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ACCT 2331: FINAL EXAM
Cash equivalents |
highly liquid short term investments that can easily and quickly be converted into cash
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Cash |
most liquid asset
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Petty Cash |
cash fund kept on hand to pay for small expenditures
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Bank |
_____ side of reconciliation;
Add: Deposits in Transits
Subtract: Outstanding Checks
A/S: Bank errors
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Book |
_____ side of reconciliation
Add: Bank collections, Interest Revenue, EFT reciepts
Subtract: Service charges, NSF checks, EFT payments
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Short-term investments |
are also called marketable securities; can be easily converted into cash; most liquid after cash
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Short-term investments |
Trading securities, available-for-sale securities, held-to-maturity securities
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Trading Securities |
_________ are recognized (in the balance sheet) at market value
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Income Statement |
Dividend revenue and unrealized loss (or gains) are reflected in the _________.
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Accounts Receivable |
represent amounts collectible from customers; the third most liquid asset after cash and short-term investments
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Control account |
summarizes total amount due from all customers
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Notes recievable |
Also called promissory notes; written promise to pay a sum at the maturity date
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Direct write-off |
record the loss when the debtor is out of business (Could be years after revenue is recorded)
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Allowance method |
set up allowance account to record in the same period as revenue is recorded, consistent with matching principle; Estimates uncollectible amount and records amount in contra-account
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Uncollectible-account expense |
Also known as doubtful-account expense or bad-debt expense (recorded on income statement)
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Allowance for uncollectible accounts |
Also known as allowance for doubtful accounts or allowance for bad-debt (recorded on balance sheet)
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Percent of Sales |
(Estimated % uncollectible) * (Revenue) = Uncollectible Accounts Expense //used on income statement
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Aging-of-Recievables |
attempts to arrive at the most relevant and faithful representation of accounts receivable deriving a desired ending balance
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Acid (Quick) Test Ratio |
(Cash + Short-term Investments + Net current recievables) / (Total current liabilities)
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One day's sales |
Net sales / 365
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Day's sales in receivables |
Average receivables / One day's sales
//Average receivables = (Beg. Net Receivables + End Net Receivables) / 2
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Cost of Goods Sold |
Beg. Inv. + Net Purchases = Goods avail. for sale - End Inv. = _________
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Net Purchases |
Purchases - Purchases returns & allowances - Purchase Discounts + Freight In = _________
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Perpetual |
________ inventory system: software keeps a running record inventory; capable of providing timely information for decisions & control; inventory is still physically counted periodically (at least once a year) for accuracy
Debit COGS, Credit Inventory
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Periodic |
________ inventory system: inventory counted periodically; no running records of inventory; cannot provide timely & accurate information; used for inexpensive goods
Debit Accounts Receivable, Credit Sales Revenue
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Inventory Turnover |
_______ = Cost of Goods Sold / Average Inventory
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Gross Profit (Margin) |
________ = Revenue - Cost of Goods Sold
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Ending Inventory |
________ = # of units on hand * Cost per unit of inventory
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Gross Profit Percentage |
________ = Gross Profit / Net Sales
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Net Sales |
________ = Sales revenue - Sales return/allowances - Sales discounts
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Plant assets |
tangible assets with long term economic benefits (fixed or long-lived)
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Intangible assets |
carry long term economic benefits but they have no physical form (e.g. patents, copyrights, trademarks)
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Land |
_______ is not depreciated since its usefulness does not diminish over time
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Straight-line |
(Cost - Residual Value) / Useful Life in years = _______ depreciation per year
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Units-of-production |
(Cost - Residual Value) / Useful Life in units of production = _______ depreciation per unit of ouput
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Double-Declining-Balance |
(1 / Useful life in years) * 2 = _______ depreciation rate per year
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Consistency Principle |
Same accounting methods from year-to-year; allows investors to compare financial statements from one period to the next
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Disclosure Principle |
Financial statements should carry sufficient information for outsiders to make informed decisions
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Accounting Conservatism Principle |
Financial statements will paint a cautious and moderate picture of the company; when there is uncertainty in reporting decisions, company should report the side of caution
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Economic entity assumption |
an entity must be different from the financial interests of the company's owners.
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Monetary unit assumption |
An economic entity's accounting records include only quantifiable transactions and accounting records must be recorded using a stable currency.
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Going concern principle |
Financial statements are prepared under the assumption that the company will remain in business indefinitely. Therefore, assets do not need to be sold at fire-sale values, and debt does not need to be paid off before maturity.
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Materiality principle |
the requirements of any accounting principle may be ignored when there is no effect on the users of financial information.
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Internal control |
Separation of duties, proper authorization, adequate documents and records, physical control over assets and records (helps protect the company's assets), independent checks on performance (conducted by employees who did not do the work being evaluated)
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Accounting Equation |
Assets = Liabilities + Owner's Equity
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Compound entry |
when a single transaction affects three or more accounts
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Balance Sheet |
reports the amounts of assets, liabilities, and stockholders' equity at a specified moment
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Income Statement |
reports revenues, expenses, gains, losses, and net income during the period of time
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Statement of Cash Flows |
reports the changes in cash and cash equivalents during a period
of time according to three activities: operating, investing, and financing
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Paid-in capital |
amount received by the corporation from the original issue of its shares of common and preferred stock; contributed capital
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Retained earnings |
the cumulative earnings of the corporation since it began,
minus the cumulative dividends declared by the corporation.
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Treasury Stock |
a corporation's own stock that it repurchased; appears as a negative amount in stockholders' equity because it has a debit balance
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Current Ratio |
Current Assets / Current Liabilities
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Receivables Turnover Ratio |
Credit Sales / Average of Accounts Receivable
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Average Collection Period |
365 / Receivables Turnover Ratio
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Rate of return on total assets |
Net Income + Interest Expense / Average Total Assets
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Asset Turnover |
Net sales / Average Amount of Assets
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Comparability |
allows readers to compare different corporations' financial statements; enhanced by accounting standard
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GAAP |
generally accepted accounting principles; accounting standards including industry practices formulated by the Financial Accounting Standards Board
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Contra Account |
an account with a balance that is opposite of the normal balance; e.g. Accumulated Depreciation
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Closing entries |
entries to transfer the balances from the temporary accounts to the owner's (stockholders') equity account
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Temporary Accounts |
accounts that are closed at the end of the accounting year so that
they begin the new year with a zero balance (revenues, expenses, dividends)
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Permanent Accounts |
accounts whose balances carry forward to the next accounting year;
e.g. balance sheet accounts
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lower of cost or market |
an application of the conservatism concept; inventory is reported
at the lower of cost or replacement cost
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Carrying value |
A plant asset's cost minus its accumulated depreciation; book value
Also called ______.
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net 30 |
invoice amount (less any returns) is payable within 30 days of the invoice date
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2/10, n/30 |
2% of the invoice amount (less any returns) can be deducted if the amount is remitted within 10 days of the invoice date
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FOB destination |
title passes to buyer when received at the buyer's location
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FOB shipping point |
title passes to buyer when shipped from the seller's location
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Corporations |
Owned by shareholders, formed under state law, legally distinct from owners, limited liability, double taxation (corporate income is taxed & shareholders taxed on dividends)
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Stockholder's Equity |
_____ consists of Paid-in Capital or Contributed Capital & Retained earnings
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Transaction |
an event that affects the financial position of an entity and can be recorded reliably (has two sides; giving and receiving)
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Deferrals |
Business has paid or received cash in advance
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Debt Ratio |
Total Liabilities / Total Assets
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Common Stock |
Shares that have the basic rights of ownership in the corporation
"+": Voting rights, residual profits (after preferred dividends), & unlimited potential for increase in value
"-": Last in liquidation, no guaranteed return, high risk
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Preferred Stock |
Stock that offers owners different rights and preferential treatment
"+": Preference over common stock in liquidation (& in dividend payout), stated dividend, variety of features regarding dividends (cumulative dividends, when declared, paid for "missed" years)
"-": Subordinate to debt in liquidation, stated dividend can be skipped, possibility of no voting rights (versus common)
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Types of Preferred Stock |
Participating -provides increasing dividends when common dividends increase (most preferred stock are non-participating)
Callable - issuer has the right to redeem the stock at a fixed price (call price)
Convertible - the holder has the right to exchange the security for common stock at a specified price
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Authorized stock |
the total number of shares that may legally be issued under the corporation's articles of incorporation
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Issued stock |
the total number of shares company has issued to stockholders from the inception up through current date
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Outstanding stock |
shares in the hands of shareholders
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Dates of Dividends |
Declaration Date - date the board of directors declares a dividend
(On this date, the company accounts for Dividends Payable)
Date of Record - stockholders who hold the shares on this date are eligible for dividend payment (No entries)
Payment Date - dividends are paid to the shareholders of record (entries made for actual payment of dividends)
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Passed dividends |
Firms do not pay dividends on preferred stock; "in arrears"
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Stock split |
an increase in the number of shares (authorized, issued and outstanding) by reducing the par value of stock
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Stock dividend |
a proportional distribution of its own stock to stockholders
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Rate of return on Common Equity |
Net income (loss) - Preferred Dividends / Average Common Equity
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Earnings per share (EPS) |
the amount of a company's net income per share of its outstanding common stock
Net income - preferred dividends / Average number of shares of common stock outstanding
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Bonds |
long term debt of issuing company to multiple lenders
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Principal Amount |
Also known as face value, maturity value, par value
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Coupon Rate |
Interest rate stated in bond certificate that determines the amount of interest payment by the borrower typically stated as an annual rate (although most bonds pay interest semianually)
Also known as stated interest rate
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Effective Interest Rate |
The rate of return investors demand for loaning their money
Also known as market interest rate
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Market Price |
Bonds are bought and sold at ______.
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Present Value |
_____ critical points;
Computed using market interest rate (not coupon rate), the coupon rate is used to arrive at the cash amount of interest payment, we use semiannual periods by dividing annual terms by 2
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Discount |
If coupon rate is lower than market rate, then bond price is lower than par value which means that the bonds were sold at a _____.
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Premium |
If coupon rate is higher than market rate, then bond price is higher than par value which means that the bonds were sold at a _____.
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Liquidity |
The ease and quickness with which assets can be converted to cash
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Solvency |
The ability of a business to have enough assets to cover its liabilities
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Revenue Growth Percentage |
Total revenue (recent year) - Total revenue (previous year) = Revenue growth
(Revenue growth / Total revenue (previous year)) * 100 = ______
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Goodwill |
_____ = Price paid - total market values of the acquired firm's net assets
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Ledger |
Record of all financial transactions taking place within a business during a particular accounting cycle, ordered by chart of account number.
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Contingency |
A liability that exists because of a circumstance (such as a lawsuit) that may cause a business loss in the future depending on other events that have yet to happen (such as the outcome of a trial) and indeed may never happen
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Working Capital |
amount of current assets minus the amount of current liabilities as of specific date
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Enhancing Qualitative Characteristics |
Comparability, verifiability, timeliness, and understandability
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Trial Balance |
A list of all ledger accounts with their balances
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Statement of Cash Flows |
Operating activities are related to normal business processes, selling goods and services
Investing activities activities are related to investments in long-term assets, selling or purchasing plants
Financing activities are related to the business' sources of fund, e.g. issuing stocks or debts
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Operations |
Cash flows from _____;
Net Income + Depreciation expense - Increases in accounts receivable + Decreases in accounts receivable + Increases in accounts payable - Decreases in accounts payable = Cash flows from _____.
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Financing |
Cash Flow from _____;
borrowing and repaying money, distributing dividends, and issuing stock
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Investing |
Cash Flow from _____;
Includes cash from buying and selling noncurrent assets,
as well as cash generated (lost) from investments in securities.
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Close Temp Accts |
Answer: Close Temp Accts
Close revenues - debit each revenue account, credit retained earnings
Close expenses - debit retained earnings, credit each expense account
Close dividends - debit retained earnings, credit dividends
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Interest Payment |
Maturity Value of Bonds * Stated Interest Rate = _____.
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Interest Expense |
[Bond carrying amount] x [Market Interest Rate] x [Portion of the year] = ______.
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