Chapter 2 - Basic Financial Statements

Financial Statement

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

Balance Sheet (Statement of Financial Position)

A financial statement that describes where the enterprise stands at a specific.

Inflation

A term used to describe the situation where the value of the monetary unit decreases, meaning that it will purchase less than previously.

Corporation

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

Stable-Dollar Assumption

Accountants in the United States prepare financial statements under an assumption that the dollar is a stable unit of measurement, as a gallon, the acre, or the mile.

Income Statement

An activity statement that shows the revenue and expenses for a designated period of time.

Business Entity

An economic unit that engages in identifiable business activities.

Sole Proprietorship

An unincorporated business owned by one person.

Partnership

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

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 from future operations.

Liabilities

Financial obligations for debt. They represent negative future cash flows for the enterprise.

Revenues

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

Owners' Equity (Stockholders' Equity or Shareholders' Equity)

Is presented in two amounts, capital stock and retained earned.

Window Dressing

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

Stockholders

Ownership of a corporation is divided into transferable shares of capital stock, and the owners called shareholders or stockholders.

Owners' Equity

Represent the owners' claims on the assets of the business.

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.

Statement of Cash Flows

Shows the ways cash changed during a designated period, the cash received from revenues and other transactions as well as the cash paid for certain expenses and other acquisitions during the period.

Liquidity

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

Going Concern

The balance sheet of a business is prepared on the assumption that the business is a continuing enterprise.

Cash Flow from Investing Activities

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

Operating Activities

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

Cash Flow from Financing 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.

Deflation

The opposite of inflation, where the value of the monetary value, meaning that it will purchase more than it previously did.

Creditor

The person or organization to whom the debt is owed.

Cost Principle of Accounting

The policy for accounting for many assets at their cost.

Negative Cash Flows

The result of past, present, or future expenses.

Positive Cash Flows

The result of past, present, or future revenues.

Articulation

The way the financial statements relate to each other.

Adequate Disclosure

Users of the financial statements are informed of all information necessary for the proper interpretation of the statements.