ACCT CH.2

what are the three assumptions of a balance sheet

separate entity assumption, going concern assumption (continuity assumption), monetary unit assumption

what is the measurement concept of a balance sheet

historical cost

each business’s activities must be accounted for separately from the personal activities of the owners, all other persons, and other entities

separate entity assumption

it is assumed that the business will continue operating into the foreseeable future, long enough to meet its contractual commitments and plans

going concern assumption (continuity assumption)

each business entity accounts for and reports its financial results primarily in terms of the national monetary unit without any adjustments for changes in purchasing power

monetary unit assumption

if the measurement concept of a balance sheet is recorded at historical cost, elements are initially recorded at their cost meaning…

the cash equivalent on the date of the transaction

the elements of a corporation’s balance sheet

assets, liabilities, stockholders’ equity

economic resources owned or controlled by a company; they have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future

assets

assets are listed on the balance sheet in order of _____

liquidity

resources the company will use or turn into cash within one year

current assets

what are the current assets

cash, short-term investments, accounts receivable, supplies, inventories, and prepaid expenses

used or turned into cash after a year

noncurrent assets

examples of noncurrent assets

land, buildings, equipment, operating lease assets, intangibles, investments, intangibles

obligations resulting from a past transaction; expected to be settles in the future by transferring assets or providing

liabilities

entities that a company owes money to

creditors

liabilities are listed in order of ______ and grouped by __________

maturity (how soon an obligation is to be paid), current and noncurrent

need to be paid or settled within one year

current liabilities

have due dates beyond one year

noncurrent liabilities

example of current liabilities

accounts payable, unearned revenue, accrued expenses payable, current lease liabilities

example of noncurrent liabilities

notes payable and long-term lease liabilities

represents the residual interest in the assets of the entity after subtracting liabilities. it is a combination of the financing provided by the owners and by business operations

stockholders’ equity

financing provided by owners

contributed capital

owners invest in a business by providing cash and sometime other assets, receiving in exchange shares of ______ as evidence of ownership

stock

what accounts represent the amount investors paid when they purchase a stock from the company

common stock and additional paid-in capital

represents the amount the company paid to its investors to repurchase common stock

treasury stock

treasury stock reduces

stockholders equity

accounting events are called

transactions

two types of accounting events

external events and internal events

exchanges of assets, goods, or services by one party for assets, services, or promises to pay (liabilities) from another party or parties

external events

events that are not exchanges between the business and other parties but nevertheless have a direct and measurable effect on the entity

internal events

is signing a contract considered to be an accounting transaction

no, exchange of promises, not assets

used by companies to accumulate the dollar effect of transactions

accounts

a list of all account titles and their unique numbers

chart of accounts

idea that every transaction has at least 2 effects on the basic accounting equation

dual effects

what are the 2 principles of the transaction analysis process

every transaction affects at least two accounts, the accounting equation must remain in balance after each transaction

what is the accounting equation

assets = liabilities + stockholders’ equity

chronological list of each transaction’s effects

general journal

a record of effects to and balances of each account

general ledger

purpose of trial balance is to

check the equality of the debits and credits

how to find current ratio

current assets/ current liabilities

trustworthy company current ratio

over 1

companies report cash inflows and outflows over a period in their

statement of cash flows

3 categories of statement of cash flows

operating, investing, and financing activities