Financial Accounting Exam 1

solvency

ability to pay interest as it comes due and repay the balance of a debt due at its maturity

liquidity

ability to pay obligations expected to become due within the next year or operating cycle

permanent account

all balance sheet accounts (balances carried forward into future accounting periods)

basic accounting equation

assets = liabilities + stockholders equity

fair value principle

assets and liabilities should be reported at fair value

current assets

assets that a company expects to convert to cash up or use up within one year or its operating cycle, whichever is longer (ex: cash, investments, receivables, inventories, prepaid expenses) --> order of liquidity

inventory

assets that are goods available for future sales to customers

supplies

assets used in day-to-day operations

Property, plant, and equipment

assets with relatively long useful lives that are currently used in operating the business

auditor's report

auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with GAAP

full disclosure principle

companies disclose all circumstances and events that would make a difference to financial statement users

historical cost principle

companies record assets at their cost

cash-basis accounting

companies record revenue when they receive cash (not in accordance with GAAP)

enhancing qualities

comparability, consistency, verifiability, timeliness, understandability

working capital

current assets-current liabilities

current ratio

current assets/current liabilities (more dependable than working capital)

bonds payable

debt securities sold to investors that must be repaid at a particular date some years in the future

economic entity assumption

every economic entity can be seperately identified and accounted for

accrued expenses

expenses incurred but not yet paid or recorded at the statement date (ex: interest, taxes, utilities, salaries)

classified balance sheet

groups together similar assets and similar liabilities, using a number of standard classifications and sections

long-term investments

investments in stocks and bonds of other corporations that are held for more than one year, long-term assets such as land or buildings that a company is not currently using in its operating activities, long-term notes receivable

amount owed to creditors

liabilities

note payable

liability to the bank

trial balance

lists accounts and their balances at a given time

expense recognition principle

match expenses with revenues in the period when the company makes efforts to generate those revenues

solvency rations

measure the ability of the company to survive over a long period of time

Earnings Per Share

measures the net income earned on each share of common stock (net income-preferred dividends)/avg # of common shares outstanding during the year

free cash flow

net cash provided by operating activities-capital expenditures-cash dividends

long term liabilities

obligations that a company expects to pay after one year (bonds payable, mortgages payable, long-term notes payable, lease liabilities, pension liabilities)

current liabilities

obligations that the company is to pay within the next year or operating cycle, whichever is longer (accounts payable, salaries and wages payable, salaries and wages payable, notes payable, interest payable, and income taxes payable)

monetary unit assumption

only those things that can be expressed in money are included in the accounting records

dividends

payments of cash from a corporation to its stockholders

creditors

persons or entities to whom a company owes money

management discussion and analysis

presents managements' views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations

statement of stockholders equity

presents the causes of changes to stockholders' equity during the period, including those that caused retained earnings to change

periodicity assumption

the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business

accounts payable

the obligation to pay for goods

stockholders' equity

the owners' claim to assets

account receivable

the right to receive money in the future

accumulated depreciation

the total amount of depreciation that the company has expensed thus far in the asset's life

common stock

the total amount paid in by stockholders for the shares they purchase

retained earnings statement

to indicate how much previous income was distributed to you and the owners of your business in the form of dividends in a specific period of time, and how much was retained in the business to allow for future growth

balance sheet

to present a picture at a point in time of what your business owns (assets) and what it owes (liabilities)

income statement

to show how successfully your business performed during a period of time, you report its revenues and expenses and show net income or loss for a period of time

statement of cash flows

to show where your business obtained cash during a period of time and how that cash was used

accrual-basis accounting

transactions that change a company's financial statements are recorded in the periods in which the events occur

cost constraint

weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having information available

debt to assets ratio

(measure of solvency) total liabilities/total assets in percentage

general journal

1. discloses in one place the complete effect of a transaction 2. provides a chronological record of transactions 3. helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared

revenue recognition principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

assets

resources owned by a business

retained earnings

revenue-expenses-dividends

accrued revenues

revenues for services performed but not yet recorded at the statement date

temporary accounts

revenues, expenses, dividends (only relative to given accting period)

depreciation

the allocation of the cost of an asset to a number of years

operating cycle

the average time required to go from cash to cash in producing revenue

going concern assumption

the business will remain in operation for the forseeable future

expenses

the cost of assets consumed or services used in the process of generating revenues

ledger

the entire group of accounts maintained by a company

revenue

the increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business