What is the basic accounting equation?

Assets = Liabilities + Stockholders' equity

What is accounts payable?

Money owed to suppliers (vendors) for items (supplies,
inventory, etc.) purchased from them.

What do notes payable represent?

Obligations to banks or other creditors based on formal written
agreements

Monetary unit assumption

Common denominator of currency is needed to measure all
business activity expressed in the financial statements

Economic entity assumption

Economic events can be identified with a particular economic
body; this assumption distinguishes the financial history or
performance of corporation from that of its owners and other
organizations.

Going concern assumption

The underlying assumption that presumes a company will
continue indefinitely (in absence of evidence to the contrary)

What is the Financial Accounting Standards Board (FASB)?

A private, not-for-profit organization to whom the SEC delegates
much responsibility for standard setting of GAAP in the U.S.

What is the Securities and Exchange Commission (SEC)?

It is a U.S. government agency that regulates the trading of
securities of public companies. It has broad powers to prescribe
and enforce GAAP.

What is Generally Accepted Accounting Principles (GAAP)?

Commonly understood and accepted conventions for gathering,
organizing and reporting the financial history (story) of an
organization.

Part of GAAP addresses valuation. What's meant by valuation?

An assignment of a monetary amount. (For instance, we assign
monetary amounts to most assets based on their historical cost,
not their current market values).

Part of GAAP addresses recognition issues. What's meant by

recognition?
It's the act of recording an item into the accounting records.
(recognize = record). For instance, GAAP addresses the timing of
recording revenues

How do you calculate growth rate for net income?

(Net income for current or more recent year - Net income for the
earlier year) DIVIDED by Net income for the earlier year

If given a recent year's earnings and the growth rate, calculate

the prior year's earnings.
Recent year earnings DIVIDED by (1 or - the % change expressed
as a decimal). (Thus, the denominator will be less than one if the
growth rate was a decrease -- meaning the earlier year's amount
was higher; or the denominator will be greater than 1 if the
growth rate reflected an increase -- meaning the earlier year's
amount was lower).

What information does a balance sheet convey?

Information about (1) cost of resources that a company owns that
will enable it to generate revenues in the future, (2) its
obligations (resources committed to satisfy creditors' claims),
and (3) residual interest of stockholders (the difference between
the assets and the liabilities)

Retained earnings represents what?

The sum of all net income or net losses minus all dividends since
the corporation's inception; it has NO relation to cash but rather
represents the firm's earned capital as part of the owners'
residual interest in the firm

When cash or accounts receivable increase as a company

provides goods or services, what income statement account is
affected?
revenue (often called sales revenue when goods are sold or
service revenue when services are provided)

When a corporation issues shares of its stock, does that

constitute sales revenue?
No. Stock represents ownership rights in the corporation.
Issuance of stock is different from sale of goods! Transactions
with the entity's own stockholders will have NO impact on the

income statement. The firm has an inflow of resources (cash) and

a residual claim against the resources of the firm as a result of
this invested (contributed) capital from owners. This residual
claim is reflected within the stockholders' equity section of the
balance sheet.

Does cash necessarily increase when revenue is recorded?

No, not necessarily. It may (if it was a cash sale) or it may not (if
it was a sale on account). For a sale on account, the entity would
record an increase to accounts receivable at the point of sale.

Does cash necessarily decrease when an expense is recorded?

No, not necessarily. An asset may decrease (cash, supplies,
inventory, prepaid rent or prepaid insurance, etc.) or a liability
may increase (accounts payable, wages payable, etc.)

What is a "net loss"?

the unfortunate situation in which expenses exceed revenues (so
earnings are negative and the bottom line of the income
statement appears in parentheses or brackets)

What are accounts receivable?

Rights to receive money owed by customers for goods sold or
services provided by the entity. (They arise from sales on
account).

What are assets?

Resources or benefits owned or controlled by a company that
offer probable future economic benefit

What is the bottom line of an income statement?

Net income (or net loss if negative); also called earnings

When we have an inflow of assets (cash or accounts receivable)

as a result of providing goods or services, what income
statement account is updated to reflect the monetary amounts
of those sales?
revenue

Which account reports what a firm is owed from customers due

to products or services that the firm previously sold on
account?
Accounts receivable

We speak of earning revenue, does that mean that earnings is

another name for revenue?
No. Earnings is another name for net income or profit (bottom
line of income statement). Revenue often arises from sales and is
the top line of the income statement.

Given the accounting equation, total equity must equal what?

the difference between total assets and total liabilities.

Does the income statement explain how much cash changed or

why cash changed?
No. The Statement of Cash Flows explains why cash changed.
The income statement (statement of operations or statement of
earnings) reports revenues and expenses under the accrual basis
(not cash basis) in order to measure profitability for a period. It's
possible to have net income and yet cash may have decreased
over the period. Conversely, it's possible to have a net loss and
yet cash may have increased! Don't look to the income statement
when you want to answers about cash since most firms often
have transactions on account.

Are payables (like accounts payable, wages payable, or interest

payable) on the income statement?
No. All "payables" are liabilities (obligations) and are reported on
the balance sheet. Expense accounts like salaries expense or
interest expense appear on the income statement. Payables
reflect amounts owed as of a point in time (as of a specific date)
so they are obligations to sacrifice cash in the future. Expenses
represent costs incurred (resources or benefits consumed or used
up) during the period that helped generate revenues of the
period. Expenses may have already been paid (and therefore may
not be associated with any payable at the end of the period) or
they may not yet have been paid.

How does a company record its purchase of supplies on

account with vendors?
+ Supplies; + Accounts payable

How does a company record that it has used some of those

supplies?
+ Supplies expense; - Supplies

How do you determine how profitable a company is?

Look at the income statement, which reports revenues, expenses,
gains

Why are wages payable and wages expense different amounts

on the financial statements?
Wages payable on the balance sheet is the amount owed to
employees at a particular point in time (balance sheet date).
Wages expense on the income statement is the amount of wages
incurred over a period of time. Wages earned by employees for
the entire year (whether or not entirely paid) would be Wages
Expense on the income statement for the fiscal year, but only the
portion of wages earned by employees but not yet paid as of the
last day of the fiscal year would be reported as wages payable on
the balance sheet as of the fiscal year end.

Are dividends distributed to stockholders reported within an

income statement?
No because dividends are not an expense.

Why are dividends NOT an expense?

By definition, expenses should contribute to generating sales.
Dividends are simply cash distributions to stockholders/owners.

Why are prepaid expenses like prepaid rent or insurance

considered assets?
Because they represent the right to use facilities or equipment or
the right to insurance coverage in the future without additional
sacrifice of resource. Since they represent a future benefit, they
are an asset. Later as the benefit expires (is used), the cost will be
transferred to an expense account.

What is an expenditure?
An outlay of cash (which could result in either recording an asset
or an expense)

Why might prepaid expenses be called deferred expenses?

Defer means to postpone or delay. Here we are delaying the
recognition of these expenditures as expenses. Costs that are in
some prepaid expense (asset category) will be expenses later so
we are just postponing recognizing them as an expense.

Why might unearned revenue be called deferred revenue?

Defer means to postpone or delay -- we are delaying the
recognition of this inflow as a revenue. Money received as
unearned revenue will become revenue later once the company

has provided the good or service (once it has satisfied revenue

recognition principle).

What is accrual accounting?

It's a method of accounting that separates the measurement of
revenues and expenses from the receipt and expenditure of cash.

Describe main rules of accrual-basis accounting

Record revenues when EARNED them and record expenses
when INCURRED so that they are matched to related revenues
of the period (regardless of the timing of cash receipts or
payments).

What is "matching"?
it is the process of making sure that all the costs incurred in
generating the revenues recognized in a period are taken as
expenses in that period.

Assume that a company paid $20,000 to an insurance

company on December 31, 2012 for a two year policy to cover
2013 and 2014. According to the MATCHING principle, how
much of this $20,000 should appear as an EXPENSE on the
company's 2012 income statement?
ZERO -- no expense was incurred in 2012. According to
matching, the expense is incurred in the period(s) that it helps to
generate benefits (or revenues). So that will happen in part in
2013 and 2014 -- the periods benefited by the insurance
coverage.

In general, when should revenue be recorded?

When the firm has earned the revenue (i.e., when it has provided
a good or service).

When does a firm recognize "advertising expense" or

"advertising revenue"?
When the ad runs

What is unearned revenue?

Monetary amounts received by an entity that accepts up-front
payments of cash in exchange for future delivery of its product or
future performance of its services. (Thus, it gives rise to an
obligation on that entity's part until the product or service is
rendered).

When would a retailer record revenue associated a gift card

that a customer purchased?
When the customer redeems that gift card for merchandise
(apply revenue recognition rules of accrual accounting). Until
that point, the retailer has a liability (unearned revenue)
associated with the gift card because it has an obligation to
provide merchandise when the customer redeems that gift card.
The same situation arises for airlines when customers pay for
tickets in advance and for magazine publishers when subscribers
pay for issues in advance.

How do dividends affect retained earnings?

Retained earnings are past earnings not distributed to
stockholders. Dividends are distributions to stockholders. So
dividends lower retained earnings.

Does net income answer the question whether cash increased

during the period?
No. Net income is an accrual-based number, not a cash based
number (since revenues are recorded when EARNED and
expenses are recorded when INCURRED, regardless of whether
or not cash is affected)

Under accrual-based accounting, when are expenses

recognized (recorded)?
When they are INCURRED -- as a resource is used to generate
benefits of the period (per matching principle). This in not
necessarily when payment is made!

Under accrual-based accounting, when are revenues

recognized (recorded)?
When company substantially fulfills its obligation to customer by
providing goods or services

What does the matching principle say about the timing of

expenses?
Record costs that are incurred to generate revenue of a period as
an expense of that period (to appropriately measure profit)

When are adjusting entries made and why are they necessary?
Adjusting entries are recorded just before the end of the
accounting period. They are necessary in order to properly
record revenues and expenses (and to update related assets and
liabilities on the balance sheet).

What adjusting entry is made if the payroll date was not the
last day of the accounting period? (Employees worked the last
few days of the period but have not yet been paid for them).
+ Salaries Expense; + Salaries Payable

If a company has unearned revenue on its books, what

adjusting entry might be needed at year-end?
- Unearned revenue; + Revenue (for any portion that the entity
has earned by satisfying its obligation to customers)

If a company has a prepaid expense on its books, what

adjusting entry is commonly needed at year-end?
+ XX expense
- Prepaid XX (where XX is the description)
(amount should reflect monetary portion of the benefit that
expired or was used,

Define "current asset"

an asset that is expected to be converted into cash or used within
the next operating cycle, which is typically one year

Examples of Current Assets?

* Cash
* Accounts receivable (trade receivables)
* Marketable securities or short-term investments
* Prepaid rent or prepaid insurance
* Supplies (not yet used)
*Inventory (merchandise held for sale but not yet sold)

Under accrual accounting, when a company collects on a sale

for which it previously billed a customer, how does this affect
the total monetary amount of current assets?
There is no net change. Cash increases and accounts receivable
decreases when the collection on account is recorded. Both are
current assets.

What's meant by the "useful life" of an asset?

It is the time frame over which an asset is capable of providing
benefits to that entity.

What are noncurrent or long-term assets?

Assets that have benefits that are expected to be realized over
periods BEYOND one year from the balance sheet date.

Examples of long-term assets?

Land, buildings, manufacturing machines, delivery vehicles, etc.,
that entities hold for use in the business over several years.
Accumulated depreciation is a contra-asset subtracted from its
applicable long-term asset account. These long-term assets are
also known as Fixed Assets or Property, Plant

What's included in current liabilities?

Generally, any obligation that must be satisfied within 12 months
or less: Such as Accounts payable Unearned revenue
Interest payable
Utilities payable
Current portion of long-term debt
Salaries or wages payable

What are noncurrent or long-term liabilities?

Obligations for which the sacrifice of resources will occur more
than one year after the balance sheet date.

What's meant by the "current portion of long-term debt"?

The amount of long-term debt that will become due within one
year of the balance sheet date.

Play audio for this term

What is cost of goods sold?

It's an expense account that represents the cost of the inventory
that was sold this period (which is matched against the revenues
generated from those sales to customers)
Part 2

Accounting
System that collects and processes (analyzes, measures, and
records) financial information about an organization and reports
that information to decision makers.

Accounting entity
Is the organization for with financial data are to be collected.

The four basic statements:

1. Balance Sheet
2. Income Statement

3. Statement of Retained Earnings

4. Statement of Cash flows

Balance Sheet
Reports the amount of assets, liabilities and stockholders' equity
of an accounting entry at a point in time.

Income Statement
Reports the revenues less the expenses of the accounting period.

Statement of Retained Earnings

Reports the way that net income and the distribution of
dividends affected the financial position of the company during
the accounting period.

Statement of Cash Flows

Reports inflows and outflows of cash during the accounting
period in the categories of operating, investing, and financing.

Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

Assets
Are the economic resources owned by the company. Each of
these economic resources is expected to provide future benefits
to the firm.

Liabilities
Are the company's debts or obligations. Which will be paid with
assets or services.

Stockholders' Equity (Owners' Equity)

Indicates the amount of financing provided by owners of the
business and earnings. Is the sum of the contribute capital + the
retained earnings.

Accounting Period
Is the time period cover by the financial statements.

Elements of the Income Statement

Revenues, Expenses and Net Income.

Revenues

Earnings from the sale of goods or services to costumers.

Revenues are reported whether or not have yet been paid for.

Expenses
Represent the dollar amount of resources the entity used to earn
revenue during the period.

Net Income ("the bottom line")

Is the excess of total revenues over total expenses.

Net Loss
If total expenses exceed total revenues.

Retained Earning Equation

Ending Retained Earnings = (Beginning of Retained Earnings +
Net Income) - Dividends

The Cash Flow Statement Equation

+/- Cash flow from Operating Activities (CFO)
+/- Cash flow from Investing Activities (CFI)
+/- Cash flow from Financing Activities (CFF)
---------------------------------------Change in Cash

Cash Flow from Operating Activities, and examples

CFO- Are cash flow that are directly related to earning income.
Example, collecting cash from costumers, pay salaries, pay bills,
pay to suppliers.

Cash Flow from Investing Activities, and examples

CFI- Are cash flow related to the acquisition or sale of the
company's productive assets. Example, the purchase of
additional equipment.

Cash Flow from Financing Activities, and examples

CFF- Are cash flow directly related to the financing of the
enterprise itself. Example, the payment of money to investors
and creditors.

Notes
"Footnotes" provide supplemental information about the
financial condition of a company.

GAAP
Generally Accepted Accounting Principles, are the measurement
rules used to develop the information in financial statements.

SEC
Security and Exchange Commission, is the U.S government
agency that determines the financial statements that public
companies must provide to stockholders, and the rules that they
must use in producing those statements.

FASB
Financial Accounting Standards Board, is the private sector body
given the primary responsibility to work out the detailed rules
that become GAAP.

Audit
Is an examination of the financial reports to ensure that they
represent claim and comfort with GAAP.

Primary objective of external financial reporting

Is to provide useful economic information to help external
parties make financial decisions.

Qualitative Characteristics of Financial Information

Information should be Relevant and Reliable.

Separate-Entity Assumption
States that a business transactions are accounted for separately
from the transactions of owners.

Unit-Measure Assumption
States that accounting information should be measure and
reported in the national monetary unit.

Continuity Assumption
States that businesses are assumed to continue to operate into
the foreseeable future.

Cost Principle
Requires assets to be recorded at historical cost-cash paid plus
the current dollar value of all none cash considerations given on
the date of the exchange.

Current Assets
Are assets that will be used or turned into cash within one year.

Current Liabilities
Are obligations that will be settle by providing cash, goods, or
services within the coming year.

Materiality
Exception suggest that small amounts that not likely to influence
a user's decision can be accounted for in the most beneficial
manner.

Conservatism
Exception suggest that care should be taken not to over state
assets and revenues or understate liabilities and expenses.

Transaction
Is an exchange of assets or services to pay between a business
and one or more external parties to a business or a measurable
internal event such as the use of assets in operations.

Accounts
Is a standardized format that organizations use to accumulate
the dollar effect of transactions on each financial statement item.
"Chart of account"

Transaction Analysis
Every transaction affects at least two accounts (dual effect), and
the accounting equation MUST remain in balance after each
transaction.

The three steps in the transaction analysis process

1. Identify the accounts affected and classify them by type of
account.
2. Determine the direction of the effect on each account.
3. Verify that the accounting equation remains in balance.

Direction of Transactions
Debit (dr) is on the LEFT side of an account.
Credit (cr) is on the RIGHT side of an account.

General Journal
Is a bookkeeping system, that records transactions in
chronological order.

Journal Entry
Is an accounting method for expressing the effects of a
transaction on accounts in debits-equal-credits format.

T-Account
Is a tool for summarizing transaction effects for each account,
determining balances, and drawing inferences about a company's
activities.

Current Ratio and formula

Helps measure the ability of the company to pay its short-term
obligations with short-term assets.
Current Ratio = Current Assets / Current Liabilities

Operating cycle
"Cash-to-cash" is the time it takes for a company to pay cash to
suppliers, sell goods and services to costumers, and collect cash
from costumers.

Time Period Assumption

Indicates that the long life of a company can be reported in
shorter time periods.

Gains
Are increases in assets or decreases in liabilities from peripheral
transactions.

Losses
Are decreases is assets or increases in liabilities from peripheral
transactions.

Cash Basis Accounting

Records revenues when cash is received and expenses hen cash is
paid.

Accrual Basis Accounting

Records revenue when earned and expenses when incurred,
regardless of the timing of cash receipts or payments.

Revenue Principle
States that revenues are recognize when:
1. Good or services are delivered.

2. There is persuasive evidence of an arrangement for costumer

payment.
3. The price is fixed or determinable.
4. Collection is reasonably assured.

Matching Principle
Requires that expenses be recorded when incurred in earning
revenue.

Total Assets Turnover Ratio and formula

Measures the sales generated per dollar of assets.
TATR = Sales Revenue / Average Total Assets
average (beginning balance + ending balance)/2

Order of the financial statements.

Income statement, statement of retained earnings, balance sheet,
and statement of cash flows.

Accounting Cycle
Is the process followed by entities to analyze and record
transactions, adjust the records at the end of the period, prepare
financial statements, and prepare the records for the next cycle.

Trial Balance
Is a list of all accounts with their balances to provide a check on
the equality of the debits and credits.

Adjusting Entries
Are entries necessary at the end of the accounting period to
measure all revenues and expenses of that period.

Deferred Revenues
"Unearned revenues" are previously recorded liabilities that need
to be adjusted at the end of the accounting period to reflect the
amount of revenue earned. Example, when cash was received
and previously recorded:
Unearned revenue xxx
Revenue xxx

Accrued Revenues
Are previously unrecorded revenues that need to be adjusted at
the end of the accounting period to reflect the amount earned
and the related receivable account. Example, cash will be

received:
Receivable xxx
Revenue xxx

Deferred Expenses
Are previously acquired assets that need to be adjusted at the end
of the accounting period to reflect the amount of expenses
incurred in using the asset to generate revenue. Example, if cash
was paid and previously recorded:
Expense xxx
Prepaid Expense xxx

Accrued Expenses
Are previously unrecorded expenses that need to be adjusted at
the end of the accounting period to reflect the amount incurred
and the related payable account. Example, if cash will be paid:
Expense xxx
Payable xxx

Contra-Account
Is an account that is an offset to, or reduction of, the primary
accout.

Net Book Value

Of an asset is the difference between its acquisition cost and
accumulated depreciation, its related contra-account.

Earnings Per Share and formula

Is the ratio that evaluates the operating performance and
profitability of a company.
EPS = Net Income / Average number of shares of common stock
outstanding during the period

Permanent Accounts
"Real" are the Balance Sheet accounts that carry their anding
balances into the next accounting period.

Temporary Accounts
"Nominal" are Income Statement accounts that are closed to
Retained earnings at the end of the accounting period.

Closing Entry
Transfers balances in temporary accounts to Retained Earnings
and establishes zero balances in temporary accounts.

Post-Closing Trial Balance

Should be prepared as the last step of the accounting cycle to
check that debits equal credits and all temporary accounts have
been closed.

Order of the steps in the

accounting cycle at the end of the accounting period
Prepare a trial balance, journalize and post
adjustments, prepare financial statements, and
journalize and post the closing entries.

Gross Profit
Net sales revenue minus cost of sales.

FOB Shipping Point (free on board)

When goods are shipped, title changes hands at shipment, and
the buyer normally pays for shipping.

FOB Destination
When title changes hand on delivery, and the seller normally
pays for shipping.

FOB Shipping Point vs FOB Destination

Revenues from good shipped FOB Shipping Point are normally
recognized at shipment. Revenues from goods shipped FOB
destination are normally recognized at delivery.

Credit Card Discount

Is the fee charged by the credit card company for its services.

Sales Discount
(Cash discount) is a cash discount offered to encourage prompt
payment of an account receivable.

Sales Returns and Allowances

Is a reduction of sales revenues for return of or allowances for
unsatisfactory good.

Gross Profit Percentage and formula

Measures a company's ability to charge premium prices and
produce goods and services at low cost.
Gross Profit Percentage = Gross Profit / Net sales

Accounts Receivables
Are open accounts owned to the business by trade costumers.

Notes Receivables
Are written promises that require another party to pay the
business under specified conditions (amount, time, interest).

Allowance Method
Bases bad debt expenses on an estimate of uncollectible
accounts.

Bad Debt Expense

Is the expense associated with estimated uncollectible account
receivable.
Bad debt expense xxx
Allowance for doubtful accounts xxx

Allowance for Doubtful Accounts

Is a contra-asset account containing the estimated uncollectible
account receivable.

Writing Off Uncollectible Accounts

Writing off of an individual bad debt is recorded through a
journal entry.
Allowance for doubtful accounts xxx
Accounts Receivables xxx

Percentage of Credit Sales Method

Bases bad debt expenses on the historical percentage of credit
sales that result in bad debts.

Aging of Accounts Receivable Method

Estimates uncollectible accounts based on the age of each
account receivable.

Receivables Turnover Ratio and formula

Reflects how many times average trade receivables are recorded

and collected during the period.
Receivables Turnover = Net sales / Average net trade account
receivables

Cash
Is money or any instrument that banks will accept for deposit
and immediate credit to a company's account, such as check,
money, or bank draft.

Cash Equivalents
Are short-term investments with original maturities of three
months or less that are readily convertible to cash and whose
value is unlikely to change.

Internal Controls
Are the process by which a company safeguards its assets.

Bank Statement
Is a monthly report from a bank that shows deposits recorded,
checks cleared, other debits and credits and a running bank
balance.

Bank Reconciliation
Is the process of verifying the accuracy of both the bank
statement and the cash accounts of a business.

Inventory
Is tangible property held for sale in the normal course of
business or used in producing goods or services for sale.

Merchandise Inventory
Includes goods held for sale in the ordinary course of business.

Raw Materials Inventory

Includes items acquire for the purpose of processing into finish
goods.

Work In Proces Inventory

Includes goods in the process of being manufactured.

Finished Goods Inventory

Includes manufactured good that are complete and ready for

sale.

Direct Labor
Refers to the earnings of employees who work directly on the
products being manufactured.

Factory Overhead
Are manufacturing costs that are not raw material or direct cost
labor. Example, cost of light, supervisor's salary.

Goods Available For Sale

Refers to the sum of beginning inventory and purchases for the
period.

Cost of Goods Sold Equation

CGS = Beginning Inventory + Purchases of merchandise Ending Inventory

Specific Identification Method

Identifies the cost of the specific item that was sold.

FIFO First-in, First-out Method

Assumes that the first goods purchased are the first goods sold.

LIFO Last-in, First-out Method

Assumes that the most recently purchased units are sold first.

Average Cost Method

Uses the weighted average unit cost of the goods available for
sale for both cost of goods and ending inventory.

Inventory Turnover and formula

Ratio reflects how many times average inventory was produced
and sold during the period.
Inventory Turnover = Cost of Goods Sold / Average Inventory

Perpetual Inventory System

A detailed inventory record is maintained, recording each
purchase and sales during the accounting period.

Periodic inventory System

Ending inventory and cost of good sold are determined at the

end of the accounting period based on a physical count.

Long-Lived Assets
Are tangible and intangible resources owned by a business and
used in its operations over several years.

Tangible Assets
Assets have physical substance.

Intangible Assets
Assets have special rights but not physical substance.

Fixed Assets Turnover and formula

Ratio that measures the sales dollar generated by each dollar of
fixed assets used.
Fixed Asset Turnover = Net Sales / Average Net Fixed Assets

Acquisition Cost
Is the net cash equivalent amount paid or to be paid for the asset.

Depreciation
Is the process of allocating the cost of buildings and equipment
over their productive lives using a systematic and rational
method.
Depreciation Expense xxxx
Accumulated Depreciation xxxx

Net Book Value

Is the acquisition cost of an asset less accumulated depreciation.

Estimated Useful Life

Is the expected service life of an asset to the present owner.

Residual Value
Is the estimated amount to be recovered by the company at the
end of the asset's estimated useful life.

Straight-Line Depreciation and formula

Is the method that allocates the cost of an asset in equal periodic
amounts over its useful life.

Depreciation Expense = (Cost - Residual Value) x (1 / Useful life)

Units-Of-Production Depreciation and formula

Is the method that allocates the cost of an asset over its useful life
based on the relation of it periodic output to its total estimated
output.
Depreciation Expense = ((Cost - Residual Value) / Estimated
total production) x Actual Production

Declining-Balance Depreciation and formula

Is the method that allocates the cost of an asset over its useful life
based on a multiple of the straight-line rate (often two times).
Depreciation Expense = ((Cost - Accumulated Depreciation) x ( 2
/ Useful Life))

Modified Accelerated Cost Recovery System (MACRS)

Is the method similar to the Declining-Balance method and is
applied over relatively short asset live to yield high depreciation
expense in the early years.

Natural Resources
Are assets that occur in nature, such as minerals deposits, timber
tracts, oil and gas.

Depletion
Is a systematic and rational allocation of the cost of a natural
resource over the period of its exploitation.

Amortization
Is the systematic and rational allocation of the acquisition cost of
an intangible asset over its useful life.

Goodwill and formula

Is the excess of the purchase price of a business over the fair
value of the business's assets and liabilities.
Goodwill = Purchase Price - Fair value of identifiable assets and
liabilities.

Trademark
Is an exclusive legal right to use a special name, image, or slogan.

Copyrights
Is the exclusive right to publish, use, and sell a literary, musical,
or artistic work.

Patent
Is granted by the federal government for a period of 20 years for
an invention.

Liquidity
Is the ability to pay current obligations.

Quick Ratio Formula

Ratio suggests good liquidity.
Quick Ratio = Quick Assets / Current Liabilities

Accounts Payable Turnover Formula

Ratio that measures how quickly management is paying trade
accounts.
Average Payable Turnover = Cost of Good Sold / Average
Accounts Payable

Accrued Liabilities
Are expenses that have been incurred but have not been paid at
the end of the accounting period.

Time Value of Money

Is the interest that is associated with the use of money over time.

Contingent Liability
Is a potential liability that has arisen as the result of a past event.

Working Capital
Is the dollar difference between total current assets and total
current liabilities.

Long-Term Liabilities
Are all the entity's obligations not classified s current liabilities.

Operating Lease

Does not meet any of the four criteria establish by GAAP and
does not cause the recording of an asset and liability.

Capital Lease
Meets a least one of the four criteria establish by GAAP and
results in the recording of an asset and liability.

Present Value and formula

is the current value of an amount to be received in the future; a
future amount discounted fro compound inters.
PV = ((1 / (1 + I)N ) x Amount

Annuity
Is a series of periodic cash receipts or payments that are equal in
amount each interest period.

Future Value
Is the sum to which an amount will increase as the result of
compound interest.

Bond Principal
Is the amount (a) payable at the maturity of the bond and (b) on
which the periodic cash interest payments are computed.

Par Value
Is another name for bond principal, or the maturity of a bond.

Face Amount
Is another name for bond principal, or the maturity amount of
the bond.

Stated Rate
Is the rate of cash interest per period stated in the bond contract.

Bonds Payable
Are both stocks and bonds issued by corporations to raise money
for long-term purposes.

Debenture
Is an unsecured bond; no assets are specifically pledged to
guarantee repayment.

Callable Bond
May be called for early retirement at the option of the issuer.
Part 3

Basic Accounting Equation

Assets = Liabilities + Stockholders' Equity

Net Income
Revenue - Expenses

Stockholders' Equity
Retained Earnings + Common Stock

Retained Earnings
Beginning Balance + Net Income - Dividends

Net Realizable Value

Accounts Receivable - Allowance for Doubtful Accounts

Cost of Goods Sold

Beginning Inventory
+Cost of goods purchased during the period
=Cost of goods available for sale
-Ending Inventory
=COGS

Gross Profit
Revenue - COGS

Net Book Value

Cost of an asset - Accumulated Depreciation

Net Sales
Revenue - (Allowances+Discounts+Returns)

Current Ratio
Current assets / Current liabilities
Higher is better. Measures Liquidity.

Debt-to-total-assets Ratio

Total Liabilities / Total Assets

Lower is better. Measures solvency.

Return on Sales Ratio

Net Income / Net Sales
Higher is better. Measures profitability.

Free Cash Flow

Cash from operations - Capital Expenditures

Inventory Turnover Ratio

Cost of Goods Sold / Average Inventory

Days' Sale Inventory

365 / Inventory Turnover Ratio

Average Inventory
(Beginning Inventory + Ending Inventory) / 2

Earnings per Share

Net Income / # of outstanding shares

Working Capital
Current assets - Current liability

Interest
Principal X Interest Rate X Time

Accounts Receivable Turnover

Net Sales / Average Accounts Receivable

Average Collection Period

365 / Accounts Receivable Turnover

Annual Straight-line Depreciation

(Acquisition cost - salvage value) / Estimated useful life

Return on Assets
Net income / Average total assets

Asset Turnover
Net Sales / Average total assets

Quick ratio
(Cash + short-term investments + accounts receivable) / Current
Liabilities

Times Interest Ratio

Income before expense / interest expense