Financial Accounting 2

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Revenues normally are reported for goods or services that have been sold to a customer...: ...whether or not they have been paid for.
Income statement: (statement of income, statement of earnings, or statement of operations)
Reports the accountant's primary measure of performance of a business, revenues less expenses during the accounting period resulting in net income.
Example Assets: Cash, accounts receivable, inventories, plant and equipment, land, short-term investments, other assets
Example Liabilities: Accounts payable, notes payable, other liabilities
Example Stockholders' Equity: Contributed capital, retained earnings
Example Revenues: Sales revenues
Example Expenses: Operating expenses, general and administrative expenses, cost of goods sold expense, research and development expense, interest expense, income taxes
owner-managers: founders also function as managers of the business
creditor: Party that loans money or other ASSETS to another party
balance sheet, income statement, statement of retained earnings, statement of cash flows heading: 1.name of entity
2.title of the statement: Balance sheet
3.specific date of the statement
4.unit of measure
Basic accounting equation: Assets=Liabilities+Stockholders' Equity
Balance sheet: reports the financial position of an accounting entity at a particular point in time.
Net income generally does...: ...not equal net cash generated by operations.
Net income equations: Net income=Revenues-Expenses
Statement of retained earnings equation: Beginning Retained Earnings + Net Income - Dividends = Ending Retained Earnings
Statement of cash flows definition: divides cash inflows and outflows into three primary categories of cash flows in a typical business: cash flows from operating, investing and financing
Cash flows from operating activities...: are cash flows that are directly related to earning income
Cash flows from investing activities...: include cash flow related to the acquisition or sale of the company's productive assets
Cash flows from financing activities...: are directly related to the financing of the enterprise itself
Price or Earnings Ratio equation: Price or Earnings Ratio=Market Price/Net income
Securities and Exchange Commission: the U.S. 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
Generally Accepted Accounting Principles: the measurement rules used to develop the information in financial statements
Financial Accounting Standards Board: the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles
audit: an examination of the rinancial reports to ensure that they represent what they claim and conform with GAAP
assurance services: independent professional services that improve the quality of information for decision makers
primary objective of external financial reporting: is to provide useful economic information about a business to help external parties make sound financial decisions
separate-entity assumption: states that business transactions are separate from the transactions of the owners
unit-of-measure assumption: states that accounting information should be measured and reported in the national monetary unit
continuity (going-concern) assumption: states that businesses are assumed to continue to operate into the foreseeable future
current assets: 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
current liabilites: obligations that will be paid in cash (or other current assets) or satisfied by providing service within the coming year
examples of current assets: cash, short-term investments, accounts receivable, inventories, prepaid expenses, and other current assets
examples of current liabilities: accounts payable accrued expenses payable, other current liabilities, unearned franchise fees, long-term notes payable, other long-term liabilities
stockholders' equity: the financing provided by the owners and the operations of business
contributed capital: results from owners providing cash (and sometimes other assets) to the business
retained earnings: refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business
current ratio equation: current ratio=current assets/current liabilities
financial leverage ratio equation: financial leverage ratio=average total assets/average stockholders' equity
historical cost principle: requires assets to be recorded at the historical cash-equivalent cost, which on the date of the transaction is cash paid plus the current dollar value of all noncash considerations also given in the exchange
transaction: 1. an exchange between a business and one or more external parties to a business
OR
2. a measurable internal event such as the use of assets in operations
account: a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item
assets: cash, accounts receivable, notes receivable, inventory, supplies, prepaid expenses, investments, equipment, buildings, land, intangibles
liablities: accounts payable, accrued expenses payable, notes payable, taxes payable, unearned revenue, bonds payable
Revenues: sales revenue, fee revenue, interest revenue, rent revenue
expenses: cost of goods sold, wages expense, rent expense, interest expense, depreciation expense, advertising expense, income tax expense
transaction analysis: is the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation
Every transaction...: has at least two effects on the basic accounting equation (duality of effects).
Systematic transaction analysis includes these steps:: 1.Accounts and effects
-identify the accounts (by title) affected and classify them by type of account, making sure that at least two accounts change (A,L, SE)
-determine the direction of the effect (an increase + or decrease - on each account)
2.balancing
-verify that the accounting equation remains in balance (A=L+SE)
debits: on the left side
credits: on the right side
operating cycle: the time it takes for company to pay cash to suppliers, sell goods and services to customers and collect cash from customers
time period assumption: indicates that the long life of a company can be reported in shorter time periods
expense: a
a: a

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