Financial Accounting Midterm Vocab

accounts payable

short-term obligations owed to suppliers for goods or services purchased on credit

accounts receivable

expected (legally enforceable) future cash receipts arising from permitting customers to buy now and pay later that can be on credit; typically relatively small balances due within a short time period

adjusting entries

end-of-period journal entries made to convert cash transactions to the accrual basis and ensure revenues and expenses are recognized in the proper period.

entry that updates account balances prior to preparing financial statements; a bookkeeping tool. _________________ never affect the cash account

assets

economic resource used to produce revenue that’s expected to provide a future benefit to the business as a result of past transactions or events

audit

an independent examination of financial statements and disclosures to express an opinion on whether they comply with GAAP

detailed examination of some aspect of a company’s accounting records or operating procedures in order to report the results to interested parties

balance sheet

financial statement that reports a company’s assets and the corresponding claims (liabilities and equity) on those assets as of a specific date (usually as of the end of the accounting period)

book value

the net amount at which an asset or liability is carried on the balance sheet

historical (original) cost of an asset minus accumulated depreciation to date

cash flow statement

a financial statement reporting the aggregate cash inflows and outflows from operating, investing, and financing activities over a reporting period

channel stuffing

a deceptive business practice of shipping excessive or unneeded inventory to distributors ahead of demand to artificially inflate short-term reported revenues

closing

the process at period-end that transfers balances from temporary accounts (revenues, expenses, dividends) into permanent equity accounts (retained earnings) to reset temporary balances to zero

common stock

basic class of corporate stock that has no preferential claim on assets or dividends; certificates that evidence ownership in a company. typically granting voting rights and rights to residual earnings

conservatism

the accounting convention dictating that potential expenses and liabilities are recognized immediately when probable, while revenues and asset gains are only recognized when realized or assured.

cost flow assumptions

methods used to allocate inventory costs between ending inventory and costs of goods sold without requiring physical tracking (e.g., FIFO, LIFO, Weighted Average)

cost of goods sold (COGS)

total cost incurred for the goods sold during a specified accounting period

dividend

a distribution of a portion of an entity’s accumulated earnings to its shareholders, approved by the board of directors

transfer of wealth from a business to its owners

double entry

the foundational bookkeeping system where every financial transaction affects at least two accounts such that total debits always equal total credits.

earnings

the bottom-line profit generated by a firm during a specific period; synonymous with net income or net profit

expenses

an economic sacrifice (decreases in assets or increase in liabilities) that is incurred in the process of generating revenue

financing activities

transactions involving debt, equity, and dividends that alter the size and composition of the entity’s contributed equity and borrowings

gains

increases in assets or decreases in liabilities that result from peripheral or incidental transactions

general journal

the chronological record (book of original entry) in which any accounting transaction could be recorded via journal entries, though commonly limited to adjusting and closing entries and unusual transaction

general ledger

the master collection of all balance sheet and income statement accounts that tracks debits, credits, and cumulative ending balances

income

total economic benefit generated over a period, encompassing both revenues earned from core operations and non-operating gains

income statement

financial report of profitability; measures the difference between revenues and expenses for the accounting period (whether or not cash has been exchanged)

inflation

the general, sustained increase in price levels across an economy, which erodes the purchasing power of money over time

interest

the cost of borrowing funds, or the return earned on lending capital, calculated as a percentage of the principal balance over time

fee paid for the use of funds; represents expense to the borrower and revenue of the lender

internal controls

policies and procedures companies establish to provide reasonable assurance of reducing fraud, providing reliable accounting records, and accomplishing organization objectives

inventory

tangible assets held for sale in the ordinary course of business, in the process of production for such sale, or raw materials to be consumed in production.

investing activies

cash inflows and outflows associated with buying or selling long-term assets, and cash inflows and outflows associated with lending activities and investments in the debt and equity of other companies; one of the three categories of cash inflows and outflows reported on the statement of cash flows

liability

a present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits

liquidity

ability to convert assets to cash quickly and meet short-term obligations

losses

decreases in assets or increases in liabilities that result from peripheral or incidental transactions outside of a company’s core operations

lower-of-cost-or-market rules

an inventory valuation guideline requiring inventory to be recorded at the lower of its historical cost or current market replacement value/net realizable value

matching concept

the accrual principle requiring expenses incurred to generate revenue to be recognized in the same accounting period as the associated revenue

materiality

the threshold at which an omission or misstatement of accounting information could reasonably be expected to influence the decisions of financial statement users

net income

the residual profit remaining after subtracting total expenses, COGS, interest, taxes, and losses from total revenues and gains

operating activies

cash inflows from and outflows for routine, everyday business operations, normally resulting from revenue and expense transactions including interest; one of the three categories of cash inflows and outflows reported on the statement of cash flows

payables

short-term and long-term monetary obligations that an entity is legally bound to pay to third parties

prepaid expense

future expenses that have been paid in cash in advance and are recorded as an asset until the benefits are consumed

product costs

all costs directly or indirectly traceable to acquiring inventory and getting it ready for sale, including transportation-in. capitalized into inventory until sold. contrast with selling and administrative costs

receivables

claims held against debtors for money, goods, or services expected to be collected in the future

retained earnings

the cumulative net income of a corporation retained in the business since inception, less any cumulative dividends distributed to shareholders

revenue

inflows of assets or settlements of liabilities resulting from delivering goods or rendering services as part of central, ongoing operations

selling and administrative costs

non-production period costs incurred to market, sell, and manage the overall business operations (e.g. marketing, executive salries, and corporate rent)

separation of duties

an internal control practice dividing responsibilities among different individuals to prevent error and fraud (e.g. custody vs authorization vs recordkeeping)

shrinkage

the unrecorded loss of inventory due to factors like theft, spoilage, damage or administrative counting errors.

transaction

any business event that directly changed an entity’s financial position and can be measured reliably in monetary terms

unearned revenue

a liability representing cash received from a customer for goods or services that have not yet been delivered or performed