Exam-1 Review: Financial Accounting Concepts (ACCT 2101)

Vocabulary flashcards covering key terms and concepts from the lecture notes.

Financial statements (four core)

The four primary statements: Income Statement, Balance Sheet, Statement of Retained Earnings, and Cash Flows Statement.

Single-step income statement

Calculates net income by subtracting total expenses from total revenues; uses only revenue and expense accounts.

Income statement components

Presents revenues and expenses; these are temporary accounts that are closed to Retained Earnings.

Balance sheet (permanent accounts)

Shows permanent accounts: assets, liabilities, and stockholders’ equity, at a specific date.

Multi-step income statement

Separates gross profit from operating income by subtracting cost of goods sold and then operating expenses (selling and administrative).

Statement of Retained Earnings (SRE) formula

Beginning retained earnings + net income − dividends = ending retained earnings.

Revenue recognition

Revenue is earned when a good or service has been delivered to the customer.

Balance sheet definition and date

Financial statement reporting assets, liabilities, and equity as of the last day of the period.

Dividends effect on equity

Cash dividends decrease assets and decrease stockholders’ equity.

Closing entries

Entries that transfer revenue, expense, and dividend balances to Retained Earnings for the next period.

Accounting equation

Assets = Liabilities + Equity.

Liability

A present obligation owed to an outside party.

Assets (example)

Total assets equal liabilities plus equity; e.g., equity 200,000 and liabilities 100,000 imply assets 300,000.

Adjusting entries impact on net income

Failing to record unpaid salaries as an adjusting entry would overstate net income.

Financial statements (definition)

Documents presenting a business’s financial information in monetary terms to aid decision-making.

Posting

Transferring data from the journal to the ledger.

Current ratio

Current assets divided by current liabilities; measures liquidity.

Repair expense paid in cash effect

Decreases cash (assets) and decreases equity via expense recognition.

Financial statements list

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

Revenue recognition (reiterated)

Revenue is earned when the business has delivered a good or service.

Cash

A cash asset; money available for immediate use.

Note payable

A liability; decreases with a debit; represents amounts owed to creditors.

Debt payment effects

Paying a debt decreases both assets and liabilities.

Trial balance

A list of all accounts with their balances.

Journal

The initial recording of a transaction in the accounting records.

Accounting cycle

Process by which financial statements for a period are produced.

Adjusting entries timing

Journalize adjusting entries at the end of the accounting period.

Income summary

Temporary account used to close revenue and expense accounts before transferring to Retained Earnings.

Service revenue cash receipt

Cash received for services; increases cash and service revenue.

Depreciation entry

Debit to depreciation expense and credit to accumulated depreciation.

Adjusted trial balance

Trial balance after adjustments; shows updated balances.

Financial statements from adjusted trial balance

Statements are prepared from the balances in the adjusted trial balance.

Depreciation adjustment understatement risk

Failing to record depreciation expense understates expenses and overstates net income.

Intangible assets

Patents, copyrights, and trademarks; non-physical assets.

Current assets (short-term bonds)

Bonds held as investments for less than a year are current assets.

Liquidity

A measure of how quickly an asset can be converted into cash.

Permanent account

An account not closed at period end (balance sheet account).

Perpetual inventory returns

Under perpetual system, returns decrease Merchandise Inventory (credit Inventory).

Time period assumption

Accounts for financial statements to reflect a specific period for accurate net income.

Going concern

Assumes the company will continue operations long enough to meet obligations.

Economic entity assumption

Business and owner’s personal transactions are kept separate in reporting.

Revenue (definition)

Increases in resources from the sale of goods or provision of services.

Expense (definition)

Decrease in resources resulting from the use of assets or incurrence of obligations to generate revenue.

Income statement (operating performance)

Used to determine the company’s operating performance for a period.

Matching principle

Expenses should be recorded in the period resources are used to generate revenues.

Retained earnings (formula)

Beginning retained earnings + net income − dividends = ending retained earnings.

Current assets definition

Assets expected to be converted into cash within one year or within the operating cycle.

Contributed capital

Source of equity contributed by owners (e.g., common stock, additional paid-in capital).

Current liabilities

Obligations due within one year: income tax payable, accounts payable, salaries payable.

Other gains and losses

Gains and losses reported on the multi-step income statement under other gains and expenses.

Notes to the financial statements

Notes included as an integral part of the financial statements.

GAAP

Generally Accepted Accounting Principles.

Chart of accounts

Listing of accounts in financial statement order.

Cash basis

Revenues and expenses are recognized when cash is received or paid.

Revenue (cash basis) recognition

Revenue recognized when cash is received.

Retained earnings (definition)

Equity earned from profitable operations not distributed to stockholders.

Issuing common stock for cash

Cash received from a stockholder in exchange for common stock; increases cash and equity.

Accrual basis accounting

Revenues recognized when earned and expenses recognized when incurred, regardless of cash flow.

Income statement purpose (revenues and expenses)

Reports revenues and expenses for a period to determine net income.

Accounts receivable

Customer promises to pay in the future; asset.

Unearned revenue

A liability representing cash received before goods/services are provided.

Debit and liability/equity impact

Debits decrease liabilities and equity; credits increase them.

Stockholders’ equity normal balance

Equity accounts have a credit normal balance.

Accounting data flow

Source document → journal → ledger.

Deferred revenue entry

Cash received for future services; debit cash, credit unearned revenue.

Cash collection from accounts receivable

When cash is collected, debit cash and credit accounts receivable.

Adjusted trial balance contents

Lists all accounts with balances after adjustments.

FASB (US standards)

Financial Accounting Standards Board; governs accounting standards in the United States.

Economic entity example

Illustrates separation of business transactions from the owner’s personal transactions.

Assets (definition)

Economic resources owned by a business (e.g., furniture, building, land).