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Business

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

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Sole Proprietorship

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Businesses owned and operated by one single owner

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Economic Entity

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

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Partnership

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A business owned by two or more individuals

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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

answer

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

Financial Accounting Chapters 1-4 – Flashcards

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