Accounting Chapters 1-7

Account: is a standardized format that organizations used to accumulated the dollar effect of transaction on each financial statement item.

Accounting: is the system that collects and processes (analyzes

Accounting Cycle: is the process followed by entities to analyze and record transactions

Accounting Entity: is the organization for which financial data are to be collected

Accounting Period: is the time period covered by the financial statements

Accrual Basis Accounting: records revenues when earned and expenses when incurred

Accrued Expenses: are previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account.

Accrued Revenues: are previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account.

Additional Paid-In Capital: (Paid-In capital

Adjusting Entries: are entries necessary at the end of the accounting period to measure all revenues and expenses of that period.

Assets: are economic resources with probable future benefits owned by the entity as a result of past transactions.

Audit: is an examination of the financial reports to ensure that they are represent what they claim and conform with GAAP.

Average Cost Method: uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory.

Balance Sheet: (Statement of Financial Position) reports the amount of assets

Bank Reconciliation: is the process of verifying the accuracy of both the bank statement and the cash accounts of a business.

Bank Statement: is the monthly report from the bank that shows deposits recorded

Basic Accounting Equation: (balance sheet equation): Assets: = Liabilities + Stockholders� Equity

Cost of Goods Sold Equation:

Board of Directors: elected by the stockholders to represent their interests

Cash: is money or any instrument that banks will accept for deposit and immediate credit to a company�s account

Cash Basis Accounting: records revenues when cash is received and expenses when cash is paid.

Cash Equivalents: are short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change.

Closing Entry: transfers balances in temporary accounts to Retained Earnings and established zero balances in temporary accounts.

Comparable Information: allows comparisons across businesses because similar accounting methods have been applied.

Conservatism: suggest that care should be taken not to overstate assets or revenues or understate liabilities and expenses.

Consistent Information: can be compared over time because similar accounting methods have been applied.

Continuity (Going-Concern) Assumption: states that businesses are assumed to continue to operate into the foreseeable future

Contra-Account: is an account that is an offset to

Contributed Capital: results from owners providing cash (and sometimes other assets) to the business.

Corporate Governance: is the procedures designed to ensure that the company is managed in the interest of the shareholders.

Cost-Benefit Constraint: suggests that the benefits of accounting for and reporting information should outweigh the costs.

Credit: is on the right side of an account

Credit Card Discount: is the fee charged by the credit card company for services.

Current Assets: are assets that will be used or turned into cash within the year. Inventory is always considered a current asset regardless of the time needed to produce and sell it.

Current Liabilities: are assets that will be used or turned into cash within one year. Inventory is always considered a current asset regardless of the time needed to produce and sell it.

Debit: is on the left side of the account.

Direct Labor: refers to the earnings of employees who work directly on the products being manufactured.

Discontinued Operations: result from the disposal of a major component of the business and are reported net of income tax effects.

Earnings Forecast: are predictions of earnings for future accounting periods.

Expenses: are decreased in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period.

Extraordinary Items: are gains and losses that are both unusual in nature and infrequent in occurrence; they are reported net of tax on the income statement.

Factory Overhead: are manufacturing costs that are not raw material or direct labor costs.

Financial Accounting Standards Board (FASB): is the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles

Finished Goods Inventory: includes manufactured goods that are complete and ready for sale.

First-Out (FIFO) Method

Form 10-K: is the annual report that publicly traded companies must file with the SEC.

Form 10-Q: is the quarterly report that publicly traded companies must file with the SEC.

Form 8-K: is used by publicly traded companies to disclose any material event not previously reported that is important to investors (e.g.

Gains: are increases in assets or decreasing in liabilities from peripheral transactions.

Generally Accepted Accounting Principles (GAAP): are the measurement rules used to develop the information in financial statements.

Goods Available for Sale: refers to the sum of beginning inventory and purchases (or transfers to finished goods) for the period.

Gross Profit (Gross Margin): is the net sales less cost of goods sold.

Historical Cost Principle: (or cost principle) requires assets to be recorded at historical cost that

Income before Income Taxes (Pretax Earnings): is revenues minus all expenses except income tax expense.

Income for Operations (Operating Income): equals net sales less cost of goods sold and other operating expenses.

Income Statement: (Statement of Income

Institutional Investors: are managers of pension

Internal Controls: are the processes by which a company safeguards its assets and provides reasonable assurance regarding the reliability of the company�s financial reporting

Inventory: is tangible property held for sale in the normal course of business or used in producing goods for services for sale.

Journal Entry: is an accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.

First-Out (LIFO) Method

Lenders (Creditors): include suppliers and financial institutions that lend money to companies.

Liabilities: are probable debts or obligations of the entity that result from past transactions

which will be paid with assets or services.

LIFO Liquidation: is a sale of a lower-cost inventory item from beginning LIFO inventory.

Lower of Cost or Market (LCM)

LIFO Reserve: is a contra-asset for the excess of FIFO over LIFO inventory.

Losses: are decreases in assets or increases in liabilities from peripheral transactions.

Lower of Cost or Market (LCM): is a valuation method departing from the cost principle; it serves to recognize a loss when replacement cost or net realizable value drops below cost.

Matching Principle: requires that expenses be recorded when incurred in earning revenue.

Material Amounts: are amounts that are large enough to influence a user�s decision.

Merchandise Inventory: includes goods held for resale in the ordinary course of business.

Carrying Value)

Net Realizable Value: is the expected sales price less selling costs (e.g.

Notes: (footnotes) provide supplemental information about the financial condition of a company without which the financial statements cannot be fully understood.

Notes Receivable: are written promises that require another party to pay the business under specified conditions (amount

Operating (Cash-to-Cash): is the time it takes for a company to pay cash to suppliers

Par Value: is the legal amount per share established by the board of directors; it establishes the minimum amount a stockholder must contribute and has no relationship to the market price of the stock.

Percentage of Credit Sales Method: bases bad debt expense on the historical percentage of credit sales that result in bad debts.

Periodic Inventory System: ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count.

Permanent (Real) Account: are the balance sheet accounts that carry their ending balances into the next accounting period

Perpetual Inventory System: a detailed inventory record is maintained

Post-Closing Trial Balance: should be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.

Prepaid Expenses: are previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred in using the asset to generate revenue.

Press Release: is a written public news announcement normally distributed to major news service.

Primary Objective of External Financing Reporting: is to provide useful economic information about a business to help external parties make sound financial decisions.

Private Investors: include individuals who purchase shares in companies.

Public Company Accounting Oversight Board (PCAOB): is the private sector body given the primary responsibility to issue detailed auditing standards

Purchase Discount: is a cash discount received for prompt payment of an account.

Purchase Returns and Allowances: are a reduction in the cost of purchases associated with unsatisfactory goods.

Raw Materials Inventory: includes goods held for resale in the ordinary course of business.

Relevant Information: can influence a decision; it is timely and has predictive and/or feedback value.

Reliable Information: is accurate

Replacement Cost: is the current purchase price for identical goods.

Retained Earnings: refers to the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business.

Revenue Principle: states that revenues are recognized when (1) goods or services are delivered

Revenues: are increasing in assets or settlements of liabilities from ongoing operations.

Sales (or Cash) Discounts: (cash discount) is a cash discount offered to encourage prompt payment of an account receivable.

Sales Returns and Allowances: is a reduction of sales revenue for return of or allowances for unsatisfactory goods.

Securities and Exchange Commission (SEC): is the US government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements.

Separate-Entity Assumption: states that business transactions are accounted for separately from the transaction of owners.

Specific Identification Method: identifies the cost of the specific item that was sold.

Statement of Cash Flow: (Cash Flow Statement) reports inflows and outflows of cash during the accounting period in the categories of operating

Statement of Retained Earnings: reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.

Stockholders� Equity (Owners� or Shareholders� Equity): (also called owners� equity or shareholder�s equity) is the financing provided by the owners and business operations.

T-account: is a tool for summarizing transactions effects for each account

Temporary (Nominal) Accounts: are income statement accounts that are closed to Retained Earnings at the end of the accounting period.

Time Period Assumption: indicates that the long life of a company can be reported in shorter time periods.

Transaction: is (1) an exchange of assets or services

Transaction Analysis: is the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation.

Trial Balance: is a list of all accounts with their balances to provide a check on the equality of the debits and credits.

Unearned (Deferred) Revenues: are previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned.

Unit-of-Measure Assumption: states that accounting information should be measured and reported in the national monetary unit.

Unqualified (Clean) Audit Opinion: is an auditor�s statement that the financial statements are fair presentations in all material respect in conformity with GAAP.

Work in Process Inventory: includes goods in the process of being manufactured.

Average Total Assets/Average Stockholder's Equity

Beginning RE + Net Income - Dividends = RE

Net Income/Average Stockholder's Equity

Net Income/Net Sales

Net Sales/Average Total Assets

Net Income/Average Shares Outstanding

Cost of Goods Sold Equation/Average Inventory

Gross Profit/Sales Revenue

Return on Equity - Return on Assets

Net Sales/Average Net Receivables

Net Income/Average Total Assets

Income Over or Understatement X PE Ratio = Over or Under Payment

Amount Saved/Amount = Interest Rate Annual Interest + 365 Days/Discount Period x Interest Rate