Financial Accounting Chapters 1-4 – Flashcards
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Corporation
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An entity organized under the laws of a particular state
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Share of stock
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A certificate that acts as evidence of ownership in a corporation
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Bond
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A certificate that represents a corporation's promise to repay a certain amount of money and interest in the future
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Nonbusiness Entity
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An organization operated for some purpose other than to earn profit
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Liability
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An obligation of a business
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Capital Stock
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Indicates the owner's contributions to a corporation
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Stockholder
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One of the owners of a corporation
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Creditor
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Someone to whome a company or a person has a debt
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Asset
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A future economic benefit
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Revenue
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An inflow of assets resulting from the sale of goods and services
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Expense
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An outflow of assets resulting from the sale of goods and services
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Accounting
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The process of identifying, measuring, and communicating economic information to various users
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Financial Accounting
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The branch of accounting concerned with the preparation of financial statements
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Owners Equity
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The owners' claims on the assets of an entity
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Stockholders' Equity
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The owners equity in a corporation
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Retained Earnings
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The part of owners' equity that represents the income earned, less dividends paid over the life of an entity
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Net Income
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The excess of revenues over expenses
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Dividends
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Distributions of the net income of a business to its owners
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Statement of Retained Earnings
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The statement that summarizes the income earned and dividends paid over the life of a business
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Cost Principle
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Assets are recorded at the cost to aquire them
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Going Concern
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The assumption that an entity is not in the process of liquidation and that it will continue indefinitley
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Generally Accepted Accounting Principles (GAAP)
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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
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Securities Exchange Commission (SEC)
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Federal agency with ultimate authority to determine the rules for preparing statements for companies whose stock is sold to the public
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Financial Accounting Standards Board (FASB)
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The group in the private sector with the authority to set accounting standards
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Auditing
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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
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Balance Sheet
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Tells what obligations will be due in the near future and what assets will be available to satisfy them
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Income Statement
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Tells the revanues and expenses for a period of time
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Statement of Cash Flows
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Tells where cash came from and how it was used during the period
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Notes
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Provide essential details about the company's accounting policies and other key factors that affect its financial condition and performance
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Understandibility
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The quality of accounting information that makes it comprehensible to those willing to spend the necessary time
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Relevance
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The capacity of information to make a difference in a decision
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Faithful Representation
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The quality of information that makes it complete, neutral, and free from error
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Comparability
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The quality that allows a user to analyze two or more companies and look for similarities and differences
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Depreciation
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The process of allocating the cost of a long-term tangible asset over its useful life
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Materiality
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The magnitude of an accounting information ommission or misstatement that will affect the judgement of someone relying on the information
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Operating Cycle
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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)
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Current Assets
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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
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Investments
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Securities not expected to be sold within the next year
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Property, Plant and Equiptment
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Consists of the various tangible, productive assets used in the operation of a business
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Intangible Assets
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Lack Physical Substance (Trademarks, copyrights, franchise rights, patents, and goodwill)
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Current Liability
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An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year
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Capital Stock
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Indicates the owner's investment in the business
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Common Stock
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Single class of capital stock that most companies have
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Preferred Stock
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A form of capital stock that carries with it certain preferences
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Liquidity
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The ability of a company to pay its debts as they come due
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Working Capital
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Current Assets minus current liabilities
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Current Ratio
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Current Assets divided by current liabilites
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Single Step Income Statement
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An income statement in which all expenses are added together and subtracted from all revenues
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Multiple Step Income Statement
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An income statement that shows classifications of revenues and expenses as well as important subtotals
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Gross Profit
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Sales minus cost of goods sold
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Profit Margin
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Net Income divided by sales
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Operating Activities
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Concern the purchase and sale of a product
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Investment Activities
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Involve the aquisition and sale of long-term or noncurrent assets such as long-term investments (Property, plant, and equiptment)
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Financing Activities
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Result from the issuance and repayment, or retirment, of longterm liabilities and capital stock and the payment of dividends
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External Event
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An event involving interaction between the entity and its environment
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Internal Event
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An event occuring entirely within an entity
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Transaction
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Any event that is recognized in a set of financial statements
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Source Document
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A piece of paper that is used as evidence to record a transaction
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Account
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A record used to accumulate amounts for each individual asset, liability, revenue, expense, and component of stockholder's equity
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Chart of Accounts
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A numerical list of all accounts used by a company
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General Ledger
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A book, a file, a hard drive, or another device containin all of the accounts
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Debit
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An entry on the left side of an account
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Credit
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An entry on the right side of an account
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Journal
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A chronalogical record of transactions
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Posting
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The process of transferring amounts from a journal to the ledger accounts
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Journalizing
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The act of recording journal entries
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General Journal
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The journal used in place of a specialized journal
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Trial Balance
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A list of each account and its balance; used to prove equality of debits and credits
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Current Value
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The amount of cash or its equivalent that could be recieved by selling an asset currently
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Cash Basis
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A system of accounting in which revenues are recognized when cash is recieved and expenses are recognized when cash is paid
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Accrual Basis
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A system of accounting in which revenues are recognized when earned and expenses are recognized when paid
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Revenue recognition principle
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Revenues are recorded in the income statement when they are realized or realizable and earned
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