Intermediate Accounting 1 Test 2

Accounting Policies

The specific principles, bases, conventions, rules, and practices applied by a company in preparing and presenting financial information

Basic Earnings Per Share

(net income-preferred dividends)/ weighted average common shares outstanding

Single step income statement

revenues-expenses=net income

Retained earnings statements

-increased by net income

-decreased by dividends

-watch out for adjustments

examples of operating activities

account payable, account receivable, depreciation, current liabilities, bond amortization

examples of investing activities

sale of land/building/equip

purchase of land/building/equip

examples of financing activities

issue common stock, payment of dividends

Non cash assets + Cash=

Liabilities+equities

Cash=

Liabilities+ Equities- Noncash assets

Cash Debt Coverage

net cash provided by operating activities/average total liabilities

Bad Debt Expense

% of Receivables * Account Receivables

Accounts Receivable

oral promises of a purchaser to pay for goods and services sold. They represent short-term extensions of credit, which are normally collected within 30 to 60 days

Accounts Receivable Turnover

an activity ratio that measures the number of time, on average, a company collects receivables during a period

Accumulated Other Comprehensive Income

the aggregate amount of the other comprehensive income items, such as unrealized gains and losses on certain investments

Activity Ratios

measures of how effectively a company is using its assets

Additional Paid-in Capital

the excess of amounts paid in over the par or stated value

Adjunct Account

an account that increases either an asset, liability, or owner’s equity account

Allowance Method

a method for recording uncollectible accounts receivable by entering the expense on an estimated basis at the end of each accounting period. Generally records bad debt expense in the same period as the sale and achieves a proper carrying value for accounts receivable

Appropriated Retained Earnings

a retained earnings account that is restricted for a specific use, usually to comply with a contractual requirements, board of directors’ policy, or current necessity

Asset Turnover

activity ratio that measures how efficiently a company uses its assets to generate sales.

available-for-sale

debt securities not classified as held-to-maturity or trading securities. Reported at fair value, but don’t report changed until the sale

Balance Sheet

Financial Statement that shows the financial condition of a company at the end of a period by reporting its assets, liabilities, and owners’ equity

Bank Overdrafts

occurs when a company writes a check for more than the amount in its cash account. Companies should report it in the current liabilities section, adding them to the amount reported as accounts payable

Bank Reconciliation

a schedule explaining any differences between the bank’s and the company’s records of cash. If some part of the difference arises from other items other than transactions not yet recorded by the bank, either the bank or the company must adjust its records

Book Value per share

the amount each share of stock would receive if a company were liquidated, based on the amounts reported on the balance sheet. Computed as Common stockholders’ equity divided by the outstanding share

Capital Maintenance Approach

the most common alternative to the transaction approach in which a company determines income for the period based on the change in equity, after adjusting for capital contributions or distributions

Capital Stock

the total par or stated value of the shares issued. Companies must disclose the par value per share and the authorized, issued, and outstanding share amounts for common and preferred stock

Cash debt coverage

measure of solvency that indicates a company’s ability to repay its liabilities from cash generated from operations. Computed as the ratio of net cash provided by operating activities to total debt, as represented by average total liabilities

Cash equivalents

treasury bills, commercial paper, and money market funds purchased with cash

Compensating Balances

minimum cash balances in checking or savings accounts, required by some banks and other lending institutions in support for existing borrowing arrangements.

Comprehensive Income

income measure that includes all changes in equity during a period expect those resulting from investments by owners and distributions to owners. Includes all revenues and gains, expenses and losses reported in net income, and all gains and losses that bypass net income but affect stockholders’ equity.

Contingency

material events with an uncertain future outcome

Contra account

an account that reduces either an asset, liability , or owners’ equity account

Current cash debt coverage

measure of liquidity that indicates a company’s ability to pay its short-term debt

Current expected credit loss (CECL) model

the FASB requirement that companies measure expected uncollectible accounts and record bad debt expense on all receivables

direct write-off method

a method for recording accounts receivable by recording bad debt in the period in which a company determines that it cannot collect a specific receivable

Earnings management

the planned timing of revenues, expenses, gains, and losses to smooth out bumps in earnings

Factors

companies that buy receivables for a fee and then collect the payments directly from customers

Financial component approach

used to record a sale with recourse, where each party to the sale only recognizes the assets and liabilities that it controls after the sale

Financing activities

cash flow activities that include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders and paying them dividends

Free cash flow

measure of the cash remaining from operating activities after adjusting for capital expenditures and cash dividends paid

Held-to-maturity

debt securities that a company has the positive intent and ability to hold to maturity

imputed interest rate

an approximated interest rate, used when a company cannot determine the interest rate of a note receivable because it has no ready market

Income statement

financial statement that measures the results of operations during a particular period and presents those results in terms of net income or net loss

Intangible Assets

assets that lack physical substance and that are not financial instruments

intraperiod tax allocated

discontinued business is followed by taxes

Inventory turnover

the number of times on average a company sells its inventory during the period

Investing Activities

cash flow activities that include (1) purchasing and disposing of investments and productive long-lived assets using cash, and (2)lending money and collecting the loans

Multiple-step income statement

income statement format that separates operating transactions from non-operating transactions, and matches costs and expenses with related revenues

net amount expected to be collected

gross accounts receivable less estimated uncollectible accounts

Non trade receivables

claims that arise from a variety of nonsales transactions

not-sufficient-funds (NSF) checks

a charge recorded by a bank against a depositor’s balance for a check written for more than the amount of funds in the depositor’s account

Notes receivable

written promises to pay a certain sum of money on a specified future date.

Operating activites

cash flows activities include the cash effects of transactions that create revenues and expenses, and thus enter into the determination of net income

other comprehensive income

measure of the accounts of all gains and losses in a period that bypass the income statement but affect stockholders’ equity

prior period adjustments

corrections of accounting errors made in previous accounting periods. Companies correct such errors by making proper entries in the accounts and reporting the corrections in the financial statements in the year in which they are discovered

promissory notes

a written promise to pay a certain sum of money at a specific future date, in support of a note receivable

receivables

claims held against customers and others for money, goods, or services

report form

presentation in a classified balance sheet that lists liabilities and stockholders’ equity directly below assets on the same page

reserve

an appropriation of retained earnings. also called appropriated earnings

restricted cash

material amounts of cash set aside for a particular purpose

retained earnings

the company’s accumulated, undistributed earnings, which may be divided into (1) unappropriated and (2) restricted

return on assets

the return a company achieves through use of its assets

revenue recognition

the recording of the transfer of goods or services to customers in an amount that reflects that consideration that the company receives, or expects to receive, in exchange for those goods or services

trade discounts

reductions in sales prices, which companies use to avoid frequent changes in catalogs, to alter prices for different quantities purchased, or to hide invoice price from competitors.

Trade receivables

accounts receivable and notes receivables that result from sales transactions for a company’s goods or services

trading

debt securities bought and held primarily for sale in the near term to generate income on short-term price differences

transaction approach

method of income measurement that focuses in the income-related activities- revenue, expense, gain, and loss transactions- that have occurred during the period

transaction price

the amount of consideration that a company expects to receive from a customer in exchange for transferring goods or services

Treasury Stock

the cost of shares repurchases by the company, which results in a reduction of stockholders’ equity

with recourse

a receivables- factoring transaction in which the seller guarantees payment to the purchaser if the debtor fails to pay. If the seller transfers control of the receivables, it may recognize a liability for the guarantee after the sale

without recourse

a receivables-factoring transaction in which the purchaser assumes the risk of collectibility and absorbs any credit losses. The transfer of receivables in such a transaction is an outright sake of the receivables both in form (transfer of title) and substance (transfer of control)

working capital

the excess of total current assets over total current liabilities; represents the net amount of a company’s relatively liquid resources. also called net working capital

zero-interest-bearing notes

a note receivable that includes interest as part of the face amount. also called non-interest-bearing notes