ACCT 3110 Entrance Exam Practice Flashcards

These vocabulary flashcards cover fundamental accounting principles, financial statements, the accounting equation, and transaction analysis based on the ACCT 3110 entrance exam study material.

Corporation

A form of business organization that limits an owner's liability to the amount they have invested in the business, and which provides the least amount of protection for bankers and other creditors.

Financial Accounting System

The organization's system primarily used by investors and creditors to obtain information.

Primary Objective of Financial Reporting

To provide information useful for making investment and credit decisions.

Historical Cost Principle

The principle under which assets are usually reported at their original purchase price (e.g., recording a warehouse at its purchase price of $550,000$ rather than a professional appraisal of $640,000$).

Fundamental Qualitative Characteristics

Relevance and faithful representation, which are required for information to be useful.

International Financial Reporting Standards

Standards that are converging gradually with U.S. standards.

Continuity Assumption

The assumption that a business will continue to operate; preparing financial statements under U.S. GAAP for a business headed for certain bankruptcy would violate this principle.

Accounting Equation

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

Expenses

The costs of doing business.

Net Income

Calculated as revenues minus expenses (e.g., $\$250,000 - \$135,000 = \$115,000$); this item flows from the income statement to the statement of retained earnings.

Common Stock Issuance

A transaction that increases both assets and stockholders' equity.

Revenues

Increases in retained earnings resulting from selling products or performing services.

Income Statement

The financial statement that shows how well a company performed over the past year.

Balance Sheet

The financial statement where the ending balance of 'accounts receivable' is found and which reports assets, liabilities, and equity.

Retained Earnings

The item that flows from the statement of retained earnings to the balance sheet.

Ethics

The practice of making difficult choices under pressure that should be kept in mind for every decision, including those involving accounting.

Accounts Receivable

An asset account representing amounts owed to a company by its customers.

Investment of Cash

A transaction where stockholders put cash into the business, which increases assets and increases stockholders' equity.

Accrual Basis of Accounting

A method of accounting that records transactions like 'purchasing inventory on account' when they occur, unlike the cash basis.

Revenue Recognition

According to U.S. GAAP, revenue should be recognized when the service is performed or the goods have been delivered to the customer.

Unearned Revenue

A liability account that represents money received before a service is performed.

Liquidity

The basis upon which assets and liabilities are ordered on the balance sheet, ranging from most liquid to least liquid.

Closing Entries

Entries made at the end of the period to update the Retained Earnings account; revenues are debited and expenses are credited.

Temporary Accounts

Accounts that are closed at the end of a period, such as supplies expense (Prepaid insurance and Accumulated Depreciation are not closed).

Current Ratio

A ratio that measures the ability to pay current liabilities with current assets (e.g., $\$10.0\,million / \$5.0\,million = 2.0$).

Journal

The place where a transaction is first recorded.

Ledger

The book of accounts where journal entries are posted; it follows the journal in the recording sequence.

Double-entry Accounting System

A system where a debit entry is recorded on the left side of a T-account.

Depreciation

The recording of equipment usage which results in net income, assets, and stockholders' equity all being decreased.