UCLA Management 1A midterm vocabs

debits go on the…

left

credits go on the…

right

Basic Financial Statements

1. Income Statement

2. Statement of Owners' Equity

3. Balance Sheet

4. Statement of Cash Flows

5. Notes

increase assets

debit

decrease assets

credit

increase cash

debit

decrease cash

credit

increase liabilities

credit

decrease liabilities

debit

increase equity

credit

decrease equity

debit

increase drawings

debit

decrease drawings

credit

increase contributed capital

credit

decrease contributed capital

debit

increase expense

debit

decrease expense

credit

increase revenue

credit

decrease revenue

debit

Single Step Income Statement

revenues
(expenses)
=net income/(loss)

Multi-Step Income Statement

sales
(cost of sales)
=net sales
(COGS)
=Gross Profit

(operating expenses)
=Income from Operations

interest income/(expense)
=income before taxes
(taxes)
=Net Income

When is revenue recognized?

when the products are sold or the services are provided (when earned), which may or may not be when cash changes hands

When are expenses recognized?

using the matching principle: expenses should be recorded during the period in which they are incurred, regardless of when the transfer of cash occurs

-"match expense to revenue it generates or period of expenses"

definition of assets

economic resources owned by the company that are expected to provide future economic benefit (vs. Expense-benefit current period)

current assets order of liquidity

1. cash and cash equivalents
2. investment or marketable securities
3. accounts receivable
4. merchandise inventory
5. prepaid expenses
6. supplies

ending retained earnings =

beginning retained earnings + net income - dividends

current liabilities (presented in order will be paid)

• accounts payable
• taxes payable
• notes payable (debt)
• interest payable
• dividends payable
• unearned revenue

Classified Balance Sheet

Assets / Liabilities
current assets / current liabilities
noncurrent assets / noncurrent liabilities

/ Owners' Equity
/ Capital
Total Assets = Total Liabilities + Owners' Equity

Statement of Owners' Equity

beginning equity
contributed capital
net income
(drawings)
= End Equity

types of cash flows

1. cash flows from operations
2. cash flows from investing activities
3. cash flows from financing activities

Statement of Cash Flows

operating activities:
investing activities:
financing activities:
=net change in cash
beginning balance of cash
= Ending Balance of Cash

example of a contra-asset

accumulated depreciation

3 characteristics of contra accounts

1. they're always attached to another account
2. they have the opposite balance of the normal account balance
3. they reduce the account to which they are attached

What is the T-account an abbreviation of?

the general ledger

period statements include

income statement, statement of owners' equity, statement of cash flows

position statements include

balance sheet

cash flows from operating activities (DIRECT METHOD)

cash collected from customers
(cash paid to suppliers)
= Net cash used by operating activities

cash flows from operating activities (INDIRECT METHOD)

net income
(A/R)
A/P
depreciation
= Net cash used by operating activities

permanent accounts include

assets, liabilities, equity (contributed capital and retained earnings)

temporary accounts

revenue, expenses, dividends/drawings

income summary

a very, very temporary account we use to close out the temporary accounts

steps in closing temporary accounts

1. close out revenue account to income summary
2. close out expense accounts to income summary
3. close out income summary to capital
4. close out drawings to capital

FOB (free on board) shipping point

buyer pays

FOB (free on board) destination

seller pays

objectives of internal controls

1. accurate and reliable financial statements
2. safeguarding of assets

segregation of duties includes

• authorization
• recording
• custody/safeguarding
• comparison

account to use if bank and books don't match

cash short/over

petty cash

• a way to pay for those little expenditures that come up all the time (postage, delivery, etc.)
• an imprest account (it has a fixed balance that doesn't change)

When do we debit/credit petty cash?

to change the amount of the fund, not to replenish it

accounting assumptions: monetary unit

usually the national currency of the reporting company; US dollar

accounting assumptions: economic entity

a business is an economic unit separate and distinct from its owners

accounting assumptions: period of time

information is reported in a company's financial statements at least on an annual basis

accounting assumptions: going concern (continuity)

the company will continue to operate in the near future; we assume a business will operate indefinitely

accounting principles: revenue recognition

revenues should be recognized when:

• realization has taken place
• usually at the time of the sale
• recognize revenue when earned, measurable, and collectible;

recognize revenue at the point of sale, not necessarily when we get the cash

accounting principles: matching

costs incurred in generating revenues expensed in the same period as the revenue recognized

accounting principles: full disclosure

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

accounting principles: historical cost

the acquisition of goods, services, and other resources are entered into the accounting records at their exchange price (the price you pay)

accounting constraints: materiality

an item is material if it is likely to influence the decision of a reasonably prudent investor or creditor

accounting constraints: conservatism

accounting measurements take place in context of significant uncertainties therefore, when alternative accounting valuations are equally possible, select the one that is least likely to:

• overstate assets and income
• understate liabilities and expenses