BUS020 Financial Accounting Study Bank (Chapters 1–4)

Essential financial accounting definitions, formulas, and concepts covering financial foundations, financial statements, the transaction cycle, and adjusting entries.

Financial accounting

Identifies, records, and communicates financial information to decision makers.

Two primary functions of financial accounting

Measure business activities and communicate information to external users.

Investing activities

Transactions with investors and creditors, such as issuing stock or borrowing money.

Financing transactions

Transactions involving obtaining resources from investors and creditors.

Operating activities

Primary business operations, such as providing services, selling products, and paying employees.

Assets

Resources owned or controlled by a company.

Liabilities

Amounts owed to creditors; claims on company resources.

Stockholders’ equity

Owners’ claims on company resources; assets minus liabilities.

Accounting equation

$$\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$$

Revenue

Amounts recognized from selling products or providing services to customers.

Expenses

Costs of providing products/services and other business activities during a period.

Net income

$\text{Revenues} - \text{Expenses}$; profit when revenues exceed expenses.

Net loss

When expenses exceed revenues.

Dividends

Distributions of company earnings to stockholders; not expenses.

Corporation

A company legally separate from its owners.

Limited liability

Owners generally are not personally responsible for the corporation’s obligations.

Sole proprietorship

Business owned by one person.

Partnership

Business owned by two or more partners.

Four primary financial statements

Income statement, balance sheet, statement of stockholders’ equity, statement of cash flows.

Income statement

Reports revenues, expenses, and net income or loss over a period.

Statement of stockholders’ equity

Summarizes changes in owners’ equity over a period.

Balance sheet

Reports assets, liabilities, and stockholders’ equity on a particular date.

Statement of cash flows

Reports cash inflows and outflows over a period.

Common stock

Amounts invested by owners in exchange for shares.

Retained earnings

Cumulative earnings retained in the business rather than distributed as dividends.

Ending retained earnings formula

$\text{Beginning retained earnings} + \text{Net income} - \text{Dividends}$ (or $- \text{Net loss}$).

Ending common stock formula

$\text{Beginning common stock} + \text{New shares issued}$ (at recorded amount).

Stockholders’ equity formula

$\text{Common Stock} + \text{Retained Earnings}$ (in simplified examples).

GAAP

Generally Accepted Accounting Principles; standards for reporting financial information.

SEC

Securities and Exchange Commission; requires public companies to report financial information.

FASB

Financial Accounting Standards Board; establishes U.S. financial reporting standards.

Auditor

Independent professional who evaluates financial reporting.

10-K

Annual report filed by public companies with the SEC.

10-Q

Quarterly report filed by public companies with the SEC.

Conceptual framework

Foundation for developing accounting standards and useful financial reporting.

Relevance

Information can make a difference in a decision.

Faithful representation

Information should reflect the underlying economic reality.

Comparability

Allows users to compare financial information across companies or periods.

Consistency

Using the same accounting methods from period to period.

Verifiability

Different knowledgeable observers could reach similar conclusions.

Timeliness

Information is available in time to influence decisions.

Current assets

Assets expected to be converted to cash, sold, or consumed within one year or the operating cycle.

Accounts receivable

Amounts customers owe the company.

Prepaid expenses

Payments made in advance for benefits to be used later; assets until used.

Short-term investments

Investments expected to be converted into cash in the near term.

Long-term assets

Assets expected to provide economic benefits for more than one year.

Property, plant, and equipment (PP&E)

Long-lived tangible operating assets.

Intangible assets

Nonphysical assets with future economic benefits.

Operating lease right-of-use asset

Asset representing the right to use leased property during the lease term.

Historical cost

Record an asset initially at its acquisition cost.

Amortized cost

Initial recorded cost adjusted over time for specified payments or amortization.

Fair value

Price to sell an asset or transfer a liability in an orderly market transaction.

Net realizable value

Expected selling/collection amount less costs needed to complete, sell, or dispose.

Current liabilities

Obligations expected to be settled within one year or the operating cycle.

Deferred revenue (unearned revenue)

Liability from receiving cash before providing goods or services.

Accrued liabilities

Expenses already incurred but not yet paid.

Current portion of long-term debt

Long-term debt payments due within the next year.

Notes payable

Formal written promises to repay borrowed money.

Bonds payable

Debt raised by issuing bonds to investors.

Contributed capital

Money invested by owners in the company.

Gross profit

$$\text{Net sales or revenue} - \text{Cost of goods sold}$$

Cost of goods sold (COGS)

Cost of inventory sold to customers.

Operating income

$$\text{Gross profit} - \text{Operating expenses}$$

Operating expenses

Expenses of core operations, such as selling and administration.

Nonoperating items

Gains, losses, revenues, or expenses outside core operations.

Income before taxes

Income after operating and nonoperating items, before income tax.

Single-step income statement

Groups all revenues and all expenses into a single calculation.

Multiple-step income statement

Separately shows gross profit, operating income, and other items.

Operating cash flows

Cash received and paid in primary business activities.

Investing cash flows

Cash flows from buying/selling long-lived assets and investments.

Financing cash flows

Cash flows involving creditors and owners.

Net change in cash

$$\text{Operating cash flows} + \text{Investing cash flows} + \text{Financing cash flows}$$

Comprehensive income

Net income plus other comprehensive income.

Other comprehensive income (OCI)

Specified gains/losses excluded from net income.

Accumulated OCI (AOCI)

Cumulative OCI items within stockholders’ equity.

Accounting cycle

Process of recording, adjusting, and reporting transactions over a period.

External transaction

Exchange between the company and a separate economic entity.

Revenue recognition principle

Recognize revenue when goods/services are provided, not necessarily when cash is collected.

Debit

Left side of an account.

Credit

Right side of an account.

Normal debit-balance accounts

Assets, expenses, and dividends.

Normal credit-balance accounts

Liabilities, common stock/equity, and revenues.

Journal

Chronological record of transactions.

Journal entry

Debit and credit record for one transaction.

Double-entry accounting

Every entry has total debits equal to total credits.

Posting

Transferring journal-entry amounts to ledger accounts.

General ledger

Collection of individual company accounts.

T-account

Simple account showing debits on the left and credits on the right.

Trial balance

List of account balances used to check total debits equal total credits.

Accounting period

Time interval for measuring and reporting performance.

Accrual-basis accounting

Record revenues when earned and expenses when incurred, regardless of cash timing.

Cash-basis accounting

Record revenue when cash is received and expenses when cash is paid.

Prepayment

Cash is paid or received before the related expense or revenue is recognized.

Accrual

Revenue is earned or expense incurred before the related cash is received or paid.

Supplies used formula

$$\text{Beginning supplies} + \text{Purchases} - \text{Ending supplies}$$

Adjusted trial balance

Trial balance prepared after posting adjusting entries.

Permanent accounts

Assets, liabilities, and equity accounts carried forward to the next period.

Temporary accounts

Revenues, expenses, and dividends closed at period-end.

Closing entries

Transfer temporary-account balances to retained earnings.

Post-closing trial balance

List of permanent-account balances after closing entries.