Accounting Exam 2-Mizzou

Net Income =

Revenues-Expense

Names for income statement

Statement of income

statement of earnings,

statement of operations,

profit or loss statement

Temporary Accounts

a company uses these revenue and expense accounts for only one accounting period to record the effects of its transactions on its net income.

Permanent Accounts

assets, liability and owner's equity are all PA. B/c they are used for the life of the company to record the effects of its transactions on its balance sheet.

Revenues

are the prices charged to customers and result in increases in assets or decreases in liabilities.

Expenses

are the costs of providing goods and services and result in a decrease in assets or an increase in liabilities

Operating Income

includes all the revenues earned and expenses incurred in the primary operating activities of the company.

Operating income subsections

1. Revenue

2. COGS

3. Operating Expense

Other Items (Income statement)

include any revenues and expenses that are not directly related to the primary operations of the company, items such as interest revenue and interest expense.

3 Policies that companies have related to the sales or their products

Discount policies, sales return policies, sales allowance policies

Quantity discount

is a reduction in the sales price of a good or service because of the number of items purchased or because of a sales promotion

C-V-P analysis

hels determine the discount that will most likely improve company profits

Sales Discount

is a percentage reduction of the invoice price if the customer pays the invoice within a specific period.

Cash discount

Also knowns as a sales discount bc when taken by a customer, the discount reduces the cash received.

Sales return

occurs when a customer returns preciously purchased merchandise

sales allowance

occurs when a customer agrees to keep the merchandise, and the company refunds a portion of the original sales price

credit memo

is a business document that lists the information for a sales return or allowance.

COGS

one of the major expenses of a retail company is the merchandise that it sells during the accounting period.

COGS=

cost of beginning inventory + cost of net purchases - cost of ending inventory

Inventory

is the merchandise a retail company is holding for resale

Perpetual Inventory System

keeps a continuous record of the cost of inventory on hand and the cost or inventory sold

Periodic Inventory system

does not keep a continuous record of the inventory on hand and sold, but determines the inventory at the end of each accounting period by physically counting it.

Why a company would chose not to keep a perpetual inventory system?

1. Many companies are small enough that they can manage their inventory w/o perpetual records.

2. Many companies sell a high volume of similar, inexpensive goods.

Net purchases

is used b/c the amount of merchandise purchases is adjusted for purchase returns, allowances and discounts

Cost of Ending Inventory

is the dollar amount of merchandise on hand, based on the physical count, at the end of the accounting period

Gross Profit

is the amount of revenue that a company has "left over" to cover its operating expenses

Operating expenses

are the expenses (other than COGS) that a company incurs in its day-to-day operations

Adjusting entries

what companies to refer to as the recording of end-of-period adjustments

Selling expense

are the operating expenses related to the sales activities of a company

General and administrative expenses

are the operating expenses related to the general management of a company.

Operating income

gross profit - operating expenses

Risk

is the uncertainty about the future earnings potential of a company

Risk cont.

When investors or creditors se the income statement to evaluate a company's risk, they are estimating the chances that the company will not earn a satisfactory profit or that it will earn a higher-than expected profit in the future

Operating capability

refers to a company's ability to continue a given level of operations in the future

Financial Flexibility

refers to a company's ability to adapt to change in the future

Ratio Analysis

consists of computations in which an item on the company's financial statements is divided by another, related item

Statement of changes in owner's equity

summarizes the transactions that addicted owner's equity during the accounting period.

Closing entries

are entries made by a company to transfer the ending balances from its temporary revenue and expense accounts into its permanent account for owner's capital

Balance Sheet

provides info that helps internal and external users evaluate a company's ability to achieve its primary goals of earning a satisfactory profit and remaining solvent. (Specific Date)

Current Assets

are cash and other assets that the company expects to convert into cash, sell or use up within one year.

Examples of Current assets

cash, marketable securities, A/R, inventory, prepaid items

marketable securities or temporary investments

are items such as government bonds and capital stock of corporations in which the company has temporarily invested. (in which the company expects to sell w/in a year

Long-term investments

Include items such as notes receivable, government bonds, bonds and capital stock of corporation and other securities. Sometimes called concurrent marketable securities. must intend to hold for longer than a year.

Property and equipment

includes all the physical, long-term assets used in the operations of a company

Book value

of an asset is its original cost minus the related accumulated depreciation

Accumulated depreciation

is the total amount of depreciation expense recorded over the life of an asset to date; thus it is the portion of asset's cost that has been "used up" to earn revenues to date

Current Liabilities

are obligations that the company expects to pay within one ear by using current assets.

Current liabilities include

A/P and salaries payable, unearned revenues, short term notes and interest payable

Unearned revenues

are advance collections from customers for the future delivery of goods or the future performance of servces

Short-term notes payable

are obligations that arise because a company signs a note that it will pay within a year

Noncurrent liabilities

are obligations that a company does not expect to pay within the next year.

Owner's equity

is the owner's current investment in the assets of the company

Working capital

is a measure of how quickly a company can convert its assets into cash to pay its bills

Current ratio

most common indicator of a company's short-run liquidity. Current assets/current liability

Quick ratio

indicator of a company's short-term debt-paying ability.

Quick assets/current liabilities

Cash Flow statement

does the changes in a company's cash during an accounting period by listing the cash inflows and outflows from its operating, investing, and financing activities during the period

Cash Inflows (3 types)-1

1. a decrease in assets other than cash causes an inflow of cash when cash is relieved in exchange for the asset. Occurs when a company collects an account receivable or sells property and equipment

Cash Inflows (3 types)-2

2. an increase in liability causes an inflow of cash when a company receives cash in exchange for the liability.

Cash Inflows (3 types)-3

3. Owner's equity increases mainly b/c additional investments by owners and net income. It causes an inflow of cash b/c the owner has used cash from personal sources to increase their investment.

Cash Outflows (3 types)-1

an increase in an asset (other than cash) causes an outflow of cash when a company pays cash for the asset

Cash Outflows (3 types)-2

a decrease in liability causes a decrease of cash when a company uses cash to pay the debt

Cash Outflows (3 types)-3

a decrease in OE happens when an owner withdrawals money.

Operating activities

include the primary activities of buying, selling, and delivering goods for sale, as well as providing services

Investing activities

incluse lending money and collecting on the loans, investing in other companies and buying and selling property and equipment

Financing activities

include obtaining capital from the owner and providing the owner with a return on investment, as well as obtaining capital from creditors and repaying the amount borrowed.

Direct method

subtracts the operating cash outflows from the operating cash inflows to determine the net cash provided by operating activities

3 categories of direct method

1. collections from customers

2. collections of interest

3. other operating receipts

Report in 4 ways of operating cash outflows

1. payment to suppliers

2. payment to employees

3. payments of interest

4. other operating payments

Operating cycle

is the average time required to pay inventory, sell the inventory, and collect on the sales

Accrual accounting

a company records its revenue and related expense transactions in the same accounting period that it provides goods or services, regardless of whether it receives or pays cash in that period.

Cash flow returns

the company's cash flows decided by the dollar amount of its assets or owner's equity

Cash flow v. income statement

the income statement reports on activities using accrual accounting whereas the cash flow statement reports only on cash activities

Operating cash flow margin

Net cash flow provided bye operating activities/net sales

Two ratios to access a company;s cash flow performance in relation to its resources are

1. the cash return on total assets

2. cash return on OE

collections from customers

beginning balance of A/R + credit sales - x = end balance of A/R

interest payments

beginning balance of Interest payable + interest expense - x = end balance of interest payable

payments to employees

beginning balance of salaries payable + salary expense - x = end balance of salaries payable

payments to suppliers

beginning balance of A/P + inventory purchases - x = end balance of A/P

purchases of inventory

beginning balance of inventory + x - COGS = end balance of inventory

rent payment

beginning balance of prepaid rent + x - rent expenses = end balance of prepaid rent