Acct 300A Financial Accounting - Chapters 1-3 Vocabulary Flashcards

Vocabulary flashcards covering key concepts, terms, and definitions from Chapters 1-3 notes.

Accrual basis of accounting

Revenue is recognized when earned and expenses are recognized when incurred, regardless of cash receipts or payments.

US GAAP

U.S. Generally Accepted Accounting Principles; the set of standards used to prepare and present financial statements in the United States.

Accounting equation

Assets = Liabilities + Stockholders’ Equity; the basic relation that underlies the balance sheet.

Economic Entity Assumption

Each business is separate from its owners and other entities for accounting purposes.

Monetary Unit Assumption

Economic events are measured in a single stable currency (e.g., dollars) without adjusting for inflation.

Going Concern

Assumption that the entity will continue to operate for the foreseeable future.

Historical Cost Principle

Assets are recorded at their original purchase cost.

Relevance

Qualitative characteristic that makes information useful for decision making; includes predictive and/or confirmatory value and materiality.

Faithful Representation

Qualitative characteristic that information is complete, neutral, and free from material error.

Full Disclosure Principle

All information necessary for users to understand the financial statements, often via footnotes.

Consistency

Same accounting methods are applied from period to period unless a change is justified and disclosed.

Comparability

Financial statements can be compared across time and across different entities.

Verifiability

Different observers can reach consensus that information faithfully represents the underlying economic events.

Timeliness

Information is available to decision makers in time to influence their decisions.

Understandability

Financial information should be clear and intelligible to users with reasonable knowledge of business and accounting.

Fundamental Qualities

Relevance and Faithful Representation—the core attributes of useful information.

Enhancing Qualities

Comparability, Verifiability, Timeliness, Understandability (and Consistency as a supporting attribute).

Asset

A present economic resource controlled by the entity as a result of past events expected to bring future benefits.

Liability

A present obligation of the entity arising from past events, expected to result in an outflow of resources.

Stockholders’ Equity

Owner’s claim on the assets after liabilities are settled; includes common stock and retained earnings.

Normal balance of Asset accounts

Debit increases the balance.

Normal balance of Liability accounts

Credit increases the balance.

Normal balance of Revenue accounts

Credit increases the balance.

Normal balance of Expense accounts

Debit increases the balance.

Normal balance of Dividends

Debit increases the balance.

Debits and Credits

Two-sided recording where debits generally increase assets/expenses and credits generally increase liabilities/equity/revenue.

Journal Entry

A record of a transaction showing the accounts affected and the amounts and directions of the debits and credits.

Trial Balance

A listing of all accounts and their balances at a point in time to verify that total debits equal total credits.

Permanent vs Temporary Accounts

Permanent accounts carry balances forward; temporary accounts (revenues, expenses, dividends) are closed to zero at period end.

Closing Entries

Entries made to transfer net income (or loss) to Retained Earnings and reset temporary accounts to zero.

Income Statement

Financial statement reporting revenues and expenses over a period to show net income or loss.

Balance Sheet

Financial statement summarizing assets, liabilities, and stockholders’ equity at a point in time.

Statement of Retained Earnings

Statement reconciling beginning Retained Earnings with net income and dividends to ending Retained Earnings.

Statement of Cash Flows

Statement showing cash inflows and outflows by operating, investing, and financing activities; reconciles to ending cash.

Five Steps of Revenue Recognition

1) Identify the contract, 2) Identify performance obligations, 3) Determine transaction price, 4) Allocate price to obligations, 5) Recognize revenue when obligations are satisfied.

Valid Contract criteria

Contract has commercial substance; parties are identified; rights and payment terms are defined; collection is probable.

Performance Obligations

Distinct goods/services promised in a contract; if highly dependent, they may be combined into a single obligation.

Transaction Price

Amount the company expects to collect from a customer, possibly adjusted for discounts or variable consideration.

Stand-alone Selling Price

The price at which a good or service would be sold separately; used to allocate the transaction price to performance obligations.

Allocation of price to performance obligations

Allocate the transaction price to each obligation based on its relative stand-alone selling price.

Discontinued Operations

Presentation of the results of a disposed business segment or major geographical area, shown net of tax.

Comprehensive Income

All changes in equity during a period except those from investments by owners and distributions to owners; includes net income and other comprehensive income.

Investments – Held-to-Maturity

Debt securities intended to be held to maturity; measured at amortized cost.

Investments – Available-for-Sale

Debt/securities not classified as trading or held-to-maturity; unrealized gains/losses go to other comprehensive income (OCI).

Investments – Trading

Debt/securities held for short-term profit; unrealized gains/losses are recognized in net income.

Notes to Financial Statements

Supplementary information providing detail and context to the numbers in the financial statements.

Footnotes

Explanatory notes included with financial statements to provide additional detail and disclosures.

Ethics in accounting (AICPA Code of Conduct)

Professional standards emphasizing public interest, integrity, objectivity, independence, and due professional care.