Accounting Chapter 3 Flashcards

Operating Activities

• Daily functions that sustain business operations; regular and short-term impact compared to infrequent investing and financing activities.
• Key components include purchasing goods/services and selling them, alongside cash collection.

Operating Cycle

• Timeframe from acquiring goods/services until cash is collected from customers.

Income Statement Accounts

• Summarizes financial outcomes of operating activities for an accounting period.
• Comprises three sections: revenues, expenses, and net income.

Revenues

• Amounts charged to customers for goods/services provided.
• Reported first in the income statement.

Expenses

• Costs incurred to operate the business and generate revenues.
• Recognized when resources are used, regardless of payment timing, and reported after revenues.

Net Income

• Result of subtracting expenses from revenues.
• A key indicator of financial performance; termed net loss if expenses exceed revenues.

Time Period Assumption

• Allows for reporting on a company's long-term operations in shorter intervals.

Balance Sheet vs Income Statement

• Income statement reflects activities of the current period with temporary accounts; balance sheet accounts are permanent and have ongoing effects.

Cash Basis Accounting

• Records revenues upon cash receipt and expenses when cash is paid.

Accrual Basis Accounting

• Records revenues when earned and expenses when incurred, unaffected by cash timing.
• Emphasizes actual occurrence of business activities over cash flow.

Revenue Recognition Principle

• Revenues recognized when obligations to customers are fulfilled, typically at delivery.

Timing of Reporting Revenue vs Cash Receipts

• Revenue recognition is dependent on service provision, not cash timing; cash can be received concurrently, before, or after services are rendered.

Unearned Revenue

• Liability indicating obligation to deliver goods/services post payment.

Accounts Receivable

• Asset reflecting rights to collect cash from customers when goods/services are provided on credit.

Expense Recognition Principle ("Matching")

• Aligns expense recording with associated revenue periods, ensuring accurate financial reporting.

Timing of Reporting Expenses vs Cash Payments

• Expense recognition tied to business activities, independent of cash payment timing.

Accounts Payable

• Liability for costs incurred but not yet paid, reflecting unpaid wages as an example.

Stockholders' Equity

• Represents claims of owners on company resources, sourced from contributed capital and retained earnings.

Retained Earnings Subcategories

• Includes revenues and expenses, which flow into retained earnings but are initially recorded separately for clarity.

Expanded Debit/Credit Framework

• Revenues credited to increase stockholders' equity; expenses debited reduce net income and retained earnings.

Trial Balance

• Internal report to verify equality of total debits and credits; lists all account balances organized by category.

Net Profit Margin

• Indicates profit earned per revenue dollar; calculated as Net Income divided by Total Revenue.
• Example: Pizza Aroma's net income of $6,400 from $15,500 revenue gives a net profit margin of approximately 41.3%.