Financial Accounting Exam 1 Answers

Flashcard maker : Clarence Louder
persons or entities to whom a company owes money
amount owed to creditors
note payable
liability to the bank
bonds payable
debt securities sold to investors that must be repaid at a particular date some years in the future
common stock
the total amount paid in by stockholders for the shares they purchase
payments of cash from a corporation to its stockholders
resources owned by a business
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
assets used in day-to-day operations
assets that are goods available for future sales to customers
account receivable
the right to receive money in the future
the cost of assets consumed or services used in the process of generating revenues
accounts payable
the obligation to pay for goods
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
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)
statement of cash flows
to show where your business obtained cash during a period of time and how that cash was used
stockholders’ equity
the owners’ claim to assets
basic accounting equation
assets = liabilities + stockholders equity
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
classified balance sheet
groups together similar assets and similar liabilities, using a number of standard classifications and sections
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
operating cycle
the average time required to go from cash to cash in producing revenue
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
Property, plant, and equipment
assets with relatively long useful lives that are currently used in operating the business
the allocation of the cost of an asset to a number of years
accumulated depreciation
the total amount of depreciation that the company has expensed thus far in the asset’s life
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)
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)
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
statement of stockholders equity
presents the causes of changes to stockholders’ equity during the period, including those that caused retained earnings to change
ability to pay obligations expected to become due within the next year or operating cycle
working capital
current assets-current liabilities
current ratio
current assets/current liabilities
(more dependable than working capital)
ability to pay interest as it comes due and repay the balance of a debt due at its maturity
solvency rations
measure the ability of the company to survive over a long period of time
debt to assets ratio
(measure of solvency) total liabilities/total assets in percentage
free cash flow
net cash provided by operating activities-capital expenditures-cash dividends
enhancing qualities
comparability, consistency, verifiability, timeliness, understandability
monetary unit assumption
only those things that can be expressed in money are included in the accounting records
economic entity assumption
every economic entity can be seperately identified and accounted for
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
going concern assumption
the business will remain in operation for the forseeable future
historical cost principle
companies record assets at their cost
fair value principle
assets and liabilities should be reported at fair value
full disclosure principle
companies disclose all circumstances and events that would make a difference to financial statement users
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
retained earnings
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
the entire group of accounts maintained by a company
trial balance
lists accounts and their balances at a given time
revenue recognition principle
requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied
expense recognition principle
match expenses with revenues in the period when the company makes efforts to generate those revenues
accrual-basis accounting
transactions that change a company’s financial statements are recorded in the periods in which the events occur
cash-basis accounting
companies record revenue when they receive cash (not in accordance with GAAP)
accrued revenues
revenues for services performed but not yet recorded at the statement date
accrued expenses
expenses incurred but not yet paid or recorded at the statement date (ex: interest, taxes, utilities, salaries)
temporary accounts
revenues, expenses, dividends (only relative to given accting period)
permanent account
all balance sheet accounts (balances carried forward into future accounting periods)
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

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