ACC 211 - Principles Accounting I Flashcards

1. Know the difference between internal and external users of accounting information.
a. An example of internal user is managers
b. An example of external user is customers
2. Know the equation Assets = Liabilities + Equity (Equity = Assets - Liabilities, Liabilities = Assets - Equity).
3. Know the four basic principles, four assumptions and two constraints (see pages 11-13)
a. Principles:
i. The measurement principle, also called the cost principle
ii. The revenue recognition principle
iii. The expense recognition principle, also called the matching principle
iv. The full disclosure principle
b. Assumptions
i. The going-concern assumption
ii. The monetary unit assumption
iii. The time period assumption
iv. The business entity assumption
c. Constraints
i. The materiality constraint
ii. The cost-benefit constraint
4. Know the different financial statements and their components:
a. Income statement—describes a company's revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
b. Statement of retained earnings—explains changes in equity from net income (or loss) and from any dividends over a period of time.
c. Balance sheet—describes a company's financial position (types and amounts of assets, liabilities, and equity) at a point in time.
d. Statement of cash flows—identifies cash inflows (receipts) and cash outflows (payments) over a period of time.
5. Know the different forms of business: Corporations, Partnerships, Sole proprietorship and be able to identify their characteristics.
6. Know the normal balances for the different accounts:
a. Cash, Accounts Receivable, Inventory, Prepaid Expenses, Unearned Revenue, Account Payable, Dividends, Common Stock, Retained Earnings, Sales, Cost of Goods Sold, Advertising Expense, Auto Expense, Payroll Expense, etc.
b. Know if a debit or credit increases or decrease the various accounts
7. Know the difference between cash and accrual basis of accounting
8. Know the definition of
a. Contra account: an account linked with another account, having an opposite normal balance and reported as a subtraction from that other account's balance.
b. Accrued expenses: costs that are incurred in a period but are both unpaid and unrecorded.
c. Accumulated Depreciation: total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been used in the day-to-day operations of the business
d. Periodic Inventory System: inventory system updates the accounting record for inventory only at the end of a period
e. Perpetual Inventory System: inventory system continually updates accounting records for merchandise transactions for the amounts of inventory available for sale and inventory sold.
f. Sales allowances: refer to reductions in the selling price of merchandise sold to customers, often involving damaged or defective merchandise that a customer is willing to purchase with a decrease in the selling price.
g. Shrinkage: the difference between a physical count and recorded quantities
9. Know how to calculate cost of goods sold (COGS aka Cost of Sales, Cost of Revenues) and gross profit using various mathematical approaches: Sales - Gross Profit = COGS
10. Know how to calculate the various ratios (formulas will be provided) and understand their indications:
a. Acid Test Ratio: reflects the liquidity of a company.
b. Gross Margin Ratio
c. The Inventory Turnover Ratio: measures how quickly a company turns over its merchandise
11. Know how to calculate the discount amount when given terms such as 2/10, n/60
12. Know the difference between FOB shipping point and FOB destination
13. Understand the different Inventory valuation methods:
a. FIFO
b. LIFO
c. Weighted-average method
d. Specific identification method
14. In your own words be able to explain:
a. What is the difference between the periodic and perpetual inventory systems?
b. How is the current ratio calculated? How is it used to evaluate a company?
c. Explain debits and credits and their role in the accounting system. Include in your answer an explanation of the double-entry system.
d. Explain why ethics are an integral part of accounting.
e. Explain the accounting equation and define its terms.
f. Explain how the inventory turnover ratio and the days' sales in inventory ratio are used to evaluate inventory management (see page 223)
Formulas