Financial Accounting Exam 1 Chapters 1-4 Saunders

Classified balance sheet

A balance sheet that contains standard classifications or sections.

Corporation

A business organized as a separate legal entity under state corporation law, having ownership divided into transferable shares of stock.

Proprietorship

A business owned by one person.

partnership

A business owned by two or more persons associated as partners.

Materiality

A company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor.

dividend

A distribution by a corporation to its stockholders.

Income Statement

A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.

Balance Sheet

A financial statement that reports the assets, liabilities, and stockholders' equity at a specific date.

statement of cash flows

A financial statement that summarizes information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time.

retained earnings statement

A financial statement that summarizes the changes in retained earnings for a specific period of time.

Three-column form of account

A form with columns for debit, credit, and balance amounts in an account.

Securities and Exchange Commission (SEC)

A governmental agency that oversees U.S. financial markets and accounting standard-setting bodies.

Simple entry

A journal entry that involves only two accounts.

compound entry

A journal entry that involves three or more accounts.

General Ledger

A ledger that contains all asset, liability, and stockholders' equity accounts.

unearned revenues

A liability recorded for cash received before services are performed.

chart of accounts

A list of accounts and the account numbers that identify their location in the ledger.

Adjusted trial balance

A list of accounts and their balances after the company has made all adjustments.

trial balance

A list of accounts and their balances at a given time.

Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Worksheet

A multiple-column form that may be used in making adjustments and in preparing financial statements.

bookkeeping

A part of accounting that involves only the recording of economic events.

Financial Accounting Standards Board (FASB)

A private organization that establishes generally accepted accounting principles (GAAP) in the United States.

account

A record of increases and decreases in specific asset, liability, or stockholders' equity items.

double-entry system

A system that records in appropriate accounts the dual effect of each transaction.

Income Summary

A temporary account used in closing revenue and expense accounts.

Comparability

Ability to compare the accounting information of different companies because they use the same accounting principles.

Cash Basis Accounting

Accounting basis in which companies record revenue when they receive cash and an expense when they pay out cash.

Accrual Basis Accounting

Accounting basis in which companies record transactions that change a company's financial statements in the periods in which the events occur.

Full disclosure principle

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Temporary (nominal) accounts

Accounts that relate only to a given accounting period. Consist of all income statement accounts and the Dividends account. All temporary accounts are closed at the end of the accounting period.

Permanent (real) accounts

Accounts that relate to one or more future accounting periods. Consist of all balance sheet accounts. Balances are carried forward to the next accounting period.

accruals

Adjusting entries for either accrued revenues or accrued expenses.

Normal Balance

An account balance on the side where an increase in the account is recorded.

contra asset account

An account offset against an asset account on the balance sheet.

calendar year

An accounting period that extends from January 1 to December 31.

fiscal year

An accounting period that is one year in length.

Fair value principle

An accounting principle stating that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Historical Cost Principle

An accounting principle that states that companies should record assets at their cost.

Historical cost principle

An accounting principle that states that companies should record assets at their cost.

journal

An accounting record in which transactions are initially recorded in chronological order.

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

public accounting

An area of accounting in which the accountant offers expert service to the general public.

Forensic Accounting

An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud

Private (or managerial) accounting

An area of accounting within a company that involves such activities as cost accounting, budgeting, design and support of accounting information systems, and tax planning and preparation.

Taxation

An area of public accounting involving tax advice, tax planning, preparing tax returns, and representing clients before governmental agencies.

management consulting

An area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.

time period assumption

An assumption that accountants can divide the economic life of a business into artificial time periods.

Economic entity assumption

An assumption that every economic entity can be separately identified and accounted for.

Monetary Unit Assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

reversing entry

An entry, made at the beginning of the next accounting period that is the exact opposite of the adjusting entry made in the previous period.

Extended Accounting Equation

Assets = Liabilities + Common stock + Revenues − Expenses − Dividends.

Basic Accounting Equation

Assets = Liabilities + Stockholders' equity.

fair value principle

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

current assets

Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer.

Property, Plant, and Equipment

Assets with relatively long useful lives and currently being used in operations.

Generally accepted accounting principles (GAAP)

Common standards that indicate how to report economic events.

Cost Constraint

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

Liabilities

Creditor claims against total assets.

adjusting entries

Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles.

closing entries

Entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

correcting entries

Entries to correct errors made in recording transactions.

accrued expenses

Expenses incurred but not yet paid in cash or recorded.

prepaid expenses

Expenses paid in cash before they are used or consumed.

Long-term investments

Generally, (1) investments in stocks and bonds of other companies that are normally held for many years; (2) long-term assets, such as land and buildings, not currently being used in operating activities; and (3) long-term notes receivable.

Understandability

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Faithful Representation

Information that accurately depicts what really happened.

timely

Information that is available to decision-makers before it loses its capacity to influence decisions.

International Financial Reporting Standards (IFRS)

International accounting standards set by the International Accounting Standards Board (IASB).

Sarbanes-Oxley Act (SOX)

Law passed by Congress intended to reduce unethical corporate behavior.

Intangible assets

Long-lived assets that do not have physical substance.

Interim periods

Monthly or quarterly accounting time periods.

retained earnings

Net income that is kept (retained) in the business.

long-term liabilities

Obligations that a company expects to pay after one year.

Liabilities

Obligations that a company expects to pay within the coming year or its operating cycle, whichever is longer.

assets

Resources a business owns.

Accrued revenues

Revenues for services performed but not yet received in cash or recorded.

common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Liquidity

The ability of a company to pay obligations expected to be due within the next year.

net loss

The amount by which expenses exceed revenues.

net income

The amount by which revenues exceed expenses.

Going concern assumption

The assumption that the company will continue in operation for the foreseeable future.

operating cycle

The average time that it takes to purchase inventory, sell it on account, and then collect cash from customers.

T-account

The basic form of an account, consisting of (1) a title, (2) a left or debit side, and (3) a right or credit side.

Expenses

The cost of assets consumed or services used in the process of generating revenue.

Book Value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

transactions

The economic events of a business that are recorded by accountants.

Journalizing

The entering of transaction data in the journal.

Ledger

The entire group of accounts maintained by a company.

Auditing

The examination of financial statements by a certified public accountant in order to express an opinion as to how accurately the financial statements present the company's results and financial position.

financial acccounting

The field of accounting that provides economic and financial information for investors, creditors, and other external users.

Managerial Accounting

The field of accounting that provides internal reports to help users make decisions about their companies.

revenue

The increases in assets or decreases in liabilities resulting from the sale of goods or the performance of services in the normal course of business.

accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users.

debit

The left side of an account.

useful life

The length of service of a long-lived asset.

general journal

The most basic form of journal.

Stockholders' Equity

The ownership claim on a corporation's total assets.

Expense Recognition Principle

The principle that companies recognize expense in the period in which they make efforts (consume assets or incur liabilities) to generate revenue.

Revenue Recognition Principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Posting

The procedure of transferring journal entries to the ledger accounts.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

convergence

The process of reducing the differences between U.S. GAAP and IFRS.

Relevance

The quality of information that indicates the information makes a difference in a decision.

verifiable

The quality of information that occurs when independent observers, using the same methods, obtain similar results.

Ethics

The standards of conduct by which one's actions are judged as right or wrong, honest or dishonest, fair or not fair.

Consistency

Use of the same accounting principles and methods from year to year within a company.

Deferrals

adjusting entries for either prepaid expenses or unearned revenues.

credit

the right side of an account.

Accounting information system

the system of collecting and processing transaction data and communicating financial information to decision-makers.