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accounting exam 1

Terms in this set (62)

what do financial statements do?
communicate the financial situation
ability to pay debt when due
liquidity
ability to earn adequate return on investment
profitability
measure of profitability, reports how well a company has performed (revenues, expenses, and income) over a period of time
income statement
net income divided by revenues
profit margin ratio
amounts/resources produced from providing goods and services
revenue
amounts/resources used up to generate revenue
expenses
economic resources used to generate revenue
assets
debts/borrowings incurred to obtain resources
liabilities
owners contributions/investments to the company in return for ownership and company performance over time
stockholders equity
returns/payments made to the owners based on their investments
dividends
one owner, can be employees, simple to establish, tax advantages, unlimited personal/legal liability
sole proprietorship
two or more co-owners, different resources, skill sets, and ownership interests, simple to establish, tax advantages, unlimited personal/legal liability
partnership
incorporated business organized under laws of a particular state
corporation
identifies the three categories of activities companies engage in
statement of cash flow
using funds and assets to create customers and earn profits
operating
acquiring funds to build and operate the business
financing
use those funds to buy assets and generate revenues
investing
shows financial position at a single point in time
balance sheet
assets expected to be used up, sold, or realized in cash within one year (or the business operating cycle whichever is greater)
current assets
assets that have a useful life of greater than one year
concurrent or long term assets
list three examples of long term assets
land, building, equipment
list two examples of current assets
cash, inventory
are intangible assets long or short term?
long
notes payable, accounts payable, and wages payable are all examples of what?
liabilities
what are the two basic accounts that make up stockholders equity?
common stock and retained earnings
common stock is also known as what?
contributed capital
an ongoing record of all profits earned, losses taken, and dividends paid folded into one number
retained earnings
what do dividends do to the retained earnings account?
decrease it
what accounts are included on the income statement?
revenues and expenses
what accounts are included on the statement of retained earnings?
retained earnings (beginning of the year), net income, dividends
what accounts are included on the balance sheet?
assets, liabilities, and stockholders equity
why are notes to financial statements required?
they add clarity and provide full disclosure
examination of books, records, and financial statements prepared by management for the purpose of expressing an opinion whether the financial statements are fairly presented in accordance with generally accepted accounting principles
audit
true or false: the auditor has to be independent from the company
true
info capable of influencing a decision, predictive value, confirmatory value, materiality (significance)
relevance
the goodness of the information (completeness, free from material error, neutrality/unbiased)
faithful representation
what are the primary characteristics of accounting?
relevance and faithful representation
info measured and reported in a similar manner by different companies is considered comparable
compatibility (pepsi v coke)
achieved by applying the same accounting rules to the same items over time
consistency
each business is accounted for separately from its owners
economic entity
transactions and activities are measured in money terms
monetary unit
absent evidence to the contrary, assume business will fulfill existing obligations
continuity/ongoing concern
divide a business lifespan int artificially determined periods, measure performance, and report results
time period
given a set of accounting procedures choose those least likely to overstate assets and income
conservatism
lists all of the accounts with their unique number
general ledger
lists all accounts, all account numbers, and description of account
chart of accounts
when is revenue recognized?
when goods and services are provided to the customer, at the same time cash is received whether or not the revenues have been earned
when are expenses recognized?
at the time cash is paid whether or not the expense has been used up
what type of accounting do businesses use?
accrual basis accounting
in what type of accounting are revenues and expenses recorded in the period they occur, rather than in the period they are received or paid
accrual basis accounting
the business receives cash (upfront_ but does not recognize the revenue right away because the revenue has not been earned yet
deferrals/prepayments
the process of identifying, measuring, recording, and communicating financial information about a company's business activities so decision makers can make informed decisions
accounting
the process of providing decision makers with information that assists them in assessing the amounts, timing, and uncertainties of a company's future cash flows
financial accounting
the person whom the corporation owes money
creditor
reports how much of the company's income was retained in the business and how much was distributed to owners over a period of time
statement of retained earnings
an international set of generally accepted accounting standards
IFRS
the primary accounting standard setter in the United States
FASB
has the power to set accounting rules for publicly traded companies
SEC
how do you find the current ratio (alternative measure of liquidity)?
current assets divided by current liabilities
how do you find the net profit margin (return on sales)?
net income divided by sales revenue
a chronological record showing the debit and credit effects of transactions on a company
journal
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