ACG 2021 Exam 1

Measurement Principle

companies record assets at their exact cost at the time of the transaction

Fair Principle

companies record assets at market value

Revenue Recognition Principle

business entities recognize revenue when it is earned, so when goods and services are provided to a customer it is recorded at the time based on what is expected to be received

Expense Recognition Principle

record when the expense in the period of when it helped generate revenue

Full Disclosure Principle

A company has to provide all important information that could affect someone's understanding of the financial statements

Economic Entity Assumption

recorded activities of a business entity should be separate from recorded activities of its owner and all other business entities

Monetary Unit Assumption

transactions are reported in monetary units

Periodicity Assumption

financial reports can be prepared for artificial time periods like months, periods, years

Going Concern Assumption

it is assumed that the business will keep going for the foreseeable future

Cost Constraint

don’t spend more money on accounting information than what its value is

Materiality

small transactions or items that do not influence business decisions do not have to be recorded

Assets

cash

accounts receivable

inventory

supplies

prepaid rent

prepaid insurance

equipment

buildings

trademarks

Liabilities

accounts payable

notes payable

unearned revenue

salaries and wages payable

Equities

common stock

retained earnings

Basic Income Statement Equation

Net Income = Revenues - Expenses

Statement of Stockholder Equity Equation

Ending Equity = Beginning Equity + Net Income - Dividends

Accounting Equation

Assets = Liabilities + Equity

Equity Equation

Equity = Common Stock + Retained Earnings

Retained Earnings Equation

Retained Earnings = Revenues - Expenses - Dividends

Net Cash Flow Equation

Net Cash Flow = Cash flow from operating activities + Cash flow from investing activities + Cash flow from financing activities

Return of Assets Ratio

Return on Assets = Net Income / Average Total Assets

Average Total Asset Equation

Average Total Assets = (beginning total assets + end total assets) / 2

Accounting Cycle

1. Identify and Analyze Transactions

2. Record in Journal

3. Post to Ledger

4. Prepare Trial Balance

5. Journalize and Post Adjusting Entries

6. Prepare an Adjusted Trial Balance

7. Prepare the financial statements

8. Journalize and post the Closing Entries

9. Prepare a Post-Closing Trial Balance

Debits Increase

Assets, Expenses and Dividends

Credits Increase

Liabilities, Equities, and Revenues

Unadjusted Trial Balance

lists all accounts that have non-zero balances and confirms that debits = credits

Debts to Assets Ratio

Debts to Assets Ratio = Total Liabilities / Total Assets

how much of a company’s assets are financed by debt (lower is better generally)

Deferrals

Dollars first, Actions later

Unearned Revenue

Prepaid Expense

Unearned Revenue

when adjusting, debit liabilities and credit revenues

Prepaid Expense

when adjusting, debit expenses and credit assets

Accruals

Actions first, Dollars later

Accrued Revenues

Accrued Expenses

Accrued Revenues

when adjusting, debit assets and credit revenues

Accrued Expenses

when adjusting, debit expenses and credit liabilities

Temporary accounts

closed into retained earnings account at end of financial period.

Revenues, Expenses, Dividends

Current Assets

Cash, Accounts Receivable, Inventories, Prepaid expenses

Long-term investments

stocks, bonds, plant assets not used in operation

Property, Plant, and equipment

Machinery, vehiclesm computers, etc

Intangible assets

trademarks, patents, copyrights

current liabilities

accounts payable, wages payable, interest payable

long-term liabilities

notes payable, bonds payable, mortgages payable

Paid-In Capital

common stock and other capital received

Current Ratio

Current Ratio = Current Assets / Current Liabilities

higher ratio = higher liquidity

Profit Margin Ratio

Profit Margin Ratio = Net Income / Net Sales

Higher Ratio = Higher Profitability

Gross Profit equation

Gross Profit = Sales Revenue - Cost of Goods Sold

FOB Shipping Point

Buyer pays

FOB Destination

Seller pays

Gross Margin Ratio

Gross Margin Ratio = Gross Profit / Net Sales

higher ratio = higher profitability

Cost of Goods Sold Equation

COGS = Beginning Inventory + Net Purchases - Ending Inventory