Financial Accounting Chapters 1-4

Internal Event

An event occuring entirely within an entity

General Ledger

A book, a file, a hard drive, or another device containin all of the accounts

Partnership

A business owned by two or more individuals

Share of stock

A certificate that acts as evidence of ownership in a corporation

Bond

A certificate that represents a corporation's promise to repay a certain amount of money and interest in the future

Journal

A chronalogical record of transactions

Preferred Stock

A form of capital stock that carries with it certain preferences

Source Document

A piece of paper that is used as evidence to record a transaction

Asset

A future economic benefit

Trial Balance

A list of each account and its balance; used to prove equality of debits and credits

Chart of Accounts

A numerical list of all accounts used by a company

Account

A record used to accumulate amounts for each individual asset, liability, revenue, expense, and component of stockholder's equity

Cash Basis

A system of accounting in which revenues are recognized when cash is recieved and expenses are recognized when cash is paid

Accrual Basis

A system of accounting in which revenues are recognized when earned and expenses are recognized when paid

Corporation

An entity organized under the laws of a particular state

Debit

An entry on the left side of an account

Credit

An entry on the right side of an account

External Event

An event involving interaction between the entity and its environment

Single Step Income Statement

An income statement in which all expenses are added together and subtracted from all revenues

Multiple Step Income Statement

An income statement that shows classifications of revenues and expenses as well as important subtotals

Revenue

An inflow of assets resulting from the sale of goods and services

Liability

An obligation of a business

Current Liability

An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year

Nonbusiness Entity

An organization operated for some purpose other than to earn profit

Expense

An outflow of assets resulting from the sale of goods and services

Transaction

Any event that is recognized in a set of financial statements

Cost Principle

Assets are recorded at the cost to aquire them

Sole Proprietorship

Businesses owned and operated by one single owner

Current Assets

Cash and other assets that are reasonably expected to be realized in cash or sold or consumed diring the normal operating cycle of a business or within one year if the operating cycle is less than one year

Operating Activities

Concern the purchase and sale of a product

Business

Consists of all activities necessary to provide the members of an economic system with goods and services

Property, Plant and Equiptment

Consists of the various tangible, productive assets used in the operation of a business

Current Ratio

Current Assets divided by current liabilites

Working Capital

Current Assets minus current liabilities

Dividends

Distributions of the net income of a business to its owners

Securities Exchange Commission (SEC)

Federal agency with ultimate authority to determine the rules for preparing statements for companies whose stock is sold to the public

Capital Stock

Indicates the owner's contributions to a corporation

Capital Stock

Indicates the owner's investment in the business

Investment Activities

Involve the aquisition and sale of long-term or noncurrent assets such as long-term investments (Property, plant, and equiptment)

Intangible Assets

Lack Physical Substance (Trademarks, copyrights, franchise rights, patents, and goodwill)

Profit Margin

Net Income divided by sales

Stockholder

One of the owners of a corporation

Notes

Provide essential details about the company's accounting policies and other key factors that affect its financial condition and performance

Economic Entity

Requires that a single indentifyable unit of organization be accounted for in all situations

Financing Activities

Result from the issuance and repayment, or retirment, of longterm liabilities and capital stock and the payment of dividends

Revenue recognition principle

Revenues are recorded in the income statement when they are realized or realizable and earned

Gross Profit

Sales minus cost of goods sold

Investments

Securities not expected to be sold within the next year

Common Stock

Single class of capital stock that most companies have

Creditor

Someone to whome a company or a person has a debt

Income Statement

Tells the revanues and expenses for a period of time

Balance Sheet

Tells what obligations will be due in the near future and what assets will be available to satisfy them

Statement of Cash Flows

Tells where cash came from and how it was used during the period

Liquidity

The ability of a company to pay its debts as they come due

Journalizing

The act of recording journal entries

Current Value

The amount of cash or its equivalent that could be recieved by selling an asset currently

Going Concern

The assumption that an entity is not in the process of liquidation and that it will continue indefinitley

Financial Accounting

The branch of accounting concerned with the preparation of financial statements

Relevance

The capacity of information to make a difference in a decision

Net Income

The excess of revenues over expenses

Financial Accounting Standards Board (FASB)

The group in the private sector with the authority to set accounting standards

General Journal

The journal used in place of a specialized journal

Materiality

The magnitude of an accounting information ommission or misstatement that will affect the judgement of someone relying on the information

Stockholders' Equity

The owners equity in a corporation

Owners Equity

The owners' claims on the assets of an entity

Retained Earnings

The part of owners' equity that represents the income earned, less dividends paid over the life of an entity

Operating Cycle

The period of time between the purchase of inventory and the collection of any recieveable from the sale of the inventory (Most businesses have one less than one year)

Depreciation

The process of allocating the cost of a long-term tangible asset over its useful life

Auditing

The process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presenteted

Accounting

The process of identifying, measuring, and communicating economic information to various users

Posting

The process of transferring amounts from a journal to the ledger accounts

Understandibility

The quality of accounting information that makes it comprehensible to those willing to spend the necessary time

Faithful Representation

The quality of information that makes it complete, neutral, and free from error

Comparability

The quality that allows a user to analyze two or more companies and look for similarities and differences

Statement of Retained Earnings

The statement that summarizes the income earned and dividends paid over the life of a business

Generally Accepted Accounting Principles (GAAP)

The various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements