Accounting Quiz 2 Review.docx

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Course Code
ACCT 1201
Ronen Gal-or

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ACCT Quiz 2 Study Guide CHAPTER 3 Operating Cycle: time it takes for a company to go from cash to cash 1. Purchase or manufacture products or services for cash or credit. 2. If purchase was made on credit, pay suppliers 3. Sell product or provide service to customers for cash or on credit 4. If sale was made on credit, receive payment from customer Length depends on nature of business, all companies want to shorten their operating cycle Shortening the operating cycle means higher profit and faster growth Classified Income Statement: Revenues (operating activities) are ordinary earnings; peripheral activities are other earnings Operating and peripheral activities must be separated Cost of sales aka cost of goods/services sold Revenue Recognition Principle (revenue recognition is most often used for fraud) Cash Accounting: revenue is recorded when cash is received (used only by private companies) Accrual Accounting: records revenues when earned, regardless of the timing of cash receipts, using holding accounts (public companies must use accrual accounting, GAAP requires it) If any of the following four criteria are not met, revenue is not recognized & can’t be recorded: i. Goods or services are delivered ii. There is persuasive evidence of an arrangement for customer payment iii. The price is fixed or determinable, and… iv. Collection is reasonably assured Matching Principle Cash Accounting: expenses are recorded when cash is paid. Accrual Accounting: records expenses when incurred, regardless of the timing of cash payments. So when are expenses incurred? In the period in which the good or service is received. Requires that costs incurred to generate revenues be recognized in the same period (a matching of costs with benefits) Total Asset Turnover Ratio = Sales (or Operating) Revenues ÷ Average Total Assets Average Total Assets = (Beginning Total Assets + Ending Total Assets) ÷ 2 Ratio measures how effective management is in generating sales from assets (r
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