Financial Information and Accounting Concepts

These flashcards cover key terms and concepts from the chapter on Financial Information and Accounting Concepts. They include definitions of accounting principles, financial statements, and financial ratios.

What is accounting?

The process of capturing, identifying, measuring, and reporting a company's financial transactions.

What is financial accounting?

The area of accounting concerned with preparing financial statements and other information for users outside the organization.

What is management accounting?

The area of accounting concerned with preparing data for use by managers within the organization.

What is bookkeeping?

Recordkeeping; the clerical aspect of accounting.

What do private accountants do?

Work for corporations, government agencies, and not-for-profit organizations; also called corporate accountants.

Who is a controller?

The highest-ranking accountant in a company, responsible for overseeing all accounting functions.

What are certified public accountants (CPAs)?

Professionally licensed accountants who meet certain requirements for education and experience and who pass a comprehensive examination.

What are public accountants?

Professionals who provide accounting services to other businesses and individuals for a fee.

What is an audit?

Formal evaluation of the fairness and reliability of a client’s financial statements.

What are generally accepted accounting principles (GAAP)?

Standards and practices used by publicly held corporations in the United States in the preparation of financial statements.

What are external auditors?

Independent accounting firms that provide auditing services for public companies.

What are international financial reporting standards (IFRS)?

Accounting standards and practices used in many countries outside the United States.

What is Sarbanes-Oxley?

The informal name of comprehensive legislation designed to improve the integrity and accountability of financial information.

What are assets?

Any things of value owned or leased by a business.

What are liabilities?

Claims against a firm’s assets by creditors.

What is owners’ equity?

The portion of a company’s assets that belongs to the owners after obligations to all creditors have been met.

What is the accounting equation?

The equation stating that assets equal liabilities plus owners’ equity.

What is double-entry bookkeeping?

A method of recording financial transactions that requires a debit entry and credit entry for each transaction to ensure that the accounting equation is always kept in balance.

What is the matching principle?

The fundamental principle requiring that expenses incurred in producing revenue be deducted from the revenues they generate during an accounting period.

What is accrual basis?

An accounting method in which revenue is recorded when a sale is made and an expense is recorded when it is incurred.

What is cash basis?

An accounting method in which revenue is recorded when payment is received and an expense is recorded when cash is paid.

What is depreciation?

An accounting procedure for systematically spreading the cost of a tangible asset over its estimated useful life.

What does closing the books mean?

Transferring net revenue and expense account balances to retained earnings for the period.

What is a balance sheet?

A statement of a firm’s financial position on a particular date; also known as a statement of financial position.

What is a fiscal year?

Any 12 consecutive months used as an accounting period.

What are current assets?

Cash and items that can be turned into cash within one year.

What are fixed assets?

Assets retained for long-term use, such as land, buildings, machinery, and equipment; also referred to as property, plant, and equipment.

What are current liabilities?

Obligations that must be met within a year.

What are long-term liabilities?

Obligations that fall due more than a year from the date of the balance sheet.

What are retained earnings?

The portion of shareholders’ equity earned by the company but not distributed to its owners in the form of dividends.

What is an income statement?

A financial record of a company’s revenues, expenses, and profits over a given period of time; also known as a profit-and-loss statement.

What is net income?

Profit (or loss) incurred by a firm, determined by subtracting expenses from revenues; casually referred to as the bottom line.

What are expenses?

Costs created in the process of generating revenues.

What are cost of goods sold?

The cost of producing or acquiring a company’s products for sale during a given period.

What is gross profit?

The amount remaining when the cost of goods sold is deducted from net sales; also known as gross margin.

What are operating expenses?

All costs of operation that are not included under cost of goods sold.

What is EBITDA?

Earnings before interest, taxes, depreciation, and amortization.

What is a statement of cash flows?

A statement of a firm’s cash receipts and cash payments that presents information on its sources and uses of cash.

What is return on sales?

The ratio between net income after taxes and net sales; also known as the profit margin.

What is return on equity?

The ratio between net income after taxes and total owners’ equity.

What is working capital?

Current assets minus current liabilities.

What are earnings per share?

A measure of a firm’s profitability for each share of outstanding stock, calculated by dividing net income after taxes by the average number of shares of common stock outstanding.

What is the current ratio?

A measure of a firm’s short-term liquidity, calculated by dividing current assets by current liabilities.

What is the quick ratio?

A measure of a firm’s short-term liquidity, calculated by adding cash, marketable securities, and receivables and then dividing that sum by current liabilities; also known as the acid-test ratio.

What is the inventory turnover ratio?

A measure of the time a company takes to turn its inventory into sales, calculated by dividing cost of goods sold by the average value of inventory for a period.

What is the accounts receivable turnover ratio?

A measure of the time a company takes to turn its accounts receivable into cash, calculated by dividing sales by the average value of accounts receivable for a period.

What is the debt-to-equity ratio?

A measure of the extent to which a business is financed by debt as opposed to invested capital, calculated by dividing the company’s total liabilities by owners’ equity.

What is the debt-to-assets ratio?

A measure of a firm’s ability to carry long-term debt, calculated by dividing total liabilities by total assets.

What is a distributed ledger?

Method of verifying and recording transactions that replaces the individual ledgers of market participants with a shared ledger that everyone can access.

What is blockchain?

A type of distributed ledger in which each new transaction is captured in a “block,” which is then appended to the previous block in a continuous chain.