Accounting 101: Financial Statements and Key Concepts

Flashcards covering core concepts from the accounting lecture: assets, liabilities, equity components, revenue, expenses, dividends, net income, and the four financial statements, plus key relationships and timing of recognition.

What is an asset in accounting?

Assets are things or legal rights owned at a point in time that have value, can provide future benefits, and are measured at that date.

What are the criteria that define an asset in this course?

It must be legally owned, provide future benefits, be controllable, and have measurable value at a point in time.

What is a liability?

An obligation to pay or to perform services for others, such as the balance owed on a credit card.

What are the two components of stockholders’ equity discussed in class?

Common stock (contributed capital) and retained earnings (earnings kept in the business).

From the issuer’s perspective, what does common stock represent?

Legal evidence of ownership issued to investors; represents contributed capital in exchange for cash or other assets.

What is contributed capital?

All monies received from shareholders in exchange for stock; total cash or other assets contributed to the company.

What are retained earnings?

Earnings kept in the business after distributions; cumulative net income minus dividends.

How is revenue defined in this lecture?

An action resulting from a transaction with a customer; the company delivers a product or service and the customer pays, typically in cash, when ownership passes.

When is revenue recognized?

Only when the product or service is delivered to the customer and ownership passes; not merely on an agreement or promise.

How is an expense defined in this class?

An action that uses assets or creates a liability with no future value; examples include advertising, salaries, rent, utilities, and interest.

Are dividends considered expenses?

No. Dividends are a distribution of assets to owners and reduce retained earnings; they are not expenses.

What is net income?

Revenue - expenses. Profit

What are the four financial statements?

Income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows.

How do you calculate ending retained earnings?

Beginning retained earnings plus net income minus dividends equals ending retained earnings.

How are assets and liabilities presented on the balance sheet?

Assets are shown by liquidity (most liquid first); liabilities by maturity (shortest due first); assets must equal liabilities plus stockholders’ equity.

What is depreciation?

The use of an asset over time; allocation of the cost across its useful life (e.g., a $50,000 asset over five years = $10,000 per year).

Revenue and Net income

Top line and bottom line refers to what?