Chapter 2 Review
What is a fiscal year?
Is an accounting year of any 12 consecutive months that might not align with the calendar year.
Asset
What is an asset?
Financial resource that is expected to benefit the business in the future. The main assets are Cash, merchandise inventory, furniture, and land.
It is a business that sells merchandise, or goods, to customers
What is the Consistency Principle?
It states that a business should use the same accounting methods and procedures from period to period
When do you recognize revenues?
When it is earned, not when it is received.
What is residual value?
The expected value of a depreciable asset at the end of its useful life
What is a liability?
Debts that are owed to creditors or financial obligations. For example, accounts payable, notes payable and salaries payable.
What are the two types of merchandisers?
Wholesaler and retailer.
It aims to help investors and creditors compare financial statements.
What is GAAP?
Generally Accepted Accounting Principles and they are standards for financial reporting.
=(cost-residual value)/ useful life
What is equity?
The owners’ claims to the assets of the business which have 2 components contributed capital (common stock) and retained earnings (equity earned from profitable operations not distributed).
What does COGS stand for?
Cost of Goods Sold.
What does disclosure principle mean?
It means that financial statements should report enough information for outsiders to make knowledgeable decisions about the company.
Requires companies to review internal controls.
Does land depreciate?
What is the accounting equation?
Assets = liabilities+equity
What does the credit term 3/15 n/30 mean?
3% discount if paid within 15 days, otherwise the full amount is due in 30 days.
What is the Materiality Concept?
It explains that a company must perform strictly proper accounting only for items that are significant to the business’s financial situation
What is the return on assets equation?
ROA= Net income / Average total assets
What does book value mean?
Is the net value of a firm's assets found on its balance sheet
What is notes Payable?
A written promise made by the business to pay a debt, usually involving interest, in the future.
Calculate the payment of $15,000 with credit terms of 5/10 n/30. Assume it was paid on the 5th.
$14,250
Explain conservatism. When is it used?
It states that a business should report the least favorable figures in the financial statements. It is used for financial statements when reporting.