Financial Accounting Vocab Ch. 2

Deflation

A decline in the general price level, resulting in an increase in the purchasing power of the monetary unit. Opposite situation in which the value of the monetary unit increases, meaning that it will purchase more than it did previously.

Creditor

A person or organization to whom the debt is owed.

Corporation A

A type of business organization that is recognized under the law as an entity separate from its owners.

Income Statement

Activity statement that shows the revenues and expenses for a designated period of time.

Going Concern Assumption

An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption. The balance sheet of a business is prepared on the assumption that the business is a continuing enterprise.

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 a sufficiently slow rate that the resulting impact on financial statements does not distort the information.

Sole Proprietorship

An incorporated business owned by one person.

Inflation

An increase in the general price level, resulting in a decline in the purchasing power of the monetary unity. Describes the situation where the value of the monetary unity, meaning that it will purchase less than it did previously.

Partnership

An unincorporated business owned by two or more persons voluntarily acting as partners (co-owners)

Accounting Equation

Assets = Liabilities + Owners' Equity.

Financial Statement

Declaration of what is believed to be true about an enterprise, communicated in terms of a monetary unit, such as the dollar.

Expenses

Decreases in the company's assets from its profit=directed activities, and they result in negative cash flows.

Assets

Economic resources that are owned by a business and are expected to benefit future operations.

Business Entity

Economic unit that engages in identifiable business activities. Controls resources, incurs obligations, and engages in business activities.

Negative Cash Flows

Expenses result in. Either past, present, or future. A payment of cash that reduces the enterprise's cash balance.

Balance Sheet / Statement of Financial Position

Financial Statement that describes where the enterprise stands at a specific date. Snapshot of the business in financial or dollar terms.

Liabilities

Financial obligations or debts resulted from past transactions. Represent negative cash flows for the enterprise or the claims of creditors on the enterprise's assets.

Statement of Cash Flows

Important in understanding an enterprise for purposes of investment and credit decisions. An activity statement that explains the enterprise's change in cash in terms of its operating, investing, and financing activities

Revenues

Increases in the enterprise's assets as a result of profit-orientated activities. Increases in the company's assets from its profit-directed activities, and they result positive cash flows.

Window Dressing

Measures taken by management to make the company appear as strong as possible in its financial statements.

Stockholders' Equity

Owners quite or shareholders equity. Two amounts: Capital Stock and Retained Earnings.

Stockholders

Ownership of a corporation is divided into transferable shares of capital stock. Owners called stockholders or shareholders.

Capital Stock

Represents the amount that the stockholders originally invested in the business in exchange for shares of the company's stock.

Retained Earnings

Represents the increase in owners' equity that has accumulated over the years as a result of profitable operations.

Owner's Equity

Represents the owners' claims on the assets of the business, also profits from successful operations that have been retained in the business. A residual amount. Owners Equity = total assets - total liabilities

Positive Cash Flows

Revenues result in. Either past, present or future. Increases in cash that add to the enterprise's cash balance.

Liquidity

The ability of the business to pay its debts as they come due.

Investing Activities

The cash effects of purchasing and selling assets, such as land and buildings. Cash flows

Operating Activities

The cash effects of revenue and expense transactions that are included in the income statement. Cash flows

Financial Activities

The cash effects of the owners investing in the company and creditors loaning money to the company and the repayment of either or both.

Cost Principle Assumption

The widely used principle of accounting for assets at their original cost to the current owner.