reporting financial results to others outside of the company, such as investors and creditors
What do annual reports include?
four required financial statements, notes to financial statements, auditors' report on financial statements, auditors' report on internal control, management's report on internal control, managements discussion and analysis
What are the four required financial statements?
income statement, balance sheet, statement stockholders' equity, statement of cash flows
When are revenues recognized?
when earned, such as when a product is delivered or a service is performed
When are expenses recognized?
When incurred, such as when utilities are used, when supplies are used, when employees have worked to earn their wages, when the time expires on an insurance policy
an accounting principle whereby firms recognize revenues and their related expenses in the same period.
revenue recognition principle
an accounting principle that determines the specific conditions under which revenue is recognized or accounted for
requires assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired
a policy of anticipating possible future losses, but not future gains. This policy tends to understate net assets and net income (the lower cost or market basis of valuing inventories)
a concept that all material matters are to be disclosed in financial statements
Accounting equation (Balance sheet)
resources that the company owns
amounts owed to others
represents claims of the company's owners
net income equation and what it shows you (income Statement)
shows if the company is profitable or not
amounts earned by the company for performance of services or sales of products
earned when assets are sold for more than their book value
costs incurred by the company to produce its revenue
incurred when assets are sold for less than their book value or from significant unusual events, such as law suits or natural disasters
sales revenue-cost of goods sold
income from operations=
gross profit-operating expenses
income before taxes
income from operations +/- other income
income before taxes-income tax expense
Net change in the cash balance (Statement of cash flows)
net cash from operating activities+ net cash from investing activities+ net cash from financing activities
includes cash received from customers and cash paid for operating items such as inventory, utilities, wages, rent, etc.
includes cash received from the sale of long term assets and cash paid to purchase long term assets
includes debt and equity transactions, such as borrowing money, paying back loans, selling stock, buying back treasury stock, and paying dividends
starts with net income and adjusts for noncash items and accruals/deferrals
Statement of Stockholder's equity
shows all changes in equity accounts during the year, including retained earnings
ending retained earnings
beginning retained earnings+net income-dividends
What inventory methods can businesses use?
weighted average, FIFO, LIFO
if prices are rising,_______ results in the highest cost of goods sold, lowest gross profit, lowest net income, highest ending inventory balance
the information system that identifies, records, and communicated the economic events of an organization to interested users
assets that do not have physical substance and yet often are very valuable. ex. goodwill, patents, copyrights, trademarks
a merchandiser that sells directly to consumer
perpetual inventory system
cost of goods sold is recorded each time a sale occurs
the sales revenue and allowances account is classified as a
contra revenue account
gross profit does not appear on
a single-step income statement
the seller has legal title to the goods until they are delivered
the inventory method which results in the highest gross profit and results in the inventory value on the balance sheet that is closest to current cost
sales tax collected by a retailer are recorded by
crediting Sales Tax Payable
if the market interest rate for a bond is higher than the stated interest rate
A NSF check should appear in which section of the bank reconciliation?
deduction from the balance per books
Outstanding checks should appear in which section of the bank reconciliation?
deduction from the balance per bank
are valued and reported on the balance sheet at cash realizable value
two methods of accounting for uncollectible accounts