Financial Accounting Exam Study Guide.
Accelerated Depreciation Methods - answerDepreciation methods that recognize more
depreciation expense in the early years and less in the later years. Double-declining balance is an
example of an accelerated depreciation method.
Accounting Equation - answe...
Accelerated Depreciation Methods - answer✔✔Depreciation methods that recognize more
depreciation expense in the early years and less in the later years. Double-declining balance is an
example of an accelerated depreciation method.
Accounting Equation - answer✔✔Assets = Liabilities + Owners' Equity. This equation is
fundamental and must always be true in double entry accounting.
Accounting Period - answer✔✔The period of time for which the financial results are reported;
typically either a month or a quarter or a year.
Accounts Payable - answer✔✔Liability account used to show the obligation to pay suppliers
who have provided goods or services on credit terms.
Accounts Payable Turnover - answer✔✔Accounts Payable Turnover is a ratio that is used to
measure how efficiently a business is paying its vendors. It is calculated by dividing the credit
purchases for the period by the average accounts payable balance for the period. In the absence
of credit purchases information, we may use cost of goods sold as a substitute. The ratio
represents how many times the accounts payable turned over during the period. For most ratios
in this course, we use averages when calculating ratios with balance sheet numbers, but this is
not necessary and some may choose to use beginning or ending balances.
Accounts Receivable - answer✔✔Asset account used to show the claim to receive cash at some
future date for goods or services that have been supplied to a customer on credit terms.
Accounts Receivable Turnover - answer✔✔Accounts Receivable Turnover is a ratio that is used
to measure how efficiently a business is collecting receivables from its customers. It is calculated
by dividing the credit sales for the period by the average accounts receivable balance for the
period. In the absence of credit sales information, we may use total sales as a substitute. The ratio
represents how many times the accounts receivable turned over during the period. For most
ratios in this course, we use averages when calculating ratios with balance sheet numbers, but
this is not necessary and some may choose to use beginning or ending balances.
Accrual - answer✔✔A revenue amount that is recorded after the revenue is earned but before the
payment is received or an expense amount that is recorded after it has been incurred but before
the payment has been made. In either case, for an accrual the exchange of cash is expected at
some future point after the initial revenue or expense is recognized.
Accrual Accounting Method - answer✔✔This is the accounting method taught in this course,
followed by most companies, and required under US GAAP and IFRS. The method follows the
revenue recognition principle, which says that revenue should be recognized in the period in
which it is earned and realizable, not necessarily when the cash is received and the matching
principle which says that expenses should be recognized in the period in which the related
revenue is recognized rather than when the related cash is paid.
Accrued Expenses - answer✔✔Liability account used to record amounts at the end of an
accounting period to recognize expenses that were incurred in the period but for which no
invoice has yet been received nor payment has yet been made. Examples are salaries/wages
payable, accrued rent expense, accrued legal fees. When the accrual is made, the debit is to the
appropriate expense account (payroll expense, rent expense, legal expense) and the credit is to
the accrued expense account, which is a liability because it represents an obligation which will
need to be paid in the future. Remember accrued expenses are NOT expenses.
Accrued Liability - answer✔✔Liability accounts that record expenses that have been recognized
on the income statement but have not yet been paid. Similar to accrued expenses.
Accrued Payroll - answer✔✔An accrued expense recorded at the end of a financial period for
amounts of payroll that have been worked but not yet paid. It is a common type of accrued
expense. See also Salaries/Wages Payable.
Accrued Revenue - answer✔✔An asset account that records revenue that has been earned and
recognized on the income statement but not yet paid for by the customer. At the time of the
accrual, we debit the receivable account and credit the appropriate accrued revenue account.
When the cash transfer ultimately occurs, we debit the cash account and credit the receivable
account.
Accumulated Depreciation - answer✔✔A contra asset account that includes the cumulative total
of all depreciation expenses recorded to date for specific assets. The credit balance in this
account offsets the debit balance in the asset account which shows the original value of the asset.
When the original asset value is netted against the accumulated depreciation for the asset you
arrive at the net book value of the asset.
Accumulated other comprehensive income - answer✔✔An equity account that consists of
cumulative unrealized gains or losses on line items classified under other comprehensive income.
It includes items such as unrealized gains or losses on investments available for sale, foreign
currency gains or losses, and pension plan gains or losses.
Adjusting (Journal) Entries - answer✔✔Entries made to adjust the balances of asset and liability
accounts to reflect changes in their values due to the passage of time or another implicit
transaction.
Allowance for Doubtful Accounts - answer✔✔A contra asset account that nets against Accounts
Receivable. It is generally set up as an estimate of accounts that will ultimately prove to be
uncollectible. It is then reduced when accounts are written off. It may be adjusted at period end
to reflect any updated estimates. May also be referred to as Reserve for Bad Debts.
Amortization - answer✔✔The method for recognizing the expense of long-lived intangible
assets such as patents, copyrights, and brands, over the life of the assets. Amortization is usually
calculated similar to straight-line depreciation. Some companies use an accumulated
amortization account, while other companies may directly reduce the value of the associated
asset.
Annuity - answer✔✔An investment where the purchaser receives the right to receive a fixed
amount each year for a lifetime or for a certain number of years.
Asset - answer✔✔A resource that is owned or controlled by a business and is expected to
provide some future economic benefit to the business. Examples include cash, inventory, and
equipment. The business expects that its assets will help to produce cash inflow in the future.
Asset Turnover - answer✔✔Asset Turnover is calculated by dividing the total sales for the
period by the average total assets. This calculation is used as a measure of efficiency in the
DuPont Framework. For most ratios in this course, we use averages when calculating ratios with
balance sheet numbers, but this is not necessary and some may choose to use beginning or
ending balances.
Average Collection Period - answer✔✔Average Collection Period is a measure related to
accounts receivable turnover that shows the average number of days it took for a business to
collect payment from a customer. It can be calculated by dividing the average accounts
receivable by the credit sales per day. Alternatively, it can be calculated by dividing 365 by the
Accounts Receivable Turnover. For most ratios in this course, we use averages when calculating
ratios with balance sheet numbers, but this is not necessary and some may choose to use
beginning or ending balances.
Balance Sheet - answer✔✔Financial report that shows the financial position of a company at a
specific point in time; a snapshot of the resources that are owned or controlled by company, and
how those resources were financed. The balance sheet shows the balance of all asset, liability,
and equity accounts as of a given date.
Bonds - answer✔✔Long term debt instruments that are issued with a specific rate of interest and
maturity date. There are many types of bonds and they are issued by governments, utilities, and
public companies to raise funds.
CAGR - answer✔✔Acronym for Compound Annual Growth Rate. It is a measure of the rate of
return of an investment over a given period of time.
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