Financial and Managerial Accounting - Chapter 2

Accounting Equation

Assets are equal to the sum of liabilities plus owners' equity.

Articulation

The close relationship that exists among the financial statements that are prepared on the basis of the same underlying transaction information.

Assets

Economic resources owned by an entity

Balance Sheet

The financial statement showing the financial position of an enterprise by summarizing its assets, liabilities, and owners' equity at a point in time. Also called the statement of financial position.

Business Entity

An economic unit that controls resources, incurs obligations, and engages in business activities.

Capital Stock

Transferable units of ownership in a corporation. A broad term that can refer to common stock, preferred stock, or both.

Corporation

A business organized as a separate legal entity and chartered by a state, with ownership divided into transferable shares of capital stock.

Cost Principle

The widely used principle of accounting for assets at their original cost to the current owner.

Creditor

A person or organization to whom debt is owed.

Deflation

A decline in the general price level, resulting in an increase in the purchasing power of the monetary unit.

Disclosure

The accounting principle of providing with financial statements any financial and other facts that are necessary for proper interpretation of those statements.

Expenses

the cost of goods or services used up in the process of obtaining revenue.

Financial Activities

A category in the statement of cash flows that reflects the results of debt and equity financing transactions.

Financial Statement

A declaration of information believed to be true and communicated in monetary terms.

Going-concern Assumption

An assumption by accountants that a business will operate in the foreseeable future unless specific evidence suggests that this is not a reasonable assumption.

Income Statement

A financial statement summarizing the results of operations of a business by matching its revenue and related expenses for a particular accounting period. Shows the net income or net loss.

Inflation

an increase in the general price level, resulting in a decline in the purchasing power of the monetary unit.

Investing Activities

A category in the statement of cash flows that reflects the results of purchases and sales of assets, such as land, buildings, and equipment.

Liabilities

Debts or obligations of an entity that resulted from past transactions. They represent the claims of creditors on the enterprise's assets.

Liquidity

Having the financial ability to pay debts as they become due.

Negative Cash Flow

A payment of cash that reduces the enterprise's cash balance.

Operating activities

A category in the statement of cash flows that includes the cash effects of all revenues and expenses included in the income statement.

Owners' Equity

The excess of assets over liabilities. The amount of the owners' investment in the business, plus profits from successful operations that have been retained in the business.

Partnership

An unincorporated form of business organization in which two or more persons voluntarily associate for purposes of carrying out business activities.

Positive Cash Flows

Increases in cash that add to the enterprise's cash balance.

Retained Earnings

That portion of stockholders' (owners') equity resulting from profits earned and retained in the business.

Revenues

Increases in the enterprise's assets as a result of profit-oriented activities.

Sole Proprietorship

an unincorporated business owned by a single individual.

Stable-Dollar Assumption

An assumption by accountants that the monetary unit used in the preparation of financial statements is stable over time or changes at a sufficiently slow rate that the resulting impact on financial statements does not distort the information.

Statement of Cash Flows

An activity statement that explains the enterprise's change in cash in terms of its operating, investing, and financing activities.

Statement of Financial Position

The financial statement showing the financial position of an enterprise by summarizing its assets, liabilities, and owners' equity at a point in time. Also called the balance sheet.

Stockholders

owners of capital stock in a corporation

Stockholders' Equity

The owners' equity of an enterprise organized as a corporation.

Window Dressing

Measures taken by management specifically intended to make a business look as strong as possible in its balance sheet, income statement, and statement of cash flows