What is the basic accounting equation?Assets = Liabilities + Stockholders' equityWhat is accounts payable?Money owed to suppliers (vendors) for items (supplies, inventory, etc.) purchased from them.What do notes payable represent?Obligations to banks or other creditors based on formal written agreementsMonetary unit assumptionCommon denominator of currency is needed to measure all business activity expressed in the financial statementsEconomic entity assumptionEconomic events can be identified with a particular economic body; this assumption distinguishes the financial history or performance of corporation from that of its owners and other organizations.Going concern assumptionThe underlying assumption that presumes a company will continue indefinitely (in absence of evidence to the contrary)What is the Financial Accounting Standards Board (FASB)?A private, not-for-profit organization to whom the SEC delegates much responsibility for standard setting of GAAP in the U.S.What is the Securities and Exchange Commission (SEC)?It is a U.S. government agency that regulates the trading of securities of public companies. It has broad powers to prescribe and enforce GAAP.What is Generally Accepted Accounting Principles (GAAP)?Commonly understood and accepted conventions for gathering, organizing and reporting the financial history (story) of an organization.Part of GAAP addresses valuation. What's meant by valuation?An assignment of a monetary amount. (For instance, we assign monetary amounts to most assets based on their historical cost, not their current market values).Part of GAAP addresses recognition issues. What's meant by recognition?It's the act of recording an item into the accounting records. (recognize = record). For instance, GAAP addresses the timing of recording revenuesHow do you calculate growth rate for net income?(Net income for current or more recent year - Net income for the earlier year) DIVIDED by Net income for the earlier yearIf given a recent year's earnings and the growth rate, calculate the prior year's earnings.Recent year earnings DIVIDED by (1 or - the % change expressed as a decimal). (Thus, the denominator will be less than one if the growth rate was a decrease -- meaning the earlier year's amount was higher; or the denominator will be greater than 1 if the growth rate reflected an increase -- meaning the earlier year's amount was lower).What information does a balance sheet convey?Information about (1) cost of resources that a company owns that will enable it to generate revenues in the future, (2) its obligations (resources committed to satisfy creditors' claims), and (3) residual interest of stockholders (the difference between the assets and the liabilities)Retained earnings represents what?The sum of all net income or net losses minus all dividends since the corporation's inception; it has NO relation to cash but rather represents the firm's earned capital as part of the owners' residual interest in the firmWhen cash or accounts receivable increase as a company provides goods or services, what income statement account is affected?revenue (often called sales revenue when goods are sold or service revenue when services are provided)When a corporation issues shares of its stock, does that constitute sales revenue?No. Stock represents ownership rights in the corporation. Issuance of stock is different from sale of goods! Transactions with the entity's own stockholders will have NO impact on the income statement. The firm has an inflow of resources (cash) and a residual claim against the resources of the firm as a result of this invested (contributed) capital from owners. This residual claim is reflected within the stockholders' equity section of the balance sheet.Does cash necessarily increase when revenue is recorded?No, not necessarily. It may (if it was a cash sale) or it may not (if it was a sale on account). For a sale on account, the entity would record an increase to accounts receivable at the point of sale.Does cash necessarily decrease when an expense is recorded?No, not necessarily. An asset may decrease (cash, supplies, inventory, prepaid rent or prepaid insurance, etc.) or a liability may increase (accounts payable, wages payable, etc.)What is a "net loss"?the unfortunate situation in which expenses exceed revenues (so earnings are negative and the bottom line of the income statement appears in parentheses or brackets)What are accounts receivable?Rights to receive money owed by customers for goods sold or services provided by the entity. (They arise from sales on account).What are assets?Resources or benefits owned or controlled by a company that offer probable future economic benefitWhat is the bottom line of an income statement?Net income (or net loss if negative); also called earningsWhen we have an inflow of assets (cash or accounts receivable) as a result of providing goods or services, what income statement account is updated to reflect the monetary amounts of those sales?revenueWhich account reports what a firm is owed from customers due to products or services that the firm previously sold on account?Accounts receivableWe speak of earning revenue, does that mean that earnings is another name for revenue?No. Earnings is another name for net income or profit (bottom line of income statement). Revenue often arises from sales and is the top line of the income statement.Given the accounting equation, total equity must equal what?the difference between total assets and total liabilities.Does the income statement explain how much cash changed or why cash changed?No. The Statement of Cash Flows explains why cash changed. The income statement (statement of operations or statement of earnings) reports revenues and expenses under the accrual basis (not cash basis) in order to measure profitability for a period. It's possible to have net income and yet cash may have decreased over the period. Conversely, it's possible to have a net loss and yet cash may have increased! Don't look to the income statement when you want to answers about cash since most firms often have transactions on account.Are payables (like accounts payable, wages payable, or interest payable) on the income statement?No. All "payables" are liabilities (obligations) and are reported on the balance sheet. Expense accounts like salaries expense or interest expense appear on the income statement. Payables reflect amounts owed as of a point in time (as of a specific date) so they are obligations to sacrifice cash in the future. Expenses represent costs incurred (resources or benefits consumed or used up) during the period that helped generate revenues of the period. Expenses may have already been paid (and therefore may not be associated with any payable at the end of the period) or they may not yet have been paid.How does a company record its purchase of supplies on account with vendors?+ Supplies; + Accounts payableHow does a company record that it has used some of those supplies?+ Supplies expense; - SuppliesHow do you determine how profitable a company is?Look at the income statement, which reports revenues, expenses, gainsWhy are wages payable and wages expense different amounts on the financial statements?Wages payable on the balance sheet is the amount owed to employees at a particular point in time (balance sheet date). Wages expense on the income statement is the amount of wages incurred over a period of time. Wages earned by employees for the entire year (whether or not entirely paid) would be Wages Expense on the income statement for the fiscal year, but only the portion of wages earned by employees but not yet paid as of the last day of the fiscal year would be reported as wages payable on the balance sheet as of the fiscal year end.Are dividends distributed to stockholders reported within an income statement?No because dividends are not an expense.Why are dividends NOT an expense?By definition, expenses should contribute to generating sales. Dividends are simply cash distributions to stockholders/owners.Why are prepaid expenses like prepaid rent or insurance considered assets?Because they represent the right to use facilities or equipment or the right to insurance coverage in the future without additional sacrifice of resource. Since they represent a future benefit, they are an asset. Later as the benefit expires (is used), the cost will be transferred to an expense account.What is an expenditure?An outlay of cash (which could result in either recording an asset or an expense)Why might prepaid expenses be called deferred expenses?Defer means to postpone or delay. Here we are delaying the recognition of these expenditures as expenses. Costs that are in some prepaid expense (asset category) will be expenses later so we are just postponing recognizing them as an expense.Why might unearned revenue be called deferred revenue?Defer means to postpone or delay -- we are delaying the recognition of this inflow as a revenue. Money received as unearned revenue will become revenue later once the company has provided the good or service (once it has satisfied revenue recognition principle).What is accrual accounting?It's a method of accounting that separates the measurement of revenues and expenses from the receipt and expenditure of cash.Describe main rules of accrual-basis accountingRecord revenues when EARNED them and record expenses when INCURRED so that they are matched to related revenues of the period (regardless of the timing of cash receipts or payments).What is "matching"?it is the process of making sure that all the costs incurred in generating the revenues recognized in a period are taken as expenses in that period.Assume that a company paid $20,000 to an insurance company on December 31, 2012 for a two year policy to cover 2013 and 2014. According to the MATCHING principle, how much of this $20,000 should appear as an EXPENSE on the company's 2012 income statement?ZERO -- no expense was incurred in 2012. According to matching, the expense is incurred in the period(s) that it helps to generate benefits (or revenues). So that will happen in part in 2013 and 2014 -- the periods benefited by the insurance coverage.In general, when should revenue be recorded?When the firm has earned the revenue (i.e., when it has provided a good or service).When does a firm recognize "advertising expense" or "advertising revenue"?When the ad runsWhat is unearned revenue?Monetary amounts received by an entity that accepts up-front payments of cash in exchange for future delivery of its product or future performance of its services. (Thus, it gives rise to an obligation on that entity's part until the product or service is rendered).When would a retailer record revenue associated a gift card that a customer purchased?When the customer redeems that gift card for merchandise (apply revenue recognition rules of accrual accounting). Until that point, the retailer has a liability (unearned revenue) associated with the gift card because it has an obligation to provide merchandise when the customer redeems that gift card. The same situation arises for airlines when customers pay for tickets in advance and for magazine publishers when subscribers pay for issues in advance.How do dividends affect retained earnings?Retained earnings are past earnings not distributed to stockholders. Dividends are distributions to stockholders. So dividends lower retained earnings.Does net income answer the question whether cash increased during the period?No. Net income is an accrual-based number, not a cash based number (since revenues are recorded when EARNED and expenses are recorded when INCURRED, regardless of whether or not cash is affected)Under accrual-based accounting, when are expenses recognized (recorded)?When they are INCURRED -- as a resource is used to generate benefits of the period (per matching principle). This in not necessarily when payment is made!Under accrual-based accounting, when are revenues recognized (recorded)?When company substantially fulfills its obligation to customer by providing goods or servicesWhat does the matching principle say about the timing of expenses?Record costs that are incurred to generate revenue of a period as an expense of that period (to appropriately measure profit)When are adjusting entries made and why are they necessary?Adjusting entries are recorded just before the end of the accounting period. They are necessary in order to properly record revenues and expenses (and to update related assets and liabilities on the balance sheet).What adjusting entry is made if the payroll date was not the last day of the accounting period? (Employees worked the last few days of the period but have not yet been paid for them).+ Salaries Expense; + Salaries PayableIf a company has unearned revenue on its books, what adjusting entry might be needed at year-end?- Unearned revenue; + Revenue (for any portion that the entity has earned by satisfying its obligation to customers)If a company has a prepaid expense on its books, what adjusting entry is commonly needed at year-end?+ XX expense- Prepaid XX (where XX is the description)(amount should reflect monetary portion of the benefit that expired or was used,Define "current asset"an asset that is expected to be converted into cash or used within the next operating cycle, which is typically one yearExamples of Current Assets?* Cash* Accounts receivable (trade receivables)* Marketable securities or short-term investments* Prepaid rent or prepaid insurance* Supplies (not yet used)*Inventory (merchandise held for sale but not yet sold)Under accrual accounting, when a company collects on a sale for which it previously billed a customer, how does this affect the total monetary amount of current assets?There is no net change. Cash increases and accounts receivable decreases when the collection on account is recorded. Both are current assets.What's meant by the "useful life" of an asset?It is the time frame over which an asset is capable of providing benefits to that entity.What are noncurrent or long-term assets?Assets that have benefits that are expected to be realized over periods BEYOND one year from the balance sheet date.Examples of long-term assets?Land, buildings, manufacturing machines, delivery vehicles, etc., that entities hold for use in the business over several years. Accumulated depreciation is a contra-asset subtracted from its applicable long-term asset account. These long-term assets are also known as Fixed Assets or Property, PlantWhat's included in current liabilities?Generally, any obligation that must be satisfied within 12 months or less: Such as Accounts payable Unearned revenueInterest payableUtilities payableCurrent portion of long-term debtSalaries or wages payableWhat are noncurrent or long-term liabilities?Obligations for which the sacrifice of resources will occur more than one year after the balance sheet date.What's meant by the "current portion of long-term debt"?The amount of long-term debt that will become due within one year of the balance sheet date.Play audio for this termWhat is cost of goods sold?It's an expense account that represents the cost of the inventory that was sold this period (which is matched against the revenues generated from those sales to customers)

Part 2AccountingSystem that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers.Accounting entityIs the organization for with financial data are to be collected.The four basic statements:1. Balance Sheet2. Income Statement3. Statement of Retained Earnings4. Statement of Cash flowsBalance SheetReports the amount of assets, liabilities and stockholders' equity of an accounting entry at a point in time.Income StatementReports the revenues less the expenses of the accounting period.Statement of Retained EarningsReports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.Statement of Cash FlowsReports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.Basic Accounting EquationAssets = Liabilities + Stockholders' EquityAssetsAre the economic resources owned by the company. Each of these economic resources is expected to provide future benefits to the firm.LiabilitiesAre the company's debts or obligations. Which will be paid with assets or services.Stockholders' Equity (Owners' Equity)Indicates the amount of financing provided by owners of the business and earnings. Is the sum of the contribute capital + the retained earnings.Accounting PeriodIs the time period cover by the financial statements.Elements of the Income StatementRevenues, Expenses and Net Income.RevenuesEarnings from the sale of goods or services to costumers. Revenues are reported whether or not have yet been paid for.ExpensesRepresent the dollar amount of resources the entity used to earn revenue during the period.Net Income ("the bottom line")Is the excess of total revenues over total expenses.Net LossIf total expenses exceed total revenues.Retained Earning EquationEnding Retained Earnings = (Beginning of Retained Earnings + Net Income) - DividendsThe Cash Flow Statement Equation+/- Cash flow from Operating Activities (CFO)+/- Cash flow from Investing Activities (CFI)+/- Cash flow from Financing Activities (CFF)----------------------------------------Change in CashCash Flow from Operating Activities, and examplesCFO- Are cash flow that are directly related to earning income. Example, collecting cash from costumers, pay salaries, pay bills, pay to suppliers.Cash Flow from Investing Activities, and examplesCFI- Are cash flow related to the acquisition or sale of the company's productive assets. Example, the purchase of additional equipment.Cash Flow from Financing Activities, and examplesCFF- Are cash flow directly related to the financing of the enterprise itself. Example, the payment of money to investors and creditors.Notes"Footnotes" provide supplemental information about the financial condition of a company.GAAPGenerally Accepted Accounting Principles, are the measurement rules used to develop the information in financial statements.SECSecurity and Exchange Commission, is the U.S government agency that determines the financial statements that public companies must provide to stockholders, and the rules that they must use in producing those statements.FASBFinancial Accounting Standards Board, is the private sector body given the primary responsibility to work out the detailed rules that become GAAP.AuditIs an examination of the financial reports to ensure that they represent claim and comfort with GAAP.Primary objective of external financial reportingIs to provide useful economic information to help external parties make financial decisions.Qualitative Characteristics of Financial InformationInformation should be Relevant and Reliable.Separate-Entity AssumptionStates that a business transactions are accounted for separately from the transactions of owners.Unit-Measure AssumptionStates that accounting information should be measure and reported in the national monetary unit.Continuity AssumptionStates that businesses are assumed to continue to operate into the foreseeable future.Cost PrincipleRequires assets to be recorded at historical cost-cash paid plus the current dollar value of all none cash considerations given on the date of the exchange.Current AssetsAre assets that will be used or turned into cash within one year.Current LiabilitiesAre obligations that will be settle by providing cash, goods, or services within the coming year.MaterialityException suggest that small amounts that not likely to influence a user's decision can be accounted for in the most beneficial manner.ConservatismException suggest that care should be taken not to over state assets and revenues or understate liabilities and expenses.TransactionIs an exchange of assets or services to pay between a business and one or more external parties to a business or a measurable internal event such as the use of assets in operations.AccountsIs a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item. "Chart of account"Transaction AnalysisEvery transaction affects at least two accounts (dual effect), and the accounting equation MUST remain in balance after each transaction.The three steps in the transaction analysis process1. Identify the accounts affected and classify them by type of account.2. Determine the direction of the effect on each account.3. Verify that the accounting equation remains in balance.Direction of TransactionsDebit (dr) is on the LEFT side of an account.Credit (cr) is on the RIGHT side of an account.General JournalIs a bookkeeping system, that records transactions in chronological order.Journal EntryIs an accounting method for expressing the effects of a transaction on accounts in debits-equal-credits format.T-AccountIs a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities.Current Ratio and formulaHelps measure the ability of the company to pay its short-term obligations with short-term assets.Current Ratio = Current Assets / Current LiabilitiesOperating cycle"Cash-to-cash" is the time it takes for a company to pay cash to suppliers, sell goods and services to costumers, and collect cash from costumers.Time Period AssumptionIndicates that the long life of a company can be reported in shorter time periods.GainsAre increases in assets or decreases in liabilities from peripheral transactions.LossesAre decreases is assets or increases in liabilities from peripheral transactions.Cash Basis AccountingRecords revenues when cash is received and expenses hen cash is paid.Accrual Basis AccountingRecords revenue when earned and expenses when incurred, regardless of the timing of cash receipts or payments.Revenue PrincipleStates that revenues are recognize when:1. Good or services are delivered.2. There is persuasive evidence of an arrangement for costumer payment.3. The price is fixed or determinable.4. Collection is reasonably assured.Matching PrincipleRequires that expenses be recorded when incurred in earning revenue.Total Assets Turnover Ratio and formulaMeasures the sales generated per dollar of assets.TATR = Sales Revenue / Average Total Assetsaverage(beginning balance + ending balance)/2Order of the financial statements.Income statement, statement of retained earnings, balance sheet, and statement of cash flows.Accounting CycleIs the process followed by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle.Trial BalanceIs a list of all accounts with their balances to provide a check on the equality of the debits and credits.Adjusting EntriesAre entries necessary at the end of the accounting period to measure all revenues and expenses of that period.Deferred Revenues"Unearned revenues" are previously recorded liabilities that need to be adjusted at the end of the accounting period to reflect the amount of revenue earned. Example, when cash was received and previously recorded:

Unearned revenue xxxRevenue xxxAccrued RevenuesAre previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account. Example, cash will be received:

Receivable xxxRevenue xxxDeferred ExpensesAre previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expenses incurred in using the asset to generate revenue. Example, if cash was paid and previously recorded:

Expense xxxPrepaid Expense xxxAccrued ExpensesAre previously unrecorded expenses that need to be adjusted at the end of the accounting period to reflect the amount incurred and the related payable account. Example, if cash will be paid:

Expense xxxPayable xxxContra-AccountIs an account that is an offset to, or reduction of, the primary accout.Net Book ValueOf an asset is the difference between its acquisition cost and accumulated depreciation, its related contra-account.Earnings Per Share and formulaIs the ratio that evaluates the operating performance and profitability of a company.

EPS = Net Income / Average number of shares of common stock outstanding during the periodPermanent Accounts"Real" are the Balance Sheet accounts that carry their anding balances into the next accounting period.Temporary Accounts"Nominal" are Income Statement accounts that are closed to Retained earnings at the end of the accounting period.Closing EntryTransfers balances in temporary accounts to Retained Earnings and establishes zero balances in temporary accounts.Post-Closing Trial BalanceShould be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.Order of the steps in theaccounting cycle at the end of the accounting periodPrepare a trial balance, journalize and postadjustments, prepare financial statements, andjournalize and post the closing entries.Gross ProfitNet sales revenue minus cost of sales.FOB Shipping Point (free on board)When goods are shipped, title changes hands at shipment, and the buyer normally pays for shipping.FOB DestinationWhen title changes hand on delivery, and the seller normally pays for shipping.FOB Shipping Point vs FOB DestinationRevenues from good shipped FOB Shipping Point are normally recognized at shipment. Revenues from goods shipped FOB destination are normally recognized at delivery.Credit Card DiscountIs the fee charged by the credit card company for its services.Sales Discount(Cash discount) is a cash discount offered to encourage prompt payment of an account receivable.Sales Returns and AllowancesIs a reduction of sales revenues for return of or allowances for unsatisfactory good.Gross Profit Percentage and formulaMeasures a company's ability to charge premium prices and produce goods and services at low cost.Gross Profit Percentage = Gross Profit / Net salesAccounts ReceivablesAre open accounts owned to the business by trade costumers.Notes ReceivablesAre written promises that require another party to pay the business under specified conditions (amount, time, interest).Allowance MethodBases bad debt expenses on an estimate of uncollectible accounts.Bad Debt ExpenseIs the expense associated with estimated uncollectible account receivable.

Bad debt expense xxxAllowance for doubtful accounts xxxAllowance for Doubtful AccountsIs a contra-asset account containing the estimated uncollectible account receivable.Writing Off Uncollectible AccountsWriting off of an individual bad debt is recorded through a journal entry.

Allowance for doubtful accounts xxxAccounts Receivables xxxPercentage of Credit Sales MethodBases bad debt expenses on the historical percentage of credit sales that result in bad debts.Aging of Accounts Receivable MethodEstimates uncollectible accounts based on the age of each account receivable.Receivables Turnover Ratio and formulaReflects how many times average trade receivables are recorded and collected during the period.

Receivables Turnover = Net sales / Average net trade account receivablesCashIs money or any instrument that banks will accept for deposit and immediate credit to a company's account, such as check, money, or bank draft.Cash EquivalentsAre short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change.Internal ControlsAre the process by which a company safeguards its assets.Bank StatementIs a monthly report from a bank that shows deposits recorded, checks cleared, other debits and credits and a running bank balance.Bank ReconciliationIs the process of verifying the accuracy of both the bank statement and the cash accounts of a business.InventoryIs tangible property held for sale in the normal course of business or used in producing goods or services for sale.Merchandise InventoryIncludes goods held for sale in the ordinary course of business.Raw Materials InventoryIncludes items acquire for the purpose of processing into finish goods.Work In Proces InventoryIncludes goods in the process of being manufactured.Finished Goods InventoryIncludes manufactured good that are complete and ready for sale.Direct LaborRefers to the earnings of employees who work directly on the products being manufactured.Factory OverheadAre manufacturing costs that are not raw material or direct cost labor. Example, cost of light, supervisor's salary.Goods Available For SaleRefers to the sum of beginning inventory and purchases for the period.Cost of Goods Sold EquationCGS = Beginning Inventory + Purchases of merchandise - Ending InventorySpecific Identification MethodIdentifies the cost of the specific item that was sold.FIFO First-in, First-out MethodAssumes that the first goods purchased are the first goods sold.LIFO Last-in, First-out MethodAssumes that the most recently purchased units are sold first.Average Cost MethodUses the weighted average unit cost of the goods available for sale for both cost of goods and ending inventory.Inventory Turnover and formulaRatio reflects how many times average inventory was produced and sold during the period.

Inventory Turnover = Cost of Goods Sold / Average InventoryPerpetual Inventory SystemA detailed inventory record is maintained, recording each purchase and sales during the accounting period.Periodic inventory SystemEnding inventory and cost of good sold are determined at the end of the accounting period based on a physical count.Long-Lived AssetsAre tangible and intangible resources owned by a business and used in its operations over several years.Tangible AssetsAssets have physical substance.Intangible AssetsAssets have special rights but not physical substance.Fixed Assets Turnover and formulaRatio that measures the sales dollar generated by each dollar of fixed assets used.

Fixed Asset Turnover = Net Sales / Average Net Fixed AssetsAcquisition CostIs the net cash equivalent amount paid or to be paid for the asset.DepreciationIs the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method.

Depreciation Expense xxxxAccumulated Depreciation xxxxNet Book ValueIs the acquisition cost of an asset less accumulated depreciation.Estimated Useful LifeIs the expected service life of an asset to the present owner.Residual ValueIs the estimated amount to be recovered by the company at the end of the asset's estimated useful life.Straight-Line Depreciation and formulaIs the method that allocates the cost of an asset in equal periodic amounts over its useful life.

Depreciation Expense = (Cost - Residual Value) x (1 / Useful life)Units-Of-Production Depreciation and formulaIs the method that allocates the cost of an asset over its useful life based on the relation of it periodic output to its total estimated output.

Depreciation Expense = ((Cost - Residual Value) / Estimated total production) x Actual ProductionDeclining-Balance Depreciation and formulaIs the method that allocates the cost of an asset over its useful life based on a multiple of the straight-line rate (often two times).

Depreciation Expense = ((Cost - Accumulated Depreciation) x ( 2 / Useful Life))Modified Accelerated Cost Recovery System (MACRS)Is the method similar to the Declining-Balance method and is applied over relatively short asset live to yield high depreciation expense in the early years.Natural ResourcesAre assets that occur in nature, such as minerals deposits, timber tracts, oil and gas.DepletionIs a systematic and rational allocation of the cost of a natural resource over the period of its exploitation.AmortizationIs the systematic and rational allocation of the acquisition cost of an intangible asset over its useful life.Goodwill and formulaIs the excess of the purchase price of a business over the fair value of the business's assets and liabilities.

Goodwill = Purchase Price - Fair value of identifiable assets and liabilities.TrademarkIs an exclusive legal right to use a special name, image, or slogan.CopyrightsIs the exclusive right to publish, use, and sell a literary, musical, or artistic work.PatentIs granted by the federal government for a period of 20 years for an invention.LiquidityIs the ability to pay current obligations.Quick Ratio FormulaRatio suggests good liquidity.

Quick Ratio = Quick Assets / Current LiabilitiesAccounts Payable Turnover FormulaRatio that measures how quickly management is paying trade accounts.

Average Payable Turnover = Cost of Good Sold / Average Accounts PayableAccrued LiabilitiesAre expenses that have been incurred but have not been paid at the end of the accounting period.Time Value of MoneyIs the interest that is associated with the use of money over time.Contingent LiabilityIs a potential liability that has arisen as the result of a past event.Working CapitalIs the dollar difference between total current assets and total current liabilities.Long-Term LiabilitiesAre all the entity's obligations not classified s current liabilities.Operating LeaseDoes not meet any of the four criteria establish by GAAP and does not cause the recording of an asset and liability.Capital LeaseMeets a least one of the four criteria establish by GAAP and results in the recording of an asset and liability.Present Value and formulais the current value of an amount to be received in the future; a future amount discounted fro compound inters.

PV = ((1 / (1 + I)N ) x AmountAnnuityIs a series of periodic cash receipts or payments that are equal in amount each interest period.Future ValueIs the sum to which an amount will increase as the result of compound interest.Bond PrincipalIs the amount (a) payable at the maturity of the bond and (b) on which the periodic cash interest payments are computed.Par ValueIs another name for bond principal, or the maturity of a bond.Face AmountIs another name for bond principal, or the maturity amount of the bond.Stated RateIs the rate of cash interest per period stated in the bond contract.Bonds PayableAre both stocks and bonds issued by corporations to raise money for long-term purposes.DebentureIs an unsecured bond; no assets are specifically pledged to guarantee repayment.Callable BondMay be called for early retirement at the option of the issuer.

Part 3Basic Accounting EquationAssets = Liabilities + Stockholders' EquityNet IncomeRevenue - ExpensesStockholders' EquityRetained Earnings + Common StockRetained EarningsBeginning Balance + Net Income - DividendsNet Realizable ValueAccounts Receivable - Allowance for Doubtful AccountsCost of Goods SoldBeginning Inventory+Cost of goods purchased during the period=Cost of goods available for sale-Ending Inventory=COGSGross ProfitRevenue - COGSNet Book ValueCost of an asset - Accumulated DepreciationNet SalesRevenue - (Allowances+Discounts+Returns)Current RatioCurrent assets / Current liabilities

Higher is better. Measures Liquidity.Debt-to-total-assets RatioTotal Liabilities / Total Assets

Lower is better. Measures solvency.Return on Sales RatioNet Income / Net Sales

Higher is better. Measures profitability.Free Cash FlowCash from operations - Capital ExpendituresInventory Turnover RatioCost of Goods Sold / Average InventoryDays' Sale Inventory365 / Inventory Turnover RatioAverage Inventory(Beginning Inventory + Ending Inventory) / 2Earnings per ShareNet Income / # of outstanding sharesWorking CapitalCurrent assets - Current liabilityInterestPrincipal X Interest Rate X TimeAccounts Receivable TurnoverNet Sales / Average Accounts ReceivableAverage Collection Period365 / Accounts Receivable TurnoverAnnual Straight-line Depreciation(Acquisition cost - salvage value) / Estimated useful lifeReturn on AssetsNet income / Average total assetsAsset TurnoverNet Sales / Average total assetsQuick ratio(Cash + short-term investments + accounts receivable) / Current LiabilitiesTimes Interest RatioIncome before expense / interest expense