ACC 221: CHAPTER 2
50 Cards in this Set
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3 Primary Financial Statements
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Balance sheet or statement of financial position
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Income statement or statement of earnings
Statement of cash flows
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Balance sheet or statement of financial position
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– reports the company’s assets, liabilities and owners’
equity at a particular date: What is the companies’ financial status?
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Income statement or statement of earnings
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reports the amount of net income earned by a company
during a period of time: What are the operating results for the period?
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Statement of cash flows
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reports the amount of cash collected and paid out by a company in the following
types of activities: operating, investing, and financing. How did the company obtain and use cash?
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Assets
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are economic resources that are owned or controlled by a company
normal balance- is a debit
Common assets – cash, accounts receivable, inventory and buildings or equipment
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Liabilities
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are obligations to pay cash, transfer other assets, or provide service to someone else
Common liability accounts – accounts payable, taxes payable, mortgages payable, unearned revenue
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accounting equation
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Assets=
Liabilities+Owners’ Equity
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Double entry accounting
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a system of recording transactions in a way that maintains the equality of the accounting
equation. The debits and the credits always have to equal for each transaction
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Classified balance sheet
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B/S where assets and liabilities are subdivided into current and long-term
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Current assets
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cash and other assets that can easily be converted to cash within a year
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Liquidity
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the ability of the company to pay its debts in the short term
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Long term assets
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assets that a company needs in order to operate its business over an extended period of time. (i.e.
buildings)
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Current liabilities
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liabilities expected to be paid within a year or the current operating cycle, whichever is longer
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Long-term liabilities
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liabilities that are not expected to be satisfied within a year (i.e. mortgage notes)
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Comparative financial statements
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F/S in which data for 2 or more years are shown together
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Limitations of the balance sheet
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– it does not reflect the current value or worth of a company. The values are reflected
at historical cost.
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Market value
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the value of a company as measured by the number of shares of stock outstanding multiplied by the
current market price of the stock: the current value of the business
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Book value
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the value of a company as measured by the amount of owner’s equity; assets less liabilities
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Income Statement
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report of a company’s performance for a particular period of time
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Revenues
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increase in a company’s assets from the sale of goods or services
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Expenses
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costs incurred in the normal course of business to generate revenues
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Net income (net loss)
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an overall measure of the performance of a company; equal to revenues minus expenses for the period
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Gross profit (gross margin
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the excess of net sales revenue over the cost of goods sold
Sales – Cost of goods sold = Gross profit (gross margin)
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Gains
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money made on activities outside the normal operations of a company (sell a building)
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Losses
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money lost on activities outside the normal operations of a company
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Earnings (loss) per share (EPS
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the amount of net income (earnings) related to each share of stock: computed by
dividing net income by the number of shares of stock outstanding during the period
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Statement of retained earning
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a report that shows the changes in retained earnings during a period of time
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Comprehensive income
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a measure of the overall change in a company’s wealth during a period: consists of net income
plus changes in investment value and exchange rates.
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Owners equity
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capital stock + retained earnings
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Retained earnings
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the amount of business’s earnings that have been retained in the business ( equals beg retained
earnings plus net income minus dividends = accumulated retained earnings at year end)
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Statement of Cash Flows
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report of a company’s cash inflows and outflows categorized into operating, investing, and
financing activities
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Operating activities
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those activities that are part of the day-to-day business of the company
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Investing activities
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those activities associated with buying and selling long-term assets- primarily the purchase and sale
of land, buildings, and equipment
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Financing activities
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those activities whereby cash is obtained from or repaid to owners and creditors. Cash from
owner’s investment, cash from loans etc
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Articulation
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the interrelationships among the financial statements
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Notes to the Financial Statements
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explanatory information considered an integral part of the financial statements
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4 general categories of notes
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1. Summary of significant accounting policy
2. Additional information about the summary totals found in the F/S
3. Disclosure of important information that is not recognized in the F/S
4. Supplementary information required by the Financial Accounting Standards Board (FASB) or the Secur…
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The External Audit
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...
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Audit report
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a report issued by an independent CPA to evaluate whether a company’s financial statements
fairly report its financial position, operating results, and cash flows in accordance with generally accepted
accounting principles (GAAP)
The audit report provides assurance that the financial s…
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Fundamental Concepts and Assumptions
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...
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Accounting mode
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the basic accounting assumptions, concepts, principles, and procedures that determine the
manner of recording, measuring and reporting a company’s transactions
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Entity
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an organizational unit (a person, partnership, or corporation) for which accounting records are kept and
about which accounting reports are prepared.
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Separate entity concept
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the idea that the activities of an entity are to be separated from those of the
individual owner
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Transaction
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exchange of goods or services, between entities as well as other events having an economic
impact on a business
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Arm’s length transaction
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business dealings between independent and rational parties who are looking out for
their own interests.
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Historical cost
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the dollar amount originally exchanged in an arm’s length transaction: assumed to reflect the
fair market value of an item at the transaction date
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Cost principle
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the idea that transactions are recorded at their historical costs or exchange prices at the
transaction date
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Monetary measurement
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the idea that money is the accounting unit of measurement and that only economic
activities measurable in monetary terms are included in the accounting model
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Going concern assumption
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the idea that an accounting entity will have a continuing existence for the
foreseeable future
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Assets
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ACC 221: CHAPTER 2