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Accounting ch 3


Interim Financial Statements covering one, three or six months of activity
Fiscal year consisting of any 12 consecutive months
Natural Business Year companies that experience seasonal variations in sale normally end on Jan 31 which is when sales are lowest for the year,like Wal-Mart, Target and Macy's
Accrual Basis Accounting uses the adjusting process to recognize revenues when earned and expenses when incurred
Cash Basis Accounting recognizes revenues when cash is received and records expenses when cash is paid
What are the two main principles of accrual accounting? (1)Revenue Recognition Principle-revenue is recognized when earned, and (2) Matching Principle- expenses are recorded in same period as revenues they helped create
Financial Statements either... (regarding time) (1) cover a period of time:income statement, statement of retained earnings, statement of cash flow, or (2) are as of a specific date: balance sheet
Why do we need Adjustments? (adjustment process) (1)required b/c financial statements are prepared at a point in time&for a period of time.(2) Transactions don't match up exactly with accounting time periods.(3) so we use revenue recognition/matching principles to assign right portion to correct period
Deferrals- adjustment situations (cash paid/received BEFORE expense/revenue incurred/earned). 1. prepaid expenses 2. unearned revenue
Accruals- adjustment situations (cash paid/received AFTER expense/revenue incurred/earned). 1.Accrued Expense 2. Accrued Revenue
adjusting entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded. Each adjusting entry affects one or more income statement accounts and one or more balance sheet accounts-but never the cash account
plant assets a special category of prepaid expenses, which refers to long-term tangible assets used to produce and sell products and services. ex: buildings machines, vehicles and fixtures
Depreciation is the process of allocating the costs of these assets over their expected useful lives
Allocation expense spread across multiple time periods to match expenses to the revenues the asset helped to create
straight-line depreciation allocates equal amounts of the asset's net cost to depreciation during its useful life
contra account an account linked with another account, it has opposite normal balance, and it is reported as a subtraction from that other account's balance
book value of an asset, aka net amount. book value= asset cost - accumulated depreciation
What type of account is unearned revenue? and when is it recognized? Liability and it is recognized when firm has earned it-when service is provided
accrued revenues refers to revenues earned in a period that are both unrecorded and not yet received in cash(or other assets)
Income Statement includes... revenues-expenses= net income or net loss
Statement of Retained Earnings includes... requires net income or net loss from income statement. Beginning RE+ NI/L - dividends= ending RE
Balance Sheet requires retained earnings from statement of retained earnings. Classified Balance sheet (current&non-current)
Temporary Accounts are equity accounts used to accumulate activities that change equity. they are revenues,expenses, dividends and income summary
Permanent Accounts report on activities related to one or more future accounting periods. They are assets, liabilities, common stock and retained earnings
Income Summary is a temporary account (only used for the closing process)that contains a credit for the sum of all revenues(and gains) and a debit for the sum of all expenses(and losses).
Why do we close accounts? What is the result? 1. closing causes retained earnings(equity)to reflect the effects of current period operations 2. closing empties the temporary accounts so they are ready to accumulate activities of next period
How do we close accounts? we empty an account by entering an amount equal to its balance on the opposite side, this results in the account balance of zero.Goal is to put balance into RE, then close income summary and dividends to RE
Post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted.
unclassified balance sheet one whose items are broadly grouped into assets, liabilities, and equities
classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers
the operating cycle the time span from when cash is used to acquire goods and services until cash is received from its outputs. Most are less than one year
Current Assets are cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle. ex:cash, short-term investments,accounts receivable, short-term notes receivable, inventory, merchandise and prepaid expenses
Long-Term Investments notes receivable and investments in stocks and bonds are long-term assets when they are expected to be held for more than the longer of one year or the operating cycle
Plant Assets tangible assets that are both long lived and used to produce or sell products and services. ex: equipment,machinery, buildings and land
Intangible Assets are long-term resources that benefit business operations, usually lack physical form, and have uncertain benefits. ex:patents, trademarks, copyrights, franchises and goodwill
Current Liabilities obligations due to be paid or settled within one year or the operating cycle. normally settled with cash. ex:accounts payable, notes payable, wages payable, taxes payable, interest payable and unearned revenue
Long-Term Liabilities obligations not due within one year or the operating cycle. ex: notes payable, mortgage payable, bonds payable, and lease obligations
Equity the owner's claim on assets. Divided into two sections: common stock and retained earnings
Profit Margin (PM) measure of how much is left for profit out of each sales dollar. PM=Net Income/Net Sales
Current Ratio (CR) measure of current assets available to meet (pay) current liabilities (measure of riskiness) CR=Current Assets/Current Liabilities
Created by: asitov
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