the depositor's records, and sent to the payees but not yet received by the bank for payment at the bank statement date
Deposits in Transit
deposits made and recorded by the depositor but not yet recorded on the bank statement
Deductions for Uncollectible items/services(aka non-sufficient funds NSF)
A company sometimes deposits another party's check that is uncollectible(usually meaning the balance in that party's account is not large enough to cover the check)
Additions for Collections and Interest
When a bank collects an item, it is added to the depositor's account, less any service fee. The bank then sends a credit memo to notify the depositor of the transaction
When a company extends credit directly to customers...
it (1) maintains a separate account receivable for each customer and (2) accounts for bad debts from credit sales
Credit Card Sales
Gives customers the ability to make purchases without cash or checks. Customers using these cards can make single monthly payments instead of several payments to different creditors and can defer their payments
Allowance Method of accounting for bad debts...
matches the estimated loss from uncollectible accounts receivable against the sales they helped produce. Advantages (1) it records estimated bad debts expense in the period when the related sales are recorded and (2) it reports accounts receivable on the balance sheet at the estimated amount of cash to be collected
Direct Write-Off Method of accounting for bad debts...
records the loss from an uncollectible account receivable when it is determined to be uncollectible. No attempt is attempted to predict bad debts expense
Percent of Sales Method(aka income statement method)
based on the idea that a given percent of a company's credit sales for the period is uncollectible.
Percent of Receivables Method(aka balance sheet method)
Uses balance sheet relations to estimate bad debts- mainly the relation between accounts receivable and the allowance amount. Assumes that a given percent of a company's receivables is uncollectible.
Aging of Receivables Method
Uses both past and current receivables info to estimate the allowance amount. Assumes that the longer an account is past due, the more likely it is to be uncollectible
Promissory Note
a written promise to pay a specified amount of money, usually with interest, either on demand or at a definite future date. Sellers sometimes ask for a note to replace an account receivable when a customer requests additional time to pay a past due account. (calculate note at maturity)
Plant Assets
tangible assets used in a company's operations that have a useful life of more than one accounting period.
process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use.
Factors include; cost, salvage value and useful life
Straight Line Depreciation
Charges the same amount of expense period of the asset's useful life.
(Cost - Salvage Value) / Useful life in periods
Asset Book Value
Net balance sheet amount is computed as the asset's total cost less its accumulated depreciation
Units of Production
Charges a varying amount to expense for each period of an asset's useful life depending on its usage
(Cost - Salvage Value) / Units of production= Dep/Unit
Dep/Unit X Units produced in period =Dep Expense
Double Declining Depreciation
(1) compute the asset's straight line depreciation rate
(2) double the straight line rate
(3)compute depreciation expense by multiplying this rate by the asset's beginning of period book value