Financial Statements & Accounting Concepts/Principles

Transactions

Economic interchanges between entities that are accounted for and reflected in financial statements.

Where are transactions summarized

accounts

Accounts are used to

organize like-kind transactions

Account balances are used for

the preparation of financial statements

Assets

The amount of resources owned by the entity.

Liabilities

Amounts owed to other entities.

Equity

The ownership right of the owner(s) of the entity in the assets that remain after deducting the liabilities.

General Accounting Equation

Assets = Liabilities + Equity

Current Assets

Assets that are likely to be converted into cash or used to benefit the entity within one year.

Long-Term Assets

Will benefit the entity over several years

Current Liabilities

To be paid within one year

Long-Term Liabilities

Liabilities that will not be repaid within one year

Income Statement

Shows the net income (or net loss) for the period of time under consideration.

statement of changes in stockholders' equity

statement that shows the detail of stockholders' equity and explains the changes that occurred in the components of stockholders' equity during the year

Statement of Cash Flows

A financial statements to identify the sources and uses of cash during the year.

Cash

Cash on hand and in the banks

Accounts receivable

Amounts due from customers

Merchandise inventory

Cost of merchandise acquired and not yet sold

Equipment

Cost of equipment purchased and used in business

Accumulated Depreciation

portion of the cost of equipment that is estimated to have been used up in the process of operating the business

Short-Term Debt

Amounts borrowed that will be repaid within one year of the balance sheet date.

Accounts Payable

Amounts due to suppliers

Other Accrued Liabilities

amounts owed to various creditors

Long-Term Debt

Amounts borrowed from banks or other creditors that will not be repaid within one year from the balance sheet date

Stockholders' Equity

Residual claim of owners, computed as "assets minus liabilities"

Net Sales

Amount of sales of merchandise to customers, less the amount of customer returns of merchandise

Cost of Goods Sold

Represents the total cost of merchandise removed from inventory and delivered to customers as a result of sales.

Gross Profit

the difference between net sales and cost of goods sold; Represents the seller's maximum amount of "cushion" from which all other expenses of the business must be deducted before it is possible to have net income.

Selling, General, and Administrative Expenses

Operating expenses of the entity

Income from Operations

Represents one of the most important measures of the firm's activities

Interest Expense

The cost of using borrowed funds

Income Taxes

Shown after all of the other income statement items have been reported because income taxes are a function of the firm's income before taxes.

Net Income per Share of common stock outstanding

a significant item in evaluating the market value of a share of common stock; often referred to as "earnings per share" or EPS

Paid-in capital

The total amount invested in the entity by the owners

common stock

Reflects the number of shares authorized by the corporation's charter, the number of shares issued to stockholders, and the number of shares still held by the stockholders.

Additional Paid-in capital

Difference between the total amount invested by the owners and the par value or stated value of the stock

Retained earnings

The cumulative net income of the entity that has been retained for use in the business

Dividends

Distributions of earnings to the owners

cash flows from operating activities

Shown first; Net income is the starting point for this measure of cash generation

Depreciation expense

Added back to net income because it is subtracted to arrive at net income, but does not require the use of cash.

Accounting Entity

every economic entity can be separately identified and accounted for

Going Concern Concept

A presumption that the entity will continue to operate in the future - it's not being liquidated.

Unit of Measurement

Only transactions denominated in dollars (currency) are recorded in the accounting records.

Cost Principle

Transactions are recorded at their original cost to the entity as measured in dollars

Objectivity

The accountants' desire to have a given transaction recorded in the same way in all situations.

Accounting Period

The period of time selected for reporting results of operations and changed in financial position.

Matching Concept

All expenses incurred to generate that period's revenues be deducted from the revenues earned.

Accrual Accounting

Recognize revenue at the point of sale and recognize expenses when incurred, even though the cash receipt or payment may occur at another time.

Consistency

Provides meaningful trend comparisons over several years.

Full Disclosure

Circumstances and events that make a difference to financial statement users should be disclosed

Materiality

The benefit of increased accuracy should outweigh the cost of achieving the increased accuracy.

Conservatism

When in doubt, make judgments and estimates that result in lower profits and asset valuations.

Accrual Accounting vs. Cash Flows

Accrual recognizes revenue when it is earned and expenses when they are incurred

Cash flow recognizes revenue when it is received and expenses when they are paid.