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Accounting Final Part 1

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stlwalk's version from 2016-12-12 04:47

Chapter 1

Question Answer
Sole proprietorshipBusiness organization owned by one person. The owner is personally liable for all debts of the business. Most common.
PartnershipBusiness organization owned by two or more people. Each partner is personally liable for all debts of the business.
CorporationA separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation.
AccountingAccounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities.
Financial accountingEvaluate the company; they're normally external users (creditors, investors)
Managerial accountingRun the company; internal users (managers, supervisors)
Separate entity assumptionThe financial reports of a business are assumed to include the results of only that business’s activities.
AssetsEconomic resources presently controlled by the company that have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future (ex: supplies, cash, furniture, equipment)
LiabilitiesMeasurable amounts that the company owes to creditors (accounts payable, notes payable)
Stockholder's EquityOwners’ claim to the business resources.(common stock, retained earnings)
RevenuesSales of goods or services to customers. They are measured at the amount the business charges the customer.
ExpensesThe costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, utilities, and supplies used in the office.
Income = ??Revenues minus expenses
DividendsDistributions of a company’s earnings to its stockholders as a return on their investment. (not an expense)
Order of preparing financial statementsIncome Statement, Statement of Retained Earnings, Balance Sheet, Statement of Cash Flows
Unit of measure assumptionstates that results of business activities should be reported in an appropriate monetary unitSt
Statement of Retained EarningsReports the way that net income and the distribution of dividends affected the financial position of the company during the period.
Income StatementMonthly (Revenues minus expenses to get net income)
Balance sheetReports at a point in time: What a business owns (assets). What it owes to creditors (liabilities). What is left over for the owners of the company’s stock (stockholders’ equity).
Statement of Cash FlowsSummarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time.
OIFOperating: activities directly related to running a business (day-to-day). Investing: buying and selling product with long-term value. Financing: bank loans, common stock, dividends.
GAAPGenerally Accepted Accounting Procedures: U.S. accounting set of rules
IFRSInternational Financial Reporting Standards: widely used accounting standards around the world
purpose of financial statementsprovide information about the financial position, performance and changes in financial position of an enterprise
External Financial ReportingMain Goal: Provide useful financial information to external users for decision making
memorize

Chapter 2

Question Answer
FinancingA company can use Debt Financing (Liabilites) or Equity Financing (Common Stock) to invest in Assets.
Activities to account forDocument all activities, document what is received and given, and document dollar amount.
External exchangesExchanges involving assets, liabilities, and stockholders’ equity that you can see between the company and someone else.
Internal eventsEvents occurring within the company, for example, using some assets to create an inventory product.
Duality of EffectsEvery transaction has at least two effects on the basic accounting equation.
TransactionBusiness activity that affects the classic accounting equation (A=L+SE); Assets must equal liabilities plus stockholders’ equity for every accounting transaction.
Accounting cycleAnalyze (determine financial effects of transactions), Record (all transactions in journal), and Summarize (in ledge/T-accounts)...then trial balance and financial statements/closing entries
Unadjusted and Adjusted Trial Balancesaccounting report to determine if the total debits equal the total credits: used to balance accounts - determine final amount
Current assetsused up or turned into cash within 12 months
Current liabilitesdebts and other obligations that will be fulfilled within 12 months
Current ratio = ??Current assets divided by Current liabilities -1.0 to 2.0- (the higher it is the better your ability to pay off debts...too high means you're not using your money for anything)
Balance sheet conceptRecord at original price and only record decreases in asset value
memorize

Chapter 3

Question Answer
Time period assumptiondividing the company’s long life into shorter chunks of time such as months, quarters, and years.
Cash Basis Accountingrecords revenues when cash is received and expenses when cash is paidAc
Accrual Basis Accounting (GAAP & IFRS)Records revenues when they are earned and expenses in the same period as the revenues to which they relate, regardless of the timing of cash receipts or payments.
Revenue Recognition PrincipleRevenues are recognized when they are earned.
Expense Recognition Principlerecord expenses in the same period in which they are incurred
Net Income is not:doesn't equal cash, isn't source of value for company, and it is not exact
OperatingOperating activities are the primary source of revenues and expenses.
Net profit marginNet income divided by Revenues
memorize

Chapter 4

Question Answer
Deferral AdjustmentsAn expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period. Deferral adjustments are used to decrease balance sheet accounts and increase corresponding income statement accounts. Each deferral adjustment involves one asset and one expense account, or one liability and one revenue account.
Accrual AdjustmentsAccrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period. Accrual adjustments are used to record revenue or expenses when they occur prior to receiving or paying cash, and to adjust corresponding balance sheet accounts.
Depreciationprocess of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used
contra-accountan account that is an offset to, or reduction of, another account; ex: Accumulated Depreciation (Asset account)
Adjusting entriesAdjusting journal entries never involve cash. Adjusting entries always include one balance sheet and one income statement account.
Closing temporary accountsTransfer net income (or loss) and dividends to Retained Earnings. Establish zero balances in all income statement and dividend accounts.
Temporary vs. PermanentTemporary accounts track financial results for a limited period of time (Ex: Revenues, Expenses, Dividends). Permanent accounts track financial results from year to year.
Closing temporary accounts (2 steps)Debit Revenue accounts and credit Expense accounts. Debit or credit the difference to Retained Earnings. Credit Dividends Declared and debit Retained Earnings. After posting these closing entries, all the income statement accounts and the dividend account will have a zero balance.
Post-Closing Trial BalanceFinal check that all debits still equal credits and that all temporary accounts have been closed.
Reason for adjustmentsto state accounts at appropriate amounts
memorize

Chapter 5

Question Answer
FraudFraud is generally defined as an attempt to deceive others for personal gain.
Fraud triangleRationalization, incentive, opportunity
Sarbanes Oxley Actworks to reduce fraud - counteractive incentives (threats), reduce opportunities, and encourage honesty (incentives)
Principles of Control Activitiesestablish responsibility, segregate duties, restrict access, document procedures, independently verify
Bank reconciliationUpdates to bank: deposit in transit (add), outstanding checks (less) ; Updates to book: interest (add), EFT transfer (add), NSF check (less), bank service charges (less) - at _________ Date
Cash and cash equivalentsconsidered cash or cash equivalent when it is present cash or will be turned into cash within three months
Bank recon (add to bank)deposit in transit
Bank recon (deduct from bank)outstanding checks
Bank recon (add to book)interest revenue, EFT(electronic funds transfer)
Bank recon (deduct from book)NSF check, bank service charges
Loan covenantcovenant requiring the debtor to do something or refrain from doing something to protect the lendor
Internal ControlInternal control consists of the actions taken by people at every level of an organization to achieve its objectives.
memorize

Chapter 6

Question Answer
Service vs Merchandising companiesservice (sell service, collect cash) ; merchandising (buy/sell inventory, collect cash)
Gross profitsales revenue minus cost of goods sold
Inventorythe merchandiser's total cost of goods that it has not yet sold
COGSequals Beginning Inventory plus Purchases minus Ending Inventory
Goods Available for SaleBeginning Inventory plus Purchases
Periodic inventoryupdates inventory records at the end of period
Perpetual inventoryinventory is update every time something is bought or sold (more common); use with bar codes and scanners
Transportation costs count as inventory (costs)purchase returns and allowances also count towards or against inventory
FOB shipping pointseller is responsible until goods are shipped
FOB destinationseller is responsible until goods reach the destination
contra revenue accountsales returns and allowances (COGS is a positive SE account)
Multi step income statement!!!net sales, cost of goods sold, Gross Profit, selling expenses, Income from Operations, other revenues/expenses, Income before Tax, tax expense, Net Income
Gross profit percentagegross profit (sales revenue minus COGS) divided by net sales times 100%
Calculating shrinkageBEG INV plus PURCHASES minus COGS equals ENDING BAL minus actual INV equals Shrinkage
Voucher systemdesigned to avoid fraudulent withdrawals - basically prenumbered checks, etc
memorize

Chapter 7

Question Answer
Inventory types (merchandiser vs manufacturer)merchandiser buys/sells goods; manufacturer buys materials and produces goods to sell
Rising costs mean that:FIFO produces higher inventory, lower cogs, and high gross profit (LIFO is opposite and WA is in middle)
Declining costs mean that:FIFO produces lower inventory, higher cogs, and low gross profit (LIFO opposite and WA middle)
LCM Rulewrite down inventory for its lowest market value when it falls below its recorded cost
Total Lower Cost of Marketequals LCM times quantity
Inventory turnover ratioCOGS divided by AVG INVENTORY: tells you the number of times inventory turns over during the period; higher ratio means faster turnover
Days to Sell365 divided by Inventory Turnover Ratio
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