Acct Final

  1. Management accounting
    Objective is to provide relevant and timely information for managers' and employees' decision making needs, this information is often sensitive and not distributed outside the business
  2. Financial Accounting
    The area that provides External users with information

    To provide relevant and timely information for the decision-making needs of external users
  3. business entity concept
    a concept of accounting that limits the economic data in the accounting system to data related directly to the activities of the business
  4. Sole Proprietorship
    owned by one individual

    Advantages: easy to start and control because of only 1 owner

    Disadvantages: Unlimited personal liability for business liabilities
  5. Partnership
    owned by two or more individuals

    Advantages: more resources from multiple owners, simple formation

    Disadvantages: Unlimited personal liability for business debts for all owners
  6. Corporation
    organized under state or federal statutes as a separate legal table entity

    Advantages: Separate Legal Entity, Can raise more money for the company with the additional owners, Easy to sell interest, Owners not liable for business debts

    Disadvantages: Legal set-up costs, taxes can be higher
  7. Limited Liability Company (LLC)
    combines the attributes of a partnership and a corporation

    Advantages: Separate Legal entity, more favorable for tax purposes

    Disadvantages: legal set up costs, differences among state laws
  8. Cost Concept
    amounts are initially recorded in the accounting records at the cost or purchase price
  9. Assets
    resources owned by a business

    has to help us in the next period
  10. Liabilities
    Rights of the creditors, or debts of the business
  11. Stockholders' Equity
    The owners' equity in a corporation

    Retained Earnings + Common/Capital Stock
  12. Accounting Equation
    Assets = Liabilities + Stockholder's Equity
  13. Dividends
    Are distributions of earnings to stockholders
  14. Retained Earnings
    the stockholders' equity created from business operations through revenue and expense transactions
  15. Financial Statements
    Financial reports that summarize the effects of events on a business

    • Income Statement
    • Statement of Retained Earnings
    • Balance Sheet
    • Statement of Cash Flows
  16. Income Statement
    a summary of the revenue and expenses for a specific period of time, such as a month or a year

    Revenues - Expenses = Net Income

    Purpose: To show Net Income
  17. Statement of Retained Earnings
    A summary of the changes in the retained earnings for a specific period of time, such as a month or a year

    • Beginning RE
    • + Net Income
    • - Dividends
    • = Ending RE
  18. Balance Sheet
    A list of assets, liabilities, and stockholders' equity as of a specific date, usually at the close of the last day of a month or a year

    • Assets = Liabilities
    • + Stockholders Equity
  19. Statement of Cash flows
    A summary of the cash receipts and cash payments for a specific period of time, such as a month or a year

    How a company is using their cash

    3 types: Operating, Investing and Financing
  20. Management Discussion & Analysis (MD&A)
    Written by management to describe financial and non financial trending, a narrative about what happened during the period

    Not objective information because the report is prepared by management
  21. Notes to the Financial Statement
    Legend to the financial statements

    states the principles and methods used to account for transactions

    Qualitative and Quantitative

    provide additional descriptions and disclosures
  22. ADE
    Assets Dividends and Expenses

    are increased with a debit!
  23. Cash Method
    Revenue is when we receive cash, and expense is when we pay it

    Not used in this class
  24. Accrual Method
    GAAP requires that we use this

    Revenue is recognized when it is earned, and Expenses are recognized when incurred
  25. Revenue Recognition Concept
    Revenue is recognized when it is earned
  26. Matching Principle
    Recognize expenses in the same period which we used item to generate revenue
  27. Adjusting Entries
    The journal entries that bring the accounts up to date at the end of the accounting period

    Will always involve a revenue or an expense account and an asset of liability account
  28. Accrued Expense
    unrecorded expenses that have been incurred and for which cash has yet to been paid

    Ex: Electric Bill for the month of September, received in October, We used the electric to bring in revenue, must post this in September

    Expense and Liability
  29. Prepaid Expenses
    Are the Advance Payment of future expenses and are recorded as assets when cash is paid

    Ex: Paid $600 in advance for 6 months of insurance, at the end of each month, a portion needs to be moved over to an expense account because we needed the insurance to generate revenue

    Asset and expense
  30. Accumulated Depreciation
    How much we've charged to expense since we have owned the asset
  31. Depreciation Expense
    How much we've charged to expense this period
  32. Unearned Revenues
    Advance receipt of future revenues and are recorded as liabilities when cash is received

    Ex: Paid Down Payment on service in September, not expecting to perform service till October, Recorded in September as a liability(unearned revenue), at the end of October moved from unearned revenue to fees earned

    Liability and Revenue
  33. Accrued Revenue
    unrecorded revenues that have been earned for which cash has yet to be received

    Ex: Preformed service for customer in September, billed in October, we record the revenue in September because we have already earned it

    Asset and Revenue
  34. Book Value of an asset
    The amount we have yet to move to expense

    Cost of the asset minus the accumulated depreciation of the asset
  35. Asset (4 Categories) Classified Balance Sheet
    • Current Assets- Expected to be used up in one year
    • - Cash
    • - accts receivable
    • - supplies
    • - prepaid expenses
    • - inventory
    • Long Term Investments - more than one year
    • - Investments in Stocks or bonds
    • - Investments in subsidiaries
    • Property, Plant, and Equipment
    • - Land
    • - Equipment
    • - Vehicles
    • - Buildings
    • - (Accumulated Depreciation)
    • Intangible Assets
    • - Copyrights
    • - Trademarks
    • - Patents
  36. Liabilities (2 Categories) Classified Balance Sheet
    • Current Liabilities - Expected to be paid out within a year
    • - Accts payable
    • - wages payable
    • - unearned revenue
    • - Current Maturities of Log term debt
    • Long-term Liabilities - more than a year
    • - loans payable
    • - notes payable
    • - bonds payable

    Notes payable and Loans payable may be in either category depending on the term
  37. Closing the books
    Process of zeroing out all temporary accounts and transferring them to permanent accounts

    • Temporary accounts
    • Need to be reset every period, they only relate to that period
    • revenue and expense accounts

    • Permanent Accounts
    • Roll over from year to year
    • Assets, Liabilities, all balance sheet accounts
  38. Closing Process
    • 1. Zero Out Revenue Balances
    • 2. Zero Out Expense Balances
    • 3. Zero Out Income Summary
    • 4. Zero Out Dividends
  39. Income Summary
    a temporary account that is only used during the closing process
  40. Internal Financial Statement Users
    Marketing, Production, Human resources, Finance, Management
  41. External Financial Statement Users
    Investors, Creditors, Government, Competitors, Suppliers
  42. Correlation Between Financial Statements
    • Must Complete in Order
    • Net Income also appears on Statement of Retained Earnings
    • Retained Earnings Balance also appears on Balance Sheet
    • Ending Cash balance on Statement of Cash Flows must agree to Balance Sheet
  43. Double Entry Accounting
    Whenever a Transaction occurs, it must affect at least 2 accounts
  44. Accounting Cycle
    • 1. Transactions are analyzed and recorded in the Journal
    • 2. Transactions are posted to the ledger
    • 3. an unadjusted trial balance is prepared
    • 4. Adjustment data are assembled and analyzed
    • 5. Spread Sheet is prepared
    • 6. Adjusting entries are journalized and posted to the ledger
    • 7. An Adjusted trial Balance is prepared
    • 8. Financial statements are prepared
    • 9. Closing entries are journalized and posted to the ledger
    • 10. A post-closing trial balance is prepared
  45. Auditor's Report
    • independent party
    • Certified public accountant (CPA)
    • reports opinion if financial statements are prepared in accordance with GAAP
  46. Perpetual inventory System
    • Inventory balance and COGS is always updated
    • Journal Entries are required upon sale of goods
    • Improved inventory Control
    • Facilitated by bar code system
    • high cost to maintain
  47. Periodic inventory system
    • Inventory balance is updated at the end of the period
    • COGS is recorded at the end of the period
    • journal entries are required upon the end of the period
    • smaller companies
    • low-cost inventory
  48. Sales returns and allowances
    are granted by the seller to customers for damaged or defective merchandise

    contra revenue
  49. Sales discounts
    granted by the seller to customers for early payment of amounts owed

    contra revenue
  50. merchandise available for sale
    The cost of merchandise available for sale to customers calculated by adding the beginning merchandise inventory to net purchases
  51. Income from operations
    determined by subtracting operating expenses from gross profit
  52. Freight
    The cost to get the product to us

    Included in cost for the perpetual system
  53. New Accounts for Perpetual System
    • Merchandise inventory - A
    • Sales - R
    • Sales returns and allowances - CR
    • Sales Discounts - CR
    • Cost of Merchandise Sold - COGS - E
    • Delivery Expense - E
  54. Cost of Goods Sold

    The cost of finished goods available for sale minus the ending finished goods inventory
  55. New accounts for Periodic System
    • Purchases - E
    • Purchases returns and allowances - E
    • Purchases Discounts - E
    • Freight in - E
  56. Freight In
    Cost of transportation

    Periodic System
  57. FOB Shipping Point
    Ownership changes when goods are shipped
  58. FOB destination
    Ownership changes when they reach the buyers
  59. Consignment
    selling goods on someone else's behalf
  60. Internal Control
    defined as the procedures and processes used by a company to:

    • safeguard its assets
    • process information accurately
    • ensure compliance with laws and regulations
  61. Elements of internal control
    • control environment
    • risk assessment
    • control procedures
    • monitoring
    • information and communication
  62. control environment
    overall attitude of management and employees about the importance of controls, factors influencing a company's control environment are:

    • management's philosophy and operating style
    • the company's organizational structure
    • the company's personnel policies
  63. Control Procedures
    • 1. Competent personnel, rotating duties, and mandatory vacations
    • 2. separating responsibilities for related operations
    • 3. separating operations, custody of assets, and accounting
    • 4. proofs and security measures
  64. Issues regarding receivables
    • criteria to extent credit, run credit checks
    • establish credit terms
    • collection
    • factoring - sell receivables
  65. Direct Write-off method
    We right off an account when we know a particular customer cannot pay

    this is easy, mostly used for small companies

    Doesn't have the best results, doesn't follow the matching principle of GAAP
  66. Allowance Method
    We estimate the amount that is uncollectible when we think it's uncollectible

    Accounts are then valued at NRV- Net realizable Value - How much you think you're actually going to collect
  67. Conservatism
    Don't want to overstate our income or assets because it could mislead financial statement users
  68. Revenue Expenditures
    Costs that only benefit the current period

    • c:repairs and maintenance expense 300
    • d:cash 300
  69. Capital expenditures
    Costs that improve the asset or extend it's useful life

    • Asset improvements
    • c:delivery truck 5500
    • d:cash 5500

    • Extraordinary repairs
    • c:accum dep - forlift 4500
    • d:cash 4500
  70. Salvage Value
    residual value

    value of the asset at the end of it's life
  71. Straight Line Depreciation
    Annual Depreciation = (cost-salvage value)/life
  72. Unite of production Method
    find depreciation per unit = (cost - residual value)/total units of production

    depreciation expense = depreciation per unit * total units of production used
  73. Double declining balance method
    depreciation expense = (book value*2)/ life
  74. Depletion
    The cost of natural recourses to an expense account
  75. Amortization
    the amount of an intangible asset to transfer to expense
  76. Patents
    exclusive rights to produce and sell a good with one or more unique features

    amortization is computed using the straight-line method
  77. Copyright
    exclusive right to publish and sell literary, artistic or musical compositions
  78. Trademark
    a name, term, or symbol used to identify a business and its products

    these are not amortized
  79. Goodwill
    intangible asset of a business that is created from such favorable factors as location, product quality, reputation, and managerial skill, allows a business to earn a greater rate of return than normal

    this is not amortized
  80. Bond
    a form of an interest bearing note, like a note, a bond requires periodic interest payments with the face amount to be repaid at the maturity date
  81. Bonds issued at face amount
    • c: cash xxx
    • d: bonds payable xxx
  82. Paying interest on a bond
    • c: interest expense xxx
    • d: cash xxx
  83. Bonds issued at a discount
    • c: cash 96406
    • c: discount on BP 3594
    • d: Bonds payable 100000

    When the market interest rate is higher than the bond interest rate

    Amortizing a bond discount

    • c:interest expense xxx
    • d:Discount on BP xxx
  84. Bonds issued at a premium
    • c:cash 104000
    • d:Premium on BP 4000
    • d:Bonds payable 100000

    When the market interest rate is lower than the bond interest rate

    Amortizing a bond premium

    • c:Premium on BP xxx
    • d:interest expense xxx
  85. Bond Redemption
    Loss- acts like an expense, recorded if the price paid for the redemption is above the carrying amount

    gain- acts like a revenue, recorded if the price paid for the redemption is below the bond carrying amount

    gain/loss on redemption of bond
  86. Straight line method for amortizing bonds
    total of discount or premium/ # of periods
  87. Stock
    Shares of Ownership
  88. Outstanding Stock
    Stock remaining in the hands of the stockholders
  89. Common Stock
    when only one class of stock is issued, each share has equal rights
  90. Preferred stock
    One or more classes of stock with various preference rights, such as preference to dividends

    Either stated as dollars per share or as percent of par

    Cumulative preferred stock - has a right to receive regular dividends that were not declared paid in prior years, Noncummulative does not have this right
  91. Par
    The monetary amount printed on a stock certificate

    Stock is often issued at an amount that is different from par
  92. Cash Dividends
    A cash distribution of earnings by a corporation o its shareholders

    • Three conditions for cash dividends
    • 1. Sufficient retained earnings
    • 2. Sufficient cash
    • 3. formal action by the board of directors
  93. Date of declaration
    the date the board of directors formally authorizes the payment of the dividend

    • d: cash dividends
    • c: cash dividends payable
  94. date of record
    the date the corporation uses to determine which stockholders will receive the dividend

    Any investors that purchase stock before the date of record will receive the dividend
  95. date of payment
    the date the corporation will pay the dividend to the stockholders who owned the stock on the date of record

    • d: cash dividends payable
    • c: cash
  96. Stock Dividends
    a distribution of shares of stock to stockholders

    are normally only declared on common stock and are issued to common stockholders
  97. Treasury Stock
    stock that a corporation has issued and then reacquired

    • a corporation may purchase its own stock for a variety of reasons including:
    • 1. To provide shares for resale to employees
    • 2. to reissue as bonuses to employees
    • 3. to support the market price of the stock
  98. Restrictions of retained earnings
    board of directors may restrict the use of retained earnings for payment of dividends, they are classified as

    • 1. Legal - state laws may require this
    • 2. Contractual - a corporation may enter into a contract that requires restrictions
    • 3. Discretionary - A corps board of directors may restrict voluntarily
  99. Stock Split
    a process by which a corporation reduces the par or stated value of it's common stock and issues a proportionate number of additional shares
  100. Inventory Shrinkage
    When the physical inventory on hand at the end of the period is lower than then balance of merchandise inventory

    adjusting entry in this case

    • d: COGS
    • c: Merhcandis inventory
  101. FIFO
    First in First out

    Gives us a higher net income in a period of increasing prices
  102. LIFO
    last in first out

    gives lowest net income in a period of increasing prices
  103. Risk Assesment
    Management shoudl identify any risks(customer requirements, regulatory changes, changes in economic factors) analyze their significance, assess their likelihood of occuring, and take any necessary actions to minimize them
  104. Monitoring
    Monitoring the internal control systems is used to locate weaknesses and improve controls

    often includes observing employee behavior and the accouting system for indicators of control problems
  105. Limitations of internal Control
    • 1. the human element of controls - human error can occur
    • 2. cost benefit considerations - cost should not exceed their benefits
  106. Bank reconciliation
    an analysis of the items and amounts that result in the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger

    • Balance per bank
    • + deposits in transit
    • - outstanding checks
    • +/- bank errors

    • Balance per books
    • + interest
    • + deposits straight to the bank
    • - NSF checks, from customers
    • - bank service charges
    • +/- book errors
  107. Payroll
    • Employee's costs
    • c: wages exp
    • d: cash
    • d: state inc tax pay
    • d: federal inc tax pay
    • d: FICA pay

    • Employer's costs
    • health insurance
    • works comp ins
    • SUTA - state unemployment tax
    • FUTA - Federal unemployment tax
    • retirement plan
    • social security and medicare tax
  108. Contingent Liabilities
    Not certain Liablities

    • remote - 1% chance we'll lose, don't do anything
    • reasonably possible we'll lose, disclose in notes of financials
    • Probable- $ estimate amount (c: exp, d: liab)
    • probable- no estimate, disclose in notes
Card Set
Acct Final