Chapter 3: Accrual Accounting and Financial Statements

Cash Based Accounting

Revenue is recorded when cash is received, regardless of when it is actually earned.

Accrual Accounting

Revenue is recorded when in is incurred, both cash and non cash transactions

Periodicity Assumption

Allows companies to artificially divide their operations into time periods so that they can satisfy users demands for information

Revenue Recognician principal

recenue is still recognized when goods have been delivered to a customer or when services are performend.

Adjustment Enteries

journal entries made at the end of an accounting period to record the completed portion of partially completed transactions

What is the point of adjustment enteries?

To ensure that revenues and expense are recorded in the proper time period.

What do Adjustment entries affect

at least one income statement account and one statement of financial position account. Cash is never affected by adjustments

Accrued Revenues

Purulator has a package in transit at the end of an accounting period, meaning that purulator has only partially completed the service. The transaction for which Purulator has earned revenue but not received the cash is called A

Accrued Expenses

Previously unrecorded expenses that have been incurred but not yet paid in cash

Unearned Revenues

transactions for which a company has received cash nut has not yet earned the revenue

prepaid expenses

when a company acquires goods or services before they are used. supplies, prepaid rent, prepaid advertising and prepaid insurance.

Depreciation

companies systematically assign or allocate the assets cost as an expense to each period in which the asset is used.

Contra Account

accounts that have a balance that is opposite to the balance in a related account.

Permeant Accounts

Assets, Liabilities and Shareholders Equity. Their balances are carried forward form the current accounting period to the future accounting period

Temporary Accounts

Revenues, Expenses and dividends declared.

Inventory

products held for resale and Is classified as a current asset on the statement

Cost of Goods Sold

outflow of asset resources caused by the sale of inventory and is typically the largest expense on the statement of earnings.

Gross Margin

key performance measure defined as sales revenue less cost of goods sold. Indicates the extent to which the asset resources generated by sales can be used to pay operating expenses

Merchandisers

companies that purchase inventory in a finished condition and hold it for resale without further processing

retailers

merchandisers that sell directly to the customer

wholesalers

merchandisers that sell to other retaiers

merchandise inventory

The inventory held by merchandisers

Manufacturers

companies that buy and transform raw materials into finished products which are then sold

Raw Materials inventory

refers to the basic ingredients used to make a product.

Work in progress inventory

raw materials that are used in production as well as other production costs such as labour and utilities

Finished Goods Inventory

cost of then final product that is available for sale.

cost of goods available for sale

the sum of beginning inventory and purchases during the period

Perpetual Inventory System

Balances for inventory and cost of goods sold are updated with each sale or purchase of inventory

Periodic Inventory System

does not require companies to keep detailed, up-to-date inventory records. Instead a periodic system records the cost of purchases as they occur

Gross Profit Ratio

Key indicator of the companies ability to sell inventory for a profit.

Inventory Turnover Ratio

describes how quickly inventory is purchased and sold