Accounting: Chapter 4-6

Reports revenues and expenses and calculates net income or net loss for the period.

Shows how Retained Earnings changed during the period due to net income (or net loss) and dividends.

Reports assets, liabilities, and stockholder’s equity as of the last day of the period.

Each asset and each liability are placed into a specific category or classification.

A measure of how quickly an item can be converted to cash.

Assets that will be converted to cash, sold, or used up during the next 12 months or within the business’s operating cycle if the cycle is longer than a year.

Assets that will not be converted to cash or used up within the business’s operating cycle or one year, whichever is greater.

The time span when:
1. Cash is used to acquire goods and services.
2. These goods and services are sold to customers.
3. The business collects cash from customers.

Investments in bonds (debt securities) or stocks (equity securities) in which the company intends to hold the investment for longer than one year.

Debt securities

Equity securities

Long-lived, tangible asset, such as land, buildings, and equipment, used in the operation of a business.

An asset with no physical form that is valuable because of the special rights it carries.

Must be paid either with cash or with goods and services within one year or within the entity’s operating cycle if the cycle is longer than a year.

Does not need to be paid within one year or within the entity’s operating cycle, whichever is longer.

A step in the operating cycle. Journalizes and posts the closing entries to set the balances of the following accounts to zero for the ext period:
1. Revenues
2. Expenses
3. Income Summary
4. Divdends

An account that is closed at the end of the period:
1. Revenues
2. Expenses
3. Income Summary
4. Dividends

An account that is not closed at the end of the period:
1. Assets
2. Liabilities
3. Common Stock
4. Retained Earnings

Transfers the the revenues, expenses, and dividends balances to the Retained Earnings account to prepare the company’s books for the next period.

Summarizes the net income (or net loss) for the period by collecting the sum of all the expenses (a debit) and the sum of all the revenues (a credit). Its ending balance (net income or net loss) is then transferred (closed) to the Retained Earnings account (the final account in the closing process.

Lists the balance of only Assets, Liabilities, Common Stock, and Retained Earnings accounts at the end of the period. Lists account balances after closing. (Permanent Accounts only)

The process by which companies produce their financial statements for a specific period.
1. Start with the beginning account balances.
2. Analyze and journalize transactions as they occur.
3. Post journal entries to the accounts.
4. Compute the unadjusted balance in each account, and prepare the unadjusted trial balance.
5. Enter the unadjusted trial balance on the worksheet, and complete the worksheet. (optional)
6. Journalize and post adjusting entries.
7. Prepare the adjusted trial balance.
8. Prepare the financial statements.
9. Journalize and post the closing entries.
10. Prepare the post-closing trial balance.

Measures the company’s ability to pay current liabilities form currents assets.
(Total current assets / Total current liabilities)

Switches the debit and the credit of a previous entry, is the exact opposite of the prior entry, and is dated the first day of the new period.

A business that sells merchandise, or goods, to customers.

The merchandise that a business sells to customers.

A merchandiser that buys goods from manufacturers and then sells them to retailers.

A merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to customers.

The individual or business form whom a company purchases goods.

The cost of the merchandise inventory that the business has sold to customers.

Net Sales Revenue / Cost of Goods Sold

Expenses, other than COGS, that are incurred in the entity’s major ongoing operations.

Keeps a running computerized record of merchandise inventory.

Requires businesses to obtain a physical count of inventory to determine quantities on hand.

A seller’s request for payment from the purchaser.

A discount that businesses offer to purchasers as an incentive for early payment.

The payment terms of a purchase or sale as stated in the invoice.

Sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable.

An amount granted to the purchaser as an incentive to keep goods that are not “as ordered.”

The buyer takes ownership (title) to the goods after the goods leave the seller’s place of business (shipping point). In most cases, the buyer pays the freight.

The buyer takes ownership (title) to the goods at the delivery destination point. In most cases, the seller also pays the freight.

The transportation cost to ship goods into the purchaser’s warehouse; thus, it is freight on purchased goods.

The transportation cost to ship goods out of the seller’s warehouse and to the customer; thus, it is freight on goods sold.

The amount that a merchandiser earns from selling its inventory.

A contra account. Reduction in the amount of cash received from a customer for early payment.

Decreases in the seller’s receivable from a customer’s return of merchandise or from granting the customer an allowance from the amount owed to the seller.

The amount a company has earned on sales of merchandise inventory after returns, allowances, and discounts have been taken out.

The loss of inventory that occurs because of theft, damage, and errors.

Groups all revenues together and then lists and deducts all expenses together without calculating any subtotals.

Contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.

What are the 2 categories of Operating Expenses?

Expenses related to marketing and selling the company’s goods and services.

Expenses incurred that are not related to marketing the company’s goods and services.

Measures the results of the entity’s major ongoing activities.

Revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense.

Expense incurred by a corporation related to federal and state income taxes.

Measures the profitability of each sales dollar above the cost of goods sold.

Purchases — Purchase Returns and Allowances — Purchase Discounts.

A business should use the same accounting methods and procedures from period to period.

A business’s financial statements must report enough information for outsiders to make knowledgeable decisions about the company.

A company must perform strictly proper accounting only for items that are significant to the business’s financial situation.

A business should report the least favorable figures in the financial statements when two or more possible options are presented.

A method of approximating the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory.

An inventory costing method based on the specific cost of particular units of inventory.

The first costs into inventory are the first costs out to cost of goods sold. Ending inventory is based on the costs of the most recent purchases.

The last costs into inventory are the first costs out to cost of goods sold. The method leaves the oldest costs—those of beginning inventory and the earliest purchases of the period—in ending inventory.

The total cost spent on inventory that was available to be sold during a period.

Based on the weighted average cost per unit of inventory that is calculated after each purchase.

Rule that merchandise inventory should be reported in the financial statements at whichever is lower — its historical cost or its market value.

Measures the number of times a company sells its average level of merchandise inventory during a period.

Measures the average number of days that inventory is held by a company.

What account closes Revenues?

How do we make Revenue accounts equal zero?

What account closes Expenses?

How do we make Expense accounts equal zero?

How do we make the Income Summary account equal zero?

How do we make the Dividends account equal zero?

Lists the closing entries.

The information system that measures business activities, processes the information into reports, and communicates the results to decision makers.

Focuses on providing information for external decision makers.

Focuses on providing information for internal decision makers.

Any person or business to whom a business owes money.

The private organization that oversees the creation and governance of accounting standards in the United States.

U.S. governmental agency that oversees the U.S. financial markets.

Accounting guidelines, currently formulated by FASB; the main U.S. accounting rule book.

An organization that stands apart as a separate economic unit.

A business with a single owner.

A business with two or more owners and not organized as a corporation.

A business organized under state law that is a separate legal entity.

A company in which each member is only liable for his or her own actions.

A person who owns stock in a corporation.

Stockholders own the business, but a board of directors—elected by the stockholders—appoints corporate officers to manage the business.

Corporations are separate taxable entities. They pay a variety of taxes not paid by sole proprietorships or partnerships.

Corporate earnings are subject to double taxation.