Chapter 2: Basic Financial Statements

corporation

A business organized as a separate legal entity and chartered by a state, with ownership divided into transferable shares of capital stock.

Operating Activities

A category in the statement of cash flows that includes the cash effects of all revenues and expenses included in the income statement

financing activities

A category in the statement of cash flows that reflects the results of debt and equity financing transactions.

investing activities

A category in the statement of cash flows that reflects the results of purchases and sales of assets, such as land, buildings, and equipment.

financial statement

A declaration of information believed to be true and communicated in monetary terms

income statement

A financial statement summarizing the results of operations of a business by matching its revenue and related expenses for a particular accounting period. Shows the net income or net loss

negative cash flows

A payment of cash that reduces the enterprise's cash balance.

creditor

A person to whom money is owed

cost principle

A principle that states that acquired assets and services should be recorded at their actual cost. The widely used principle of accounting for assets at their original cost to the current owner.

deflation

A situation in which prices are declining; a decline in the general price level, resulting in an increase in the purchasing power of the monetary unit.

Statement of Cash Flows

An activity statement that explains the enterprise's change in cash in terms of its operating, investing, and financing activities.

Stable-Dollar Assumption

An assumption by accountants that the monetary unit used in the preparation of financial statements is stable over time or changes at an arbitrarily slow rate that the resulting impact on financial statements does not distort the information.

business entity

An economic unit that controls resources, incurs obligations, and engages in business activities

inflation

An increase in the general price level, resulting in a decline in the purchasing power of the monetary unit.

Sole Proprietorship

An unincorporated business owned by a single individual

partnership

An unincorporated form of business organization in which two or more persons voluntarily associate for purposes of carrying out business activities.

liabilities

Debts or obligations of an entity that resulted from past transactions. They represent the claims of creditors on the enterprise's assets.

assets

Economic resources owned by an entity

liquidity

Having the financial ability to pay debts as they become due.

positive cash flows

Increases in cash that add to the enterprise's cash balance

revenues

Increases in the enterprise's assets as a result of profit-oriented activities.

stockholders

Owners of capital stock in a corporation

retained earnings

That portion of stockholders' (owners') equity resulting from profits earned and retained in the business.

disclosure

The accounting principle of providing with financial statements any financial and other facts that are necessary for proper interpretation of those statements.

expenses

The costs of the goods and services used in the process of obtaining revenue.

owners' equity

The excess of assets over liabilities. The amount of the owners' investment in the business, plus profits from successful operations that have been retained in the business.

Statement of financial position (balance sheet)

The financial statement showing the financial position of an enterprise by summarizing its assets, liabilities, and owners' equity at a point in time

stockholders' equity

The owners' equity of an enterprise organized as a corporation

Revenue Recognition

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

capital stock

Transferable units of ownership in a corporation

Going Concern Assumption (Continuity Assumption)

assumption that businesses are assumed to continue to operate into the foreseeable future

Accountants who move from public accounting firms into corporations often have which jobs?

controller, treasurer, chief financial officer

chief accounting officer

keeping the company´s books, preparing financial statements, preparing tax returns, developing strategies to minimize taxes • signs the Form 10-K

Form 10-K

the annual report that publicly traded companies must file with the SEC • signed by the CEO, the CFO, and the chief accounting officer (CAO)

articulation

the close relationship that exists among the financial statements that are prepared on the basis of the same underlying transaction information

Window dressing (creative accounting)

the legal act of manipulating financial data to make the results seem better than actuality