Chapter 2: Basic Financial Statements

corporation

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

business entity

an economic unit that engages in identifiable business activities -separate from the personal activities of its owners

accounting equation

assets = liabilities + owners equity

going concern

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

expenses

decreases in the company assets from its profit-directed activities, they result in negative cash flows

statement of financial position (balance sheet)

describes where the enterprise stands at a specific date "snapshot of the business in dollar terms"

assets

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

negative cash flows

expenses that are either past, present, or future

liabilities

financial obligations or debts -represent negative future cash flows for the enterprise

partnership

incorporated business owned by 2 or more persons voluntarily acting as partners (co-owners)

revenues

increases in the company assets from its profit-directed activities, and they result in positive cash flows

stable-dollar assumption

is when using money as a measuring unit and preparing financial statements expressed in dollars, accountants make the assumption that the dollar is a stable unit of measurement

window dressing

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

stockholders equity

owners equity is presented in 2 amounts— capital stock & retained earnings

stockholders (shareholders)

ownership of a corporation is divided into transferable shares of capital stock, and the owners are called this

statement of cash flows

particularly important in understanding an enterprise for purposes of investment and credit decisions

cost principle

principle that the original cost of an assets stays unchanged on the balance sheets even if market price increases or decreases

retained earnings

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

capital stock

represents the amount that the stockholders originally invested in the business in exchange for shares of the company stock

owners equity

represents the owners claims on the assets of the business

positive cash flows

revenues that are either past, present, or future

financial statement

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

liquidity

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

investing activities

the cash effects of purchasing and selling assets

operating activities

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

financing activities

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

net income (net loss)

the difference between all of an enterprise's revenues and expenses for a designated period of time

creditor

the person or organization to whom the debt is owed

inflation

the value of the monetary unit decreases, meaning that it will purchase less than it did previously

deflation

the value of the monetary unit increases, meaning that it will purchase more than it did previously

articulation

the way that the 3 financial statements relate to each other

sole proprietorship

unincorporated business owned by one person

disclosure

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