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Accounting Test Unit 1

accounting
the process of measuring economic activity of an entity in monetary terms and communicating results to users
four basic financial statements
balance sheet, income statement, statement of stockholder’s equity, and statement of cash flows
balance sheet
listing of a firm’s assets, liabilities, and stockholder’s equity as of a given date, usually the end of an accounting period
accounting equation
assets=liabilities+stockholder’s equity
assets
economic resources of a business that can be expressed in monetary terms. assets take many forms. cash, accounts receivable, supplies, furniture, and equipment
liabilities
obligations or debts that a business must pay in cash or in goods and services at some future time as a consequence of past transactions or events. accounts payable, notes payable, and unearned revenue
stockholder’s equity
refers to the ownership (stockholder) claims on the assets of the business. it represents a residual claim on a business assets; it is a claim on the assets of a business that remain after all liabilities to creditors have been satisfied. sometimes referred to as a business’s net assets
income statement
reports the results of operations for a business for a given time period, usually a quarter or a year. lists the revenues and expenses of the business.
sales revenue
increases to a company’s resources that result when goods or services are provided to customers. measured by the slue of assets received in exchange for the goods or services delivered.
expenses
decreases in a company’s resources from generating revenue, usually measured by the value of the assets used up or exchanged as a result of business’s operating activities. cost of goods sold, selling expenses, marketing expenses, admin expenses, interest expense, income taxes. two parts: contributed capital and earned capital
contributed capital
measure of the capital contributed by the stockholders of a company when they purchase ownership shares in the company. ownership shares are called common shares or common stock
earned capital
a measure of the capital that is earned by the company, reinvesting in the business, and not distributed to its stockholders– its retained earnings
retained earnings
increased when operations produce net income and decreased when operations produce a net loss. also decrease when a company pays a dividend to its stockholders. RETAINED EARNINGS BOP +net income – dividends = RET EARN EOP
accounting cycle
analyze, record, adjust, report, close
analyze
analyze transactions from source documents
record
journalize transactions and prepare unadjusted trail balance
adjust
journalize adjusting entries and prepare adjusted trial balance
report
prepare financial statements
close
journalize closing entries and prepare post-closing trial balance
prepaid expenses
allocating previously recorded assets to expenses, to reflect the proper expenses incurred during that period
unearned revenues
allocating previously recorded unearned revenue to earned revenue, to reflect revenues earned during the period
accrued expenses
recording operating expenses that have not yet been paid or recorded, to reflect expenses incurred during the period
accrued revenues
recording revenues that have not yet been received or recorded, to reflect revenue earned during the period
closing process
the process of transferring the balances in temporary accounts to retained earnings
current assets
will be cash within a year
liquidity
determined by the ability of an asset to be readily converted into cash.
long term assets
assets that the company does not expect to convert to cash within the next year or use up during the course of the normal operating cycle, whichever is longer. ppe
PPE
property, plant, and equipment, long term assets
intangible assets
include brand names, copyrights, patents, trademarks, that a company acquires. lack a physical presence but enable a company to generate revenue from its customers who recognize the quality associated with products bearing a brand name or trademark
current liabilities
consist of liabilities that must be settled within the normal operating cycle or one year, whichever is longer. (accts payable, accrued expenses payable, short term notes payable, and other current liabilities)
accounts payable
reflects the amts owed for inventory that was purchased on credit
accrued expenses payable
includes wages, utilities, interest, income tax, and property taxes that are legally owed by a company but which have not yet been paid.
short-term notes payable
represents amounts owed that are specified in a formal contract called a note
long-term liabilities
consist of debt obligations not due to be settled within the normal operating cycle or one year
single step income statement
sum of the expenses is subtracted from the sum of the revenues in a single step to arrive at net income
current ratio
current assets/current liabilities, measurement of liquidity. more than one means that a company has more cash and current assets than needed to pay off its current obligations, less than one means they don’t have enough.
debt to total assets ratio
total liabilities/total assets, how much debt for every dollar of cash that they have. the greater it is, the greater the company’s risk of not being able to pay its interest payments or principal repayments on a timely basis. the smaller, the opposite applies
profitability
one way to measure a company’s success, indicates whether or not a company is able to bring its products or services to the market efficiently, and whether it produces things that are valued by the market.
return on sales ratio
aka profit margin. net income/net sales

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