Chapter 19

administrative expenses

(related to the management of the business

vertical analysis

With vertical analysis, each dollar amount reported on a financial statement is also reported as a percentage of another amount, called a base amount, appearing on that same statement.

Comparability

allows accounting information to be compared from one fiscal period to another.

Financing activities

are the borrowing activities needed to finance the company operations and the repayment of these debts.

Operating expenses

are the costs of the goods and services used in the process of earning revenue for the business.

gross profit on sales

during the period is the profit made before operating expenses are deducted. Gross profit on sales is found by subtracting the cost of merchandise sold from net sales.

Operating activities

include all transactions that occurred during the accounting period as part of normal business operations.

Investing activities

include loans the business makes, payments received for those loans, purchase and sale of plant assets, and investments. Plant assets are property that will be used in the business for more than one year.

selling expenses

incurred to sell or market the merchandise sold

base period

is a period, usually a year, that is used for comparison.

Capital Stock

is classified as a stockholders' equity account.

net sales

is the amount of sales for the period less any sales discounts, returns, and allowances.

Horizontal analysis

is the comparison of the same items on financial statements for two or more accounting periods or dates, and the determination of changes from one period or date to the next.

Operating income

is the excess of gross profit over operating expenses.

Relevance

is the requirement that all information that would affect the decisions of financial statement users be disclosed in the financial reports.

Stockholders' equity

is the value of the stockholders' claims to the corpo- ration. Like the owner's capital account in a sole proprietorship, increases to Capital Stock are recorded as credits and decreases are recorded as debits.

Full disclosure

means that financial reports include enough information to be complete.

materiality

means that relevant information should be included in financial reports.

cash outflows

pay- ments of cash

Cash inflows

receipts of cash

Reliability

refers to the confidence users have that the financial information is reason- ably free from bias and error.

Net purchases

represents all costs related to merchandise purchased during the period

statement of retained earnings

that reports the changes in the Retained Earnings account during the period. These changes result from business operations and dividends, which are the distributions of earnings to stockholders.

retained earnings

the amount of accumulated net income earned and retained by the corporation. This amount is comparable to the amount of net income less any withdrawals by the owner in a sole proprietorship.