Term
| Primary Objective of External Financial Reporting |
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Definition
| to provide useful economic information about a business to help external parties make sound financial decisions |
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Definition
| can influence a decision; it is timely and has predictive and/or feedback value |
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| is accurate, unbiased, and verifiable |
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| Separate-Entity Assumption |
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Definition
| states that business transactions are accounted for separately from the transactions of owners |
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| Unit-of-Measure Assumption |
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Definition
| states that accounting information should be measured and reported in the national monetary unit |
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Term
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| (going-concern assumption) states that businesses are assumed to continue to operate into the foreseeable future |
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Term
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| economic resources with probable future benefits owned by the entity as a result of past transactions |
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| Historical Cost Principle |
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Definition
| (cost principle) requires assets to be recorded at historical cost-cash paid plus the current dollar value of all noncash considerations given on the date of the exchange |
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Term
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Definition
| assets that will be used or turned into cash within one year. Inventory is always considered a current asset regardless of the time needed to produce and sell it |
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Definition
| probable debts or obligations of the entity that result from past transactions, which will be paid with assets or services |
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Definition
| obligations that will be settled by providing cash, goods, or services within the coming year |
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Term
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| (owners' equity or shareholders' equity) the financing provided by the owners and business operations |
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Term
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| results from owners providing cash (and sometimes other assets) to the business |
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Term
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Definition
| the cumulative earnings of a company that are not distributed to the owners and are reinvested in the business |
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Term
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Definition
| exception suggests that small amounts that are not likely to influence a user's decision can be accounted for in the most cost-beneficial manner |
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Term
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Definition
| exeption suggest that care should be taken not to overstate assets and revenues or understate liabilities and expenses |
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Term
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Definition
| 1)an exchange of assets or services for assets, services, or promises to pay between a business and one or more external parties to a business or 2) a measurable internal event such as the use of assets in operations |
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Term
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| a standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item |
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Term
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Definition
| the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation |
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Term
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Definition
| the left side of an account |
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Term
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Definition
| the right side of an account |
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Term
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Definition
| an accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format |
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Term
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Definition
| a tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities |
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Term
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Definition
| cash, accounts receivable, notes receivable, inventory, prepaid expenses |
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Term
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Definition
| long-term investments, property and equipment, intangibles |
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Term
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Definition
| accounts payable, notes payable, accrued expenses payable, unearned revenue |
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Term
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Term
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Definition
| contributed capital, retained earnings |
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Term
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Definition
+ sales of noncurrent assets for cash
- purchases of noncurrent assets for cash
- loans to others
+ Receipt of loan principal payments from others |
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Term
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Definition
+ borrowing from banks
- repayment of loan principal to banks
+ issuance of stock
- repurchasing stock
- dividends paid |
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Term
| What is the primary objective of financial reporting? |
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Definition
| To provide useful economic information about a business to help external parties, primarily investors and creditors, make sound financial decisions |
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Term
| 2 Principles of Transaction Analysis |
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Definition
1)every transaction affects at least two accounts; correctly identifying those accounts and the direction of the effect (whether an increase or a decrease) is critical
2)The accounting equation must remain in balance after each transaction |
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Term
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Definition
| Current Assets/Current Liabilities |
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Term
| Qualitative Characteristics of Financial Information |
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Definition
Useful information is:
Relevant, Reliable, Comparable, and Consistent |
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Term
| What creditors and potential creditors are interested in: |
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Definition
the entity's ability to
1) pay interest on a loan over time
2) pay back the principal on the loan when it is due |
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Term
| What investors and potential investors are interested in: |
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Definition
the entity's ability to
1) pay dividends in the future
2) be successful so that the stock price rises, enabling investors to sell their stock for more than the paid |
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Term
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Definition
| gains from selling the stock for more than they paid |
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Term
| Systematic Transaction Analysis Steps |
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Definition
1) Identify and classify accounts and effects: Identify the accounts affected, Classify them by type of account, Determine the direction of the effect
2)Verify accounting equation is in balance |
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Term
| Accounting cycle during the period |
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Definition
-analyze transactions
-record journal entries in the general ledger
-post amounts to the general ledger |
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Term
| Accounting cycle at the end of the period |
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Definition
-prepare a trial balance
-adjust revenues and expenses and related balance sheet accounts
-prepare a complete set of financial statements
-close revenues, gains, expenses, and losses to Retained Earnings |
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Term
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Definition
| the idea that every transaction has at least two effects on the basic accounting equation |
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Term
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Definition
current assets/current liabilities
measures management's effectiveness to manage short-term debt |
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Term
| Total Asset Turnover Ratio |
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Definition
Sales Revenue/Total Assets
measures management's effectiveness to utilize assets |
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Term
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Definition
| measures management's effectiveness to control revenues and costs |
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