Chapter 1 Key Terms Practice Flashcards

Flashcards covering key accounting terms, principles, assumptions, and regulatory bodies from Chapter 1.

What is the liability created by a purchase on account?

Account payable

What asset represents a claim against a customer created by selling merchandise or services on credit?

Account receivable

What information system measures, records, and reports financial information about a company to assist user decision making?

Accounting

How is the accounting equation expressed?

$$\text{Assets} = \text{Liabilities} + \text{Equity}$$

What is the electronic database maintained by the Financial Accounting Standards Board (FASB) containing all standards that make up GAAP?

Accounting Standards Codification

What term describes transactions between two independent parties?

Arm’s-length transactions

What list shows assets, liabilities, and stockholders’ equity as of a specific date, usually at the close of the last day of a month or year?

Balance sheet

What accounting concept limits economic data in the accounting system to data related directly to the activities of the business?

Business entity assumption

What account represents ownership rights issued by a corporation to investors that bears no preference rights?

Common stock

What concept states that an asset should be recorded and maintained in the accounting records at its initial transaction price?

Cost principle (or historical cost principle)

What principle, also known as the matching principle, requires expenses to be recorded in the same period as the related revenue?

Expense recognition principle

What branch of accounting is concerned with recording transactions using GAAP and preparing periodic statements?

Financial accounting

What authoritative body has the primary responsibility for developing accounting principles?

Financial Accounting Standards Board (FASB)

What is the collection of accounting standards, principles, and assumptions that define how financial information should be reported?

Generally accepted accounting principles (GAAP)

What assumption requires that financial reports be prepared assuming the entity will continue operating in the future?

Going concern assumption

What organization issues International Financial Reporting Standards for many countries outside the United States?

International Accounting Standards Board (IASB)

What business form consists of one or more entities filing an operating agreement with a state and is treated as a partnership for tax purposes?

Limited liability company (LLC)

What accounting assumption requires that financial reports be expressed in a single currency?

Monetary unit assumption

What is a fiscal year that ends when business activities have reached the lowest point in an annual operating cycle?

Natural business year

What is the amount by which revenues exceed expenses?

Net income (or net profit)

What assets are created by making advanced payments for items such as insurance premiums or supplies to be used in the future?

Prepaid expenses

Which oversight body for the accounting profession was established by the Sarbanes-Oxley Act?

Public Company Accounting Oversight Board (PCAOB)

How is the ratio of liabilities to stockholders’ equity computed?

$$\text{total liabilities} / \text{total stockholders’ equity}$$

What principle states that revenues are recorded when earned, such as when services are performed or products are delivered?

Revenue recognition principle

What act was passed by Congress to restore public confidence and trust in the financial statements of companies?

Sarbanes-Oxley Act (SOX)

Which U.S. government agency has authority over the accounting and financial disclosures for companies whose stock is traded publicly?

Securities and Exchange Commission (SEC)

What report summarizes the cash receipts and cash payments for a specific period of time?

Statement of cash flows

What accounting assumption allows a company to report its economic activities on a regular basis for a specific period of time?

Time period assumption

What characteristic of financial information requires clear and concise reports that facilitate user interpretation?

Understandability

What term describes the stockholders' rights to the assets in a corporation after all liabilities have been paid?

Stockholders’ equity