What are adjusting entries?
Entries made at the end of an accounting period under accrual accounting to ensure the proper recording of expenses incurred and revenues earned for the period
What is the accounting equation?
Assets = Liabilities + Owners' Equity
What is accrual accounting?
Accounting procedures whereby revenues are recorded when they are earned and realized and expenses are recorded in the period in which they help to generate revenues
What are are accruals?
Adjustments that reflect revenues earned but not received or recorded and expenses incurred but not paid or recorded
What are the four financial statements?
Income Statement, Balance Sheet, Statement of Owners' Equity, and Statement of Cash Flows
How are the four financial statements linked across time?
The balance sheet reports on a company's financial position at a point in time. The income statement, statement of owners' equity, and statement of cash flows report on performance over a period of time.
What is the balance sheet?
The balance sheet is a list of assets, liabilities, and owners' equity of a business entity as of a specific date, usually at the close of the last day of a month or year. Assets are usually listed first, followed by a list of liabilities and a section detailing owners' equity.
What is the income statement?
The income statement is a summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year. If total revenues for the period in question exceed total expenses, the result is net income (or net profit). If total expenses exceed total revenues, the result is a net loss.
What is the statement of owners' equity?
The statement of owners' equity reports on changes in key types of equity over a period of time. For each type of equity, the statement reports the beginning balance, a summary of the activity in the account during the year, and the ending balance.
What is the statement of cash flows?
The statement of cash flows reports the change in a company's cash balance over a period of time. The statement reports on cash inflows and outflows from operating, investing, and financing activities over a period of time.
What are the five key determinants of profitability?
1. Industry competition2. Bargaining power of buyers3. Bargaining power of suppliers4. Threat of substitution5. Threat of entry
What two characteristics must an asset possess in order to be reported on the balance sheet?
1. It must be owned or controlled by the company2. It must possess expected future economic benefits
List the five types of current assets.
1. Cash and cash equivalents2. Short-term investments3. Accounts receivable, net4. Inventories5. Prepaid expenses
List the three types of long-term assets.
1. Property, plant, and equipment (PPE), net2. Long-term investments3. Intangible, and other assets
List the five types of current liabilities
1. Accounts payable2. Accrued liabilities3. Unearned revenues4. Short-term notes payable5. Current maturities of long-term debt
What are accrued liabilities?
Obligations for expenses that have been incurred but not yet paid
Give three examples of accrued liabilities.
1. Wages earned but not yet paid2. Interest that is owing but has not been paid3. Income taxes (taxes due)
What are unearned revenues?
Obligations created when the company accepts payment in advance for goods or services it will deliver in the future; also called advances from customers, customer deposits, or deferred revenues
What are noncurrent liabilities?
Obligations due after one year
What are the two types of noncurrent liabilities?
1. Long-term debt (such as bonds and mortgages)2. Other long-term liabilities (such as pensions)
The equity section of the balance sheet consists of what two basic components?
1. Contributed capital2. Earned capital
What is contributed capital?
The net funding that a company received from issuing and reacquiring its equity shares; that is, the funds received from issuing shares less and funds paid to repurchase such shares
What is earned capital?
The cumulative net income (loss) that has been retained by the company (not paid out to shareholders as dividends)
What are the six types of stockholders' equity?
1. Common stock2. Preferred stock3. Additional paid-in capital4. Treasury stock5. Retained earnings6. Accumulated other comprehensive income or loss
How are retained earnings calculated?
Beginning retained earnings + Net income - Dividends = Ending retained earnings
The statement of cash flows is formatted to report cash inflows and outflows from what three primary business activities?
1. Operating activities2. Investing activities3. Financing activities
How do the net cash flows from operating activities (from the statement of cash flows) relate to other financial statements?
They relate to the income statement and to the current asset and current liabilities sections of the balance sheet.
How do the net cash flows from investing activities (from the statement of cash flows) relate to other financial statements?
They relate to the long-term assets section of the balance sheet.
How do the net cash flows from financing activities (from the statement of cash flows) relate to other financial statements?
They relate to the long-term liabilities and stockholders' equity sections of the balance sheet.
What is net working capital?
Current assets less current liabilities
What is net income?
The excess of a firm's revenues over its expenses
What is net loss?
The excess of a firm's expenses over its revenues
What are operating expenses?
The usual and customary costs that a company incurs to support its main business activities; these include cost of goods sold, selling expenses, depreciation expense, amortization expense, research and development expense, and taxes on operating profits
What is amortization?
The periodic writing off of an account balance to expense; similar to depreciation and usually refers to the periodic writing off of an intangible asset
What are nonoperating expenses?
Expenses that relate to the company's financing activities and include interest income and interest expense, gains and losses on sales of securities, and income or loss on discontinued operations
What is earned capital?
The cumulative net income (losses) retained by the company (not paid out to shareholders as dividends)
What are expenses?
Decreases in owners' equity incurred by a firm in the process of earning revenues
What are revenues?
Increases in owners' equity a firm earns by providing goods or services for its customers
What are retained earnings?
Earned capital, the cumulative net income and loss, of the company (from its inception) that has not been paid to shareholders as dividends
What are accrued expenses?
Expenses that are incurred and recognized on the income statement, even though they are not yet paid in cash; and example is wages owed to employees who performed work but who have not yet been paid
What are accrued revenues?
Revenues earned and recognized on the income statement, even though cash is not yet received; examples include accounts receivable and revenue earned under a long-term contract
How would you increase an asset account (debit or credit)?
How would you decrease an asset account (debit or credit)?
How would you increase a liability account (debit or credit)?
How would you decrease a liability account (debit or credit)?
How would you increase an equity account (debit or credit)?
How would you decrease an equity account (debit or credit)?
The revenue recognition principle prescribes that a company can recognize revenues provided that what two conditions are met?
1. Revenues are earned2. Revenues are realized or realizable
What is the matching principle?
An accounting guideline that states that income is determined by relating expenses, to the extent feasible, with revenues that have been recorded
What are the four main types of accounting adjustments?
1. Prepaid expenses2. Unearned revenues3. Accrued expenses4. Accrued revenues
Are prepaid expenses an asset or a liability?
Are unearned revenues an asset or liability?
Are accrued expenses an asset or liability?
Are accrued revenues an asset or liability?
Which method of presentation is more widely used for the statement of cash flows, the direct method or the indirect method?
The indirect method
What are the four steps of the accounting cycle?
1. Analyze transactions and prepare and post entries2. Prepare and post adjustments3. Prepare financial statements from adjusted trial balance4. Perform closing process
What is a general journal?
A journal with enough flexibility so that any type of business transaction can be recorded in it
What is a general ledger?
A grouping of all of an entity's accounts that are used to prepare the basic financial statements
What is a trial balance?
A list of the account titles in the general ledger, their respective debit or credit balances, and the totals of the debit and credit amounts
Are are closing procedures?
A step in the accounting cycle in which the balances of all temporary accounts are transferred to the retained earnings account, leaving the temporary accounts with zero balances
What is a debit?
An entry on the left side of any account
What is a credit?
An entry on the right side of any account
What is the indirect method?
A presentation format for the statement of cash flows that refers to the operating section only; that section begins with net income and converts it to cash flows from operations
What is the direct method?
A presentation format for the statement of cash flows that refers to the operating section only; it reports major classes of gross cash receipts and payments, as opposed to beginning with net income