Financial Accounting: Ch. 1

Exchange rate

The value of one currency in terms of another.

Creditors

Those who lend money or deliver goods and services to a company before being paid.

Expenses

Decreases in owner's equity resulting from the costs of goods and services used in the course of earning revenues. Also called cost of doing business or expired costs.

Management information systems (MIS)

The interconnected subsystems that provide the information needed to run a business.

Economic entity

a unit that exists independently, such as a business, hospital, or a governmental body.

Operating activities

activities undertaken by management in the course of running a business.

Due care

competence and diligence in carrying out professional responsibilities.

Objectivity

impartiality and intellectual honesty.

Sole proprietorship

A business that is owned by one person and that is not incorporated.

Partnership

A business that is owned by two or more people and that is not incorporated.

Separate entity

A business that is treated as distinct from its creditors, customers, and owners.

Corporation

A business unit granted a state charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its owners.

Liabilities

A business's present obligations to pay cash, transfer assets, or provide services to other entities in the future.

Statement of owner's equity

A financial statement that shows the changes in owner's equity over an accounting period.

Statement of Cash Flows

A financial statement that shows the inflows and outflows of cash from operating activities, investing activities, and financing activities over an accounting period.

Income statement

A financial statement that summarizes the revenues earned and expenses incurred by a business over an accounting period.

Public Company Accounting Oversight board (PCAOB)

A governmental body created by the Sarbanes-Oxley Act to regulate the accounting profession. It has the power to determine the standards that auditors must follow.

Certified public accountant (CPA)

A public accountant who has met stringent state licensing requirements.

Financing activities

Activities undertaken by management to obtain adequate funds (as from stockholders and creditors ) to begin and to continue operating a business.

Investing activities

Activities undertaken by management to spend capital in productive ways that will help a business achieve its goals.

Business

An economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.

Accounting

An information system that measures, processes, and communicates financial information about an economic entity.

Accounting equation

Assets = Liabilities +Owner's equity.

Net assets

Assets minus liabilities; owner's equity.

Owner's investments

Assets that the owner puts into the business.

Withdrawals

Assets that the owner takes out of the business.

Financial ratios

Comparisons between the elements on financial statements from one period to another and from one company to another.

Liquidity

Having enough cash available to pay debts when they are due and to take care of unexpected needs for cash.

Integrity

Honesty, candidness, and the subordination of personal gain to service and the public trust.

Revenues

Increases in owner's equity resulting from operating a business.

Investors

Stockholders who have a direct financial interest in the success of the company in which they have invested.

Profitability

The ability to earn enough income to attract and hold investment capital.

Independence

The avoidance of all relationships that impair or appear to impair an accountant's objectivity.

Owner's equity

The claims of the owner of a company to the assets of the business.

Generally accepted accounting principles (GAAP)

The conventions, rules, and procedures that define accepted accounting practice at a particular time.

Net loss

The difference between expenses and revenues when expenses exceed revenues.

Net income

The difference between revenues and expenses when revenues exceed expenses. Also called net earnings.

Assets

The economic resources of a company that are expected to benefit future operations.

Financial analysis

The evaluation and interpretation of financial statements and related performance measures to determine whether a business is well managed and achieving its goals.

Balance sheet

The financial statement that shows a business's assets, liabilities, and owner's equity as of a specific date. Also called the statement of financial position.

Fraudulent financial reporting

The intentional preparation of misleading financial statements.

Limited Liability

The limited risk of loss that applies to stockholders' investments in corporations. It is limited to the amount stockholders paid for their shares of stock.

Financial Accounting Standards Board (FASB)

The most important body for developing rules on accounting practice; it issues statements of financial accounting standards.

Stockholders

The owners of a corporation whose ownership is represented by shares of stock but who do not directly control the corporation's operations.

Management

The people who have overall responsibility for operating a business and meeting its goal of profitability and liquidity.

Financial statements

The primary means of communicating important accounting information to users. They include the income statement, statement of owner' equity, balance sheet, and statement of cash flows.

Managerial accounting

The process of generating and communicating accounting information about operating, investing, and financing activities for internal use by managers.

Financial Accounting

The process of generating and communicating accounting information in the form of financial statements to those outside the organization.

Bookkeeping

The process of recording financial transactions and keeping financial records.

American Institute of Certified Public Accountants (AICPA)

The professional association of certified public accountants.

Money measure

The recording of all business transactions in terms of money.

Financial position

the economic resources that belong to a company and the claims (equities) against those resources at a particular time.

Cash flows

the inflows and outflows of cash into and out of a business.