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Terms in this set (205)
a system that collects and processes financial information about an organization and reportd that information to decision makers.
the organization for which financial data are to be collected
the time period covered by the financial statements
an examination of the financial reports to ensure that they represent what they claim and conform with GAAP
Statement of Financial Position; reports the amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time.
Basic Accounting Equation
Assets= Liabilities+ Stockholder's Equity
Financial Accounting Standards Board (FASB)
the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles.
Generally Accepted Accounting Principles (GAAP)
the measurement rules used to developed the information in financial statements.
Statement of Income, Statement of Earnings, Statement of Operations; reports the revenues minus the expenses of the accounting period to recieve net income.
(footnotes) provide supplemental information about the financial condition of a company, without which the financial statements cannot be fully understood.
Public Company Accounting Oversight Board (PCAOB)
the private sector body given the primary responsibility to issue detailed auditing standards.
Statement of Cash Flows
reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.
Cash Flows from Operating Activities
cash flows that are directly related to earning income from normal operations
Cash Flows from Investing Activities
include cash flows related to the acquisition or sale of the company's productive assets in the securities of other companies.
Cash Flows from Financing Activities
cash flows directly related to the financing of the enterprise itself. They involve the receipt or payment of money to investors and creditors (except for suppliers)
Statement of Retained Earnings
reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.
Securities and Exchange Commission (SEC)
the US government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements.
a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item.
economic resources with probable future benefits owned by the entity as a result of past transactions.
suggests that care should be taken not to overstate assets and revenues or understate liabilities and expenses.
(Going-Concern); states that businesses are assumed to continue to operate into the foreseeable future.
results from owners providing cash (and sometimes other assets) to the business.
on the right side of an account
assets that will be used or turned into cash within one year. inventory is always considered a current asset regardless of the time needed to produce and sell it.
obligations that will be settled by providing cash, goods, or services within the operating cycle or one year, whichever is longer.
on the left side of an account
Historical Cost Principle
(cost principle) requires assets to be recorded at historical cost-cash paid plus the current dollar value of all non cash considerations given on the date of exchange. AKA Cash paid + dollar value of non cash assets privileges or rights that are given for exchange=historical cost of new asset
an accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.
probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services.
suggests that small amounts that are not likely to influence a user's decision can be accounted for in the most cost-beneficial manner.
Primary Objective of External Financial Reporting
to provide useful economic information about a business to hep external parties make sound financial decisions
can influence a decision; it is timely and has predictive and/or feedback value
accurate, unbiased, and verifiable.
refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.
states that business transactions are accounted for separately from the transactions of owners.
(owner's equity/shareholders equity) the financing provided by the owners and business operations.
a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities.
is 1.) an exchange of assets or services for assets, services, or promises to pay between a business amd one or more external parties to a business or 2.) a measurable internal event such as the use of assets in operations.
the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation.
states that accounting information should be measured and reported in the national monetary unit.
Accrual Basis Accounting
records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments.
Cash Basis Accounting
records revenues when cash is received and expenses when cash is paid.
decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period
increases in assets or decreases in liabilities from peripheral transactions.
decreases in assets or increases in liabilities from peripheral transactions.
requires that expenses be recorded when incurred in earning revenue
(cash-to-cash) is the time it takes for a company to pay cash to suppliers, sell goods and services to consumers, and collect cash from customers.
increases in assets, or settlements of liabilities, from ongoing operations.
states that revenues are recognized when
1. goods or services are delivered
2. there is persuasive evidence of an arrangement for customer payment
3. price is fixed or determinable
4. collection is reasonably assured
Time Period Assumption
indicates that the long life of a company can be reported in shorter time periods
the process followed by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle.
previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account.
previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account.
entries necessary at the end of the accounting period to measure all revenues and expenses of that period.
transfers balances in temporary accounts to retained earnings and establishes zero balances in temporary accounts.
an account that is an offset to, or reduction of, the primary account.
previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred in using the asset to generate revenue.
previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned.
Net Book Value
(book value, carrying value) of an asset is the difference between its acquisition cost and accumulated depreciation, its related contra-account. [T-Accounts -->Property and Equipment Balance -Accumulated Depreciation Balance]
(real accounts) are the balance sheet accounts that carry their ending balances into the next accounting period.
Post-Closing Trial Balance
should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.
(nominal accounts) are income statement accounts that are closed to retained earnings at the end of the accounting period.
a list of all accounts with their balances to provide a check on the equality of the debits and credits.
Additional Paid-In Capital
(contributed capital in excess of par) the amount of contributed capital minus the par value of the stock.
Board of Directors
elected by the stockholders to represent their interests, is responsible for maintaining the integrity of the company's financial reports.
allows comparisons across businesses because similar accounting methods have been applied.
can be compared over time because similar accounting methods have been applied.
refers to the procedures designed to ensure that the company is managed in the interests of the shareholders.
suggests that the benefits of accounting for and reporting information should outweigh the costs.
result from the disposal of a major component of the business and are reported net of income tax effects.
predictions of earnings for future accounting periods.
gains and losses that are both unusual in nature and infrequent in occurrence; they are reported net of tax on the income statement
used by publicly traded companies to disclose any material event not previously reported that is important to investors (e. auditor,changes,mergers.)
the annual report that publicly traded companies must file with the SEC
the quarterly report that publicly traded companies must file with the SEC.
(Gross Margin) net sales minus cost of goods sold
Income before Income Taxes
(Pre-Tax Earnings) revenues minus all expenses except income tax expense
Income from Operations
(Operating Income) equals net sales minus cost of goods sold and other operating expenses.
managers of pension, mutual, endowment, and other funds that invest on the behalf of others.
(creditors) include suppliers and financial institutions that lend money to companies.
amounts that are large enough to influence a user's decision.
a legal amount per share established by the board of directors; it establishes the minimum amount a stockholder must contribute and has no relationship to the market price of the stock.
a written public news announcement normally distributed to major news services.
include individuals who purchase shares in companies
Unqualified (Clean) Audit Opinion
an auditor's statement that the financial statements are fair presentations in all material respects in conformity with GAAP.
open account owed to the business by trade customers.
Created by a credit sale on an open account
Aging of Accounts Receivable Method
estimates uncollectible accounts based on the age of each account receivable.
Allowance for Doubtful Accounts
(Allowance for Bad Debts/Uncollectible Accounts) is a contra-asset account containing the estimated uncollectible accounts receivable.
bases bad debt expense on an estimate of uncollectible accounts.
Bad Debt Expense
(Doubtful Accounts Expense) the expense associated with estimated uncollectible accounts receivable.
the process of verifying the accuracy of both the bank statement and the cash accounts of a business.
a monthly report from a bank that shows deposits recorded, checks cleared, other debits and credits and a running bank balance.
money or any instrument that banks will accept for deposit and immediate credit to a company's account, such as a check, money order, or bank draft.
short-term, highly liquid investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change.
Credit Card Discount
the fee charged by the credit card company for its services.
the processes by which a company safeguards its assets and provides reasonable assurance regarding the reliability of the company's financial reporting, the effectiveness and efficiency of its operations, and its compliance with applicable laws and regulations.
written promises that require another party to pay the business under specified conditions. (amount, time, interest)
Promise to pay= specified amount of money (principal), specified amount of interest
Percentage of Credit Sales Method
bases bad debt on the historical percentage of credit sales that result in bad debts.
Sales (cash) Discount
offered to encourage prompt payment of an account receivable.
Sales Returns and Allowances
a reduction of sales revenues for return of or allowances for unsatisfactory goods.
tangible property held for sale in the normal course of business or used in producing goods or services for sale.
includes goods held for resale in the ordinary course of business
Raw Materials Inventory
includes items acquired for the purpose of processing into finished goods.
Work in Process Inventory
includes goods in the process of being manufactured
Finished Goods Inventory
includes manufactured goods that are complete and ready for sale
refers to the earnings of employees who work directly on the products being manufactured
manufacturing costs that are not raw material or direct labor costs
Goods Available for Sale
refers to the sum of beginning inventory and purchases (or transfers to finished goods) for the period
Cost of Goods Sold Equation
Beginning Inventory+Purchases-Ending Inventory=Cost of Goods Sold
Specific Identification Method
identifies the cost of the specific item that was sold
(first in first out) assumes that the first goods purchased are the first ones sold.
(last in first out) assumes that the most recently purchased units are sold first
Average Cost Method
used the weighted average unit cost of goods available for sale for both cost of goods sold and ending inventory.
the current purchase price for identical goods.
Net Realizable Value
the excepted sales price minus selling costs (ex. repair and disposal costs)
Lower of Cost or Market (LCM)
a valuation method departing from the cost principle; it serves to recognize a loss when replacement cost or net realizable value drops below cost.
a contra-asset for the excess of FIFO over LIFO inventory.
Perpetual Inventory System
a detailed inventory record is maintained, recording each purchase and sale during the accounting period.
Periodic Inventory System
ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count.
a sale of a lower-cost inventory item from beginning LIFO inventory.
Purchase Returns and Allowances
a reduction in the cost of purchases associated with unsatisfactory goods.
is a cash discount received for prompt payment of an account
tangible and intangible resources owned by a business and used in its operations over several years.
(fixed assets) have physical substance
have special rights but not physical substance.
the net cash equivalent amount paid or to be paid for the asset.
refers to interest expenditures included in the cost of a self-constructed asset.
Ordinary Repairs and Maintenance
expenditures for normal operating upkeep of long-lived assets.
maintain the productive capacity of the asset during the current accounting period only and are recorded as expenses.
Addition and Improvements
infrequent expenditures that increase an assets economic usefulness in the future
increase productive life, operating efficiency, or capacity of the asset and are recorded as increases in asset accounts, not as expenses.
the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method
Net Book (carrying value)
the acquisition cost of an asset minus accumulated depreciation
Estimated Useful Life
the expected service life of an asset to the present owner.
Residual (salvage) Value
the estimated amount to be recovered by the company at the end of the asset's estimated useful life.
method allocates the cost of an asset in equal periodic amounts over its useful life.
a method that allocates the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output
a method that acllocates the cost of an asset over its useful life based on a multiple of the straight-line rate (often two times)
assets that occur in nature, such as mineral deposits, timber tracts, oil, and gas.
the systematic and rational allocation of the cost of a natural resource over the period of its exploitation
the systematic and rational allocation of the acquisition cost of an intangible asset over its useful life.
the excess of the purchase price of a business over the fair value of the business's assets and liabilities.
an exclusive legal right to use a special name, image, or slogan.
the exclusive right to publish, use, and sell a literary, musical, or artistic work.
includes costs for computer software and web development
granted by the federal government for an invention; it is an exclusive right given to the owner to use, manufacture, and sell the a given subject.
a contractual right to sell certain products or services, use certain trademarks, or preform activities in a geographical region.
Licenses and Operating Rights
obtained through agreements with governmental units or agencies, permit owners to use public property in performing their services.
the ability to pay current obligations
expenses that have been incurred but have not been paid at the end of the accounting period.
Time Value of Money
is interest that is associated with the use of money over time.
revenues that have not been collected but not earned; they are liabilities until the goods or services have been provided.
a potential liability that has arisen as the result of a past event; it is not an effective liability until some future event occurs.
the dollar difference between total current assets and total current liabilities.
all of the entity's obligations not classified as current liabilities
a short term lease on an asset; does not meet any of the four criteria established by the GAAP and does not cause the recording of an asset and liability.
a long-term lease on an asset; meets at least one of the four criteria established by GAAP and results in the recording of an asset and liability.
the current value of an amount to be received in the future; a future amount discounted for compound interest
a series of periodic cash receipts or payments that are equal in amount each interest period.
Deferred Tax Items
exist because of timing differences caused by reporting revenues and expenses according to GAAP on a company's income statement and according to the Internal Revenue Code on the tax return.
timing differences that cause deferred income taxes and will reverse, or turn around, in the future.
the sum to which an amount will increase as the result of compound interest.
the amount 1. payable at the maturity of the bond and 2. on which the periodic cash interest payments are computed
Par Value (Face Amount)
another name for bond principal, or the maturity amount of a bond.
the rate of cash interest per period stated in the bond contract.
an unsecured bond; no assets are specifically pledged to guarantee repayment.
may be called for early retirement at the option of the issuer
may be converted to other securities of the issuer (usually common stock)
a bond contract that specifies the legal provisions of a bond issue.
the bond document that each bondholder receives
an independent party appointed to represent the bondholders.
is the stated rate of interest on bonds.
Market Interest Rate
(Yield, Effective-Interest Rate)
the current rate of interest on a debt when incurred
the difference between the selling price and par when the bond is sold for more than par.
the difference between the selling price and par when the bond is sold for less than par.
a simplified method of amortizing a bond discount or premium that allocates an equal dollar amount to each interest period.
a method of mortizing a bond discount or premium on the basis of the effective- interest rate; it is the theoretically preferred method.
Authorized Number of Shares
the maximum number of shares of a corporation's capital stock that can be issued as specified in the charter
represent the total number of shares of stock that have been sold
refer to the total number of shares of stock that are owned by stockholders on any particular date
is the basic voting stock issued by a corporation
the nominal value per share of capital stock specified in the charter; serves as the basis for legal capital
the permanent amount of capital defined by state law that must remain invested in the business; serves as a cushion for creditors.
No-Par Value Stock
capital stock that has no par value specified in the corporate charter.
a corporation's own stock that has been issued but subsequently reacquired and is still being held by that corporation
is the date on which the board of directors officially approves a dividend
the date on which the corporation prepares the list of current stockholders as shown on its records; dividends can be paid only to the stockholders who own stock on that date
the date on which a cash dividend is paid to the stockholders of record
a distribution of additional shares of a corporation's own stock
an increase in the total number of authorized shares by a specified ratio; it does not decrease retained earnings.
is stock that has specified rights over common stock
Current Dividend Preference
the feature of preferred stock that grants priority on preferred dividends over common dividends.
Cumulative Dividend Preference
the preferred stock feature that requires specified current dividends not paid in full to accumulate for every year in which they are not paid. These cumulative preferred dividends must be paid before any common dividends can be paid.
Dividends in Arrears
are dividends on cumulative preferred stock that have not been declared in prior years.
reports components of cash flows from operating activities as gross receipts and gross payments
adjusts net income to compute cash flows from operating activities
Free Cash Flow
equals Cash Flows from Operating Activities- Dividends-Capital Expenditures
Non-Cash Investing and Financing Activities
transactions that do not have direct cash flow effects; they are reported as a supplement to the statement of cash flows in narrative or schedule form.
Ratio (Percentage) Analysis
an analytical tool that measures the proportional relationship between two financial statement amounts.
express each item on a particular financial statement as a percentage of a single base amount
Tests of Profitability
ratios that compare income with one or more primary activities
Tests of Liquidity
are ratios that measure a company's ability to meet its currently maturing obligations
Tests of Solvency
ratios that measure a company's ability to meet its long-term obligations.
ratios that tend to measure the market worth of a share of stock.
securities markets in which prices fully reflect available information.
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