Financial Accounting Concepts and Principles

These flashcards cover essential vocabulary and concepts related to financial accounting, helping students review key terms and their definitions as they prepare for their exam.

Financial Statement

Formal records of the financial activities and position of a business, person, or entity.

Balance Sheet

A financial statement that reports assets, liabilities, and shareholders’ equity at a specific point in time.

Income Statement

A financial statement that shows revenues and expenses for a period of time, resulting in net income or loss.

Statement of Cash Flows

A financial statement that summarizes the cash inflows and outflows for a period.

Shareholders’ Equity

The residual interest in the assets of the entity after deducting liabilities.

Liabilities

Obligations of a company to transfer economic benefits to other entities in the future.

Assets

Resources owned by a business that are expected to provide future economic benefits.

Current Assets

Assets that are expected to be converted into cash or used up within one year.

Non-current Assets

Assets held for longer than one year that are not expected to be converted into cash in the short term.

Depreciation

The systematic allocation of the cost of an asset over its useful life.

Net Book Value

The carrying amount of an asset, which is its cost minus accumulated depreciation.

Goodwill

An intangible asset that represents the excess of the purchase price over the fair market value of the net identifiable assets and liabilities acquired in a business acquisition.

Tangible Assets

Physical assets that can be seen and touched, such as property and equipment.

Accrual Accounting

An accounting method where revenue is recognized when earned and expenses when incurred, regardless of cash transactions.

Cash Basis Accounting

An accounting method where revenue and expenses are recorded only when cash is received or paid.

Prepaid Expenses

Payments made for expenses that will be incurred in the future.

Unearned Revenue

Money received before services are performed or goods are delivered.

Adjusting Entries

Journal entries made at the end of an accounting period to update account balances before financial statements are prepared.

Trial Balance

A list of all accounts and their balances to check that debits equal credits.

Closing Entries

Journal entries made at the end of an accounting period to transfer balances from temporary accounts to permanent accounts.

Liquidity Ratios

Financial metrics used to assess a company’s ability to meet its short-term obligations.

Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations, calculated as current assets divided by current liabilities. A higher current ratio is generally considered better, indicating a stronger ability to cover short-term debts.

Debt to Total Assets

A financial ratio that indicates the proportion of a company's assets that are financed by debt.

Earnings per Share

The portion of a company's profit allocated to each outstanding share of common stock.

Cost of Goods Sold (COGS)

The direct costs attributable to the production of the goods sold by a company.

Gross Profit

Revenue minus COGS, indicating the profitability of core business activities.

Operating Expenses

Costs required to run a company daily, like wages and rent.

Financial Reporting

The process of disclosing financial information about a company's performance and financial position.

Revenue Recognition Principle

The accounting principle that determines the conditions under which revenue is recognized.

Comparability

The quality of financial statements that allows users to identify similarities and differences between entities.

Verifiability

The quality of financial information that allows users to confirm the information's accuracy.

Timeliness

The property of financial information being available to decision-makers in time to influence their decisions.

Understandability

The ease with which financial information can be comprehended by users.

Materiality

An accounting principle that states that all significant information affecting the financial statements must be disclosed.

Cost Constraint

The principle that the benefits of financial reporting should justify its associated costs.

Going Concern Assumption

The assumption that a company will continue to operate for the foreseeable future.

Inventory Turnover Ratio

The ratio measuring how many times a company's inventory is sold and replaced over a period.

Days in Inventory

The average number of days that inventory is held before being sold.

Accounts Receivable

Money owed to a company by its customers for goods or services provided on credit.

Accounts Payable

Obligations of a company to pay for goods or services that have been acquired on credit.

Financial Accounting Standards Board (FASB)

An independent organization that establishes financial accounting and reporting standards.

International Financial Reporting Standards (IFRS)

A set of accounting standards developed by the International Accounting Standards Board (IASB) for international use.

Generally Accepted Accounting Principles (GAAP)

A collection of commonly-followed accounting rules and standards for financial reporting.

Non-profit Organization

An organization that operates for a charitable purpose and does not earn profits for shareholders.

Public Corporation

A corporation whose shares are publicly traded on stock exchanges.

Private Corporation

A corporation owned by a small number of shareholders and not traded publicly.

Sole Proprietorship

A business owned and operated by a single individual.

Partnership

A business owned by two or more individuals who share profits and liabilities.

Merchantability

An implied warranty that goods will be fit for a general purpose.

Price Earnings Ratio (P/E Ratio)

A ratio for valuing a company that relates its current share price to its earnings per share. A higher P/E ratio often indicates that shareholders have confidence in the company’s future earnings potential.

Freight-out

Shipping costs that a seller incurs when delivering goods to customers.

Account Receivable Turnover Ratio

A ratio that measures how efficiently a company uses its assets.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue.

PS

Earnings of the company in the current year per share. A higher PS is generally better, indicating stronger profitability.

Profit Margin

The net income of a company expressed as a percentage of its revenue. A higher profit margin is generally better and is useful for comparison with other companies and prior years.

Working Capital

The difference between a company's current assets and its current liabilities. It indicates a company's short-term liquidity and operational efficiency; a higher value is generally better.