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Working Capital,"Working capital is defined as current assets minus current liabilities. Therefore, a company with current assets of $43,000 and current liabilities of $38,000 has working capital of $5,000.",This is a cheet sheet Question
Current Assets,"Current assets are a company’s resources that are expected to be converted to cash within one year of the balance sheet’s date. (However, in industries having operating cycles that are longer than one year, the current assets are the resources that are expected to be converted to cash within the operating cycle.) Current assets are usually listed in the general ledger and on the balance sheet in the order in which they normally turn into cash. This is referred to as their order of liquidity. The typical order is shown here: •	 Cash (currency, checking account balances, money received but not yet deposited, petty cash) •	 Cash equivalents •	 Temporary investments •	 Accounts receivable •	 Inventory •	 Supplies •	 Prepaid expenses",This is a cheet sheet Question
Current Liabilities,"Current liabilities are the company’s obligations that will come due for payment within one year of the balance sheet’s date. (In industries with operating cycles that are longer than one year, the current liabilities are the obligations that will come due within the operating cycle.) Current liabilities are not listed in the order in which they need to be paid. However, it is common to see the current liabilities presented on the balance sheet in the following order: For personal use by the original purchaser only. Copyright © AccountingCoach®.com. •	 Short-term notes payable •	 Accounts payable •	 Accrued wages and other payroll related expenses •	 Other accrued expenses/liabilities (utilities, repairs, interest, etc.) •	 Customer deposits •	 Deferred revenues •	 Others If a current liability is assured of being replaced with a long-term liability, it should be reported as a long-term liability.",This is a cheet sheet Question
Operating Cycle,"If a company sells goods (products, component parts, etc.) its operating cycle is the time it takes for a company’s money to purchase the inventory items and for the money from their sale to return to the company’s checking account. To illustrate, assume a company purchases goods for inventory and it takes the company 120 days to sell the inventory to customers who are given trade credit terms. Next, assume that the company collects the customers’ money 45 days after the sale. This company’s operating cycle is 165 days as shown here: Since the operating cycle of 165 days is less than one year, a current asset for this company will be a resource that is expected to turn to cash within one year of the date shown in the heading of the balance sheet. A current liability will be an obligation that is due within one year of the balance sheet’s date (unless there is assurance that the liability will be replaced with a long-term liability). For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Liquidity,"Liquidity refers to a company’s ability to pay its bills as they come due. In accounting terms, we might say that liquidity is a company’s ability to convert its current assets to cash before the current liabilities must be paid. Current assets are reported on a company’s balance sheet in their order of liquidity. Since cash is the most liquid asset, it will appear first followed by the current assets that can be quickly turned into cash: cash equivalents, temporary investments, and accounts receivable. The remaining current assets will follow in this order: inventory, supplies, and prepaid expenses. If a company has most of its current assets in inventory, the company may have a large amount of working capital but may not have the liquidity necessary to pay its current liabilities when they come due. In contrast, another company with a small amount of working capital with little inventory may have the liquidity it needs. (This can occur if a company sells high-demand products through its online website and the customers pay with credit cards when ordering.) Thus, the speed at which a company’s current assets can be converted to cash is as important as the amount of working capital. A company’s liquidity is also influenced by the credit terms granted by its suppliers. For example, one company may have to pay cash when it receives goods from its suppliers, while another company is permitted to pay 30 or 60 days after receiving the goods. If a company is permitted to pay its suppliers by using its business credit card, it will mean the company’s cash payment can be delayed for 27 to 57 days. With accrual accounting, credit terms and paying with a business credit card will help the company’s liquidity but will not increase the amount of working capital. Lastly, but perhaps most importantly, a company’s liquidity is affected by the profitability of its business operations. If a company has operating profits because its revenues are greater than its expenses, the company’s working capital and liquidity is more likely to increase. (If the company has operating losses, the company’s liquidity is more likely to decrease.) Operating profits also make it easier for a company to obtain money from long-term lenders or investors in order to increase the company’s working capital and liquidity. On the other hand, operating losses make it difficult to obtain such financing. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Working Capital Ratios,"In addition to calculating the amount of working capital (current assets minus current liabilities), there are two financial ratios directly associated with working capital and liquidity: •	 Current ratio (sometimes referred to as the working capital ratio) •	 Quick ratio (also known as the acid-test ratio) The current ratio is the total amount of current assets divided by the total amount of current liabilities. The quick ratio is the amount of “quick” assets divided by the total amount of current liabilities. The quick assets are cash, temporary investments, and accounts receivable. To illustrate the calculations, assume a company has the following current assets: Current assets Cash $   24,000 Temporary investments 6,000 Accounts receivable 100,000 Inventory 198,000 Supplies 8,000 Prepaid expenses 4,000 Total current assets $ 340,000 Also assume that the total amount of the company’s current liabilities is $200,000. Based on our assumptions, the company has the following metrics: Working capital = $140,000 ($340,000 minus $200,000) Current ratio = 1.7 to 1 ($340,000 divided by $200,000) Quick ratio = 0.65 to 1 ($130,000* divided by $200,000) *The quick assets consist of cash, temporary investments, and accounts receivable For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Accounts Receivable,"Accounts receivable result from selling goods (or providing services) and allowing the customers to pay at a later date (perhaps in 10, 30, or 60 days). At the time of the sale, the seller transfers ownership of the goods to the customer and in turn becomes one of the customer’s unsecured creditors until the money is collected. This means the seller is at risk for a potential loss if the customer fails to pay. Therefore, it is imperative that the seller be certain that potential and current customers are credit worthy before shipping goods on credit. To avoid the risk of such a loss, the seller could require some of its potential and current customers to pay when the goods are delivered or to pay with a business credit card at the time of delivery.",This is a cheet sheet Question
Accounts Receivable Ratios,"There are two ratios/metrics that are calculated for reviewing a company’s success in collecting its accounts receivable: •	 Accounts receivable turnover ratio (or receivables turnover ratio) •	 Average collection period (or days’ sales in accounts receivable) The accounts receivable turnover ratio is calculated by dividing a company’s net credit sales for a year by the average balance in accounts receivable during the year. Outside of your own company, the financial information may not be available. Here are some examples: •	 A company may not distribute its financial statements to outsiders •	 Only total sales are reported. Credit sales are not listed seperately. •	 Sales took place throughout the year, but the amount of inventory is the amount at the final moment of the accounting year •	 The inventory at the final moment of the year may be much smaller than the inventory throughout the year To calculate the accounts receivable turnover ratio and the average collection period, let’s assume that in the most recent year all of a company’s sales were credit sales in the amount of $2,000,000 For personal use by the original purchaser only. Copyright © AccountingCoach®.com. and its accounts receivable had an average balance throughout the year of $250,000. Given these assumptions, the company will have: Accounts receivable turnover ratio = $2,000,000 of net credit sales divided by the average accounts receivable balance of $250,000 = 8 times. Average collection period = 360 or 365 days divided by the accounts receivable turnover ratio of 8 times = 45 or 45.6 days.",This is a cheet sheet Question
Inventory,"If a company sells goods (products, component parts, etc.), it is common for inventory to be its largest current asset. Having sufficient inventory is necessary to serve and retain customers, but too much inventory can result in excessive expenses (including potential losses if any of the goods become obsolete). Slow-moving inventory may also cause a liquidity problem since the company’s cash is now sitting in the warehouse as inventory. The inventory needs to be sold for the company to have the cash to pay its current liabilities.",This is a cheet sheet Question
Inventory Ratios,"The following ratios are often computed to see how a company has managed its inventory: •	 Inventory turnover ratio •	 Days’ sales in inventory The inventory turnover ratio is best calculated by using the following amounts from the most recent year: the cost of goods sold divided by the average balance in inventory. The cost of goods sold is used because typically the inventories are recorded and reported at cost (not at selling prices). The average inventory amounts during the year are known to people within a company, but outsiders may know only the amount as of the final moment of the accounting year. Since U.S. companies often end their accounting years when their business activity is slowest, the inventory cost reported on their balance sheets may be less than the average of the inventory amounts throughout the year. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. To illustrate the inventory ratios, we will assume that a company’s cost of goods sold for the most recent year was $1,440,000 and that the average amount of inventory throughout the same year was $480,000. Given these assumptions, the company will have: Inventory turnover ratio = the cost of goods sold of $1,440,000 divided by the average inventory of $480,000 = 3 times. Days’ sales in inventory = 360 or 365 days divided by the inventory turnover ratio which was 3 times = 120 or 121.7 days. These metrics are averages because sales do not occur evenly throughout the year. In addition, some inventory items may turn over quickly while some items are rarely sold.",This is a cheet sheet Question
Financial Ratios in General,"When financial ratios are calculated using the amounts reported on a company’s financial statements, the ratios reflect the transactions that occurred perhaps a year ago. It is possible that today the demand for some products has changed, new competitors entered the market, economic conditions changed, etc. Financial ratios allow a company to track the trend of its own ratios over several years. It could also be helpful when comparing one company’s financial ratios to those of another company within the same industry. However, the ratios may be of no value when they are compared to the ratios of companies in different industries. Within a company, the financial ratios based on the prior year’s summarized amounts are less valuable than current, detailed information. For example, the accounts receivable turnover ratio based on last year’s amounts is less valuable/relevant than an aging of today’s accounts receivable. Similarly, an inventory turnover ratio based on last year’s summarized amounts is less valuable than a report comparing the current quantities of every inventory item on hand with the quantity sold in the recent past. This report will expose the inventory items not turning over.",This is a cheet sheet Question
Cash Flow Statement,"Since liquidity depends on a company having the cash to pay its obligations when they come due, insights can be gained from reading a company’s statement of cash flows (SCF or cash flow statement). While the SCF may be difficult to prepare, you can read and understand it with a little coaching. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. The SCF organizes a company’s main cash inflows and cash outflows into three major sections: 1.	 Cash flows from operating activities which typically begins with net income (based on the accrual method of accounting) and then lists the adjustments necessary to arrive at the cash from its business operations. The adjustments include the adding back of noncash expenses such as depreciation, and the changes in the working capital accounts (except for short-term loans which are included as part of financing activities). 2.	 Cash flows from investing activities which includes the purchase and/or sale of long-term assets. 3.	 Cash flows from financing activities which includes borrowing and/or repaying of short- term and long-term debt, issuing and/or repurchasing of capital stock, declaring of dividends to stockholders, and draws made by an owner.",This is a cheet sheet Question
Cash flows from operating activities,"We will focus on the first section of the SCF, cash flows from operating activities, which shows the adjustments made to convert the working capital accounts (except for short-term loans payable). The adjustments involve the changes in the balances at the end of the year minus the balances from one year earlier. Let’s clarify this with some examples using hypothetical amounts: •	 If the balance in accounts receivable was $50,000 at the end of the year and was $38,000 one year earlier, the accounts receivables increased by $12,000. An increase in accounts receivable is not good for the company’s liquidity since less was collected than was sold. Since this increase in accounts receivables is unfavorable or negative for the company’s cash balance and its liquidity, the $12,000 will be reported in parentheses: (12,000). •	 If the balance in inventory was $250,000 at the end of the year and was $270,000 one year earlier, the inventory had decreased by $20,000. A decrease in inventory indicates that for the year the company did not have to buy $20,000 of the goods that it had sold. This is good for a company’s liquidity. Since a decrease of $20,000 in inventory is favorable or positive for the company’s cash balance and its liquidity, the decrease in inventory will be reported on the SCF as a positive amount: 20,000. •	 If accounts payable had a balance of $60,000 at the end of the current year and was $53,000 one year earlier, it indicates that accounts payable increased by $7,000 during the year. An increase in accounts payable is good for the company’s cash balance and liquidity since less cash was paid out. Since the increase in accounts payable (or other current liabilities) is favorable or positive for the company’s cash balance and liquidity, the increase in accounts payable will be reported on the SCF as a positive amount: 7,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. From these three examples, you should remember the following when reading the SCF: •	 An amount in parentheses is not good, is unfavorable, is negative for a company’s cash balance and liquidity •	 A positive amount is good, is favorable, is positive for a company’s cash balance and its liquidity",This is a cheet sheet Question
Operating Cash Flow Ratio,"A financial ratio for assessing a company’s working capital and liquidity that is based on the statement of cash flows is: Operating cash flow ratio = net cash flows from operating activities divided by the average amount of current liabilities throughout the year Since the net cash provided by operating activities is likely the amount from the SCF of a recent year, it needs to be divided by the average amount of current liabilities throughout the same year. (Using only the amount of current liabilities at the final instant of one or two accounting years may not be representative of the amounts during the year.) To illustrate this ratio, let’s assume that a company’s SCF for the recent year reported net cash provided by operating activities of $200,000. For the same year it was determined that the average amount of current liabilities during the year was $300,000. Inserting those amounts into the formula, we have: Operating cash flow ratio = net cash provided by operating activities divided by average current liabilities = $200,000 divided by $300,000 = 67%, or 0.67:1, or 0.67 to 1",This is a cheet sheet Question
Reasons Why Liquidity Will Decrease,"Below is a list of reasons why a company’s liquidity may decrease. The list is organized according to the three sections of the statement of cash flows. Since these items decrease the company’s liquidity, they can be thought of as being unfavorable or as having a negative effect on the company’s liquidity. They are also reported in parentheses on the statement of cash flows. Operating activities Net loss from the business operations Accounts receivable increased For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Inventory increased Prepaid expenses increased Accounts payable decreased Investing activities Capital expenditures (purchase of equipment, etc.) Purchase of long-term investments Financing activities Repayment of short-term and long-term borrowings Declaring dividends on capital stock Purchase of treasury stock Draws by an owner",This is a cheet sheet Question
Reasons Why Liquidity Will Increase,"The following are reasons why a company’s cash and liquidity could increase. The list is also arranged according to the three sections of the statement of cash flows. Since these items are increasing the company’s liquidity, they can be thought of as being favorable or having a positive effect on the company’s liquidity. The amounts for these items will appear on the statement of cash flows as positive amounts. Operating activities Net income from the business operations Accounts receivable decreased Inventory decreased Prepaid expenses decreased Accounts payable increased Investing activities Proceeds from the sale of assets used in the business Proceeds from the sale of long-term investments Financing activities Short-term and long-term borrowings Proceeds from issuing shares of common and preferred stock Proceeds from sale of treasury stock Additional investments by an owner To learn more about the statement of cash flows see our separate topic Cash Flow Statement. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Stockholders’ Equity,"A business corporation’s owners are referred to as stockholders or shareholders because they hold stock certificates which provide evidence of their share of ownership in the corporation. Hence, the balance sheet of a business corporation will report the following: Assets = Liabilities  +  Stockholders’ Equity Stockholders’ equity (along with corporation’s liabilities) can be viewed as: •	 Sources of a corporation’s assets, and/or •	 Claims against the corporation’s assets.  (However, the liabilities (creditor’s claims) come ahead of the stockholders’ claims.) The stockholders’ equity section of the balance sheet consist of the following components: •	 Paid-in capital   (or contributed capital) •	 Retained earnings •	 Accumulated other comprehensive income •	 Treasury stock   (however, this is a deduction/negative amount) The changes which occurred during an accounting year are reported in the annual statement of stockholders’ equity, which is one of the five required external financial statements.",This is a cheet sheet Question
Paid-in Capital or Contributed Capital,"Paid-in capital or contributed capital is the first component listed in the stockholders’ equity section of the balance sheet. It includes the amounts that the corporation received from investors when the corporation issued its shares of capital stock. (Capital stock is used to describe both common and preferred stock.) All corporations issue common stock, but a few will also issue preferred stock. If preferred stock is issued, the amounts received will be reported separately from the amounts received for its common stock. If any of the shares of stock have par values or stated values, those amounts are listed separately. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Common Stock Common stock is the capital stock that is issued by all U.S. business corporations. (Relatively few corporations issue preferred stock in addition to the common stock.) The holders of common stock: •	 Elect the corporation’s directors •	 Vote on significant issues such as its acquisition by another corporation •	 Receive dividends if declared by the board of directors Depending on state laws, each share of common stock could have a par value, a stated value, or neither. If the shares have a par or stated value, that amount is reported separate from the amount in excess of the par or stated value. When approved by a corporation’s board of directors, the common stockholders will receive cash dividends based on the number of shares of common stock owned.",This is a cheet sheet Question
Preferred Stock,"In addition to common stock, a few corporations also issue preferred stock. These shares have a preferential treatment as far as dividends and liquidation. This means that stockholders of the preferred shares of stock must receive their dividends before the corporation can pay a dividend on its common stock. The dividend for the preferred stock is based on its stated dividend rate and the par value of the preferred stock. For example, each share of 6% preferred stock with a par value of $100 must be paid its $6 per year dividend before the common stockholders will receive any dividend. (Only participating preferred stock will receive more than the stated dividend.) When the stock is cumulative preferred, any past omitted preferred dividends plus the preferred stock’s current dividend must be paid before a dividend can be given to the common stockholders. Any past omitted dividend on the cumulative preferred stock is known as a dividend in arrears and it must be disclosed in the notes to the financial statements.",This is a cheet sheet Question
Par Value or Stated Value,"The par value or stated value of shares of stock is a legal amount (based on state laws) that must be recorded and reported separately from the amounts received in excess of the par or stated value. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. The par value of a corporation’s preferred stock (if any is issued) will determine the dividends for the preferred stockholders. For example, a 6% $100 par value preferred stock will receive a $6 per year dividend. However, the shares of common stock often have no par value or a very small par value.",This is a cheet sheet Question
Retained Earnings,"Generally, retained earnings are the cumulative amounts of the corporation’s earnings or net income since the corporation began minus the cumulative amounts of dividends that the corporation declared since the corporation began. The amount of retained earnings is reported separately in the stockholders’ equity section of the balance sheet and must be a positive amount (a credit balance) in order for the corporation to declare and pay dividends to its stockholders.  For successful corporations the amount of retained earnings is often many times the amount of its paid- in capital.",This is a cheet sheet Question
Accumulated Other Comprehensive Income,"Accumulated other comprehensive income is a separate line within the stockholders’ equity section of the balance sheet. While retained earnings reports the cumulative amounts of earnings or net income, accumulated other comprehensive income reports the cumulative amount of the other comprehensive income or loss. (Other comprehensive income involves gains or losses on hedging transactions, foreign currency translation adjustments, and a few others.)",This is a cheet sheet Question
Treasury Stock,Treasury stock is usually the amount that a corporation has paid to repurchase some of its own shares of stock (and has not reissued or retired the shares). The corporation’s cost is debited to the general ledger account Treasury Stock. This debit balance will appear as a subtraction near the end of the stockholders’ equity section of the balance sheet. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Cash Dividend,"A cash dividend is a distribution of cash by a corporation to its stockholders. The dividend amount will reduce the balance in the account Retained Earnings (as well as reduce the corporation’s cash). In order for a corporation’s board of directors to declare a cash dividend, the Retained Earnings must have a positive, credit balance.",This is a cheet sheet Question
Stock Dividend,"A stock dividend is a distribution of additional shares of a corporation’s own shares of stock to its existing stockholders. For instance, if a corporation declares a 5% common stock dividend and the corporation has 100,000 shares of common stock outstanding, the corporation will be issuing and distributing 5,000 additional shares of common stock. After the stock dividend there will be 105,000 shares outstanding (instead of 100,000) but the total amount of the corporation’s assets, liabilities, and stockholders’ equity do not change. The journal entry to record the declaration of a stock dividend will usually debit Retained Earnings for the market value of the new shares and will credit the paid-in capital accounts for the same total amount.",This is a cheet sheet Question
Stock Split,"A stock split reduces the market value per share of common stock by increasing the number of shares outstanding. If the market value of a share of common stock was $60 before a 2-for-1 stock split, the market value per share of common stock should be approximately $30 after the stock split. If the corporation had 300,000 shares of $10 par value common stock outstanding and it declares a 2-for-1 stock split, the corporation will have 600,000 shares of $5 par value common stock after the stock split. No journal entry is necessary since the total amounts of the stockholders’ equity are unchanged. A memo is entered to indicate the stock split and to note the new total number of common shares and the new par value per share.",This is a cheet sheet Question
Declaration Date,The declaration date is the date that the board of directors declares a dividend to the corporation’s stockholders. The declaration date is used to record a credit to the liability account Dividends Payable and a debit to the account Retained Earnings (or the temporary account Dividends). For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Payroll Accounting,"Payroll accounting involves the recording of a company’s: •	 Gross wages, salaries, commissions, bonuses, overtime premium, sick pay, holiday pay, and vacation pay that are earned by the employees •	 Payroll taxes which include 1) the taxes that are withheld from the employees’ pay, 2) payroll taxes that are paid solely by the employer, and 3) the payroll taxes that are withheld from the employees’ gross pay and also paid by the employer •	 Payments to employees for their net pay (the amount remaining after withholdings for taxes and other amounts are deducted from each employee’s gross pay) •	 Remittance of withholdings and the employer’s payroll obligations to governments and others •	 Costs of fringe benefits provided by the employer (medical insurance, dental insurance, life insurance, disability insurance, and retirement plans) •	 Workers’ compensation insurance, which covers medical claims and lost wages when an employee cannot work because of a work-related injury",This is a cheet sheet Question
Wages or Gross Wages,"Wages or gross wages usually refers to the pay earned by hourly-paid employees. These employees are paid hourly rates of pay for the number of hours worked. If these employees have a work week that begins on Sunday and ends on Saturday, their pay date is typically the Thursday or Friday following the work week. This allows the employer a few days to prepare the hourly-paid employees’ paychecks. (The term gross wages emphasizes that the amounts are before withholdings for taxes and other deductions.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Salaries or Gross Salaries,"Salaries or gross salaries refers to the pay earned by employees who are paid a fixed or constant amount for each pay period. For example, an office manager that is compensated with an annual salary of $52,000 will have a monthly salary of $4,333; a semi-monthly salary of $2,167; a biweekly salary of $2,000; or a weekly salary of $1,000. Since the paychecks reflect a constant amount, the paychecks of salaried employees often cover the work period up to and including the date of the paychecks. (The term gross salaries emphasizes that the amounts are before any withholdings for taxes and other deductions.)",This is a cheet sheet Question
Semi-monthly,"Semi-monthly means two times per month. For instance, a salaried employee might be paid on the 15th day of the month and the last day of the month. An employee with an annual salary of $52,000 would have a gross salary of $2,167 for each of the 24 semi-monthly pay periods in the year.",This is a cheet sheet Question
Bi-weekly,"Bi-weekly means every two weeks (such as every other Friday). In most years, there will be 26 bi- weekly pay periods. An employee with an annual salary of $52,000 would have a gross salary of $2,000 for each of the 26 bi-weekly pay periods in a year.",This is a cheet sheet Question
Overtime,"Generally, overtime refers to an employee’s hours that exceed 40 hours in a work week. The hours in excess of 40 hours per week must be compensated for unless the employee is exempt from overtime pay. Merely classifying a low-paid employee as salaried does not eliminate the need to pay overtime pay. As a result, a salaried employee with an annual salary of $20,000 must receive additional compensation for the hours worked that are in excess of 40 hours in a work week. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Overtime Premium,"Overtime premium is the additional amount per hour that is paid to employees for the overtime hours. To illustrate, let’s assume that a company pays “time-and-a-half” for hours worked that are greater than 40 hours during the work week. If an employee earns $9 an hour (the straight-time hourly rate), the overtime premium is $4.50 per hour (half of $9.00). Therefore for every hour worked that is in excess of 40 hours in a work week, the employee will be paid $13.50 instead of the straight-time rate of $9 per hour.",This is a cheet sheet Question
Exempt Employee,"An exempt employee refers to an employee who is not entitled to receive overtime pay when working more than 40 hours in a work week. For example, a company’s vice president of sales earning $125,000 per year is an exempt employee because the person earns a high salary and the person can control the number of hours worked. (On the other hand, a clerk earning an annual salary of $20,000 is a nonexempt employee because the person’s salary is low and the person is unlikely to be able to control the number of hours that are worked.)",This is a cheet sheet Question
Payroll Withholdings,"Payroll withholdings refers to the amounts deducted from an employee’s gross wages, salaries, etc. Examples of payroll withholdings include the employee’s portion of the Social Security and Medicare taxes, personal income taxes, medical insurance contributions, retirement plan contributions, garnishments, etc.",This is a cheet sheet Question
Net Pay,Net pay is the employee’s gross pay minus the withholdings. Net pay is also known as an employee’s take-home pay or the amount that an employee clears on their paycheck. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Social Security Taxes,"Social Security taxes are paid by both the employee and the employer. Usually the rate for each has been 6.2% of the employee’s gross pay. In other words, if an employee earns $100,000 in a year, the employee will have $6,200 of withholding for Social Security tax, and the employer will also incur an expense of $6,200. This means the employer is required to remit $12,400 during the year. For the year 2024, there is a ceiling on the wages, salaries, etc. of $168,600 per employee that are subject to the Social Security tax. (Current rates and ceiling amounts are available at irs.gov.) The combination on the Social Security tax and the Medicare tax is known as FICA.",This is a cheet sheet Question
Medicare Taxes,"Medicare taxes are also paid by both the employee and the employer. The basic rate for each is 1.45% of the employee’s gross pay (with no annual ceiling). If an employee earns $100,000 in a year, the employee will have $1,450 of withholding for the Medicare tax, and the employer will also incur an expense of $1,450. This means the employer is required to remit $2,900 during the year. The combination of the Medicare tax and the Social Security tax is known as FICA. There is also an Additional Medicare Tax of 0.9% that applies to highly-paid employees.",This is a cheet sheet Question
FICA,FICA is the acronym for Federal Insurance Contributions Act. FICA refers to the combination of the Social Security tax and the Medicare tax.,This is a cheet sheet Question
Employer’s Tax Guide,Employer’s Tax Guide (also known as IRS Publication 15 or Circular E) is a guide to U.S. payroll taxes. It is published annually by the Internal Revenue Service and it can be downloaded from irs.gov at no cost. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
State Unemployment Tax,"State unemployment tax is a tax paid by the employer. However, the amount of the tax is calculated by multiplying the company’s state unemployment tax rate times each of its employee’s annual wages, salaries, etc. up to a ceiling amount which varies from state to state. The unemployment benefit payments to employees are funded by this tax.",This is a cheet sheet Question
Federal Unemployment Tax,"Federal unemployment tax is a tax paid by the employer. However, the amount of the tax is calculated by multiplying 0.6% (rate depends on credits allowed) times each employee’s annual wages, salaries, etc. up to a ceiling amount of $7,000.",This is a cheet sheet Question
Worker Compensation Insurance,"Depending on the number of employees, companies must provide worker compensation insurance to 1) pay the medical costs for work-related injuries or illnesses, and 2) provide compensation to the employee until the worker is able to return to work.",This is a cheet sheet Question
Compensated Absences,"Compensated absences is a term used by accountants for the paid holidays, paid sick days, paid vacations, etc. provided to employees. For example, a company’s vacation plan may require the company to 1) record and report the vacation expense in the accounting period when the vacation days are earned, and 2) record and report a liability for the amount of vacation days that employees have earned but have not yet taken. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Postretirement Benefits Other Than Pensions,"Postretirement benefits other than pensions is a term that is used by accountants to describe the medical, dental, and vision benefits that are provided to retirees. The amounts owed for such commitments must be expensed during the years when the employee earns the benefits. The amount is also recorded as a liability (which will be reduced when the retiree receives the benefits).",This is a cheet sheet Question
Accrued Wages,"Accrued wages refers to the amounts that a company owes its employees for hours worked that have not yet been recorded in the general ledger accounts. For example, hourly-paid employees often have a work week of Sunday through Saturday and are paid on the following Thursday. On any given day, the company will have a liability and an expense for hours worked that have not yet been entered in the company’s general ledger accounts. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Inventory,"Inventory is usually the most significant current asset of a retailer or manufacturer. Generally, inventory is reported on the balance sheet at its cost (or lower). When the items in inventory are sold, their costs will move from inventory to the cost of goods sold on the income statement. Inventory is important for a company’s profitability and survival. For instance, if a retailer or manufacturer does not have sufficient inventory of requested items, the result can be lost sales and lost customers. If a company has too much inventory, the company may encounter a cash flow problem and/or losses due to obsolescence. Inventory also means some accounting complexities due to the changing costs of the items in inventory.",This is a cheet sheet Question
Cost of Goods Sold,"For a retailer or manufacturer the cost of goods sold is likely to be its most significant expense on its income statement. When the costs of its items in inventory are continuously increasing (perhaps from inflation or scarcity), a decision must be made as to which of the costs in inventory should become the cost of goods sold. For instance, should the oldest (or first costs) be moved out of inventory, thereby leaving the most recent costs in inventory? Or, should an average cost be used? U.S. companies may decide that the most recent costs will be moved out of inventory, thereby leaving the oldest costs in inventory. The decision involves the flowing of costs (which can be different from the physical flow of the goods being removed from the warehouse).",This is a cheet sheet Question
Cost Flow Assumptions,"When the costs of the items in inventory are changing, a cost flow assumption must be made. If a company elects to first flow the oldest costs to the cost of goods sold, they are choosing the cost flow assumption known as first-in, first-out (FIFO). This means the most recent costs of items remain in inventory. In the U.S. a company may instead choose to use the last-in, first-out (LIFO) cost flow assumption. This means that the most recent costs will be the first costs moved from inventory to become the cost of goods sold. Under this assumption, the oldest costs will remain in inventory. The LIFO cost flow assumption can be used even if the goods that are removed from inventory are the oldest units. This is why it is a cost flow assumption. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Another option is to use an average cost of the items purchased in the current period along with the costs in inventory from the prior accounting period. The average cost per item is then used to determine both 1) the cost of the items remaining in inventory, and 2) the cost of goods sold. It is important to understand that these are cost flow assumptions and that the physical goods may flow differently. With continuous inflation, LIFO (compared to FIFO) will result in lower gross profits, lower net income, and lower taxable income. Hence, since 1960 many profitable U.S. corporations have elected the LIFO cost flow assumption.",This is a cheet sheet Question
Inventory Systems,"For the recording of inventory transactions in the general ledger, there are two main types of inventory systems: •	 periodic •	 perpetual When combined with a cost flow assumption, some of the many options for computing the cost of inventory and the cost of goods sold are: •	 periodic FIFO •	 periodic LIFO •	 periodic weighted-average cost •	 perpetual FIFO •	 perpetual LIFO •	 perpetual moving average •	 specific identification •	 others (such as a retailer’s dollar-value retail LIFO system) As the list indicates, the calculation of inventory and the cost of goods sold amounts can vary from company to company. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Periodic Inventory System,"Under the periodic inventory system, the general ledger account Inventory will NOT be updated with each transaction. (Neither the cost of goods purchased nor the cost of goods sold are recorded in the inventory account.) Instead, the cost of the inventory items purchased will be recorded in a temporary account entitled Purchases. Then at the end of the accounting year, the Inventory account balance will be adjusted so that its balance is equal to the cost of the inventory items that are actually on hand. In other words, during the accounting year the balance in the Inventory account will be dormant and will show only the ending balance from the previous accounting year.",This is a cheet sheet Question
Perpetual Inventory System,"Under the perpetual inventory system, the general ledger account Inventory will be increased with the cost of each purchase of goods and decreased with the cost of each sale of goods. In other words, the balance in the Inventory account will be perpetually changing. In the perpetual system there will be a general ledger account Cost of Goods Sold that will be debited at the time of each sale for the cost of the goods that are sold.",This is a cheet sheet Question
Estimating Ending Inventory,"There are occasions when a company needs to estimate the cost of its inventory. Two examples are: •	 Filing an insurance claim for the inventory that was destroyed by a fire, tornado, etc. •	 Calculating the estimated cost of its ending inventory for its monthly balance sheets and the related cost of goods for the income statements Two common methods for estimating the cost of a company’s inventory are: •	 Gross profit method •	 Retail method For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Gross Profit Method of Estimating Ending Inventory,"The gross profit method allows you to estimate the amount of ending inventory by using the following information: sales, purchases, and gross profit percentage since the last physical inventory was taken. For example, if the company had sales of $100,000 and its gross profit was 30% the cost of goods sold must have been 70% of sales. If the prior physical inventory had a cost of $25,000 and purchases were $60,000, the resulting costs of the goods available would be $85,000. The goods available of $85,000 minus the cost of goods sold of $70,000 means that the estimated amount of ending inventory is $15,000. It is easier to understand when the information is arranged as follows:",This is a cheet sheet Question
Retail Method of Estimating Ending Inventory,"The retail method can be used when a company has records showing both the cost and the retail prices of the merchandise. Since there are many variations of the retail method including the FIFO average cost method and the dollar-value retail LIFO method, it is best to study this topic from an intermediate accounting book. In order to apply the various retail methods you must understand the terms such as additional markups, markup cancellations, markdowns, returns, etc. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Income Statement,"The income statement is also known as the statement of income, statement of operations, statement of earnings, profit and loss statement, and P&L. It reports a corporation’s revenues, expenses, gains, losses, and the resulting net income that occurred during the period of time shown in the heading of the income statement. The period of time (or time interval) could be a year, quarter, five months, one month, 52 weeks, 4 weeks, etc. If the corporation’s shares of common stock are publicly traded, the earnings per share of common stock must also appear on the face of the income statement. As with all of the external financial statements, the notes to the financial statements are to be referenced on the face of the income statement, and should be distributed with the financial statements.",This is a cheet sheet Question
Generally Accepted Accounting Principles,"In the U.S., an income statement that is distributed to someone outside of the corporation must comply with generally accepted accounting principles (referred to as GAAP or US GAAP). US GAAP includes basic underlying concepts such as the cost principle and matching principle to some very complex accounting standards developed by the Financial Accounting Standards Board (FASB). As a result of US GAAP, a corporation’s income statement will be prepared using the accrual method of accounting (as opposed to the cash method). Under the accrual method, revenues will be included on the income statement in the period in which they are earned (which often occurs before the receipt of cash). The accrual method also means that expenses will appear on the income statement when they best match the revenues or when a cost expires or is used up (instead of when the cash is paid out). Double-entry accounting, debits and credits, and the accounting equation result in a connection betwee the income statement and the balance sheet. For example, the net income from the income statement increases the retained earnings reported on the balance sheet. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Components or Elements of the Income,"Statement 1.	 Revenues •	 Operating revenues such as the sale of goods and fees earned from providing services •	 Nonoperating revenues (or other income) earned from peripheral activities. An example is interest income that is earned by a retailer when it invests its idle cash. 2.	 Expenses •	 Operating expenses such as the cost of goods sold, selling and administrative expenses •	 Nonoperating expenses (or other expenses) which were incurred but were outside of the corporation’s main activities. An example is the interest expense incurred by a retailer. 3.	 Gains •	 An example is the Gain on Sale of a Plant Asset which resulted from selling a plant asset for more than the asset’s book value. 4.	 Losses •	 An example is the Loss on Sale of a Plant Asset which resulted from selling a plant asset for less than the asset’s book value. The net result (or combination) of these components is a corporation’s net income or net earnings.",This is a cheet sheet Question
Format of Income Statement,"Accounting textbooks often present two types of income statement formats: •	 Multiple-step. This format has more than one subtraction before displaying the company’s net income. The following is a condensed version of a multiple-step income statement: For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Income Statement,"For the Year Ended December 31, 2023 •	 Single-step. This format has only one subtraction before displaying the company’s net income. In other words, all revenues (operating and nonoperating) minus all expenses (operating and nonoperating) equals net income. The following is a condensed version of the single-step income statement: XYZ Corporation Income Statement For the Year Ended December 31, 2023 For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Cost of Goods Sold,"The cost of goods sold or cost of sales is likely the largest expense on the income statement of a retailer or manufacturer. Since the amount is very significant it is important that the proper costs are matched with the sales revenues. On the internal financial statements of a retailer, the cost of goods sold (COGS) might be presented in one of two ways: 1.	 The COGS could be calculated as the cost of the beginning inventory plus the cost of its net purchases minus the cost of the ending inventory:",This is a cheet sheet Question
Gross Profit,Gross profit is the remainder of a company’s net sales minus its cost of goods sold. Gross profit is often expressed as a dollar amount and as a percentage of net sales. The gross profit is also known as gross margin. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
"Selling, General and Administrative (SG&A) Expenses","Selling, general and administrative (SG&A) expenses are a company’s operating expenses (along with the cost of goods sold). SG&A expenses are not considered to be product costs and therefore are not inventoriable costs. Rather, SG&A expenses are considered to be expenses of the accounting period.",This is a cheet sheet Question
Inventory Cost Flow Assumptions,"When inventory items are purchased at different unit costs during the year, a company must elect a cost flow assumption. In the U.S. the options are 1) first costs in are the first costs out (first-in, first-out or FIFO), 2) last costs in are first costs out (last-in, first-out or LIFO), 3) average costs, 4) specific identification, and others. The inventory systems could be periodic or perpetual. Hence, the combination of the cost flow assumptions and the system used can result in differing amounts for the cost of goods sold, gross profit, net income, taxable income, and income tax expense being reported on the income statement.",This is a cheet sheet Question
Notes to the Income Statement,"In addition to the amounts appearing on the face of the income statement, there needs to be a reference such as “See notes to the financial statements.” or “The accompanying notes are an integral part of the financial statements.” The notes to the financial statements are important because a corporation’s net income is dependent on the accounting policies regarding inventory, depreciation, revenue recognition, and more. There may also be some potential losses that are looming, but have not yet been finalized. Hence, the notes will disclose this and other important information pertinent to the income statement and the other financial statements. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Improving Profits,"Improving profits or reducing operating losses is likely to require some decisions and some action. Both the decisions and the actions involve the future and may involve: •	 expanding a product line •	 eliminating a product line •	 increasing selling prices •	 reducing selling prices •	 reducing advertising expenses •	 increasing advertising expenses •	 closing a facility or outlet •	 adding a facility or outlet •	 many other possibilities Unfortunately, the amounts that are readily available (such as the amounts in the general ledger accounts) are amounts from the past transactions. To make the best decisions, management needs the future amounts. Obviously, the future has not yet occurred, therefore getting the approximate future amounts will be a challenge.",This is a cheet sheet Question
Past Amounts Are Not Relevant,"The enormous number of transactions that a company has experienced can be found in the company’s accounting records. However, those transactions are from the past. As a result, they are not relevant for today’s decisions or future decisions. Management accounting textbooks describe these past historical transactions as sunk or irrelevant as far as decision making. Even though the past amounts are irrelevant for today’s decisions they may help the management accountant to understand how costs behave, which costs to examine, etc. Some past costs could also have an impact on income tax payments or income tax savings that will occur due to a decision regarding the future. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Future Amounts That Will Be the Same Are Not Relevant,"In making a decision between two alternatives, the costs and/or revenues that will be the same under both alternatives are not relevant and therefore can be omitted from the analysis. For example, if the management’s total compensation will be the same whether or not the company expands into ten additional states, the management’s compensation is irrelevant to the decision of whether to expand or not. Therefore, the management’s compensation can be excluded from the analysis. Only Future Amounts That Will Differ Among",This is a cheet sheet Question
Alternatives Are Relevant,"In order to make the best decisions, management accountants must work to identify, predict and estimate the relevant future amounts. However, only the future costs and future revenues that will be different will be relevant.",This is a cheet sheet Question
Accountants Must Be Careful,"Accountants might be the most knowledgeable about a company’s past costs and past revenues. However, when it comes to decision making, management will need information on the future costs and future revenues. Accountants must realize that their familiarity with numbers does not necessarily translate into an ability to predict the future. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Future Value of a Single Amount,"The future value of a single amount is also known as the future value of 1. The amount is a single, one-time deposit made at time period 0, which is also the beginning of period 1. It is assumed that the interest earned is added at the end of each time period.",This is a cheet sheet Question
Compounding of Interest,"In the future value of a single amount, it is assumed that the interest added at the end of a time period will earn interest in the next time period. When the amount of interest earns interest, it is known as the compounding of interest. A single deposit that remains invested for many years at a high rate of interest will result in a very large amount. Example 1. Assume that someone inherits $100,000 and the amount is deposited in an investment that is not taxed until the money is withdrawn. Also assume the money is never withdrawn and the investment earns a consistent 10% per year compounded annually. The following table illustrates how the single deposit of $100,000 will grow as a result of the compounding at 10% per year. (The amounts are approximate due to rounding.) * The interest earned during a one-year period is 10% of the future value at the start of that year, (which is also the ending balance of the previous year). For example, the interest earned in Year 4 is $13,310 (10% of $133,100 the balance at the end of Year 3). In year 40, the interest earned during that year single year is $411,448 (10% of $4,114,479 which is the balance at the end of Year 39 which is not shown).",This is a cheet sheet Question
Rule of 72,"The rule of 72 is a quick way to approximate either: •	 the number of years needed for an amount to double, or •	 the interest rate needed in order for an amount to double For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Example 2. To illustrate how to approximate the number of years needed for an amount to double using the rule of 72, assume that an amount (or deposit) will earn 10% per year with the interest compounded at the end of each year. To determine the approximate number of years needed for the amount to double, divide 72 by the interest rate to be earned. Since 72 divided by 10 (the annual interest rate) = 7.2 years, a single amount compounded annually at 10% will double in 7.2 years. In the table from Example 1, you will see that at the end of 7 years the future value is $194,872. This is nearly double the initial deposit of $100,000. At 7.2 years, the amount will be extremely close to $200,000 or double the $100,000 deposit. Example 3. To illustrate how to approximate the interest rate needed for an amount to double in 7 years, divide 72 by 7 years. The result is a required interest rate of 10.3%.",This is a cheet sheet Question
Future Value of 1 Tables,"In a classroom setting, future value of 1 (FV of 1) table which displays the future value factors is often used for instruction purposes. For instance, if you looked at an FV of 1 table, under the column with the heading of 10% and selected the row where the number of periods is 7, you would see the factor “1.94872”. This tells you that if $1 is invested at 10% and the interest is compounded annually for 7 annual periods, the $1 will grow to $1.95. Therefore, if you invest $100,000 at 10% interest for 7 years, it will grow to a future value of $194,872 ($100,000 X 1.94872). Note that this is the same as the amount we have in the table above.",This is a cheet sheet Question
Frequency of Compounded Interest,"If the compounding of interest is done quarterly (instead of annually) for 7 years, the annual rate of 10% would be restated to be 2.5% per quarterly period; and the 7 annual periods will be restated to be 28 quarterly periods. The more frequent the compounding, the greater will be the future value.",This is a cheet sheet Question
Calculators,"Instead of using a future value table or the rule of 72, it will be more precise and faster to use an online financial calculator. Electronic handheld financial calculators are also available. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Annual Financial Statements,"The financial statements that are to be included as a complete set when a U.S. corporation distributes them to people outside* of the corporation are: *Examples of people outside of the corporation that are likely to receive these external, general- purpose financial statements include investors, lenders, government agencies, etc. **Note that the balance sheet reports amounts as of the final moment of the accounting period. For example, the balance sheet’s heading might indicate “December 31, 2023. This means that the amounts are as of midnight on December 31. Examples of the headings of the other four financial statements include “For the Year Ended December 31, 2023”, “For the Six Months Ended June 30, 2023”, For the 13 Weeks Ended…”, etc.",This is a cheet sheet Question
Notes to Financial Statements,"For the financial statements to be complete, they must be accompanied with notes to the financial statements. The notes are usually referenced at the bottom of each of the financial statements with wording such as “See notes to the financial statements.” or “The accompanying notes are an integral part of the financial statements.” For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Generally Accepted Accounting Principles,"The external financial statements must be in compliance with generally accepted accounting principles, which are commonly referred to as GAAP or US GAAP. GAAP includes basic underlying principles, official accounting standards issued by the Financial Accounting Standards Board (FASB), and industry-specific requirements. U.S. corporations whose stock is publicly-traded are also required to file financial reports to the U.S. Securities and Exchange Commission (SEC). Generally, US GAAP requires that a U.S. corporation’s financial statements be based on the accrual method (or accrual basis) of accounting. The accrual method means that 1) revenues and a related receivable will be reported when they are earned and collection is assured, and 2) expenses and a related payable will be reported when an expense or loss has occurred. In short, the accrual method of accounting will result in financial statements that will be more complete and useful. The financial statements are interconnected and should always be in balance because of the accounting equation and double-entry accounting system.",This is a cheet sheet Question
Accounting Periods,"Often U.S. corporations have accounting years that end on December 31 (referred to as calendar years). However, many U.S. corporations have fiscal years which end on other dates, such as June 30, September 30, etc. In addition, some U.S. corporations have 52/53-week years which end on the Saturday nearest to January 31 or some other day of the week. Those corporations’ interim financial statements will include four 13-week periods instead of four 3-month quarters.",This is a cheet sheet Question
Income Statement,"The income statement reports a corporation’s revenues, expenses, gains, losses, and the resulting net income for the period of time specified in its heading. The period of time or time interval could be a year, quarter, week, 26 weeks, etc. If the corporation’s shares of stock are publicly traded, the earnings per share of common stock (EPS) must also be reported on the face of the income statement. A positive net income reported on the income statement will cause the corporation’s retained earnings (part of the balance sheet section, stockholders’ equity) to increase. A net loss will cause retained earnings to decrease. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. There are a few items that will increase stockholders’ equity but will not be reported on the income statement. These items are part of other comprehensive income, which is reported on the statement of comprehensive income.",This is a cheet sheet Question
Statement of Comprehensive Income,"The statement of comprehensive income reports the amount of a corporation’s comprehensive income (or loss), which consists of the following: •	 The corporation’s net income (the details of which are reported on the income statement) •	 Items that are classified as other comprehensive income for the period of time indicated in the heading. Some of the items that are considered to be other comprehensive income include: •	 Unrealized gains or losses on derivatives used in hedging •	 Unrealized gains or losses on pension and postretirement liabilities •	 Foreign currency adjustments. The total of the other comprehensive income will cause the corporation’s accumulated other comprehensive income (a component of the balance sheet section, stockholders’ equity) to change. NOTE: Net income increases retained earnings, but other comprehensive income increases accumulated other comprehensive income.",This is a cheet sheet Question
Balance Sheet,"The balance sheet reports a corporation’s assets, liabilities, and stockholders’ equity as of a moment in time. (The other financial statements report amounts for a period of time.) The balance sheet reports amounts as of the final moment of the day shown in the heading of the balance sheet, which is typically the final moment of the accounting period. At all times the amount of the corporation’s assets should be equal to the amount of liabilities plus stockholders’ equity. In other words, the balance sheet reflects the accounting equation: assets = liabilities + stockholders’ equity. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Assets are resources such as cash, inventory, investments, buildings, equipment, and prepaid or deferred expenses. Liabilities are obligations such as accounts payable, loans payable, accrued expenses payable (wages, interest, utilities), deferred revenues, and bonds payable. Stockholders’ equity includes paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock. Because of the cost principle, some valuable assets will not be reported (trade names, management) and some assets may be more valuable than the reported amounts based on cost. As a result, the amount of stockholders’ equity should not be interpreted to be the corporation’s market value.",This is a cheet sheet Question
Statement of Stockholders’ Equity,"The statement of stockholders’ equity reports the changes that occurred during the accounting year to the corporation’s paid-in capital, retained earnings, accumulated other comprehensive income, and treasury stock.",This is a cheet sheet Question
Statement of Cash Flows,"The statement of cash flows (SCF or cash flow statement) reports a corporation’s significant cash inflows and cash outflows that caused the corporation’s cash and cash equivalents to change. The cash flow information is important because the income statement reflects the accrual method of accounting (not the cash method). The cash flows are presented in one of the three sections of the SCF: •	 Operating activities •	 Investing activities •	 Financing activities In addition, the following supplementary information must be disclosed: interest paid, income taxes paid, and significant noncash transactions such as the exchange of shares of common stock for land. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Notes to Financial Statements,The notes to the financial statements are considered to be an integral part of the financial statements and are referenced at the bottom of each financial statement. The first of the notes lists the corporation’s significant accounting policies. Large corporations could have 30 or more pages of notes in order to comply with the full disclosure principle.,This is a cheet sheet Question
Comparative Financial Statements,"In order for the financial statements to be more useful, corporations prepare comparative financial statements. This means that in addition to the amounts for the current year, the statements will also have columns containing the amounts from one or two of the earlier years. These earlier amounts give the readers a frame of reference when reviewing the most recent amounts.",This is a cheet sheet Question
Audited Financial Statements,"Some financial statements must be audited. For example, corporations with common stock that is traded on a stock exchange must have their financial statements audited by a registered CPA firm. Other corporations may have a lender or investor that requires that the financial statements be audited. The CPA firm that performs the audit will issue an audit report to describe what to expect from the audit. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Financial Ratios Including Limitations,"Financial ratios are one component of financial analysis. Financial ratios are often calculated by using amounts from previously issued annual financial statements. In that case the resulting ratios are history and may not be indicative of the present and future situation. It is also wise to consider the financial ratios to be averages. For example, the sales are unlikely to have occured evenly throughout the year. Therefore, the resulting number of days’ sales in inventory may be 100, but it is an average of some months of 120 days and some months of 80 days. The turnover ratios and the “return on” ratios usually involve an annual income statement amount and a balance sheet amount. However, the balance sheet amount is valid only for the final moment of the accounting year and may not be indicative of the amounts within the accounting year. This is especially true when a corporation ends its accounting year at the low point of its business activity. To overcome this situation, it is best to use the average balance sheet amounts for the 12 months during the year. (Merely averaging the two lowest points of the year will not solve the problem.) It is also important to realize that companies within the same industry may apply accounting principles differently. Some companies may be conservative in their accounting, while another may be the complete opposite. For example, Company C values its inventory using LIFO and uses very short useful lives for depreciating its plant assets. Its competitor Company L values its inventory using FIFO and uses very long useful lives for depreciating its plant assets. In periods of inflation, the financial statements and financial ratios of these companies will have differences due to the way accounting principles are applied. Of course within a company where the accounting rules are consistantly applied, the current financial ratios can be compared with confidence to its financial ratios from the past and to those budgeted for the current year and future years.",This is a cheet sheet Question
Working Capital,"Working capital is actually an amount (rather than a ratio) which is an indicator of a company’s ability to meet its obligations. It is calculated as follows: current assets minus current liabilities. For example, if a business has $280,000 of current assets and $260,000 of current liabilities, its working capital is $20,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Current Ratio,"The current ratio is also an indicator of a company’s ability to pay its current obligations. The calculation is: current assets divided by current liabilities. If a company has current assets of $300,000 and current liabilities of $150,000 the company’s current ratio is 2:1 [($300,000/$150,000):1].",This is a cheet sheet Question
Acid-Test Ratio or Quick Ratio,"The acid-test ratio is also known as the quick ratio. It is a more conservative indicator of a company’s ability to pay its current obligations (than the current ratio) since inventory is excluded from the calculation. In other words, the calculation is: [cash + marketable securities + accounts receivable] divided by current liabilities. If a company had current assets of $300,000 (of which $180,000 was inventory) and current liabilities of $150,000, the acid-test ratio will be approximately 0.8:1 [$120,000/$150,000].",This is a cheet sheet Question
Receivables Turnover Ratio,"The receivables turnover ratio is an indicator of how fast a company’s accounts receivable are (or were) collected. The calculation is: credit sales for a year divided by the average balance in accounts receivable during the same year. If credit sales for the year were $800,000 and the average amount of accounts receivable throughout the year was $100,000 the company’s receivables turnover ratio will be 8 times [$800,000/$100,000]. Of course, if only the two low end-of-the-year receivable amounts are averaged, the resulting ratio will be much different from the average based on the average throughout the year. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Average Collection Period or Days’ Sales in Receivables,"The average collection period tells how many days (on average) it takes to collect a company’s accounts receivable. The calculation is: 360 or 365 days divided by the receivables turnover ratio. Using the information in our previous calculation, the receivables turnover ratio was 8. Therefore, the average collection period was 45 days [360 days/8]. A logical next step is to compare the average collection period to past ratios and also to the credit terms offered to customers.",This is a cheet sheet Question
Inventory Turnover Ratio,"The inventory turnover ratio indicates how many times a company’s inventory turns over in a year. The calculation is: cost of goods sold for a year divided by the average inventory during the same year. Since a company records inventory at cost, it is logical to use the cost of goods sold from the income statement. If the cost of goods sold for the year was $600,000 and the average cost of inventory during  the year was $200,000 the company’s inventory turnover ratio is 3 times [$600,000/$200,000]. Again, if the average inventory is based on the two lowest points of the year, this turnover ratio will be greater than an average based on amounts throughout the year.",This is a cheet sheet Question
Days’ Sales in Inventory or Days to Sell,"The days’ sales in inventory indicates how many days of sales are in inventory. The calculation is: 360 or 365 days divided by the inventory turnover ratio. If the inventory turnover ratio is 3, the days’ sales in inventory will be 120 days [360 days/3].",This is a cheet sheet Question
Free Cash Flow,"The calculation of free cash flow is: net cash flow from operating activities minus the necessary capital expenditures. (Sometimes a company’s dividend payments are deducted along with the capital expenditures.) If a corporation had cash from operating activities of $200,000 and necessary capital expenditures of $60,000 the amount of free cash flow was $140,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Times Interest Earned,"Times interest earned indicates a company’s ability to pay the interest on its debt. The calculation is: income before interest expense and income tax expense divided by interest expense. If a company’s net income was $100,000 after interest expense of $40,000 and income tax expense of $20,000 the times interest earned is 4 times [$160,000/$40,000]. Gross Profit or Gross Margin (in dollars) Gross profit is the remainder of net sales minus cost of goods sold. Gross profit is the amount prior to deducting a company’s selling, general and administrative expenses and adding or subtracting the nonoperating items. If net sales (gross sales minus sales returns and allowances and sales discounts) were $800,000 and the cost of goods sold was $600,000 the gross profit was $200,000. Gross Profit Percentage or Gross Margin as a",This is a cheet sheet Question
Percentage,"The gross profit percentage is the dollars of gross profit divided by the dollars of net sales. If the gross profit was $200,000 and the net sales were $800,000 the gross profit percentage or gross margin was 25%.",This is a cheet sheet Question
Return on Assets,"The return on assets indicates how profitably a company has used its assets. The calculation is the company’s net income for a year divided by the average amount of assets during the same year. If the corporation’s net income for the year was $100,000 and the average amount of assets was $1,000,000 the return on assets was 10%. Sometimes the return is after income tax expense and sometimes it is before income tax expense. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Return on Equity,"Return on equity (with no preferred stock) is a corporation’s net income for a year divided by the average amount of stockholders’ equity during the year. If the corporation’s net income was $100,000 and its stockholders’ equity averaged $500,000 during the year, the return on equity was 20%.",This is a cheet sheet Question
Asset Turnover Ratio,"The calculation of the asset turnover ratio is: net sales for a year divided by the average amount of assets during the same year. If net sales were $800,000 and the average amount of assets was $1,000,000 the asset turnover ratio was 0.8:1 [$800,000/$1,000,000].",This is a cheet sheet Question
Evaluating Business Investments,"When someone is deciding to invest in business assets that have a life of more than one year, it is important that the time value of money be considered. The time value of money means that the dollars (or other currency) invested or paid today are more valuable than the dollars that will be received in the future years. The process of evaluating and deciding which long-lived assets will be made is referred to as capital budgeting and the amounts actually invested are referred to as capital expenditures. We will discuss two models that consider the time value of money. They are: •	 Net present value •	 Internal rate of return Both of these models are also referred to as discounted cash flow (DCF) models.",This is a cheet sheet Question
Discounting Future Cash Flows,"To recognize the time value of money, the future cash flows are discounted to their “present value.” Discounting can be thought of as removing the interest or necessary earnings that is included in the future cash amounts. After the interest has been removed the resulting amount is the present value or the discounted cash amount. Depending on the purpose, the rate used for discounting the future cash amounts could be described as any of the following: •	 desired rate of return •	 target rate of return •	 time value of money •	 company’s cost of capital •	 incremental interest rate of the borrower •	 the inflation rate, etc. Example 1. If a company will be receiving a single amount of $1,000 at the end of 5 years, its present value is only $621 (if the $1,000 is discounted by a target rate of 10% per year for 5 years). If the $1,000 is discounted by 12%, the present value is $567. If the $1,000 is discounted by 8%, the present value is $681. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Note that when the rate used for discounting increases, the present value of the future cash amounts will be smaller. In other words, if you need to earn a higher rate and the $1,000 is a fixed amount, you need to invest a smaller amount.",This is a cheet sheet Question
Present Value Tables,"In classrooms, textbooks, and in our explanation, the calculation of the present values will be done by using present value tables. If there is a stream of equal cash amounts occurring at equal time intervals, the present value of an annuity table can be used. When there is a single future amount, or when the future amounts are not uniform in amount or occur at various time intervals, the present value of 1 table is used. (However, using an online calculator or a financial calculator is more practical, precise and faster.)",This is a cheet sheet Question
Net Present Value Model,"Net present value (NPV) is one of the discounted cash flow models used to evaluate investments in long-lived assets. In the NPV model, the future cash flows are discounted to their present values and then all of the present values (including the investment outflow of cash) are summed into a single amount. That single amount is known as the net present value. Example 2. A company is deciding whether to pay out cash of $100,000 today in order to receive the following cash amounts at the end of each of the years 1 thru 5: $25,000 + $30,000 + $35,000 + $40,000 + $45,000. Since the $100,000 is occurring at the present time, its present value is $100,000. Next the 5 future amounts need to be discounted to their present value. The discounting of the future amounts by 10% per year is shown in the following table: When the present value of the $100,000 cash outflow is combined with the present value of the five cash inflows we arrive at the net present value of 29,055. This positive present value indicates that the investment is earning significantly more than the 10% rate to discount the cash flows. (A net present value of $0 would indicate that the corporation was earning exactly 10%.)",This is a cheet sheet Question
Internal Rate of Return,"The internal rate of return (IRR) is a discounted flow model that computes the exact rate of return earned on an investment. In other words, the internal rate of return tells you the rate that will discount all of the investment’s cash flows to a net present value of exactly $0. If a present value table is used, it requires a trial-and-error approach. If it is done online or with a financial calculator, the rate will appear with electronic speed. Example 3. To illustrate the internal rate of return, we will use the same cash flows that were used in Example 2. First, recall that the net present value showed a positive 29,055. This relatively large net present value indicates that the internal rate of return will be significantly greater than the 10% rate used to calculate the net present value. As a result, we decided to discount the cash flows by 20%. The present value factors of a single amount for 20% are used in the following table: For personal use by the original purchaser only. Copyright © AccountingCoach®.com. After discounting the cash flows by 20%, the net present value is (720). This relatively small amount indicates that the internal rate of return is very close to 20%. Since the amount is negative, the actual rate is less than 20% (as opposed to more than 20%).  When an internal rate of return is calculated for each of the potential investments, the investments can be ranked from high to low.",This is a cheet sheet Question
Recap of NPV and IRR,"Both the net present value (NPV) and the internal rate of return (IRR) models are recommended because of the following: 1.	 Both use all of the cash flows that occur during the entire life of the investment 2.	 Both recognize the time value of money (future amounts are discounted) 3.	 Because the present value factors are very small in the future years, the estimated future amounts (which are difficult to predit) carry less weight than the more current amounts For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Payback Period,"Another model that is often used when evaluating business investments is the payback period. The payback period simply indicates the number of years it takes for a company to recover its investment. The payback period is easy to understand, but it has two drawbacks: •	 The future cash amounts are not discounted to their present value. This means that the time value of money is ignored. •	 The payback calculation does not consider all of the cash inflows. It merely looks at the cash flows until the investment is recovered. Example 4. The following chart illustrates the payback period calculation. The amounts come from our earlier examples, except that the cash inflows are assumed to occur evenly throughout each of the five years. Cash In or (Cash Out) Cumulative Amount of Cash In Portion of the Year Cumulative Number of Years Day 1 of Year 1 ($100,000) Year 1 $25,000 $    25,000 1.00 1.00 Year 2 $30,000 $    55,000 1.00 2.00 Year 3 $35,000 $    90,000 1.00 3.00 Year 4 $40,000 $  100,000 0.25 3.25 Year 5 $45,000 As the chart indicates, the company will recover its $100,000 investment in 3.25 years. This is 3 full years plus $10,000 of the $40,000 in Year 4. Note that the payback period calculation ignored the following: •	 $30,000 of the $40,000 occurring in Year 4, and •	 $45,000 occurring in Year 5. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Financial Accounting,"Financial accounting is a type or branch of accounting that begins with the recording, sorting and storing of a business’s transactions in accounts contained in its general ledger. After reviewing and adjusting the amounts to comply with generally accepted accounting principles, the amounts are summarized and presented in the form of financial statements. When the financial statements of a U.S. corporation are distributed to someone outside of the corporation, the financial statements should include the following: •	 Income statement •	 Statement of comprehensive income •	 Balance sheet •	 Cash flow statement •	 Statement of stockholders’ equity •	 Notes to the financial statements",This is a cheet sheet Question
Double-Entry; Debit and Credit,"It is the norm for a corporation to use the double-entry accounting system. Double-entry accounting means that every transaction will affect two or more accounts. It also uses the terms debit and credit, which had their origin five centuries ago. Today, you should associate debit with left side of an account, and associate the term credit with the right side of an account. As a result, every business transaction will have an amount recorded (as a debit) on the left side of an account and will have an amount recorded (as a credit) on the right side of an account. Example 1. If a corporation borrows $10,000 from its bank, the corporation will debit the account Cash and will credit the account Loans Payable. Example 2. When a corporation pays its June rent on June 1, the corporation will debit Rent Expense and will credit Cash. Today’s accounting software will assure that the double-entry system is adhered to. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Generally Accepted Accounting Principles (GAAP),"When a U.S. corporation’s financial statements are distributed to someone outside of the corporation, they must comply with generally accepted accounting principles (GAAP or US GAAP). GAAP includes underlying concepts such as the historical cost principle, matching principle, revenue recognition, full disclosure principle, plus many detailed rules or standards that are required by the Financial Accounting Standards Board (FASB). Some of the rules or standards include the accounting for hedging transactions, pensions, leases, foreign currency translation, and many more.",This is a cheet sheet Question
Accrual Method of Accounting,"US GAAP usually requires that a corporation’s financial statements be prepared using the accrual method (or basis) of accounting. (Individuals on the other hand are likely to use the cash method of accounting.) Under the accrual method, revenues are reported on the income statement and the related receivable will be reported on the balance sheet when the amount is earned (as opposed to when the cash is received). Similarly, expenses and losses are reported on the income statement and the related liability is reported on the balance sheet when they occur (as opposed to waiting until the amount is paid).",This is a cheet sheet Question
Other Types or Branches of Accounting,"As noted earlier financial accounting is just one type or branch of accounting. The others include cost accounting, management accounting, not-for-profit accounting, governmental accounting, income tax accounting, auditing, forensic accounting, accounting systems, auditing, and more. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Depreciation,"In accounting, depreciation is the spreading (allocation) of an asset’s cost over the many accounting periods in which it is used. The assets that are depreciated include buildings, equipment, furnishings, vehicles, land improvements (but not the land), and similar long-term assets that are used in a business. The purpose of depreciation is to match the cost of the asset with the revenues that are earned from the use of the asset. Note that the purpose of depreciation is not to calculate the market value of an asset. Except for some manufacturing assets, the depreciation for the accounting period is recorded as a debit in the income statement account Depreciation Expense. The amount of depreciation is recorded as a credit in the balance sheet account Accumulated Depreciation, which is a contra-asset account. This is done instead of crediting an asset such as Equipment. The combination of the debit balance in the Equipment account and the credit balance in the account Accumulated Depreciation for Equipment is the book value (or the carrying value) of the equipment. Remember that this book value is not the fair market value of the equipment. It merely represents the cost which has not yet been depreciated. Example 1. A company purchases equipment at a cost of $100,000 and it is expected to be useful for 10 years. At the end of 10 years it will be scrapped for $0. A common depreciation method is to debit $10,000 per year to Depreciation Expense and to credit Accumulated Depreciation for $10,000. Depreciation on the Financial Statements Vs.",This is a cheet sheet Question
Tax Return,"The depreciation that we are discussing is the depreciation reported on the financial statements. This depreciation is almost always different from the depreciation reported on the corporation’s income tax returns. The reason is that the financial statement depreciation is based on the matching principle of accounting while the income tax depreciation is based on income tax regulations and tax strategies. However, the total amount of depreciation over the life of the asset will likely be the same: the asset’s cost. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Cost,"An asset’s cost is the cash equivalent amount paid for the asset plus the necessary costs to get the asset in place and ready for use. The asset’s cost is the maximum total amount of depreciation expense over the years of the asset’s useful life. Once the asset’s cost is fully depreciated, the depreciation expense stops, even if the asset continues to be used in the business.",This is a cheet sheet Question
Useful Life,"An asset’s useful life is the estimated number of years (or units of output) that the asset will be economically useful. This estimate is made when the asset is placed into service. For example, if a company estimates that a machine with a cost of $100,000 will have a useful life of 10 years, its financial statements will report $10,000 per year. (The 10 years is used even if the income tax regulations specify a 7-year life or it allows the immediate expensing of the $100,000 in the year that it is placed into service.) Salvage Value (Scrap Value or Residual Value) An asset’s salvage value is an estimate of the amount that will be recovered at the end of an asset’s useful life. It is also known as the scrap value or residual value. This estimate is made at the time the asset is placed into service and the amount is subtracted from an asset’s cost in order to determine the total amount of depreciation over the life of the asset. Often the salvage value is estimated to be $0.",This is a cheet sheet Question
Depreciable Cost,An asset’s depreciable cost is the asset’s cost minus the asset’s estimated salvage value at the end of its useful life. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Half-year Convention,"The half-year convention assumes that a newly acquired asset was placed in service at the midpoint of a year. As a result, one-half of the annual depreciation is charged to depreciation expense in the first year (and in the final year) of the asset’s useful life. Example 2. If an asset has a cost of $100,000 and an estimated useful life of 10 years and an estimated salvage value of $0, the annual depreciation could be $10,000. Under the half-year convention, the company will report $5,000 of depreciation in the year the asset is placed into service, followed by 9 full years of $10,000 of depreciation, and then $5,000 in the 11th year…for a total of $100,000.",This is a cheet sheet Question
Straight-Line Depreciation,"Straight-line depreciation is the common method for computing the depreciation reported on the financial statements. Straight-line depreciation results in the same amount of annual depreciation in each year (except for partial years). The full-year, annual depreciation is computed by taking the asset’s depreciable cost and dividing it by the number of years of useful life.",This is a cheet sheet Question
Accelerated Depreciation,"Accelerated depreciation refers to the depreciation methods in which larger amounts of annual depreciation are taken in the early years of an asset’s life, and smaller amounts of annual depreciation are taken in the later years. (Over the entire useful life of the asset the total amount of depreciation is the same as the straight-line method.) Two of the accelerated depreciation methods are the double-declining-balance method, and the sum-of-the-years’-digits method. Double-Declining-Balance (DDB) Method Double-declining-balance (or DDB) method of depreciation is one of the accelerated methods of depreciation. “Double” means taking 200% of the straight-line depreciation rate. The “declining- balance” refers to the asset’s book value which is declining as the asset is depreciated. (Book value or carrying value is the asset’s cost minus its accumulated depreciation.) This means that an asset with a For personal use by the original purchaser only. Copyright © AccountingCoach®.com. useful life of 10 years will have a straight-line rate of 10% which will be doubled to 20%. This rate is multiplied times the asset’s book value as of the beginning of the year. Example 3. Assume that a corporation acquires an asset at the cost of $100,000. It estimates the asset will be useful for 10 years. This means the straight-line depreciation rate is 10%, which will become 20% for the double-declining-balance method. The asset’s book value at the beginning of the first year is $100,000 which is multiplied by 20% to arrive at $20,000 of depreciation in the first year of the asset’s life. For the second year of the asset’s life, the beginning book value will be $80,000 ($100,000 minus $20,000 of accumulated depreciation). That amount times 20% will mean $16,000 of depreciation during the second year of the asset’s life. The depreciation for the third year of the asset’s life will be $64,000 X 20% = $12,800. This continues until the asset’s book value is equal to the asset’s salvage value. (Over the life of the asset, the total amount of depreciation will be the same under any depreciation method. The differences involve the timing of the depreciation.)",This is a cheet sheet Question
Sum-of-the-Years’-Digits (SYD) Method,"Sum-of-the-years’-digits (SYD) method of depreciation is also an accelerated method of depreciation. Its name comes from summing all of the digits in the years of the asset’s useful life (see Example 4 below). This sum will become the denominator of the fraction that will be used. The numerator of the fraction is the years of depreciation remaining. Example 4. Assume that a corporation acquires a business asset and estimates its useful life is 10 years. The digits in the years of useful life are: 1+2+3+4+5+6+7+8+9+10 and the sum is 55. Since there are 10 years remaining in the first year of the asset’s life, the depreciation for the first year will be 10/55 of the depreciable cost. If the asset has a cost of $100,000 and the estimated salvage value is $0, the depreciation (rounded) for the first year of the asset’s life is $100,000 X 10/55 = $18,182. The depreciation for the second year of the asset’s life will be $100,000 X 9/55 = $16,364. In the final year of the asset’s life the depreciation will be $100,000 X 1/55 = $1,818. (Again, the total amount of depreciation expense during the years of useful life will be the same regardless of the method used.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Meaning of Debits and Credits,"Debit and credit are related to the terms used in Italy 500 years ago to record business transactions using the double-entry system of accounting. Today, you should memorize the following meanings: •	 Debit means left or left side of an account •	 Credit means right or right side of an account An amount recorded on the left side of an account is said to have been debited to the account, or that the amount was a debit (or debit entry) in the account. An amount recorded on the right side of an account is said to be a credit entry, a credit, or that the account was credited. It is important that you do not think that a debit is “good” or “bad”. Similarly, you should not think of a credit as being “good” or “bad”.",This is a cheet sheet Question
Account,"An account is a record in which the amounts from a company’s transactions are posted (or recorded) in order to sort and store similar amounts. The following are common account titles: Cash, Accounts Receivable, Accounts Payable, Loans Payable, Sales, Advertising Expense, Rent Expense, Interest Expense, and perhaps hundreds more. When we use the term accounts, we are referring to the general ledger accounts. In the past, the general ledger was a ledger book with paper pages, but today it is likely to be a computer file or database. A simple listing of the general ledger account titles and account numbers that are available for use is the chart of accounts. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Double-Entry Accounting or Bookkeeping,"The double-entry system requires that the amount(s) in a transaction must be entered in the general ledger accounts as a debit and as a credit in another account(s). In other words, every transaction will involve: •	 A minimum of two accounts •	 One or more of the accounts must have an amount entered as a debit, and •	 One or more of the accounts must have an amount entered as a credit •	 The total amount entered as a debit must be equal to the amount entered as a credit Example #1. When a company borrows $5,000 from its bank, the company will record a debit of $5,000 in the account entitled Cash and a credit of $5,000 in the account Loans Payable or Notes Payable. Example #2. When a company pays $1,000 for a loan payment consisting of $100 of interest and $900 of principal the company will record a debit of $100 in the account Interest Expense, a debit of $900 to Loans Payable, and a credit of $1,000 in the account Cash. It is common for inexpensive, yet sophisticated accounting software to use the double-entry system, however, it may prompt you for only one account name or number. For example, if the software prepares a check, it will automatically credit the account Cash when the check is written. Therefore, the software requires that you enter only the account or accounts to be debited. Accounting Equation May Help You",This is a cheet sheet Question
Understand Debits and Credits,"The accounting equation is: Assets  = Liabilities  +  Stockholders’ (or Owner’s) Equity Asset accounts, which are on the left side of the equation, will usually have their balances on the left side of the general ledger account. Since debit means left side, an asset account will normally have a debit balance. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Liability accounts, which appear on the right side of the accounting equation, will usually have their balances on the right side of the general ledger account. Since credit means right side, a liability account will normally have a credit balance. Stockholders’ equity accounts, which also appear on the right side of the accounting equation, will usually have their account balances on the right side. Asset Accounts Will Likely Have Debit",This is a cheet sheet Question
Balances,"Examples of asset accounts are: •	 Cash •	 Accounts Receivable •	 Inventory •	 Prepaid Expenses •	 Investments •	 Land •	 Buildings •	 Furniture and Fixtures •	 Vehicles, and more Generally, asset accounts will have debit balances and their account balances will be increased with a debit entry. Therefore, a credit entry will decrease the asset’s normal debit balance. There are a few asset accounts that are expected to have credit balances. These are known as contra-asset accounts. Two examples of contra-asset accounts include: •	 Allowance for Doubtful Accounts (which relates to the debit balance in Accounts Receivable) •	 Accumulated Depreciation (which relates to the debit balances in the accounts Buildings, Equipment, Vehicles, etc.) These contra-asset accounts will be credited instead of crediting the related asset accounts. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Liability Accounts Will Likely Have Credit Balances,"Some examples of liability accounts include: •	 Accounts Payable •	 Loans Payable (or Notes Payable) •	 Interest Payable •	 Wages Payable •	 Income Taxes Payable •	 Accrued Expenses Payable (or Accrued Liabilities) •	 Deferred Revenues, and others Generally, liability accounts are expected to have credit balances and their account balances will be increased with a credit entry. To decrease a liability account’s balance a debit entry is needed. Stockholders’ (or Owner’s) Equity Accounts",This is a cheet sheet Question
Will Have Credit Balances,"Some examples of stockholders’ (or owner’s) equity accounts include: •	 Common Stock •	 Paid-in Capital in Excess of Par •	 Retained Earnings •	 Accumulated Other Comprehensive Income •	 Mary Smith, Capital Generally, these accounts are expected to have credit balances and their account balances will be increased with a credit entry. To decrease one of these accounts a debit entry is needed. Note: Treasury Stock and Mary Smith, Drawing are two contra-equity accounts that are expected to have debit balances. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Revenue Accounts Will Have Credit Balances Examples of revenue accounts include: •	 Sales •	 Service Fees Earned •	 Fee Revenues •	 Interest Income Revenue accounts will have credit balances and their account balances will be increased with a credit entry. Revenue accounts have credit balances because revenues increase stockholders’ (or owner’s) equity. There are a few revenue accounts that will have debit balances. Two examples are: •	 Sales Discounts •	 Sales Returns and Allowances Revenue accounts that are expected to have debit balances are known as contra-revenue accounts. These accounts are debited because they cause a decrease in the expected credit balances of the stockholders’ (or owner’s) equity accounts.",This is a cheet sheet Question
Expense Accounts Will Have Debit Balances,"The following are just a few of the many general ledger accounts for expenses: •	 Salaries Expense •	 Rent Expense •	 Utilities Expense •	 Repairs and Maintenance Expense •	 Advertising Expense •	 Depreciation Expense •	 Interest Expense •	 Income Tax Expense For personal use by the original purchaser only. Copyright © AccountingCoach®.com. The accounts for expenses will have debit balances and will almost always be debited. Expenses have debit balances because they decrease the normal credit balances of stockholders’ (owner’s) equity. The Accounts for Revenues and Expenses are",This is a cheet sheet Question
Temporary Accounts,"At the end of each accounting year, the income statement accounts (revenues, expenses, gains, losses) are closed to a stockholders’ (owner’s) equity account. As a result, the income statement accounts will begin each accounting year with zero balances. This is the reason that the income statement accounts are known as temporary accounts. (The balance sheet accounts are known as permanent accounts, since their balances are not closed at the end of an accounting year. Instead, balances in the balance sheet accounts are carried forward to the next accounting year.)",This is a cheet sheet Question
Learning Which Accounts to Debit and Credit,"Since many business transactions involve cash, a good place to begin learning debits and credits is with the general ledger account Cash. Since Cash is an asset account: •	 Cash will be debited when cash is received. (Recall that a debit will increase an asset account’s balance.) •	 Cash will be credited when cash is paid out. (Recall that a credit will decrease an asset account’s balance.) In our earlier examples, a company borrowed money from its bank. The account Cash has to be debited because the company is receiving $5,000 of cash from its bank. Because of double-entry accounting, another account will be credited for $5,000. In this case, the company should credit Loans Payable or Notes Payable. This credit makes sense because the balance in a liability account needs to be increased. In our other example, when a company pays a bill, the asset account Cash needs to be credited for $1,000 in order to reduce this asset’s normal debit balance. Therefore, one or more accounts will need to be debited. Since $100 of the payment was for interest, the account Interest Expense will be debited. The $900 principal repayment will be debited to the liability account Loans Payable. (Recall that liability accounts are decreased with a debit entry.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com. If a company makes a cash sale of $500, the company will debit Cash for $500 because the company is receiving cash and needs to increase the balance in the asset account Cash. The double-entry system requires that another account be credited. In this situation, the account to be credited is Sales. (Recall that revenue accounts are almost always credited. Also recall that revenue accounts are credited since they increase the normal credit balance in the equity accounts.) If a company buys a new machine at a cost of $20,000 by writing a check for $12,000 and promising to pay $8,000 in six months, the company will debit the asset Machinery for $20,000; credit Cash for $12,000; and credit Loans Payable or Notes Payable for $8,000.",This is a cheet sheet Question
Additional Tips for Accounts to be Debited and Credited,You might think of the acronym DEAL when learning which accounts will be increased with a debit entry. Use the first letter from the following four types of accounts to spell D-E-A-L: Dividends Expenses Assets Losses You could think of the acronym GIRLS when learning which accounts will be increased with a credit entry. Use the first letter from the following five types of accounts to spell G-I-R-L-S: Gains Income Revenue Liabilities Stockholders’ (or owner’s Equity),This is a cheet sheet Question
Trial Balance,"If each transaction is recorded with debits equal to credits, and there are no math errors in calculating the account balances, then the accounts will be in balance. A trial balance is an internal report that lists all of the account balances in the respective debit or credit column. The amounts in each column should sum to the same total. (Today’s popular accounting software is programmed For personal use by the original purchaser only. Copyright © AccountingCoach®.com. to require debits to be equal to credits and the account balances will be computed without error. Therefore, the trial balance should never indicate a difference.) However, a balanced trial balance does not guarantee that the records are free of errors. For example, an entry could be completely omitted or could be entered twice and the trial balance will be in balance. Also, the monthly rent payment could be coded incorrectly as a debit to an asset account instead of a debit to Rent Expense and the trial balance will be in balance. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Financial Ratios Including Limitations,"Financial ratios are one component of financial analysis. Financial ratios are often calculated by using amounts from previously issued annual financial statements. In that case the resulting ratios are history and may not be indicative of the present and future situation. It is also wise to consider the financial ratios to be averages. For example, the sales are unlikely to have occured evenly throughout the year. Therefore, the resulting number of days’ sales in inventory may be 100, but it is an average of some months of 120 days and some months of 80 days. The turnover ratios and the “return on” ratios usually involve an annual income statement amount and a balance sheet amount. However, the balance sheet amount is valid only for the final moment of the accounting year and may not be indicative of the amounts within the accounting year. This is especially true when a corporation ends its accounting year at the low point of its business activity. To overcome this situation, it is best to use the average balance sheet amounts for the 12 months during the year. (Merely averaging the two lowest points of the year will not solve the problem.) It is also important to realize that companies within the same industry may apply accounting principles differently. Some companies may be conservative in their accounting, while another may be the complete opposite. For example, Company C values its inventory using LIFO and uses very short useful lives for depreciating its plant assets. Its competitor Company L values its inventory using FIFO and uses very long useful lives for depreciating its plant assets. In periods of inflation, the financial statements and financial ratios of these companies will have differences due to the way accounting principles are applied. Of course within a company where the accounting rules are consistantly applied, the current financial ratios can be compared with confidence to its financial ratios from the past and to those budgeted for the current year and future years.",This is a cheet sheet Question
Working Capital,"Working capital is actually an amount (rather than a ratio) which is an indicator of a company’s ability to meet its obligations. It is calculated as follows: current assets minus current liabilities. For example, if a business has $280,000 of current assets and $260,000 of current liabilities, its working capital is $20,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Current Ratio,"The current ratio is also an indicator of a company’s ability to pay its current obligations. The calculation is: current assets divided by current liabilities. If a company has current assets of $300,000 and current liabilities of $150,000 the company’s current ratio is 2:1 [($300,000/$150,000):1].",This is a cheet sheet Question
Acid-Test Ratio or Quick Ratio,"The acid-test ratio is also known as the quick ratio. It is a more conservative indicator of a company’s ability to pay its current obligations (than the current ratio) since inventory is excluded from the calculation. In other words, the calculation is: [cash + marketable securities + accounts receivable] divided by current liabilities. If a company had current assets of $300,000 (of which $180,000 was inventory) and current liabilities of $150,000, the acid-test ratio will be approximately 0.8:1 [$120,000/$150,000].",This is a cheet sheet Question
Receivables Turnover Ratio,"The receivables turnover ratio is an indicator of how fast a company’s accounts receivable are (or were) collected. The calculation is: credit sales for a year divided by the average balance in accounts receivable during the same year. If credit sales for the year were $800,000 and the average amount of accounts receivable throughout the year was $100,000 the company’s receivables turnover ratio will be 8 times [$800,000/$100,000]. Of course, if only the two low end-of-the-year receivable amounts are averaged, the resulting ratio will be much different from the average based on the average throughout the year. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Average Collection Period or Days’ Sales in Receivables,"The average collection period tells how many days (on average) it takes to collect a company’s accounts receivable. The calculation is: 360 or 365 days divided by the receivables turnover ratio. Using the information in our previous calculation, the receivables turnover ratio was 8. Therefore, the average collection period was 45 days [360 days/8]. A logical next step is to compare the average collection period to past ratios and also to the credit terms offered to customers.",This is a cheet sheet Question
Inventory Turnover Ratio,"The inventory turnover ratio indicates how many times a company’s inventory turns over in a year. The calculation is: cost of goods sold for a year divided by the average inventory during the same year. Since a company records inventory at cost, it is logical to use the cost of goods sold from the income statement. If the cost of goods sold for the year was $600,000 and the average cost of inventory during  the year was $200,000 the company’s inventory turnover ratio is 3 times [$600,000/$200,000]. Again, if the average inventory is based on the two lowest points of the year, this turnover ratio will be greater than an average based on amounts throughout the year.",This is a cheet sheet Question
Days’ Sales in Inventory or Days to Sell,"The days’ sales in inventory indicates how many days of sales are in inventory. The calculation is: 360 or 365 days divided by the inventory turnover ratio. If the inventory turnover ratio is 3, the days’ sales in inventory will be 120 days [360 days/3].",This is a cheet sheet Question
Free Cash Flow,"The calculation of free cash flow is: net cash flow from operating activities minus the necessary capital expenditures. (Sometimes a company’s dividend payments are deducted along with the capital expenditures.) If a corporation had cash from operating activities of $200,000 and necessary capital expenditures of $60,000 the amount of free cash flow was $140,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Times Interest Earned,"Times interest earned indicates a company’s ability to pay the interest on its debt. The calculation is: income before interest expense and income tax expense divided by interest expense. If a company’s net income was $100,000 after interest expense of $40,000 and income tax expense of $20,000 the times interest earned is 4 times [$160,000/$40,000]. Gross Profit or Gross Margin (in dollars) Gross profit is the remainder of net sales minus cost of goods sold. Gross profit is the amount prior to deducting a company’s selling, general and administrative expenses and adding or subtracting the nonoperating items. If net sales (gross sales minus sales returns and allowances and sales discounts) were $800,000 and the cost of goods sold was $600,000 the gross profit was $200,000. Gross Profit Percentage or Gross Margin as a",This is a cheet sheet Question
Percentage,"The gross profit percentage is the dollars of gross profit divided by the dollars of net sales. If the gross profit was $200,000 and the net sales were $800,000 the gross profit percentage or gross margin was 25%.",This is a cheet sheet Question
Return on Assets,"The return on assets indicates how profitably a company has used its assets. The calculation is the company’s net income for a year divided by the average amount of assets during the same year. If the corporation’s net income for the year was $100,000 and the average amount of assets was $1,000,000 the return on assets was 10%. Sometimes the return is after income tax expense and sometimes it is before income tax expense. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Return on Equity,"Return on equity (with no preferred stock) is a corporation’s net income for a year divided by the average amount of stockholders’ equity during the year. If the corporation’s net income was $100,000 and its stockholders’ equity averaged $500,000 during the year, the return on equity was 20%.",This is a cheet sheet Question
Asset Turnover Ratio,"The calculation of the asset turnover ratio is: net sales for a year divided by the average amount of assets during the same year. If net sales were $800,000 and the average amount of assets was $1,000,000 the asset turnover ratio was 0.8:1 [$800,000/$1,000,000]. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Financial Accounting,"Financial accounting is a type or branch of accounting that begins with the recording, sorting and storing of a business’s transactions in accounts contained in its general ledger. After reviewing and adjusting the amounts to comply with generally accepted accounting principles, the amounts are summarized and presented in the form of financial statements. When the financial statements of a U.S. corporation are distributed to someone outside of the corporation, the financial statements should include the following: •	 Income statement •	 Statement of comprehensive income •	 Balance sheet •	 Cash flow statement •	 Statement of stockholders’ equity •	 Notes to the financial statements",This is a cheet sheet Question
Double-Entry; Debit and Credit,"It is the norm for a corporation to use the double-entry accounting system. Double-entry accounting means that every transaction will affect two or more accounts. It also uses the terms debit and credit, which had their origin five centuries ago. Today, you should associate debit with left side of an account, and associate the term credit with the right side of an account. As a result, every business transaction will have an amount recorded (as a debit) on the left side of an account and will have an amount recorded (as a credit) on the right side of an account. Example 1. If a corporation borrows $10,000 from its bank, the corporation will debit the account Cash and will credit the account Loans Payable. Example 2. When a corporation pays its June rent on June 1, the corporation will debit Rent Expense and will credit Cash. Today’s accounting software will assure that the double-entry system is adhered to. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Generally Accepted Accounting Principles (GAAP),"When a U.S. corporation’s financial statements are distributed to someone outside of the corporation, they must comply with generally accepted accounting principles (GAAP or US GAAP). GAAP includes underlying concepts such as the historical cost principle, matching principle, revenue recognition, full disclosure principle, plus many detailed rules or standards that are required by the Financial Accounting Standards Board (FASB). Some of the rules or standards include the accounting for hedging transactions, pensions, leases, foreign currency translation, and many more.",This is a cheet sheet Question
Accrual Method of Accounting,"US GAAP usually requires that a corporation’s financial statements be prepared using the accrual method (or basis) of accounting. (Individuals on the other hand are likely to use the cash method of accounting.) Under the accrual method, revenues are reported on the income statement and the related receivable will be reported on the balance sheet when the amount is earned (as opposed to when the cash is received). Similarly, expenses and losses are reported on the income statement and the related liability is reported on the balance sheet when they occur (as opposed to waiting until the amount is paid).",This is a cheet sheet Question
Other Types or Branches of Accounting,"As noted earlier financial accounting is just one type or branch of accounting. The others include cost accounting, management accounting, not-for-profit accounting, governmental accounting, income tax accounting, auditing, forensic accounting, accounting systems, auditing, and more. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Evaluating Business Investments,"When someone is deciding to invest in business assets that have a life of more than one year, it is important that the time value of money be considered. The time value of money means that the dollars (or other currency) invested or paid today are more valuable than the dollars that will be received in the future years. The process of evaluating and deciding which long-lived assets will be made is referred to as capital budgeting and the amounts actually invested are referred to as capital expenditures. We will discuss two models that consider the time value of money. They are: •	 Net present value •	 Internal rate of return Both of these models are also referred to as discounted cash flow (DCF) models.",This is a cheet sheet Question
Discounting Future Cash Flows,"To recognize the time value of money, the future cash flows are discounted to their “present value.” Discounting can be thought of as removing the interest or necessary earnings that is included in the future cash amounts. After the interest has been removed the resulting amount is the present value or the discounted cash amount. Depending on the purpose, the rate used for discounting the future cash amounts could be described as any of the following: •	 desired rate of return •	 target rate of return •	 time value of money •	 company’s cost of capital •	 incremental interest rate of the borrower •	 the inflation rate, etc. Example 1. If a company will be receiving a single amount of $1,000 at the end of 5 years, its present value is only $621 (if the $1,000 is discounted by a target rate of 10% per year for 5 years). If the $1,000 is discounted by 12%, the present value is $567. If the $1,000 is discounted by 8%, the present value is $681. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Note that when the rate used for discounting increases, the present value of the future cash amounts will be smaller. In other words, if you need to earn a higher rate and the $1,000 is a fixed amount, you need to invest a smaller amount.",This is a cheet sheet Question
Present Value Tables,"In classrooms, textbooks, and in our explanation, the calculation of the present values will be done by using present value tables. If there is a stream of equal cash amounts occurring at equal time intervals, the present value of an annuity table can be used. When there is a single future amount, or when the future amounts are not uniform in amount or occur at various time intervals, the present value of 1 table is used. (However, using an online calculator or a financial calculator is more practical, precise and faster.)",This is a cheet sheet Question
Net Present Value Model,"Net present value (NPV) is one of the discounted cash flow models used to evaluate investments in long-lived assets. In the NPV model, the future cash flows are discounted to their present values and then all of the present values (including the investment outflow of cash) are summed into a single amount. That single amount is known as the net present value. Example 2. A company is deciding whether to pay out cash of $100,000 today in order to receive the following cash amounts at the end of each of the years 1 thru 5: $25,000 + $30,000 + $35,000 + $40,000 + $45,000. Since the $100,000 is occurring at the present time, its present value is $100,000. Next the 5 future amounts need to be discounted to their present value. The discounting of the future amounts by 10% per year is shown in the following table: For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Cash In or (Cash Out) Present Value of 1 Factors for 10% Present Value Amounts Day 1 of Year 1 ($100,000) 1.000 (100,000) Final Day of Year 1 $25,000 0.909 22,725 Final Day of Year 2 $30,000 0.826 24,780 Final Day of Year 3 $35,000 0.751 26,285 Final Day of Year 4 $40,000 0.683 27,320 Final Day of Year 5 $45,000 0.621 27,945 Net Present Value 29,055 When the present value of the $100,000 cash outflow is combined with the present value of the five cash inflows we arrive at the net present value of 29,055. This positive present value indicates that the investment is earning significantly more than the 10% rate to discount the cash flows. (A net present value of $0 would indicate that the corporation was earning exactly 10%.)",This is a cheet sheet Question
Internal Rate of Return,"The internal rate of return (IRR) is a discounted flow model that computes the exact rate of return earned on an investment. In other words, the internal rate of return tells you the rate that will discount all of the investment’s cash flows to a net present value of exactly $0. If a present value table is used, it requires a trial-and-error approach. If it is done online or with a financial calculator, the rate will appear with electronic speed. Example 3. To illustrate the internal rate of return, we will use the same cash flows that were used in Example 2. First, recall that the net present value showed a positive 29,055. This relatively large net present value indicates that the internal rate of return will be significantly greater than the 10% rate used to calculate the net present value. As a result, we decided to discount the cash flows by 20%. The present value factors of a single amount for 20% are used in the following table: For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Cash In or (Cash Out) Present Value of 1 Factors for 20% Present Value Amounts Day 1 of Year 1 ($100,000) 1.000 (100,000) Final Day of Year 1 $25,000 0.833 20,825 Final Day of Year 2 $30,000 0.694 20,820 Final Day of Year 3 $35,000 0.579 20,265 Final Day of Year 4 $40,000 0.482 19,280 Final Day of Year 5 $45,000 0.402 18,090 Net Present Value (        720) After discounting the cash flows by 20%, the net present value is (720). This relatively small amount indicates that the internal rate of return is very close to 20%. Since the amount is negative, the actual rate is less than 20% (as opposed to more than 20%).  When an internal rate of return is calculated for each of the potential investments, the investments can be ranked from high to low.",This is a cheet sheet Question
Recap of NPV and IRR,"Both the net present value (NPV) and the internal rate of return (IRR) models are recommended because of the following: 1.	 Both use all of the cash flows that occur during the entire life of the investment 2.	 Both recognize the time value of money (future amounts are discounted) 3.	 Because the present value factors are very small in the future years, the estimated future amounts (which are difficult to predit) carry less weight than the more current amounts For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Payback Period,"Another model that is often used when evaluating business investments is the payback period. The payback period simply indicates the number of years it takes for a company to recover its investment. The payback period is easy to understand, but it has two drawbacks: •	 The future cash amounts are not discounted to their present value. This means that the time value of money is ignored. •	 The payback calculation does not consider all of the cash inflows. It merely looks at the cash flows until the investment is recovered. Example 4. The following chart illustrates the payback period calculation. The amounts come from our earlier examples, except that the cash inflows are assumed to occur evenly throughout each of the five years. Cash In or (Cash Out) Cumulative Amount of Cash In Portion of the Year Cumulative Number of Years Day 1 of Year 1 ($100,000) Year 1 $25,000 $    25,000 1.00 1.00 Year 2 $30,000 $    55,000 1.00 2.00 Year 3 $35,000 $    90,000 1.00 3.00 Year 4 $40,000 $  100,000 0.25 3.25 Year 5 $45,000 As the chart indicates, the company will recover its $100,000 investment in 3.25 years. This is 3 full years plus $10,000 of the $40,000 in Year 4. Note that the payback period calculation ignored the following: •	 $30,000 of the $40,000 occurring in Year 4, and •	 $45,000 occurring in Year 5. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Depreciation,"In accounting, depreciation is the spreading (allocation) of an asset’s cost over the many accounting periods in which it is used. The assets that are depreciated include buildings, equipment, furnishings, vehicles, land improvements (but not the land), and similar long-term assets that are used in a business. The purpose of depreciation is to match the cost of the asset with the revenues that are earned from the use of the asset. Note that the purpose of depreciation is not to calculate the market value of an asset. Except for some manufacturing assets, the depreciation for the accounting period is recorded as a debit in the income statement account Depreciation Expense. The amount of depreciation is recorded as a credit in the balance sheet account Accumulated Depreciation, which is a contra-asset account. This is done instead of crediting an asset such as Equipment. The combination of the debit balance in the Equipment account and the credit balance in the account Accumulated Depreciation for Equipment is the book value (or the carrying value) of the equipment. Remember that this book value is not the fair market value of the equipment. It merely represents the cost which has not yet been depreciated. Example 1. A company purchases equipment at a cost of $100,000 and it is expected to be useful for 10 years. At the end of 10 years it will be scrapped for $0. A common depreciation method is to debit $10,000 per year to Depreciation Expense and to credit Accumulated Depreciation for $10,000. Depreciation on the Financial Statements Vs.",This is a cheet sheet Question
Tax Return,"The depreciation that we are discussing is the depreciation reported on the financial statements. This depreciation is almost always different from the depreciation reported on the corporation’s income tax returns. The reason is that the financial statement depreciation is based on the matching principle of accounting while the income tax depreciation is based on income tax regulations and tax strategies. However, the total amount of depreciation over the life of the asset will likely be the same: the asset’s cost. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Cost,"An asset’s cost is the cash equivalent amount paid for the asset plus the necessary costs to get the asset in place and ready for use. The asset’s cost is the maximum total amount of depreciation expense over the years of the asset’s useful life. Once the asset’s cost is fully depreciated, the depreciation expense stops, even if the asset continues to be used in the business.",This is a cheet sheet Question
Useful Life,"An asset’s useful life is the estimated number of years (or units of output) that the asset will be economically useful. This estimate is made when the asset is placed into service. For example, if a company estimates that a machine with a cost of $100,000 will have a useful life of 10 years, its financial statements will report $10,000 per year. (The 10 years is used even if the income tax regulations specify a 7-year life or it allows the immediate expensing of the $100,000 in the year that it is placed into service.) Salvage Value (Scrap Value or Residual Value) An asset’s salvage value is an estimate of the amount that will be recovered at the end of an asset’s useful life. It is also known as the scrap value or residual value. This estimate is made at the time the asset is placed into service and the amount is subtracted from an asset’s cost in order to determine the total amount of depreciation over the life of the asset. Often the salvage value is estimated to be $0.",This is a cheet sheet Question
Depreciable Cost,An asset’s depreciable cost is the asset’s cost minus the asset’s estimated salvage value at the end of its useful life. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Half-year Convention,"The half-year convention assumes that a newly acquired asset was placed in service at the midpoint of a year. As a result, one-half of the annual depreciation is charged to depreciation expense in the first year (and in the final year) of the asset’s useful life. Example 2. If an asset has a cost of $100,000 and an estimated useful life of 10 years and an estimated salvage value of $0, the annual depreciation could be $10,000. Under the half-year convention, the company will report $5,000 of depreciation in the year the asset is placed into service, followed by 9 full years of $10,000 of depreciation, and then $5,000 in the 11th year…for a total of $100,000.",This is a cheet sheet Question
Straight-Line Depreciation,"Straight-line depreciation is the common method for computing the depreciation reported on the financial statements. Straight-line depreciation results in the same amount of annual depreciation in each year (except for partial years). The full-year, annual depreciation is computed by taking the asset’s depreciable cost and dividing it by the number of years of useful life.",This is a cheet sheet Question
Accelerated Depreciation,"Accelerated depreciation refers to the depreciation methods in which larger amounts of annual depreciation are taken in the early years of an asset’s life, and smaller amounts of annual depreciation are taken in the later years. (Over the entire useful life of the asset the total amount of depreciation is the same as the straight-line method.) Two of the accelerated depreciation methods are the double-declining-balance method, and the sum-of-the-years’-digits method. Double-Declining-Balance (DDB) Method Double-declining-balance (or DDB) method of depreciation is one of the accelerated methods of depreciation. “Double” means taking 200% of the straight-line depreciation rate. The “declining- balance” refers to the asset’s book value which is declining as the asset is depreciated. (Book value or carrying value is the asset’s cost minus its accumulated depreciation.) This means that an asset with a For personal use by the original purchaser only. Copyright © AccountingCoach®.com. useful life of 10 years will have a straight-line rate of 10% which will be doubled to 20%. This rate is multiplied times the asset’s book value as of the beginning of the year. Example 3. Assume that a corporation acquires an asset at the cost of $100,000. It estimates the asset will be useful for 10 years. This means the straight-line depreciation rate is 10%, which will become 20% for the double-declining-balance method. The asset’s book value at the beginning of the first year is $100,000 which is multiplied by 20% to arrive at $20,000 of depreciation in the first year of the asset’s life. For the second year of the asset’s life, the beginning book value will be $80,000 ($100,000 minus $20,000 of accumulated depreciation). That amount times 20% will mean $16,000 of depreciation during the second year of the asset’s life. The depreciation for the third year of the asset’s life will be $64,000 X 20% = $12,800. This continues until the asset’s book value is equal to the asset’s salvage value. (Over the life of the asset, the total amount of depreciation will be the same under any depreciation method. The differences involve the timing of the depreciation.)",This is a cheet sheet Question
Sum-of-the-Years’-Digits (SYD) Method,"Sum-of-the-years’-digits (SYD) method of depreciation is also an accelerated method of depreciation. Its name comes from summing all of the digits in the years of the asset’s useful life (see Example 4 below). This sum will become the denominator of the fraction that will be used. The numerator of the fraction is the years of depreciation remaining. Example 4. Assume that a corporation acquires a business asset and estimates its useful life is 10 years. The digits in the years of useful life are: 1+2+3+4+5+6+7+8+9+10 and the sum is 55. Since there are 10 years remaining in the first year of the asset’s life, the depreciation for the first year will be 10/55 of the depreciable cost. If the asset has a cost of $100,000 and the estimated salvage value is $0, the depreciation (rounded) for the first year of the asset’s life is $100,000 X 10/55 = $18,182. The depreciation for the second year of the asset’s life will be $100,000 X 9/55 = $16,364. In the final year of the asset’s life the depreciation will be $100,000 X 1/55 = $1,818. (Again, the total amount of depreciation expense during the years of useful life will be the same regardless of the method used.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Chart of Accounts,"A chart of accounts is a list of the general ledger accounts (and subaccounts) available for recording an organization’s transactions. The chart of accounts will likely include an account number and account title. However, there could also be a brief description of the transactions that should be recorded in each of the accounts. The chart of accounts can be expanded to accommodate new types of business transactions. The chart of accounts will not include the account balances or other amounts. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
How the Chart of Accounts Is Organized,"The chart of accounts will have the accounts arranged in the same order as the general ledger. A common order for a business corporation is: Asset accounts Current assets Noncurrent assets Liability accounts Current liabilities Noncurrent liabilities Stockholders’ equity accounts Paid-in capital Retained earnings Accum other comprehensive income Treasury stock Common Stock, Paid-in Capital in Excess of Par Retained Earnings Accumulated Other Comprehensive Income Treasury Stock Cash, Accounts Receivable, Allowance for Doubtful Accounts, Inventory, Prepaid Expenses Investments, Land, Buildings, Equipment, Vehicles, Furnishings, Accumulated Depreciation Sales, Service Revenues, Fees Earned Salaries & Wages Expense, Rent Expense, Utilities Expense, Advertising Expense, Delivery Expense Interest Income, Gain on Sale of Delivery Truck Interest Expense, Loss from Lawsuit, Loss on Sale of Equipment Notes Payable, Accounts Payable, Accrued Expenses Payable Mortgage Loan Payable, Bonds Payable, Deferred Income Taxes Operating revenues Operating expenses Non-operating revenues & gains Non-operating expenses & losses Balance Sheet Accounts Income Statement Accounts Examples/Common Account Titles Examples/Common Account Titles For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Account Numbers,"It is common for the first digit of each account number to indicate the type of account. For example, the first digit of an asset account number will usually begin with a “1”.  The first digit of the liability accounts will begin with the digit “2”. Perhaps marketing expenses will begin with the digit “5” and administrative expenses will begin with the digit “6”. Non-operating or other income items may begin with the digit “9”. Very small companies might use 4-digit account numbers, while large companies may use 6 or more digits in their account numbers.",This is a cheet sheet Question
Other Comments,"The chart of accounts often reflects a company’s organization chart. With that arrangement, the internal financial statements can be prepared for each division, department, cost center, etc. This allows a company to give the person who is responsible for a specific department only the financial information for which they are responsible. Today’s accounting software may provide sample charts of accounts for a variety of businesses. However, you should plan on having to modify and expand the chart of accounts in order to accommodate your particular organization. In the accounting software that I had used many years ago, the chart of accounts included a field for coding the layout of the financial statements. For example, part of the code would cause the balances in several accounts to be “condensed” into a single amount. The financial statement would then display only the condensed total amount. It also prepared a separate page or schedule to show the detailed amounts.",This is a cheet sheet Question
Cash Flow Statement,"The cash flow statement is officially known as the statement of cash flows (SCF). It reports the major cash inflows and outflows that have occurred during the accounting period specified in its heading. Expressed another way, the SCF for the calendar year 2023 will list the major cash flows that caused the change in a corporation’s cash and cash equivalents from December 31, 2022 to December 31, 2023. The cash flow statement is especially useful because a corporation’s income statement is prepared under the accrual method of accounting. This means the income statement reports revenues earned (not cash receipts) and expenses incurred (not cash payments). Since many investors and financial analysts believe that “cash is king” the annual cash flow statement is one of the five required annual financial statements whenever financial statements are distributed to people outside of the corporation. (The other four required financial statements are: income statement, statement of comprehensive income, balance sheet, and statement of stockholders’ equity.)",This is a cheet sheet Question
Format of SCF,"The statement of cash flows has three major sections: •	 Cash flows from operating activities •	 Cash flows from investing activities •	 Cash flows from financing activities In addition, the SCF must disclose some supplemental or supplementary information, including significant noncash transactions (such as an exchange of shares of stock for land), income taxes paid, and interest paid. How Amounts Are Presented Each significant cash inflow and each significant cash outflow will be reported in one of the three sections noted above (operating, investing, financing). For personal use by the original purchaser only. Copyright © AccountingCoach®.com. A positive amount on the SCF means: •	 a cash inflow •	 cash was provided •	 it was good for the corporation’s cash •	 it had a positive or favorable effect on the corporation’s cash balance A negative amount on the SCF means: •	 a cash outflow •	 cash was used •	 it was not good for the corporation’s cash •	 it had a negative or unfavorable effect on the corporation’s cash balance",This is a cheet sheet Question
How a Positive Amount is Determined,"If a balance sheet asset (other than cash) has decreased it usually means that cash was provided. Therefore, the SCF will report the amount of the asset’s decrease as a positive amount. For instance, if the asset Accounts Receivable has decreased by $2,000, the SCF will report this as a positive $2,000 since decreasing Accounts Receivable is good for the corporation’s cash, there was a cash inflow, and it had a positive or favorable effect on the corporation’s cash balance. When a balance sheet liability has increased, it will mean that cash was provided. This means the amount of the increase will be shown on the SCF as a positive amount. For example, if Notes Payable has increased by $10,000 it will be reported on the SCF as a positive $10,000 since the increase in Notes Payable means there was a cash inflow, cash was provided, and this had a positive or favorable effect on the cash balance. When a stockholders’ equity account has increased, it will mean that cash was provided. Thus, the amount of the increase in stockholders’ equity will be reported on the SCF as a positive amount. For instance, if Common Stock has increased by $40,000, it will be reported on the SCF as a positive $40,000. It is positive since the increase in Common Stock means there was a cash inflow, cash was provided, and this had a positive or favorable effect on the cash balance. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
How a Negative Amount is Determined,"If the asset Inventory has increased, the SCF will report this as a negative amount. The reasoning is that increasing Inventory likely meant a cash outflow, cash was used, and/or it was not good for the corporation’s cash balance. When a liability has decreased, it is also assumed that cash was used and it is presented on the SCF as a negative amount. For example, if Accounts Payable has decreased by $3,000, the amount will be reported on the SCF as (3,000). It is reported as a negative amount since reducing Accounts Payable meant there was a cash outflow, cash was used, and this had a negative or unfavorable effect on the corporation’s cash balance. When a stockholders’ equity account is decreased, it is assumed that cash was used. As a result, the amount of the decrease will appear on the SCF as a negative amount. For example, if Retained Earnings is decreased, it could be the result of declaring and paying a cash dividend. The payment of a cash dividend is reported on the SCF as a negative amount since the decrease in Retained Earnings means there was a cash outflow, cash was used, and it had a negative or unfavorable effect on the corporation’s cash balance.",This is a cheet sheet Question
Indirect Method of Preparing SCF,"The indirect method of preparing the statement of cash flows is used by nearly all large corporations. (The alternative is the direct method, which is actually preferred by the Financial Accounting Standards Board or FASB.) Under the indirect method the first section of the SCF (which is the cash flows from operating activities) begins with the corporation’s net income. Since the income statement reports revenues and expenses using the accrual method of accounting, the net income will have to be adjusted to cash amounts. A common adjustment involves depreciation expense. The reason is the depreciation expense had reduced the amount of net income, but depreciation did not require the use of cash. There will be additional adjustments to net income reporting in the operating activities section for the changes in the current assets and current liabilities. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Cash Flows from Operating Activities,"The cash flows from operating activities is the heading of the first section of the cash flow statement. Under the indirect method, this section begins with a corporation’s net income and is then adjusted from the accrual accounting amounts to the cash amounts. For example, there will be a positive adjustment to net income for the depreciation expense taken on the income statement since it did not use cash. If Accounts Receivable increased, it indicates that the corporation did not collect cash for all of the Sales reported on the income statement. As a result, there will be a subtraction or negative adjustment to the net income for the amount of the increase in Accounts Receivable. There will be adjustments for most of the changes in current asset and current liability accounts, including inventory, prepaid expenses, accounts payable, deferred revenues, etc. (However, the change in a company’s short-term borrowings is reported under cash flows from financing activities.) Ideally, the net amount of cash flows from operating activities will be greater than the net income. If this is not the case, I suggest a close review of the negative adjustments within this section of the SCF. For instance, an increase in Accounts Receivable may indicate that customers are unable to pay the amounts they owe. An increase in Inventory may indicate sales have slowed unexpectedly.",This is a cheet sheet Question
Cash Flows from Investing Activities,"The cash flows from investing activities is the second section of the SCF. This section reports the amounts pertaining to the purchase and sale of a corporation’s noncurrent (or long-term) assets. For example, capital expenditures (amounts spent for property, plant and equipment used in the business) and the purchase of long-term investments are uses of cash and therefore will be reported as negative amounts. The proceeds from the sale of property, plant and equipment and the sale of a long-term investment will provide cash and are therefore reported as positive amounts.",This is a cheet sheet Question
Cash Flows from Financing Activities,"The third section of SCF is the cash flows from financing activities. The amounts reported in this section involve the increases and decreases in noncurrent liabilities, stockholders’ equity, and short- term loans. For example, if the corporation issues common stock or bonds, the amount received will be reported as a positive amount since this provides cash, which is positive for the corporation’s cash balance. If the corporation pays off some of its debt or pays a cash dividend to stockholders, those amounts will be listed as negative amounts, since cash was used and that has a negative effect on the corporation’s cash balance. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Total of Three Sections = Change in Cash and Cash Equivalents,"After the three sections, the SCF will show the grand total of the three sections. The grand total is followed by a reconciliation with the change in the corporation’s cash and cash equivalents.",This is a cheet sheet Question
Supplemental Information,"In addition to the amounts reported in the three sections of the face of the cash flow statement, the statement must also disclose supplemental or supplementary information. One example is the acquisition of an asset in exchange for shares of stock. In this example, no cash was involved, but the transaction did involve a significant investing activity and a significant financing activity. Two other required disclosures are the amount of interest paid and the amount of income taxes paid. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Break-even Point,"The break-even point is the level of sales that result in a business having a net income of zero. In other words, its revenues will be exactly equal to its expenses. The break-even point calculation that is found in managerial accounting textbooks is based on knowing how a company’s costs or expenses will change as the volume of sales change. The break- even point calculation is based on the following amounts: •	 Total amount of fixed expenses •	 Variable expenses per unit or as a percentage of sales •	 Selling price or sales dollars •	 Contribution margin (which can be determined from the sales and variable expenses)",This is a cheet sheet Question
Fixed Expenses,"Fixed expenses are the expenses that will not change in total as the sales volume changes. For example, if a retail store’s rent is $30,000 per year and will not change within a reasonable range of sales, the rent is a fixed expense. Other examples are managers’ salaries, property insurance, property tax, etc.",This is a cheet sheet Question
Variable Expenses,"Variable expenses are the expenses that change in total as volume changes. For example, if a retailer purchases a product at a cost of $11 and sells it for $20, the $11 per unit is a variable expense. Another variable expense would be a sales commission of 5% that is given on every sale. In this example, the variable expenses would be $12 per unit ($11 + $1). The $12 of variable expenses can also be expressed as a percentage of selling price, such as 60% ($12 divided by $20). For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Selling Price,"In the calculation of the break-even point, the selling price of a product is assumed to be a constant amount per unit. If the selling price is $20 per unit, the break-even calculation assumes that the selling price will remain $20 whether 50 units are sold or 50,000 are sold.",This is a cheet sheet Question
Contribution Margin per Unit,"Contribution margin per unit = selling price per unit minus the variable expenses per unit. If the selling price per unit is $20 and the variable expenses are $12, the resulting contribution margin per unit is $8. Contribution Margin Ratio (using the per unit amounts) Contribution margin ratio (using the per unit amounts) = contribution margin per unit divided by selling price per unit. If the selling price per unit is $20 and the variable expenses per unit are $12, the resulting contribution margin per unit is $8. This means that the contribution margin ratio is 40% ($8 contribution margin/$20 selling price).",This is a cheet sheet Question
Total Contribution Margin,"If a company has total sales of $200,000 and total variable expenses of $120,000 its total contribution margin is $80,000. Contribution Margin Ratio (using totals) The contribution margin ratio using totals = total contribution margin divided by total sales. If a company has a total contribution margin of $80,000 and its total sales were $200,000, the company’s contribution margin ratio is 40% ($80,000/$200,000). For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Break-even Calculations,"Here’s a recap of the information we discussed above and some other information which we will use in the break-even calculations that follow: •	 The company had only one product and its selling price was $20 per unit •	 The total fixed expenses were $66,000 per year •	 The variable expenses were $12 per unit, which is 60% of the $20 selling price •	 The contribution margin was $8 per unit, which is 40% of the selling price Break-even Point in Units (for the year): = Total fixed expenses for the year divided by the contribution margin per unit = $66,000 divided by $8 per unit = 8,250 units Break-even Point in Sales Dollars (for the year): = Total fixed expenses for the year divided by the contribution margin ratio = $66,000 divided by 40% = $165,000 The break-even point in sales dollars for the year could also be calculated taking the break-even point in units of 8,250 and multiplying that amount by the $20 selling price = $165,000 per year.",This is a cheet sheet Question
The Mix of Products Sold May Change,"The break-even model has some limitations. For example, a company often sells many different products (and/or services) with a wide range of contribution margins (and a variety of contribution margin ratios). Therefore, the same total number of units sold could result in vastly different profits if the sales mix changes. (Sales mix is the varying proportions of high and low margin products that are sold.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Not All Variable Expenses Are Linear,"Another limitation is that many variable expenses will not change in direct proportion to the change in volume. In other words, if the total variable expenses were graphed according to sales volume, the resulting line would not be a straight line. Perhaps the line will curve upward thereby revealing that some variable expenses may be increasing exponentially instead of increasing at a constant rate.",This is a cheet sheet Question
Fixed Expenses Could Change,"Some fixed expenses could increase when a very large change in volume occurs. That is why the definition of fixed expense has a qualifier: The total expense is fixed “within a relevant range of sales or volume.” For example, if the volume increases by such a large amount that another salaried supervisor is required, the fixed expense of supervisors will increase. If the increase in volume is so large that it necessitates renting an additional building, the fixed expense of rent will increase.",This is a cheet sheet Question
Selling Prices May Have to Change,"A company may find that in order to increase its sales, it will have to lower its selling prices. This in turn reduces the contribution margin per unit. Competitors may also enter the market and offer lower selling prices in order to attract customers.",This is a cheet sheet Question
Electronic Worksheets,"The simple break-even point models were developed prior to electronic worksheets and personal computers. Now that these inexpensive tools are available, it makes sense to develop electronic worksheets with more sophistication than the simple break-even models. With formulas in the electronic worksheet cells, accountants can easily change various assumptions and immediately see the results. In other words, electronic worksheets allow accountants to play “What if?” What if the selling price is increased by $1 per unit? What if the volume is decreased by 4,000 units? What if the fixed expenses are increased by $8,000 per year? For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bookkeeping in the Past,"Historically, bookkeepers were responsible for the following steps in the accounting cycle: •	 Record all the company’s transactions in journals •	 Post the amounts from the journals to accounts in the general ledger and subsidiary ledgers •	 Calculate the balance in each of the accounts •	 Prepare a trial balance (a list of the balances in the general ledger accounts) •	 Identify and correct any errors that caused the trial balance to not balance (total debit balances did not equal total credit balances) After the bookkeeper completed these time-consuming tasks each month, an accountant prepared the necessary adjusting entries and the financial statements for the month and year-to-date.",This is a cheet sheet Question
Bookkeeping Today,"Thanks to computers and the discipline imposed by the accounting software, the accounts and trial balance will always be in balance. Further, the previously distinct steps in the accounting cycle now appear to happen simultaneously. For example, when a distributor sells goods on credit, the software prepares the sales invoice, credits the general ledger’s Sales account, debits the general ledger’s Accounts Receivable, updates the customer’s detailed account, reduces the Inventory account, increases the Cost of Goods Sold, updates all balances in the general ledger accounts, provides for a trial balance and financial statements on demand, and more. Of course, the bookkeeper must be certain that only legitimate business transactions are processed by the accounting software.",This is a cheet sheet Question
Double-entry Accounting System,"Behind the computer screens, most accounting software is based on the double-entry system of accounting which has been in existence for more than 500 years. The double-entry system means the following: For personal use by the original purchaser only. Copyright © AccountingCoach®.com. •	 Every transaction affects two (or more) general ledger accounts •	 Every transaction must have an amount recorded in at least one account as a debit (left side of the account), and an amount must be recorded in at least one account as a credit (right side of the account) •	 The amounts entered for each transaction must have the total debits equal to the total credits •	 At all times, the total of the amounts entered as debits must equal the total of the amounts entered as credits •	 At all times, the total of the debit balances in the accounts must be equal to the total of the credit balances in the accounts Here are a few examples of what will be occurring automatically when using accounting software: •	 Cash will be credited whenever a check is written •	 Cash will be debited when money is received •	 Accounts Receivable will be debited when a sales invoice is issued for a credit sale",This is a cheet sheet Question
Accounting Equation,"In addition to the general ledger having debits equal to credits, the account balances must satisfy the accounting equation, which is: Assets = Liabilities + Stockholders’ Equity Asset accounts (normally debit balances) include: •	 Cash •	 Accounts receivable •	 Inventory •	 Prepaid expenses •	 Equipment For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Liability accounts (normally credit balances) include: •	 Accounts payable •	 Loans payable •	 Wages and payroll taxes payable •	 Interest payable •	 Deferred or unearned revenues Stockholders’ equity accounts (normally credit balances) include: •	 Common stock •	 Retained earnings •	 Accumulated other comprehensive income •	 Treasury stock (a subtraction) NOTE: The asset accounts normally have debit (or left side) balances, which is consistent with the total amount of the asset account balances appearing on the left side of the accounting equation. The liability accounts normally have credit (or right side) balances, which is consistent with the total amount of the liability account balances appearing on the right side of the accounting equation. The stockholders’ equity accounts normally have credit (or right side) balances, which is consistent with the total amount of the stockholders’ equity account balances appearing on the right side of the accounting equation.",This is a cheet sheet Question
Example 1,"If Jay Corporation borrows $10,000 from its bank, Jay Corporation’s asset Cash increases by $10,000 and its liability Loans Payable increases by $10,000. Thus, the accounting equation remains in balance. The debits and credits are as follows: debit Cash for $10,000; credit Loans Payable for $10,000. If Jay Corporation repays $3,000 of the loan amount, Jay Corporation’s asset Cash will decrease by $3,000 and its liability Loans Payable will decrease by $3,000. As a result, the accounting equation remains in balance. The debits and credits are as follows: debit Loans Payable for $3,000; credit Cash for $3,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Recording Revenues and Expenses,"When a corporation earns revenues (such as fees for having provided services for a client), the corporation’s assets will increase and its stockholders’ equity will increase. Similarly, when the corporation pays its monthly rent, the corporation’s assets decrease and its stockholders’ equity decreases. Since a corporation will have thousands of transactions involving revenues and expenses, it is useful to have: •	 Separate accounts for every type of revenues, and •	 Separate accounts for every type of expenses. The revenue and expense accounts should be thought of as temporary stockholders’ equity accounts or subaccounts of stockholders’ equity. Next, we list just a few examples of the hundreds of revenue and expense accounts typically used by a company. Revenue accounts (normally credit balances) include: •	 Sales of product A •	 Fees earned from services •	 Interest earned on bank accounts Expense accounts (normally debit balances) include: •	 Cost of goods sold •	 Salaries expense •	 Rent expense •	 Interest expense NOTE: Since revenues increase stockholders’ equity, the revenue accounts will have credit balances. Since expenses decrease stockholders’ equity, the expense accounts will have debit balances. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Example 2 Jay Corporation provides a customer with $4,000 of services and allows the customer to pay in 30 days. As a result, Jay Corporation’s assets increase by $4,000 and its stockholders’ equity increases by $4,000. Because Jay Corporation has earned the $4,000, it is recorded with a debit to Accounts Receivable for $4,000 and a credit to Fees Earned for $4,000. Example 3 Jay Corporation paid $1,500 for the current month’s rent. This causes a decrease in Jay Corporation’s assets and a decrease in its stockholders’ equity. The debits and credits are: debit Rent Expense for $1,500; credit Cash for $1,500. NOTE: A complete list of a company’s general ledger accounts in which amounts can be recorded is known as the chart of accounts. Accounts can be added when necessary. An internal report that lists the general ledger accounts which have balances (with the debit balances listed in one column and the credit balances listed in another column) is known as a trial balance.",This is a cheet sheet Question
Accrual Method of Accounting,"The accrual method (as opposed to the cash method) of accounting is the preferred method for measuring and reporting a corporation’s revenues, expenses, gains, losses, and net income for a month, year, etc. The accrual method is also the preferred method for reporting a corporation’s assets, liabilities, and stockholders’ equity at the end of the accounting period. Under the accrual method, revenues are reported in the accounting period in which they are earned (which is often different from the accounting period when cash is received). For example, if a business earns $1,000 today by providing consulting services, but issues an invoice stating that the client has 30 days in which to pay, the business reports the $1,000 as today’s revenue. Today’s accounting entry is: debit Accounts (or Fees) Receivable for $1,000; credit Fees Earned (Revenues) for $1,000. Under the accrual method, expenses are reported in the accounting period in which they occur or match revenues (which is often different from when cash is paid). For example, if a company incurs an $800 emergency repair today but has 10 days in which to pay the vendor’s invoice, today’s accounting entry is: debit Repairs Expense $800; credit Accounts Payable $800. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. The accrual method of accounting is necessary so that revenues are reported in the period when they are earned, and expenses are matched with the related revenues or are reported in the period in which a cost is used up. NOTE: Our focus is on financial accounting and financial reporting which culminates with a company’s financial statements. We do not discuss income tax reporting, which may require or allow for recognizing revenues and/or expenses differently.",This is a cheet sheet Question
Adusting Entries,"For a company’s financial statements to comply with the accrual method of accounting, it is likely that some adjusting entries must be recorded before the financial statements are issued. Typically, the adjusting entries include recording some expenses that have occurred, but the bookkeeper did not yet record the transactions in the accounts. For instance, a company may have incurred interest expense on its bank loan, but the interest payment is not due until the loan is due in 60 days. Another common example of an adjusting entry is the depreciation of certain assets. Assume that a company purchased equipment last year at a cost of $120,000 and the equipment is expected to be used for 5 years or 60 months. Each month the company’s accounts must include the following adjusting entry: debit Depreciation Expense for $2,000; credit Accumulated Depreciation Expense for $2,000. It is also possible that revenues were earned, but the sales invoice has not yet been issued. As a result, an adjusting entry will be needed to report the revenues earned on the income statement and to report the receivable on the balance sheet. Accountants often categorize adjusting entries into three types: accruals, deferrals, and other. You can learn more by visiting our topic Adjusting Entries. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Financial Statements,"The main objective of recording the huge number of business transactions is to generate a complete set of financial statements. The complete set includes the following: •	 Balance sheet (or statement of financial position) •	 Income statement (or statement of earnings, statement of operations, profit and loss) •	 Statement of comprehensive income (if a company has certain types of transactions) •	 Statement of cash flows (SCF or cash flow statement) •	 Statement of stockholders’ equity In addition to the amounts appearing on the face of the financial statements, the company must include notes to the financial statements. The notes are necessary to disclose important information regarding the amounts shown (or not shown) on the face of the financial statements. You can learn more by visiting our topic Financial Statements.",This is a cheet sheet Question
Internal Controls,"It is critical that a company have internal controls to safeguard its assets. In the area of accounting and bookkeeping, it is best to separate some of the duties. In other words, instead of one person handling the cash, recording the amounts in the accounts, making the bank deposits, reconciling the bank statement, and preparing the financial statements, it is wise to separate the responsibilities between two or more people. For example, the person receiving and handling the cash should not be the person recording the amounts in the general ledger. The amounts on the company’s bank statement should be reconciled with the amounts in the company’s records by someone not involved with recording the amounts. Customer credit memos should be approved by someone not involved in the accounts receivable transactions. The reason for separating (or segregating) duties is to minimize losses. For instance, if one person handles all the transactions, then only one person (if dishonest) could falsify records so that the loss is not detected for months. With the separation of responsibilities, it is less likely for two dishonest employees to be working together to steal some of the company’s assets. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bank Reconciliation,"As often as is feasible and soon after a bank statement is received, the company should reconcile the bank statement. This involves comparing the detailed information on the bank statement with the detailed information in the company’s pertinent general ledger account. The bank reconciliation is important for several reasons, including: •	 To be certain that the general ledger accounts are complete and accurate •	 To be certain of the company’s cash amount to avoid writing checks for more than the actual checking account balance •	 To report the correct amount of cash on the company’s balance sheet Having an independent person prepare the bank reconciliation may result in finding some questionable amounts being deducted from the company’s bank account. You can learn more by visiting our topic Bank Reconciliation.",This is a cheet sheet Question
Accounts Receivable,"Accounts receivable arise when a company sells goods on credit. For instance, some companies provide its customers with goods and/or services and allow them to pay the amount owed 30 days later. If a customer does not pay the amount owed, the company will report Bad Debts Expense for the amount not collected. Because of this risk, a company should review its new customer’s credit rating before selling to the customer on credit. If there is some uncertainty, the company should require the customer to pay with a credit card when the goods are shipped. While there will be a credit card processing fee, the company may be avoiding a complete loss of the amount of the sale. The amounts owed by customers should be reviewed often. Accounting software will generate a report known as an aging of accounts receivable. This report sorts each credit customer’s balance into columns such as: current, 1-30 days past due, 31-60 days past due, 61-90 days past due, and 90+ days past due. This report allows for a quick review of the amounts that the company has not yet collected. Monitoring accounts receivable is critical because the company needs to collect the amount it is owed so it can pay its employees, accounts payable, loans payable, etc. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Accounts Payable,"Accounts payable is a general ledger liability account containing the amounts owed to vendors/ suppliers. The amount owed is supported by vendor invoices that have been entered in the accounting system. To avoid entering a bogus invoice or an incorrect invoice amount, it is common to use what is known as the three-way match. The name refers to the requirement to match (compare or reconcile) the details contained in the following: 1.	 Vendor’s invoice 2.	 Company’s purchase order 3.	 Company’s receiving report A vendor’s invoice is entered in Accounts Payable only after the three-way match is completed. If some amounts are owed, but the three-way match is not completed, an adjusting entry will be recorded in a liability account such as Other Accrued Liabilities. You can learn more by visiting our topic Accounts Payable. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bonds,"Bonds are a form of long-term debt for the issuer. (For the buyer of the bonds, the bonds are an investment.)",This is a cheet sheet Question
Bonds Payable,"As part of the entry to record the issuance of bonds, the issuer will record the face value of the bonds in a long-term (or noncurrent) liability account entitled Bonds Payable. Typically the issuer of the bonds agrees to pay the bondholders: •	 interest every six months (semiannually), and •	 the face or maturity value when the bonds come due Why Bonds? Why Not Common Stock? Bonds are different from common stock in that usually: •	 the issuer of the bonds does not give the bondholders any ownership interest •	 the semiannual interest payments must be made when due •	 the maturity amount must be paid when the bonds come due •	 the issuer’s interest expense qualifies as an income tax deduction (whereas dividends are not tax deductible) As a result of the above features, the money raised from issuing bonds will be less costly than the money raised from issuing shares of common stock. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Face Value of Bonds,"The amount appearing on the face of the bonds is also known as the following: •	 face value •	 par value •	 principal amount •	 stated value •	 maturity value",This is a cheet sheet Question
Interest Rate on Bonds,"The interest rate shown on the face of the bonds is the annual interest rate that will be used to determine the semiannual interest payments. This interest rate is also known as: •	 face interest rate •	 stated interest rate •	 contractual interest rate •	 nominal interest rate •	 coupon interest rate Typically the stated interest rate will not change and is therefore considered to be a fixed rate. This will result in the semiannual interest payments being the same amount. The formula for the semiannual interest payments is: face interest rate X face value of the bond X 6/12 of a year. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Market Interest Rates,"We stated that the bonds’ semiannual interest payments and maturity value are both fixed in amount. However, the market interest rates for similar bonds are likely to change daily due to events occurring throughout the world. The market interest rate is also known as: •	 effective interest rate •	 yield-to-maturity •	 discount interest rate •	 desired interest rate Market Interest Rates and the Value of",This is a cheet sheet Question
Existing Bonds,"When market interest rates decrease, the value of existing bonds will increase. The reason is the fixed amounts of the cash payments (interest and maturity value) will become more attractive and therefore more valuable. When market interest rates increase, the value of existing bonds will decrease. The reason is the fixed cash payments for interest and maturity value have now become less attractive and therefore less valuable. To recap, the market value of existing bonds will move in the opposite direction of the change in the market interest rates. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bonds Sold at Par Value,"When a corporation offers bonds having a stated interest rate of say 8% and the market interest rate for similar bonds is 8%, the bonds will sell at their par or maturity value. Bonds selling at their par value are said to be sold at 100, which means 100% of the bonds par value. Therefore, a $100,000 bond will sell for $100,000 and will be recorded as follows: Cash $100,000 Bonds Payable $100,000",This is a cheet sheet Question
Bonds Sold at a Discount,"If bonds having a stated interest rate of 8% are offered on a day when the market interest rate is 8.2%, the bonds will sell for less than their par or maturity value. Perhaps the bonds will sell for 98 or 98% of face value. This means that a $100,000 bond will sell for $98,000. Assuming there is no accrued interest on the date the bond is issued, the journal entry for the issuance of the bond will be: Cash $98,000 Discount on Bonds Payable $2,000 Bonds Payable $100,000 Discount on Bonds Payable is a contra-liability account which is always presented on the balance sheet with Bonds Payable. The combination of these two account balances means the book value or the carrying value of the bonds payable is $98,000 ($100,000 minus $2,000). Over the life of the bonds, the discount on bonds payable must be amortized to interest expense.",This is a cheet sheet Question
Bonds Sold at a Premium,"If bonds having a stated interest rate of 8% are issued on a day when the market interest rate is 7.9%, the bonds will sell for more than the par value or maturity value of the bonds. Perhaps the bonds will sell for 101 or 101% of face value. Therefore, a $100,000 bond will sell for $101,000. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Assuming there is no accrued interest on the date the bond is issued, the journal entry for the issuance of the bond will be: Cash $101,000 Premium on Bonds Payable $1,000 Bonds Payable $100,000 Premium on Bonds Payable is an adjunct liability account which is always presented with Bonds Payable. The combination of these two account balances means the book value or the carrying value of the bonds payable is $101,000 ($100,000 plus $1,000). Over the life of the bonds, the premium on bonds payable must be amortized to interest expense.",This is a cheet sheet Question
Straight-line Amortization of Discount or Premium,"If the amount of the discount or the premium on bonds payable is not significant, the corporation may amortize the discount or premium using the straight-line method of amortization. This means that each accounting period during the life of the bonds the same amount of discount or premium will move from the balance sheet to interest expense.",This is a cheet sheet Question
Effective Interest Rate Method of Amortizing Discount or Premium,"If the amount of the discount or the premium is significant, the initial amount of the discount or premium should be reduced by using the effective interest rate method of amortization. Under this method the market interest rate on the date that the bonds were issued is multiplied times the book value (carrying value) of the bonds at the start of each six-month period. The resulting amount is the amount debited to Interest Expense for the six-month period. The difference between the interest expense and the actual interest payment is the amount of the Discount or Premium that is being amortized in the current period. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Accrued Interest on Bonds Payable,"Since most bonds pay interest semiannually, the issuer of the bonds will have accrued interest expense and accrued interest payable if the bonds are outstanding on any of the other 363 days of the year. To illustrate, assume that on June 1 a corporation issued $3,000,000 of bonds with a stated interest rate of 6% (and the market interest rate is also 6%), the corporation will be incurring interest expense of $180,000 per year; $15,000 per month; $500 per day. Also assume that the corporation prepares monthly financial statements. This means that on June 30 (and on the last day of every month), the corporation must record an adjusting entry to debit Accrued Interest Expense for $15,000 and credit Accrued Interest Liability for $15,000. When the corporation makes its December 1 interest payment of $90,000 the balance in Accrued Interest Liability will be $0 for that day. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bank Reconciliation,"The bank reconciliation is also known as the bank statement reconciliation or the bank rec. In accounting, a corporation’s checking account is considered to be part of its cash (which is reported on the corporation’s balance sheet). We will assume that the corporation has a separate general ledger cash account for each of its bank checking accounts. It is unusual for the balance in the bank account (balance per bank) to be the same as the balance in the corporation’s general ledger account (balance per books). Further, it is common for neither of these balances to be the true amount to be reported on the corporation’s balance sheet. Our approach to the bank reconciliation is to add and/or subtract the necessary adjustments to the appropriate balances. After the adjustments, both the balance per bank and the balance per books will show the same, true amount of cash.",This is a cheet sheet Question
Adjustments to the Balance per Bank,"A tip for listing the adjustments for the bank reconciliation is: “Put it where it isn’t.” For instance, a check that had been written and recorded in the company’s books, but has not yet cleared the bank account, will be an adjustment to the balance per bank. (The balance per bank is the ending balance on the bank statement or the balance available through the bank’s online access.) Here is a list of the common adjustments to the balance per bank: •	 Deduct: outstanding checks •	 Add: deposits in transit •	 Add/deduct: bank errors The adding and subtracting of these adjustments should result in the Adjusted (or Corrected) Balance per Bank.",This is a cheet sheet Question
Adjustments to the Balance per Books,"Again, the tip for listing the adjustments is: “Put it where it isn’t.” For example, the bank service charge is on the bank statement, but it is not yet on the books. Therefore the bank service charge is an adjustment to the balance per books. For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Here is a list of common adjustments to the balance per books: •	 Deduct: bank service charge for maintaining the company’s checking account •	 Deduct: bank fee for processing a returned check •	 Deduct: bank deduction for a deposited check that was not paid by the bank on which it was drawn (for example, an NSF check or a check drawn on a closed bank account) •	 Deduct: check printing charge •	 Deduct: automatic loan payment •	 Add: electronic transfer into the account •	 Add: interest received from the bank •	 Add/deduct: correction of company errors The adding and subtracting of these adjustments should result in the Adjusted (or Corrected) Balance per Books.",This is a cheet sheet Question
Journal Entries for Adjustments to Books,"Without journal entries to record the adjustments to the balance per books, Cash and at least one other account will have incorrect balances. (The reason is the double-entry system of accounting and bookkeeping.)",This is a cheet sheet Question
Internal Control,"For internal control purposes (to safeguard a company’s assets), it is best if the company’s bank statement reconciliation is prepared by someone that does NOT write checks, record receipts, or enter amounts in the company’s general ledger cash account. For instance, at a small business it would be best if the owner reconciled the bank statement instead of the bookkeeper.",This is a cheet sheet Question
Balance per Bank,The balance per bank is the ending balance appearing on the bank statement (and/or in the bank account) before the bank reconciliation adjustments for outstanding checks and deposits in transit. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Balance per Books,"The balance per books is the ending balance appearing in the company’s appropriate general ledger account before the bank reconciliation adjustments for bank fees, deposited checks that were returned, electronic transfers, errors, etc.",This is a cheet sheet Question
Adjusted Balance per Bank,"The adjusted balance per bank is the true or corrected balance after the bank statement balance has been adjusted for items such as outstanding checks and deposits in transit. When the adjusted balance per bank is equal to the adjusted balance per books, the bank statement is said to be “reconciled”. This adjusted, true balance is the amount that should be reported on the company’s balance sheet.",This is a cheet sheet Question
Adjusted Balance per Books,"The adjusted balance per books is the true or corrected balance after the general ledger accounts have been adjusted for items such as bank fees, deposited checks that were returned, etc. When the adjusted balance per books is equal to the adjusted balance per bank, the bank statement has been reconciled. This adjusted, true balance is the amount that should be reported on the company’s balance sheet. The adjustments to the balance per books must be journalized and posted to the company’s general ledger accounts.",This is a cheet sheet Question
Outstanding Checks,Outstanding checks are the checks that a company has written but which have not yet cleared the company’s bank account.,This is a cheet sheet Question
Deposits in Transit,"Deposits in transit are a company’s receipts (such as checks and currency from customers) that are recorded in a company’s general ledger account, but are not yet recorded in the company’s bank account. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bank Service Charge,The bank service charge is often a monthly fee charged by a company’s bank for maintaining the company’s bank account. This will be an adjustment to the balance per books that credits the company’s general ledger account Cash and debits an account such as Bank Fee Expenses.,This is a cheet sheet Question
NSF Check,An NSF check is a check that was not paid by the bank on which it was drawn because the checking account on which it was drawn did not have a sufficient balance. (NSF is the acronym for not sufficient funds.) An NSF check is also referred to as a “rubber check” since the check is said to have “bounced.” An NSF check that was deposited by a company will result in a deduction by the company’s bank for the amount of the check and also a fee for handling the returned check. The company must credit its general ledger account Cash for the amount of the NSF check and debit another account (which is often Accounts Receivable).,This is a cheet sheet Question
Bank Fee for NSF Check,"A company’s bank charges a fee for having to process a deposited check that had been returned due to insufficient funds. Since the bank charges the company’s checking account, the company must reduce the balance in its general ledger. This will be an adjustment to the balance per books that will credit the company’s general ledger account Cash (and debit another account).",This is a cheet sheet Question
Bank Credit Memo,"A bank credit memo is used by a bank to indicate that an amount is being added to a company’s bank account. As a result, the company will have an adjustment to the balance per books that will debit the company’s general ledger account Cash (and credit another account). For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bank Debit Memo,"A bank debit memo is used by a bank to indicate that an amount is being deducted from a company’s bank account. As a result, the company will have an adjustment to the balance per books that will credit the company’s general ledger account Cash (and debit another account).",This is a cheet sheet Question
Journal Entries,Journal entries are required to record in the company’s general ledger accounts the bank reconciliation items shown as adjustments to the balance per books. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Balance Sheet,"The balance sheet is also known as the statement of financial position and it is one of the five external financial statements issued by U.S. corporations. The balance sheet reflects the balances in all of the corporation’s asset, liability and stockholders’ equity accounts as of the final moment of the date shown in the heading. Note: Typically the final moment of the balance sheet is the last instant of the last day of an accounting period, such as midnight of December 31, June 30, etc. This is different from the other four external financial statements (income statement, statement of comprehensive income, statement of stockholders’ equity, and statement of cash flows) which report the amounts that occurred during a period of time such as the year ended December 31, the three months ended June 30, etc. The format for the balance sheet is similar to the accounting equation: assets = liabilities + stockholders’ equity",This is a cheet sheet Question
Assets,"Assets are the resources that a corporation owns as a result of a purchase transaction. Examples of a corporation’s assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, vehicles, etc.",This is a cheet sheet Question
Liabilities,"Liabilities are the obligations that a corporation owes as of the final moment of the date shown in the heading of the balance sheet. Examples of liabilities include accounts payable, loans payable, accrued expenses payable, customer deposits, deferred revenues, bonds payable, etc. Liabilities are claims against a corporation’s assets. Liabilities (along with stockholders’ equity) can also be thought of as a source of a corporation’s assets. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Stockholders’ Equity,"Stockholders’ equity is equal to the amount of a corporation’s assets minus the amount of its liabilities. The stockholders’ equity section of the balance sheet is divided into several parts: •	 Paid-in (or contributed) capital •	 Retained earnings •	 Accumulated other comprehensive income •	 Treasury stock Stockholders’ equity (along with liabilities) can be thought of as a source of a corporation’s assets. Stockholders’ equity is also viewed as a claim against the assets; however, it is a residual claim since the creditors’ claims (liabilities) must first be satisfied.",This is a cheet sheet Question
Generally Accepted Accounting Principles,"A balance sheet distributed by a U.S. corporation must comply with generally accepted accounting principles, which are commonly known as GAAP or US GAAP. US GAAP is very comprehensive and includes a wide range of concepts, rules, practices, etc. Currently the authoritative group for establishing the U.S. accounting standards is the Financial Accounting Standards Board or FASB (pronounced faz-bee). As a result of the accounting rules, assets may be reported at various amounts. Here are a few examples: •	 Certain marketable investment securities will be reported at market value •	 Inventory is often reported at the lower of cost or net realizable value •	 Land used in a business will be reported at its cost and will not be depreciated •	 Buildings and equipment will be reported at cost minus accumulated depreciation •	 Some very valuable intangible assets (trade names, logos, excellent reputation, management, etc.) that were not purchased in a transaction are not reported on the balance sheet The above list reveals that the amounts reported or not reported for assets means that the amount reported for stockholders’ equity is NOT the fair market value of the corporation. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Classified Balance Sheet,"A classified balance sheet is a balance sheet having various groupings or classifications. For example, the assets will be presented under one of the following classifications: •	 Current assets •	 Investments •	 Property, plant and equipment •	 Other assets Liabilities will be classified as follows: •	 Current liabilities •	 Noncurrent liabilities (or long-term liabilities) Current Assets Current assets include cash and assets that will turn to cash within one year of the balance sheet’s date (unless the operating cycle is longer than one year). Examples of current assets include cash, temporary investments, accounts receivable, inventory, supplies, and prepaid expenses.",This is a cheet sheet Question
Current Liabilities,"Current liabilities are obligations that have occurred as of the date in the heading of the balance sheet and must be paid within one year of the balance sheet date (unless the operating cycle is longer than one year). Examples of current liabilities include accounts payable, short-term loans, current portion of a long-term loan, wages payable, accrued expenses, customer deposits, deferred revenues, and income taxes payable. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Working Capital,"Working capital is the amount of current assets minus the amount of current liabilities. If a corporation has $150,000 of current assets and $120,000 of current liabilities, its working capital is $30,000.",This is a cheet sheet Question
Current Ratio,"The current ratio is calculated as current assets divided by current liabilities. If a corporation has $150,000 of current assets and $120,000 of current liabilities, its current ratio is $150,000/$120,000 or 1.25 to 1.",This is a cheet sheet Question
"Property, Plant and Equipment","This section of the classified balance sheet reports the long-term assets used in a business. These assets are sometimes referred to as fixed assets and/or plant assets. Some of the assets in this classification are: •	 Land •	 Land Improvements •	 Buildings •	 Machinery and Equipment •	 Vehicles •	 Furniture and Fixtures The property, plant and equipment section will also report the accumulated depreciation pertaining to these assets. Accumulated depreciation is presented as a subtraction and the remainder is often shown with the word “net”. This net amount is the book value (or carrying value) of the property, plant and equipment, and it is also the amount that has not yet been allocated to depreciation expense. The book value of these assets should not be interpreted to be the assets’ fair market value (FMV). FMV could be more than or less than the book value of any or all of these assets. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Notes to the Balance Sheet,"In addition to the amounts appearing on the face of the balance sheet, there will also to be a reference such as “See notes to the financial statements.” or “The accompanying notes are an integral part of the financial statements.” The notes to the financial statements are especially important because a corporation may have a significant liability for which the amount of the obligation cannot be determined as of the final moment of the accounting period. Therefore, this significant liability and other important information will be disclosed in the notes to the financial statements. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Why Adjusting Entries are Necessary,"Adjusting entries are required at the end of each accounting period so that a company’s financial statements reflect the accrual method of accounting. Without adjusting entries, a corporation’s financial statements will likely report incorrect amounts of revenues, expenses, gains, losses, assets, liabilities, and stockholders’ equity.",This is a cheet sheet Question
Common Characteristic of Adjusting Entries,"Every adjusting entry will involve: •	 At least one balance sheet account, and •	 At least one income statement account Therefore, if a required adjusting entry is omitted, both the company’s balance sheet and its income statement will not report the correct amounts. Adjusting entries are usually dated as of the final day of the accounting period. As is the case with all journal entries, every adjusting entry must have debit amounts equal to the credit amounts.",This is a cheet sheet Question
Types of Adjusting Entries,"Adjusting entries are often categorized as follows: •	 Accruals •	 Deferrals •	 Others For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Accruals (or accrual-type adjusting entries) refer to the adjusting entries that must be recorded prior to issuing the financial statements because a business transaction occurred, but it is not yet recorded in the company’s general ledger. Two examples are: •	 Electricity and gas used by the company in June but not billed by the utility until July •	 Wages earned by hourly paid employees, but not processed until the following week Without the accrual adjusting entries for these examples, the company’s balance sheet will report too little in liabilities and too much in stockholders’ equity, and the income statement will report the incorrect amount of expenses. Deferrals (or deferral-type adjusting entries) refer to the adjustments needed because an amount that was recorded in the general ledger pertains to one or more future accounting periods. To illustrate, assume that on December 1, a company recorded its $2,400 payment for six months of property insurance for December through May. At December 31, one month of the insurance cost (1/6 of $2,400) has expired and should be reported on its December income statement as Insurance Expense of $400. The remaining $2,000 of unexpired insurance (5 months X $400) must be reported on the December 31 balance sheet as a current asset such as Prepaid Insurance or Prepaid Expenses. In effect the unexpired cost of $2,000 is being deferred until it becomes Insurance Expense in January through May. All of this will be achieved through a series of deferral adjusting entries. Others include the adjusting entries to record depreciation, bad debts, and adjustments for valuing some investments.",This is a cheet sheet Question
Typical Accruals,"The following table shows the balance sheet account and the related income statement account for some typical accruals. (Recall that accruals are necessary so that all of a company’s assets, liabilities, revenues, expenses, and losses are included in the appropriate financial statements.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Balance Sheet Account Income Statement Acct Wages Payable Liability Wages Expense Interest Payable Liability Interest Expense Utilities Payable Liability Utilities Expense Repairs Exp Payable or Accrued Exp Payable Liability Repairs Expense Interest Receivable Asset Interest Income Account Title Account Title Type Example of Accrual Entry. On the final day of the accounting period, a corporation had an emergency repair of its heating system. The heating contractor told the corporation that the repair bill will be $3,000 and that an invoice will be sent in the corporation’s next accounting period. Before the current period’s financial statements are distributed the corporation must record an adjusting entry to accrue the $3,000 expense and liability. The journal entry will debit $3,000 to Repairs Expense, and will credit $3,000 to Accrued Expenses Payable. Without this adjusting entry the income statement would show net income which will be too high, the balance sheet will report liabilities which will be too low, and stockholders’ equity which will be too high.",This is a cheet sheet Question
Typical Deferrals,"The following table shows the accounts involved in some typical deferrals. (Recall that the adjusting entries for deferrals are necessary because some of the amounts in the general ledger accounts belong on the income statement of a future accounting period. Those amounts must be reported on the balance sheet dated for the end of the current accounting period.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com. Balance Sheet Account Income Statement Acct Prepaid Insurance Asset Insurance Expense Supplies Asset Supplies Expense Deferred Revenues Liability Revenues Account Title Account Title Type Example 1 of Deferral Entry on December 31. On December 1, a company paid $2,400 for the cost of its property insurance for the 6-month period beginning on December 1. The entire $2,400 was charged/debited to Insurance Expense. On December 31 (the end of its accounting year) an adjusting entry will be needed to defer $2,000 (5 months X $400 per month): Prepaid Insurance will be debited for $2,000 and Insurance Expense will be credited for $2,000. After the December 31 adjusting entry, the debit balance in the asset account Prepaid Insurance will be $2,000; and Insurance Expense will have a debit balance of $400. In each of the next 5 months, adjusting entries will be needed to debit Insurance Expense for $400 and to credit Prepaid Insurance for $400. Example 2 of Deferral Entry on December 31. On December 1, the company paid $2,400 for the cost of its property insurance for the 6-month period beginning on December 1. The entire $2,400 was charged/debited to the asset account Prepaid Insurance. On December 31 (the end of its accounting year) an adjusting entry will be needed to move $400 ($2,400 divided by 6 months) from Prepaid Insurance to expense: Insurance Expense will be debited for $400 and Prepaid Insurance will be credited for $400. After the December 31 adjusting entry, the asset account Prepaid Insurance will have a debit balance of $2,000. In each of the next 5 months, adjusting entries will be needed to debit Insurance Expense for $400 and to credit Prepaid Insurance for $400. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Other Adjusting Entries,"The following table shows the balance sheet account and the related income statement account for two of the adjusting entries described as other. Balance Sheet Account Income Statement Acct Accumulated Depreciation Contra Asset Depreciation Expense Allowance for Doubtful Accts Contra Asset Bad Debts Expense Account Title Account Title Type Helpful Process for Preparing Adjusting Entries Accountants often use “T” accounts to visualize the effect of a journal entry on the two (or more accounts) that are involved. Recall that the double-entry system requires the debit amounts to be equal to the credit amounts. The left side of one “T” will show the debit amounts, while the right side of another “T” will show the credit amounts. Our helpful process for preparing adjusting entries has the following steps: 1.	 Draw two T-accounts, since every entry requires a minimum of two accounts. 2.	 Indicate the account titles on the horizontal part of each “T”. For every adjusting entry there must be a balance sheet account and an income statement account. 3.	 Enter the balance prior to the adjusting entry in each of the T-accounts. 4.	 Determine the correct ending/final account balance for the balance sheet account. 5.	 Record an adjustment so that the ending amount in the balance sheet account is the correct amount from Step 4. 6.	 Enter the same adjustment amount into the related income statement account. 7.	 Write the adjusting journal entry. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Reversing Entries,"Reversing entries are typically used in conjunction with the accruals. The reason is that shortly after the current period’s financial statements are distributed, the company will receive the paperwork for the transactions that had been accrued. For example, if a company had accrued a repair expense that occurred at the end of the accounting period, the company will be receiving the vendor’s invoice in the early part of the next accounting period. Similarly, if a company had accrued wages that had been earned near the end of the accounting period, the company will be processing its payroll a few days into the next accounting period. These two examples could result in a double recording (once with the adjusting entry and once with the actual billing transaction or the routine payroll entries that will be processed early in the next accounting period). To avoid the risk of double-recording, reversing entries are processed on the first day of the next accounting period to remove the accrual adjusting entries. To illustrate, let’s assume that on December 30 a retailer had an emergency repair of its heating system. The work was done on December 30 but the bill doesn’t arrive prior to the preparation of the financial statements. As a result, the retailer recorded an accrual adjusting entry dated December 31 which debited Repairs Expense for $3,000 and credited the liability account Accrued Expenses Payable for $3,000. In order to avoid the risk of double-recording, the company will record a reversing entry dated January 1 (the first day of the next accounting period) that debits Accrued Expenses Payable for $3,000 and credits Repairs Expense for $3,000. This will result in a $0 balance in Accrued Expenses Payable and an unusual credit of $3,000 in Repairs Expense. On January 10, the heating contractor’s invoice is received and is approved for payment on January 20. Because a reversing entry was recorded on January 1, the company can record the contractor’s invoice on January 10 with the usual debit to Repairs Expense and a credit to Accounts Payable. After the contractor’s invoice is recorded, the balance in Repairs Expense for the new accounting period will be $0 (the credit of $3,000 on January 1 and the debit of $3,000 on January 10) and the balance in Accounts Payable that pertains to the repair will be $3,000. When the company pays the contractor on January 20, the company will debit Accounts Payable and will credit Cash for $3,000. In short, the use of reversing entries eliminates any special handling of the vendor invoices. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Accounts Receivable,"Accounts receivable refers to a company’s unsecured claim for money it is owed by a customer or client for goods and/or services the company had provided on credit (on account). The company that is selling the goods is usually transferring title to its goods at either: •	 the time the goods are shipped (the terms are FOB shipping point), or •	 the time the goods are delivered to the buyer (the terms are FOB destination) It is at one of these points that the seller is creating an account receivable and a sale. The sales invoice will also be prepared at the same time and will result in a debit to Accounts Receivable and a credit to Sales. If a company provides services on account, it will debit Accounts Receivable and will credit Service Revenues (or Fees Earned) at the time the service has been completed.",This is a cheet sheet Question
Credit Terms,"The seller’s credit terms will be indicated on the sales invoice. For example, the seller may have terms of “Net 30 days” or “Due upon receipt.” The term Net means net sales which is the amount of the sales invoice minus any authorized returns and/or allowances. Early Payment Discounts Some sellers offer an early payment discount, which allows a customer to pay less than the net amount if they pay within a stated discount period. (The seller also refers to the early payment discounts as sales discounts or cash discounts.) Example 1. A seller offers an early payment discount stated as “1/10, n/30” or “1/10, net 30”. This means that the customer may deduct 1% from the net amount due if the payment is made within 10 days of the date of the invoice. For instance, if a sale is made for 200 units at $15 each, the gross amount of the invoice is $3,000. If the customer is authorized to return 20 units at $15 each, the net amount is $2,700 and it is due in 30 days. However, the customer may deduct $27 (1% of the $2,700) if $2,673 is remitted within 10 days. Saving 1% by paying 20 days sooner (within 10 days instead of 30 days) is considered to be 18% on an annual basis. An early payment discount of “2/10, n/30” is considered to be 36% on an annual basis. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Bad Debts Expense,"When sales or services are provided on credit, there is a risk that the seller or provider will not receive the amount owed by a customer. The amount that is not collected is reported on the seller’s income statement as bad debts expense. Bad debts expense is part of the selling, general and administrative (SG&A) expenses. Typically there are two methods for reporting the bad debts expense: direct write-off method, and allowance method.",This is a cheet sheet Question
Direct Write-Off Method,"Under the direct write-off method, the bad debts expense is not recorded and reported on the income statement until a specific account has been identified as uncollectible and the account is removed from the company’s accounts receivable. At that time, the company debits Bad Debts Expense and credits Accounts Receivable. The problem with the direct write-off method is that the balance sheet will report the full amount of a company’s accounts receivable even though some are likely to be uncollectible. Because of the delay in reporting the bad debts expense on the income statement, this is not the recommended method. (However, for U.S. income tax purposes the direct write-off method is required.)",This is a cheet sheet Question
Allowance Method,"The allowance method requires a company to anticipate that some amount of the accounts receivable will not be collected. In other words, prior to writing off an account receivable, the company will debit Bad Debts Expense and will credit a contra-asset account Allowance for Doubtful Accounts for an estimated amount. The Allowance account is a contra-account to Accounts Receivable and the combined balances is referred to as the net realizable value of the accounts receivable. (On the balance sheet the combined amount is often presented as accounts receivable (net) or accounts receivable—net.) Under the allowance method, there are two ways for estimating the amounts for the accounts Allowance for Doubtful Accounts and for Bad Debts Expense: •	 Percentage of accounts receivable •	 Percentage of credit sales For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Percentage of Accounts Receivable,"The percentage of accounts receivable is also known as the balance sheet approach, since its focus is on reporting a realistic ending balance in the balance sheet account Allowance for Doubtful Accounts. In other words, the balance in the income statement account Bad Debts Expense is secondary and will depend on the adjustment needed in the Allowance account. In order to determine the balance needed in the Allowance account, companies will review an aging of accounts receivable. The aging sorts the unpaid sales invoices that make up the balance in Accounts Receivable according to the sales invoice dates. The aging of accounts receivable will show the amounts that are current (unpaid but not past due), amounts that are 1-30 days past due, 31-60 days past due, etc. A thorough review of the aging will provide insights as to the potentially uncollectible amounts needed in the Allowance account. A general rule is that the older the unpaid invoice, the more likely that the amount will not be collected in full. Example 2. A corporation’s Accounts Receivable has a debit balance of $130,000. The corporation’s Allowance for Doubtful Accounts has a credit balance of $10,000. Before issuing the financial statements, an aging of accounts receivable is prepared. Based on the aging, the credit manager estimates that $18,000 of the accounts receivable will be uncollectible. Under the percentage of accounts receivable method (balance sheet approach) there needs to be a debit to Bad Debts Expense of $8,000 and a credit to Allowance for Doubtful Accounts of $8,000 (the amount needed to have a credit balance of $18,000). Hence, the balance sheet will report Accounts Receivable – net of $112,000 ($130,000 minus $18,000). Percentage of Credit Sales The percentage of credit sales is sometimes referred to as the income statement approach since the focus is on the amount to be reported as bad debts expense. The objective is to match the appropriate amount of bad debts expense with the credit sales shown on the income statement. In other words, the balance in the Allowance for Doubtful Accounts is secondary and will depend on the amount of the bad debts expense. Example 3. A corporation’s Accounts Receivable has a debit balance of $130,000. The corporation’s Allowance for Doubtful Accounts has a credit balance of $10,000. The corporation uses the percentage of credit sales method and estimates that 0.3% of its credit sales will not be collected. In June the credit sales are $100,000. Hence, on June 30 the corporation will prepare an entry to debit Bad Debts Expense for $300 ($100,000 X 0.3%) and will credit Allowance for Doubtful Accounts for $300. (The objective is to have the June income statement match $300 of Bad Debts Expense with the $100,000 of credit sales). Whatever was the beginning balance in the Allowance account is assumed For personal use by the original purchaser only. Copyright © AccountingCoach®.com. to be the appropriate amount for the receivables that are unpaid from earlier periods. As a result, the Allowance for Doubtful Accounts will now report a credit balance of $10,300. Writing Off an Account When Using the",This is a cheet sheet Question
Allowance Method,"When the allowance method (either the percentage of receivables or the percentage of credit sales) is used and a specific account is identified as uncollectible, it is written off with a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. [Note that under the allowance method, the write-off of an uncollectible account does not involve an income statement account. Both Accounts Receivable and the Allowance for Doubtful Accounts are balance sheet accounts. The bad debts expense had already been recorded as a percentage of accounts receivable or as a percentage of credit sales.] Example 4. A corporation has the following account balances: Accounts Receivable debit balance of $130,000; Allowance for Doubtful Accounts credit balance of $10,000. The company has been informed that one of its customers has filed for bankruptcy and the corporation is not expecting to collect any of the $7,000 balance it is owed. Under either of the allowance methods, the corporation will write off the customer’s balance with a debit of $7,000 to Allowance for Doubtful Accounts and a credit to Accounts Receivable for $7,000.",This is a cheet sheet Question
FOB Destination and FOB Shipping Point,"The invoice term FOB destination indicates that the buyer will receive title to the goods when the goods arrive at the buyer’s location. At that point the seller will have a sale and an unsecured account receivable and the buyer will have a purchase of goods and an account payable. Since the seller owns the goods while they are in transit, the seller is responsible for the goods and the cost of transporting the goods until they reach the buyer. The invoice term FOB shipping point indicates that the buyer will receive title to the goods when the goods leave the seller’s location. At that point the seller will have an unsecured account receivable and the buyer will have an account payable. Since the buyer owns the goods while they are in transit, the buyer is responsible for the goods and the cost of transporting the goods after they leave the seller’s dock. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Accounts Payable,"Accounts payable are sometimes referred to as trade payables. Accounts payable involve the amounts that a company owes to vendors and others who have supplied goods or services on credit. Accounts payable can also refer to the department within a company that is responsible for reviewing and paying bills. The review is likely to include: •	 matching the vendors’ invoices with the company’s purchase orders, receiving reports, contracts, etc. •	 being certain that proper approvals have been obtained •	 making certain that the general ledger accounts are proper Accounts Payable is also the title of the current liability account in a company’s general ledger. Under the accrual method of accounting, the bills and vendor invoices which have been approved for payment are recorded in Accounts Payable. When the bills and invoices are paid, the amounts are removed from Accounts Payable. Amounts owed but not yet recorded in the Accounts Payable account will need to be accrued through an adjusting entry. The adjusting entry will credit a liability account such as Accrued Expenses Payable or Accrued Liabilities Payable. The debit amounts are typically expense or asset accounts. The balances in Accounts Payable and Accrued Expenses Payable will be reported on the company’s balance sheet under the heading of current liabilities.",This is a cheet sheet Question
Vendor Invoice,"The sales invoice issued by the supplier of goods or services will be referred to as a vendor invoice by the company receiving the goods or services. The vendor invoice will include the relevant details (date of service or shipment of goods, amounts, payment terms, etc.) concerning the goods and/or services provided. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Purchase Order,"A purchase order could be a multi-copy paper document or an electronic document. It is prepared by the company that ordered the goods/services. One copy is sent to the vendor, one is forwarded to the company’s accounts payable person or department, one copy will be kept by the person ordering, etc. The purchase order will specify the goods/services being ordered, the quantity, unit prices, and other information.",This is a cheet sheet Question
Receiving Document,A receiving document could be a paper document or an electronic record that is prepared by the person receiving the goods. It contains a description and the quantity of goods received. One copy is sent to the accounts payable person or department so that it can be compared with the goods listed on the vendor’s invoice and on the company’s purchase order.,This is a cheet sheet Question
Three-Way Match,"The three-way match is a technique used to verify that a vendor’s invoice is acceptable for payment. The three-way match involves comparing the information shown on three documents:  1) the vendor’s invoice, 2) the company’s purchase order, and 3) the company’s receiving document. After the descriptions, quantities, prices and terms are found to be consistent, the vendor’s invoice can be recorded into the general ledger account Accounts Payable.",This is a cheet sheet Question
Accrual Adjusting Entry,"An accrual adjusting entry is prepared at the end of each accounting period for vendor invoices and/ or other documents that have been received and which represent legitimate obligations, but have not yet been fully processed and therefore not yet recorded in Accounts Payable. These items will likely be reported as the current liability Accrued Expenses Payable or Accrued Liabilities. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Early Payment Discount,"An early payment discount is also known as a purchase discount or cash discount. This is sometimes offered by a vendor that has credit terms but wants to encourage faster remittance. For example, a vendor might offer terms of “1/10, n/30” which means that the buyer can deduct 1% of the net amount owed if the amount is paid within 10 days. If the buyer does not pay within 10 days no discount is allowed and the buyer must remit the net amount owed (invoice amount minus any returns and/or allowances). For example, a company ordered and received 1,000 units of goods at $10 each. The vendor invoice reflects these amounts and also terms of 1/10, n/30. The vendor also authorized the company to return 100 units. Hence, the net amount the company must remit within 30 days is $9,000. However, a 1% discount of $90 is allowed if the buyer remits $8,910 within 10 days of the invoice date.",This is a cheet sheet Question
Trade Discount,"A trade discount is a discount expressed as a percentage of a list price. The percentage may vary according to the volume of a customer’s annual purchases. The trade discount allows a seller to have a single catalog with a single price for each item. The seller may then allow a high-volume customer to take a 40% trade discount, a middle-volume customer to take a 30% trade discount, and low-volume customers to take a 20% trade discount.",This is a cheet sheet Question
FOB Destination and FOB Shipping Point,"The invoice term FOB destination indicates that the buyer will receive title to the goods when the goods arrive at the buyer’s location. At that point the buyer will have an account payable (and the seller will have an account receivable). Since the seller owns the goods while they are in transit, the seller is responsible for the goods and the cost of transporting the goods until the goods reach the buyer. The invoice term FOB shipping point indicates that the buyer will receive title to the goods when the goods leave the seller’s location. At that point the buyer will have an account payable (and the seller will have an account receivable). Since the buyer owns the goods while they are in transit, the buyer is responsible for the goods and the cost of transporting the goods after they leave the seller’s dock. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
EOM,EOM is the acronym for end of the month.,This is a cheet sheet Question
Voucher,"In accounts payable, a voucher refers to a document that is used as a “cover sheet” for collecting, attaching and retaining the supporting documents and approvals before a vendor’s invoice can be scheduled for payment.",This is a cheet sheet Question
End-of-Month Cut-Off,"The end-of-month cut-off (or end-of-year cut-off) is an established routine to ensure that all expenses, liabilities, revenues, assets, etc. are reported on the financial statements. For example, under the accrual method of accounting, a series of accrual adjusting entries will be established so that expenses and liabilities that are not yet recorded in Accounts Payable will appear in a liability account such as Accrued Expenses Payable or Accrued Liabilities.",This is a cheet sheet Question
Duplicate Payment,"The term duplicate payment refers to paying a vendor’s invoice twice. This double-payment could occur if a company pays a vendor’s invoice and also makes a payment from a vendor’s statement of open invoices. It could also occur if a vendor sends a customer a second invoice for the same goods. There are two things that could eliminate or reduce the number of duplicate payments: 1) the three- way match, and 2) never pay a vendor from a vendor’s statement (pay only from a vendor’s invoice).",This is a cheet sheet Question
Vendor Statements,Vendor statements are often received from suppliers when a customer has not fully paid the amounts previously billed by the supplier or vendor. A general rule is: Never pay a vendor from a vendor’s statement. A company should pay only from a vendor’s invoice. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Form 1099-NEC,"Form 1099-NEC is an Internal Revenue Service form that must be sent to a person who provided services of $600 or more in a calendar year. A copy is also sent to the IRS. (If the services are provided by a corporation, this form is not required.)",This is a cheet sheet Question
Form W-9,Form W-9 is an Internal Revenue Service form that is used to request a taxpayer identification number from an independent contractor (that is not a corporation). The taxpayer identification number is needed when the company prepares Form 1099-NEC to an individual who provided services to the company for $600 or more in a calendar year. Often the taxpayer identification number is the person’s social security number. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Accounting Principles,"The financial statements distributed to people outside of a U.S. corporation must be in compliance with generally accepted accounting principles (GAAP or US GAAP).  US GAAP includes basic accounting concepts and underlying principles to very complex and detailed accounting standards found in the Financial Accounting Standards Board (FASB) electronic search system known as the Accounting Standards Codification. The following are some of the underlying concepts, principles and assumptions of accounting.",This is a cheet sheet Question
Cost Principle,"The cost principle (or historical cost principle) requires that transactions be recorded at their cost. Cost is defined as the cash amount or the cash equivalent amount at the time of the transaction. Except for certain marketable investment securities and impairments, the recorded amounts are not increased for inflation or market values. However, there are cases when the cost amounts are reduced to amounts that are less than the original cost amount. Example 1. A company purchased land in the year 1983 for $50,000. The company continues to own the land without making any improvements. A recent appraisal indicates the land’s current market value is $475,000. The company’s current balance sheet will report the land at $50,000.",This is a cheet sheet Question
Accrual Method of Accounting,"The accrual method of accounting (or accrual basis of accounting) is to be used instead of the cash method of accounting due to various accounting principles (matching, revenue recognition). The accrual method results in a better picture of a corporation’s net income during a specified period of time and it results in a better picture of a corporation’s assets and liabilities at any moment in time. Generally speaking, the accrual method of accounting means that revenues and assets are reported when they are earned (not when cash is received) and expenses, losses, and liabilities are reported when the transactions occur (not when cash is paid out). Example 2. A contractor provided emergency service to a client on December 30. The work required the contractor to rent some special equipment for $2,000. The contractor will bill the client $19,000 on January 10 and will pay the equipment rental company on January 10. Under the accrual method of accounting the contractor had revenue of $19,000 in December and equipment rental expense of $2,000 in December.  (Under the cash method, the company would report the revenue and expense in January.) For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Matching Principle,"The matching principle, which is associated with the accrual method of accounting, requires a company to match expenses with revenues. For example, a retailer’s income statement should match the cost of the goods that were sold with the sales of the goods. It also requires the matching of sales commission expense with the related sales. If these cause and effect relationships are not present, an expense is to appear on the income statement when a cost is used up or has expired. If there is uncertainty, a cost should be expensed immediately. For instance, the cost of a retailer’s ads that were run in December is to be expensed in December, since there is uncertainty as to any future benefit from the ads.",This is a cheet sheet Question
Full Disclosure Principle,"The full disclosure principle requires a company to report information that will make a difference to an investor, lender, or other decision maker. As a result of the full disclosure principle, a company’s financial statements must include notes to the financial statements.",This is a cheet sheet Question
Economic Entity Assumption,The economic entity assumption allows accountants to prepare financial statements for a sole proprietorship’s business transactions (even though legally there may not be any separation between the owner and the business). The economic entity assumption also results in accountants preparing consolidated financial statements for a group of corporations that have common ownership.,This is a cheet sheet Question
Periodicity (or Time Period) Assumption,"The periodicity (or time period) assumption allows accountants to report financial information for distinct time periods even though a business is an ongoing operation. In other words, the periodicity assumption allows the accountant to report 1) revenue and expense amounts for a distinct time period such as a month, quarter, etc., and 2) asset and liability amounts as of the final moment of the accounting period. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Monetary Unit Assumption,"The monetary unit assumption allows accountants in the U.S. to express the results of past business transactions in U.S. dollars. The monetary unit assumption also means that the previously recorded amounts will not be adjusted for inflation since it also assumes that the U.S. dollar does not lose purchasing power over time. Example 3. A company purchased land several years ago for $200,000. The company continues to hold the land without making any improvements. During the time after the land was purchased the general price index for inflation has increased by 5% and the value of land has increased by 15%. The company’s current balance sheet will report the land at $200,000",This is a cheet sheet Question
Going Concern Assumption,The going concern assumption means that the accountant believes that the business will be able to continue on (rather than having to be liquidated). This justifies deferring prepaid expenses to the balance sheet and reporting them as an expense in a later accounting period.,This is a cheet sheet Question
Materiality,The concept of materiality allows a minor violation of an accounting principle if the amount is insignificant. The amount must be very minor in relation to a corporation’s assets and its net income. Example 4. Companies often expense immediately the purchase of assets that have a cost of $500 or less. The justification is that a lender or investor will not be misled with a $500 expense occurring in the first year instead of $100 per year for 5 years.,This is a cheet sheet Question
Industry Practices,"Industries that are regulated by government agencies often have unique financial reporting requirements. As a result, the external financial statements issued by the company may be in the format required by the government. This concept is sometimes referred to as industry practices or industry peculiarities. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Conservatism,"The concept of conservatism provides guidance to an accountant who is faced with two acceptable alternative ways for reporting an amount. Conservatism tells the accountant to “break the tie” by using the alternative that will result in less net income and less assets or greater liabilities. The concept does NOT instruct accountants to report the lowest amounts possible. Example 5. Due to advances in technology, most of the items in a company’s inventory have had their value dropped dramatically. Should the company report the loss in value now, or should the company wait until the items in inventory are sold. Conservatism directs the accountant to report the loss now (as opposed to waiting until the items are sold). Consistency Consistency means that the same method of accounting should be followed from period to period. For example, if a U.S. company has adopted the LIFO cost flow assumption for valuing its inventory, it is required to use LIFO in all of the subsequent years. (In the year that a company switched from FIFO to LIFO, the financial statements must communicate clearly that the FIFO consistency had ended.)",This is a cheet sheet Question
Reliability,Another qualitative characteristic of accounting is reliability. This means that accountants should be reporting amounts that are dependable and free from bias. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.,This is a cheet sheet Question
Basic Accounting Equation,In accounting (and bookkeeping) the basic accounting equation is: Assets  = Liabilities  +  Owner’s Equity   (sole proprietorship) Assets  = Liabilities  +  Stockholders’ Equity   (corporation) Assets  = Liabilities  +  Net Assets   (not-for-profit organization) Thanks to double-entry accounting (or double-entry bookkeeping) the basic accounting equation will/ must always be in balance. We will demonstrate the double-entry accounting and the accounting equation with eight examples.,This is a cheet sheet Question
Effect of Owner Investing in a Business,"For example, if a person starts a sole proprietorship with $15,000 the accounting equation will show: Assets  = Liabilities  +  Owner’s Equity $15,000  = $15,000",This is a cheet sheet Question
Effect of Business Borrowing Money,"Next, let’s assume that the company borrows $10,000 from its bank. This will cause the asset Cash to increase by $10,000 and it will cause the liability Notes Payable or Loans Payable to increase by $10,000. The accounting equation remains in balance because both sides of the equation increased by $10,000 For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Purchase of Office Furniture for Cash,"If the company pays Cash of $3,000 for new office furniture, the transaction will cause the asset Office Furniture to increase by $3,000 and the asset Cash to decrease by $3,000. Note that the total amount of assets (shown on the left side of the equation) does not change since there was both an increase and a decrease of $3,000 on the left side of the accounting equation:",This is a cheet sheet Question
Purchase of New Machine with Cash and a Loan,"The company buys a new machine for $20,000 by paying $12,000 in cash and signing a promissory note for the remaining $8,000. This transaction causes the asset Machinery to increase by $20,000 and causes the asset Cash to decrease by $12,000 and the liabilities to increase by $8,000:",This is a cheet sheet Question
Owner Invests Additional Money in Business,"Owner’s equity (on the right side of the accounting equation) is affected by several types of transactions. First, owner’s equity increases when the business owner invests personal cash or other assets into the business. For example, if M. Jones invests $20,000 of cash in her business, the company’s asset Cash increases by $20,000 and the owner’s equity account M. Jones, Capital increases by $20,000. The accounting equation continues to be in balance because each side of the equation increased by $20,000:",This is a cheet sheet Question
Owner Withdraws Money for Personal Use,"Owner’s equity will decrease when the owner withdraws business assets for personal use. To illustrate, let’s assume the owner draws (or withdraws) $3,000 of the business asset Cash for personal use. The result is that assets decrease by $3,000 and the owner’s equity decreases by $3,000. Again, the accounting equation remains in balance.",This is a cheet sheet Question
Revenues Increase Owner’s Equity and Usually Assets,"Owner’s equity also increases when a company earns revenues. Under the accrual method of accounting, revenues will increase owner’s equity and will usually increase an asset when the revenues are earned (as opposed to waiting until the client’s cash is received). For example, if the company earns fees of $4,000 and allows the client to pay in 30 days, the company’s asset Accounts Receivable increases by $4,000 and owner’s equity increases by $4,000. Since both sides of the accounting equation increase by $4,000, the accounting equation remains in balance: Expenses Decrease Owner’s Equity and",This is a cheet sheet Question
Affects Another Account,"Owner’s equity will decrease when a company incurs expenses. Under the accrual method of accounting, an expense is recorded when the expense occurs (as opposed to the time of payment). Assume that a company incurs electricity expense of $400 in December that will be paid in January. In December the company must report a decrease in owner’s equity of $400 (because of the electricity expense) and an increase of $400 in its liabilities: For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Additional Information on the Accounting Equation,"As you may have noticed, the accounting equation is similar to the balance sheet (or statement of financial position) which is one of the main financial statements. The accounting equation also provides insight into the link between the balance sheet and the income statement. For instance, the balances in the income statement accounts will be the net income or net loss that will be transferred to the owner’s capital account at the end of the year.",This is a cheet sheet Question
Summary of Effects on Owner’s Equity,"The following table shows the changes in owner’s equity as a result of our eight examples: Owner’s equity at the beginning of the period Owner’s equity at the end of the period Note: While the owner’s investments and the owner’s draws cause owner’s equity to change, they are NOT part of the company’s net income. Hence, they are not reported on the company’s income statement. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Accounting Basics,"Accounting basics is often described by the following actions: •	 Recording the vast number of transactions that a business (or other organization) experiences. •	 Sorting and storing the transactions in accounts within the company’s general ledger. •	 Adjusting the account balances prior to issuing financial statements in order to comply with the accrual method of accounting as well as other accounting principles and standards. •	 Issuing financial statements to a variety of people for various accounting periods (annual, monthly, etc.). However, the field of accounting also includes management accounting, income tax accounting, auditing, accounting systems, SEC reporting, and more.",This is a cheet sheet Question
Double-entry System,"Generally, accounting is accomplished by the use of the double-entry system (or double-entry bookkeeping). This means that every transaction and/or accounting entry will affect a minimum of two accounts. For example, paying the rent usually means an entry to the account Cash and to the account Rent Expense. In addition, double entry requires that at least one account will be debited (entering an amount on the left side of an account) and at least one other account will be credited (entering an amount on the right side of an account). As a result of double entry, the company’s general ledger accounts should always have the total amount of the debit amounts equal to the total amount of the credit amounts. Double entry also assures that the accounting equation will remain in balance. (The accounting equation is:  Assets = Liabilities + Stockholders’ Equity.)",This is a cheet sheet Question
Types of General Ledger Accounts,"The accounts in the general ledger of a corporation consist of two major categories: • Balance sheet accounts (assets, liabilities, stockholders’ equity) • Income statement accounts (revenues, expenses, gains, losses) For personal use by the original purchaser only. Copyright © AccountingCoach®.com. A few examples of the balance sheet accounts include Cash, Accounts Receivables, Prepaid Expenses, Equipment, Accounts Payable, Notes Payable, Accrued Expenses Payable, Common Stock, Retained Earnings and more. The balance sheet accounts are also referred to as permanent accounts since the balances in these accounts are not closed at the end of the accounting year. Rather, the balances at the end of the year are carried forward to become the beginning balances of the following year. A few examples of the income statement accounts include Sales Revenues, Service Revenues, Investment Income, Wages Expense, Rent Expense, Utilities Expense, Advertising Expense, Insurance Expense, Depreciation Expense, Interest Expense, Gain on Sale of Assets, Loss from Lawsuit, and many more. The income statement accounts are referred to as temporary accounts because the account balances are closed at the end of the accounting year. When the income statement accounts are closed, the net amount will be recorded in a stockholders’ (or owner’s) equity account. The income statement accounts will begin each accounting year with zero balances.",This is a cheet sheet Question
External Financial Statements,"When a corporation releases its financial statements to people outside of the corporation, they are to include the following: •	Income statement •	Statement of comprehensive income •	Balance sheet •	Statement of stockholders’ equity •	Statement of cash flows •	Notes to the financial statements",This is a cheet sheet Question
Income Statement,"The income statement is also known as statement of earnings, statement of operations, profit and loss statement (P&L). The amounts on the income statement are the revenues, expenses, gains, losses, and the resulting net income that occurred in the accounting period. This is best done by following the accrual method of accounting. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Statement of Comprehensive Income,"The statement of comprehensive income reports 1) the amount of net income from the income statement, plus 2) some additional items referred to as other comprehensive income. Examples of other comprehensive income include gains and losses from foreign currency adjustments, hedging, and postretirement liabilities.",This is a cheet sheet Question
Balance Sheet,"The balance sheet is also known as the statement of financial position. The balance sheet reports the balances in the asset, liability, and stockholders’ equity accounts as of the final moment of the accounting period. Similar to the accounting equation, the balance sheet must always be in balance. For instance under the accrual method of accounting, when a corporation earns revenues and allows the customer to pay 30 days later, both the asset Accounts Receivable and the stockholders’ equity account Retained Earnings will increase. (However, the amount earned will first be recorded in the temporary account Revenues Earned in order for the amount to easily be reported on the income statement.)",This is a cheet sheet Question
Statement of Stockholders’ Equity,"The statement of stockholders’ equity lists the changes that occurred during the accounting period in the corporation’s stockholders’ equity accounts. These general ledger accounts include common stock, preferred stock, retained earnings, accumulated other comprehensive income, and treasury stock. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question
Statement of Cash Flows,"The statement of cash flows (SCF) is also referred to as the cash flow statement. The SCF is necessary because the income statement reflects the accrual method of accounting (not the cash method). The statement of cash flows lists a corporation’s significant cash inflows and cash outflows that had occurred during the accounting period. The cash flows are listed under one of the following categories: operating activities, investing activities, and financing activities. The total of the three categories should equal the change in the amount of the corporation’s cash and cash equivalents during the accounting period.",This is a cheet sheet Question
Notes to the Financial Statements,"The amounts appearing on the face of the financial statements cannot adequately communicate all of the complexities involved in the business activities. Therefore, additional information must be disclosed in the notes to the financial statements. For personal use by the original purchaser only. Copyright © AccountingCoach®.com.",This is a cheet sheet Question