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109 terms

Accounting Block #1

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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)