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Corporate Stock Holders
- pay higher taxes
- no personal liability
communicates financial information about a busines to internal and external users
- can be expressed as:
- Assets - Stockholders' Equity = Liabilities.
A business organized as a corporation
is owned by its stockholers
Internal users of data
- Sales person of company
- President of company
- Controller of company
Principal type of business activities
- activities involves collecting the necessary funds to support the
The cost of assets consumed or services used
Ending retained earnings
Beginning retained earnings + Net income – Dividends
When does net income result?
when revenues exceed expenses
is concerned with the company at a point in time
What can stockholder's equity be desribed as?
as claims of owners on total assets
have the effect of increasing retained earnings
derives its value from the rights and privileges it provides the owner
Operating cycle of a company
is the average time that is required to go from cash to cash in producing revenues
What is a measure of profitabilit?
earnings per share
Where do dividends appear?
On the retained earnings statement ONLY
Characteristics of Accounting information
Accounting information should be verifiablein order to enhance what?
Going Concern assumption
- assumes that an enterprise will continue in operation long enough to
- carry out its existing objectives and commitments
Does a debit to an account always indicate an increase in that account?
What happens if expenses are paid in cash?
Which items have an effect on retained earnings?
Are advanced receipts from customers treated as revenue at the time of the receipt?
No, revenue cannot be recognized until the work is performed
What does an account consist of?
- debit side
- credit side
What is the normal balance of any account?
the side which increases that account
requires that each transaction must be recorded in at least two different accounts
Which accounts normally have credit balances?
- retained earnings
Sequence of steps in the recording process?
- analyze each transaction
- enter transaction in journal
- transfer info to ledger accounts
revenues that have been earned but not yet received
Over what period should a building be written off?
over its useful life
accrual basis of accounting
- events that change a company's financial statements are recognized in
- the period they occur rather than in the period in which cash is paid or
Difference between prepaid and accrued expenses
prepaid expenses have been recorded and accrued expenses have not
Why are adjusting entries made?
- to ensure that:
- expense are recognized in the period in which they are incurred
- revenues are recorded in the period in which they are earned
- balance sheet and income statement accounts have correct balances at the
- end of an accounting period
Goods purchased for future use in the business, such as supplies or insurance
what is unearned revenue classified as?
- is the process of allocating the cost of an asset to expense over its useful life in a
- rational and systematic manner
what causes and understatement of assets and an understatement of revenues?
Failure to prepare an adjusting entry at the end of a period to record an accrued revenue
Perpetual inventory system
the cost of goods sold is determined each time a sale occurs
net sales minus cost of goods sold is equal to what?
determines the inventory on hand only at the end of the accounting period
Goods in transit shipped FOB shipping point
should be included in the buyer's ending inventory
an inventory ratio that is too high indicates what?
- that the company is losing sales opportunities because of inventory
Advantage of LIFO inventory costing method
Cost of goods sold will include most recent costs and thus will be more realistic
when is the specific identification method of costing inventories used?
when the company sells a limited quantity of high-unit cost items
Objectives of a system of internal controls
- Safe-guard company assets
- Reduce risk of errors
- Enhance reliability and accuracy of accounting records
Internal control procedures
- Using prenumbered documents
- Reconciling the bank statement
- Insistance that employees take vacations
are meant to safeguard assets
which asset is most susceptable to improper use and diversion?
separation of duties
control principle related to not having the same person authorize and pay for goods
What does it mean if an employee has been bonded?
they have been insured against misappropriation of assets
A NSF check should appear in which section of the bank reconciliation?
Deduction from the balance per books
Accounts receivable are the result of?
cash and credit sales
an estimate of a plant asset's value at the end of its useful life
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