ACCT 5110 Holt Exam 1

What is the purpose of accounting?

To help people make decisions about economic activities

Financing Activities

Involve raising the capital needed to run the company

Investing Activities

Once a company has financial capital, it typically invests that capital in productive resources that are needed to operate the business

Operating Activities

With necessary resources in place, the company can commence day-to-day operating activities, producing goods and/or services and selling them to customers

DEAD CRLS

(Debit) - Expenses (COGS included), Assets, and Dividends

(Credit) - Revenues, Liabilities, and Stockholder's Equity

Accounting Equation

Assets = Liabilities (anything "unearned" as well) + Shareholder's Equity (position at point in time)

Shareholder's Equity Includes:

-Contributed Capital

-Retained Earnings (Net Income-Dividends)

-Accumulated Other Comprehensive Income (AOCI)

Revenues

Measure the inflows of assets and the settlements of obligations from selling goods and providing services to customers.

Expenses

Measure the outflows of assets that a company consumes and the obligations a company incurs in the process of operating the business.

Gains Or Losses

-Result from transactions in which the company sells assets or settles liabilities for more or less than their book values.

-Usually long term assets/liabilities

Depreciation Formula

(Cost - Residual value) / Useful life

Interest Formula

Principal x Rate x Time

Transaction

Involves the transfer or exchange of resources between the company and another party, such as the purchase of inventory from a supplier or the sale of a product or service to a customer.

Event

An occurrence that affects the company. The event may be internal, such as using equipment in operations, or external, such as a gain in the fair value of an investment security.

Arrangement

An agreement or a promise by the company with another party or entity.

Permanent Accounts

Balance sheet accounts whose balances are carried forward to the next accounting period

Temporary Accounts

Revenue, expense, gain, loss, and dividend accounts (income statement accounts)

Income Statement

Revenues - Expenses = Net Income (for a period of time)

Statement of Cash Flows

summarizes a company's cash inflows and outflows

(for a period of time)

Verifiability

Different knowledgeable and independent observers can reach consensus that a particular representation is faithful

Timeliness

Making information available to decision makers before it loses its capacity to influence decisions

Relevance

Capacity to make a difference in a decision, enabling users to predict future outcomes and/or confirm prior expectations

Decision Usefulness

Overall objective of financial information, relevant and faithfully represented.

Neutrality

Absence of bias intended to influence financial statement users' behavior in a particular direction

Free from Error

Presented as accurately as possible, using a process that reflects the best available inputs

Predictive Value

Helps decision makers form expectations about the future

Completeness

Full disclosure of all the information necessary to understand the information being reported

Comparability

Enables users to identify and explain similarities and differences between two or more sets of economic facts

Materiality

The nature and magnitude of an omission or misstatement that would influence the judgment of reasonable users of that information

Consistency

Accounting methods and procedures applied in the same manner from period to period

Confirmatory Value

Helps decision makers confirm or correct prior predictions or expectations

Faithful Representation

When the words and amounts accurately depict the economic substance of what they purport to depict

Understandability

Comprehensible to users

Period of Time

To provide timely information, companies prepare and report financial statements at the end of each year

Expense Recognition

Appropriate recognition when a company consumes economic resources in conducting business operations

Monetary Unit

Accounting measurements for U.S. companies are reported in dollars

Reporting Entity

The financial statements represent the business, rather than its owners

Going Concern

In the absence of evidence to the contrary, the business can be reasonably expected to operate long enough to carry out its existing commitments

Revenue Recognition

Appropriate recognition when a company creates economic benefits (inflows of assets or settlements of obligations) by providing goods or services to customers

Historical Cost

Transactions and events are recognized initially at the exchange price to provide relevant and reliable information

Conservatism

An accounting alternative is selected that is least likely to overstate assets and income

Recognition

The process of formally recording and reporting an item in the financial statements of a company

Accrual Accounting

The process of measuring and reporting the economic effects of transactions, events, and circumstances in the appropriate period when those effects occur, even though the cash consequences may occur in a different period

Purchase Return

When the company returns inventory to its supplier and receives a refund of the purchase price

Purchase Allowance

When the company agrees to keep damaged inventory and receives a refund from its supplier

Perpetual Inventory System

A system to update the inventory account for each purchase or sale

Purchase Discount

Suppliers offer a discount on credit sales for prompt payment within a discount period

Adjusting Entries

-Entries by which all revenues and expenses are recorded in the appropriate period and all assets and liabilities have correct ending balances

-Never use CASH accounts for Adj. Entries

-Happen on last day of fiscal period

-Always one income statement and one balance sheet account

Deferrals

Arise when cash flows occur prior to recognition of an item in income (for example, prepaid expenses and deferred revenues)

Accruals

Arise when cash flows occur after recognition of an item in income (for example, wages payable and accounts receivable).

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

Closing Entries

-Journal entries that a company makes at the end of the period to reduce the balance in each temporary account to zero and update the Retained Earnings account

1)Close out revenues (and gains on any revenues), to income summary account

2)Close out expenses (and losses) to income summary account

3) Close income summary account to retained earnings account

4) close dividends to retained earnings

Income Summary

A temporary account is used to store income statement account balances during the closing entry step of the accounting cycle

Reversing Entries

-Journal entries that are the exact opposite of the adjusting entries made in the previous period

-Occur either immediately following closing entries, or on the first day of next fiscal period

-Only do when balance sheet account is increased

-Do not reverse accumulated depreciation or bad debt

Cash-Basis Accounting

A method under which a company records revenues when it collects cash from sales and records expenses when it pays cash for its operations

Concept Statements (SFAC)

Fundamental theories and truths that provide the foundation for financial accounting and financial reporting. Broad and definitional

Return on Investment

Provides a measure of overall company performance.

Risk

The uncertainty or unpredictability surrounding a company's future results.

Financial Flexibility

The ability of a company to use its financial resources to

adapt to change

Liquidity

Refers to how quickly a company can convert its assets into cash to pay its bills.

Operating Capability

The ability of a company to maintain a given physical

level of operations.

Cost Constraint

Benefits of the information must exceed the cost of it. Applies to the 4 enhancing characteristics (comparability, verifiability, timeliness, understandability)

Mixed Attribute Measurement

Measures assets, liabilities, revenues, expenses, and other elements of the financial statements with the most relevant and faithful measurement available