users of financial accounting information
Government (SEC and IRD), customers, investors, creditors, labor unions
sources of generally accepted accounting principles
FASB- private-sector group that sets both broad and specific principles, IASB- independent group that issues IFRS, AICPA
role of the certified public accountant
taxes, consulting, book-keeping, audit and opinion
balance sheet
describes financial position at one point in time. describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time
assets
resources owned or controlled by a company expected to yield future benefits. cash, real estate, cars, machinery, equipment, investments, supplies, inventory, accounts receivable=claim to payment (bought on credit).
liabilities
claims by outsiders against assets. accounts payable, utilities payable, wages payable, loans payable, bonds payable. creditors claims on assets
owners' equity
owners' claims on assets (residual after creditors).
format of owners' equity depends on
type of entity
sole proprietorship
one owner. accounts on balance sheet: 1 account for all types of investment, owners equity, owners capital. unlimited liability, not a separate legal entity
partnership
2 or more owners, no limit. accounts on balance sheet: separate account for each partner, partner a capital and partner b capital. unlimited liability
corporation
business separate from owners who are the shareholders, limited liability. creditors only get assets invested in corporation, double taxation- corporate tax and shareholder level through dividends and capital gains tax. accounts on balance sheet: common s
owners have two ways of investing in a business
direct capital contribution and reinvestment of earnings/income (retained earnings)
direct capital contribution
buying stock when company issues it
reinvestment of earnings/income
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income statement
presents results of operations (profit or loss) for a period of time. reveneus-expenses=net income. describes a company's revenues and expenses along with the resulting net income or loss over a period of time
revenues
asset inflows from sales or services. sales or providing as service or interest or dividends. increase retained earnings and are generated from a company's earnings activities.
expenses
costs of generating revenues. wages, costs of goods sold, taxes utilities, interest, advertising. decrease retained earnings and are the costs of assets or services used to earn revenues.
statement of retained earnings
explains changes in retained earnings from net income or loss and from any dividends over a period of time.
statement of cash flows
explains change in cash for a period by describing its sources and uses. operations- where you want to generate cash-selling assets, investing, finance- long term borrowing. identifies cash inflows (receipts) and cash outflows (payments) over a period of
information provided to outsiders
qualitative- credit history, employment history, business plan, references. quantitative- income in income statements, balance sheet- collateral, other debts. credit history
retained earnings
income that hasn't been withdrawn by owners
FASB
private organization
IASB
international
AICPA
American Institute
financial statement order
first do income statement, second statement of retained earnings, third do balance sheet
journal entries
organized chronologically, economic effects of transactions coded using debits and credits. a complete record of each transaction in one place and shows debits and credits
ledger
organized by account, transactions posted from journal, depicted in accounting classes with t accounts
trial balance
simple listing of end balances in ledger. 1 list each account title and its amount in the trial balance, 2 compute the total debit balances and credit balances,3 verify total debit balances equal total credit balances
steps to journal
transaction analysis- what accounts are affected, journal- chronologically organized by date, posting- transfer data from journal to ledger, ledger- organized by account
what can affect cash buy not income
investment
cash does not correspond to
income
what financial statement is most important for investors
income statement- are they able to generate cash through operations
under GAAP income is determined under the what basis
accrual basis. cash basis income statements not acceptable under GAAP
cash basis
revenues and expenses are recognized / recorded when cash received or paid. cash basis net income is for a period is the difference between cash receipts and cash payments.
accrual basis
revenue recognized when earned and expenses recognized when incurred. uses the adjusting process to recognize revenues when earned and expenses when incurred (matched with revenues)
key aspects of accrual basis accounting
revenue recognition, expense recognition, gains and losses
revenue recognition for accrual basis
when earned- usually when sale is made or service provided, accompanied by inflow of assets usually in cash or receivables or reduction of liability
expense recognition for accrual basis
expenses matched against the revenues they helped produce. accompanied by outflow of assets and incurrence of liability and using up an asset
gains and losses for accrual basis
similar to revenues and expenses except that they do not relate to regular operations (sale of goods or provision of services). gains is an increase in income. losses is a decrease in income.
adjusting entries
needed at end of accounting period to properly state income on the accrual basis. 1 determine what the current account balance equals, 2 determine what the current account balance should equal, 3 record an adjusting entry to get from step 1 to 2
analyzing the income statement
return on sales, return on assets, return on equity. reports the revenues earned less the expenses incurred by a business over a period of time.
classified balance sheet
current assets and noncurrent assets
current assets
cash or items expected to be used or converted to cash within one year or one operating cycle whichever is longer. cash, A/R, inventory, prepaid expenses generally, short term investments.
noncurrent assets
assets not expected to be converted into cash or consumed during one year or the operating cycle, whichever is longer. plant asets, long term investments, intangible assets
current liabilities
obligations expected to be eliminated through the use of current assets or the creation of other current liabilities. A/P, accrued expenses- utilities, salaries, wages
long-term liabilities
obligations that will be settled beyond the operating cycle or one year, whichever is longer. mortgages payable, notes payable, bonds payable, lease obligations
operating cycle
time where acquires product, held in inventory, sale on credit, collect cash. time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services.
accrued expense
incurred but not yet paid for. accrued liabilities are amounts owed that are not yet paid. ex wages payable, taxes payable, interest payable. incurred but unpaid and unrecorded
accrued revenue
earned but not yet collected. unrecorded and not yet received in cash
liquidity
ability of firm to meet its short term obligations (current liabilities)
working capital
current assets-current liabilities
current ratio
current assets/current liabilities. short term creditors look at current ratio and investors when it is bad. possible to have too much case because unprofitable asset
sources of comparison for liquidity ratios
past years balance sheets, other similar companies
quick ratio or acid test
cash+A/R+short term investments (most liquid)/current liabilities
solvency
ability of firm to meet obligations over a longer period
steps in accounting cycle
journal entries, posting to ledger (t-accounts), unadjusted trial balance, adjusting entries, adjusted trial balance, preparing financial statements
closing entries
purpose- close nominal accounts and establish year end balance in owner's equity (retained earnings), procedures- close nominal accounts to income summary, close income summary to owner's equity, close withdrawals (dividends) to owner's equity
work sheet
simply a type of accountant's scratch pad not a formal accounting period
merchandise accounting
net sales-cost of goods sold=gross profit-expenses=net income
sales
differences between gross and net.
sales returns and allowances
returns refers to merchandise that customers return to seller after a sale. allowances refer to reductions in the selling price of merchandise sold to customers this can occur with damaged or defective merchandise that a customer is willing to purchase wi
cash discounts
gross vs. net method
trade discounts
a selling price equals list price minus a given percent called a ___
accounting for cost of goods sold
inventory systems, gross vs net purchases for periodic, freight costs
inventory system- periodic
relies on physical count at end of period to determine inventory on hand. updates at end of period
inventory system- perpetual
inventory records keep a running total of purchases and sales. continually updates accounting records for transactions
gross vs net purchases for periodic
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freight costs
seller records costs of shipping in a delivery expense account- transportation out or freight out. buyer- transportation in or freight in can be included as a cost of purchased merchandise by debiting inventory
closing entries for periodic
no cost of goods sold account to close so close pieces such as purchases and sales
periodic returns complication
goods never came out of inventory so don't need to be returned, debit sales returns and credit cash
sales returns and discounts have a what balance
debit
closing entries order
1 close I/S accounts with credit balance (not liabilities) revenues, 2 nominal accounts with debit balance expenses, 3 close inventory, 4 close income summary into retained earnings, 5 close dividends into retained earnings
external users of accounting information
lenders, shareholders, governments, consumer groups, external auditors, customers
internal users of accounting information
officers, managers, internal auditors, sales executives, budget officers, controllers
temporary or nominal accounts
all income statements accounts, dividends account, and income summary. opened at beginning of period and closed at the end. closing only applies to these accounts. revenues, expenses, dividends, income summary
permanent or real accounts
report on activities related to one or more future accounting periods. carry their end balances into the next period and consist of balance sheet accounts. assets, liabilities, common stock, retained earnings
closing process
1 identify accounts for closing, record and post the closing entries, prepare a post-closing trial balance. purpose- resets revenue, expense and dividend account balances to zero at the end of each period. helps summarize a period's revenues and expenses
accounting cycle summary
1 analyze transaction, journalize, post, prepare unadjusted trial balance, adjust, prepare adjusted trial balance, prepare statements, close, prepare post-closing trial balance, reverse (optional)
gross margin or profit
net sales-cost of goods sold