Financial Accounting I - Exam 1 Review (ACCTG 5110)

This flashcard set covers essential vocabulary and concepts from Chapters 1-4, 8, and 9 for Exam 1, including financial statement components, accounting equations, liquidity ratios, and inventory methods.

Liquidity ratios

Measures used to determine a company's ability to pay its short-term obligations; examples include the Current Ratio and the Acid-Test Ratio.

Working Capital

A measure of a company's ability to satisfy short-term obligations, calculated as $\text{Current Assets} - \text{Current Liabilities}$. For example, Nike reported $\$16,617$ million in $2021$.

Contra-asset account

An account that reduces the balance of an asset account; an example provided is the Allowance for uncollectible (or doubtful) accounts.

Accounting Standards Codification (ASC)

The authoritative source of U.S. accounting and reporting standards for non-governmental entities, created by FASB in $2009$ to consolidate GAAP into a single database.

Accounting Standards Updates (ASU)

The mechanism through which the FASB accomplishes changes to authoritative GAAP.

Balance Sheet

A financial statement that provides a snapshot of what a company owns (assets) and owes (liabilities) as of a specific date, such as December $31$.

Income Statement

A financial statement that summarizes the earnings generated by a firm (revenues and expenses) over a specified accounting period.

Statement of Cash Flows

A financial statement detailing the cash paid and cash received by a company over an accounting period.

Basic Accounting Equation

$\text{Assets (A)} = \text{Liabilities (L)} + \text{Owner's Equity (OE)}$.

Paid-in capital

The portion of shareholders' equity representing dollars invested in the firm by its shareholders.

Retained earnings

The accumulation of all the company’s earnings since inception minus dividends paid to shareholders; it is increased by net income and decreased by net losses.

Net Income

The net effect of all revenues and expenses over an accounting period, calculated as $\text{Revenues} - \text{Expenses} = \text{Net Income}$.

Closing process

The sequence at the end of an accounting period where temporary accounts (revenues and expenses) are summed into net income and then added to the permanent Retained Earnings account.

Liquidity

The ability of a company to convert its assets to cash.

Long-term solvency

The assessment of whether a company will be able to pay all its liabilities, including long-term obligations.

Financial flexibility

The ability of a company to alter cash flows to take advantage of unexpected investment opportunities and needs.

Accounts Receivable

Amounts resulting from the sale of goods or services on account, reported net of the allowance for doubtful accounts.

Inventory for a manufacturer

Consists of three categories: Raw materials, Work in process, and Finished goods.

Prepaid Expenses

Assets created when a company incurs a cost in one period that will not be expensed until a future period, such as prepaid rent or insurance.

Property, Plant & Equipment (PP&E)

Tangible, long-lived assets used in operations (e.g., land, buildings, machinery) reported on the balance sheet at original cost less accumulated depreciation.

Intangible Assets

Assets with no physical substance representing exclusive rights, such as patents, copyrights, and trademarks, reported net of accumulated amortization.

Goodwill

An intangible asset that must arise from an external acquisition and cannot be internally generated.

Current Liabilities

Obligations expected to be satisfied within one year or the operating cycle, including accounts payable, notes payable, and deferred revenues.

Deferred Revenues

Cash received from a customer for goods or services to be provided in a future period; revenue is recognized when the obligation is met, such as when a gift card is redeemed.

Accrued Liabilities

Obligations created when expenses (e.g., salaries, interest, taxes) have been incurred but not yet paid as of the reporting period.

Default risk

The risk that a company will not be able to pay its obligations when they come due.

Operational risk

Relates to how a company can withstand events that might impair its ability to earn profits.

Current Ratio

A liquidity measure calculated as $\frac{\text{Current Assets}}{\text{Current Liabilities}}$. Nike's $2021$ ratio was $2.72$.

Acid-Test Ratio (Quick Ratio)

A stringent liquidity measure calculated as $\frac{\text{Quick Assets}}{\text{Current Liabilities}}$; quick assets include cash, short-term investments, and accounts receivable, but exclude inventories and prepaid items.

Gross Profit

Calculated as $\text{Revenues} - \text{Cost of Goods Sold (COGS)}$.

Restructuring costs

Unusual items including termination benefits and costs associated with closing facilities when management materially changes the scope of business operations.

Discontinued Operations

Reported when a component of an entity is sold or disposed of, representing a strategic shift with a major effect on operations; reported separately below income from continuing operations.

Basic EPS

Calculated as $\frac{\text{Net income} - \text{Preferred stock dividends}}{\text{Weighted-average number of common shares outstanding}}$.

Diluted EPS

Earnings per share calculation that incorporates the dilutive effect of all potential common shares that could be converted into common stock.

Perpetual Inventory System

A system that allocates inventory costs by decreasing inventory and increasing COGS each time goods are sold, facilitating interim financial statements.

Periodic Inventory System

A system that requires a physical count at the end of the period to determine ending inventory and COGS.

F.O.B. shipping point

Shipping terms where legal title passes to the buyer at the point of shipment; the buyer is responsible for shipping costs and insurance.

F.O.B. destination

Shipping terms where legal title passes to the buyer only when the goods arrive at the customer's location; the seller is responsible for shipping costs.

Consignment

An arrangement where a transferor (consignor) remains the legal owner of goods while a consignee attempts to sell them for a commission.

FIFO (First-In, First-Out)

An inventory cost flow assumption that assumes the units first acquired are the first ones sold; during rising costs, it results in lower COGS and higher ending inventory.

LIFO (Last-In, First-Out)

An inventory cost flow assumption that assumes the units last acquired are sold first; ending inventory consists of the first units acquired.

Net Realizable Value (NRV)

The estimated selling price of a good minus the cost to deliver that good.

Lower of Cost and Net Realizable Value (LCNRV)

A US GAAP requirement for inventory reported under FIFO or average cost to ensure inventory is not reported at an amount greater than the cash it can provide.

Change to LIFO inventory method

Unlike other voluntary accounting changes that are retrospective, this change is used from the point of adoption going forward because prior year income effects are usually impossible to compute.