Introduction to Financial Statements - Vocabulary Flashcards

Vocabulary flashcards covering core accounting concepts, financial statements, income statement structures, and retained earnings based on Week 1A lecture notes.

Profit

The difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide those goods or services.

Business

An economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners.

Profitability

Earning a sufficient return to maintain owner interest and investment in the business.

Liquidity

Having enough cash on hand to pay debts and obligations as they come due.

Income Statement

A summary of the revenues, expenses, and net profit or loss of a business for a specific period of time, such as a month or a year.

Balance Sheet

A list of the assets, liabilities, and stockholders' equity as of a specific date, usually the close of the last day of a month or year.

Statement of Stockholders' Equity

A summary of the changes in stockholders' equity, including common stock and retained earnings, that occurred during a specific period of time.

Statement of Cash Flows

A summary of the cash receipts and cash payments from operating, investing, and financing activities for a specific period of time.

Golden Rule of Financial Statements

The essential balance equation stating that $\text{Total Assets} = \text{Total Liabilities} + \text{Total Stockholders' Equity}$.

Revenues

Increases in stockholders' equity that result from operating a business, such as sales, rent revenue, or fees earned.

Expenses

Decreases in stockholders' equity that result from operating a business, such as cost of goods sold, salaries, advertising, and rent.

Single-Step Income Statement

An income statement format containing just a few sections, subsections, and subtotals, where revenues and expenses are each totaled once to calculate net income directly using $\text{Total Revenues} - \text{Total Expenses} - \text{Tax} = \text{Net Income}$.

Multiple-Step Income Statement

An income statement format containing several sections, subsections, and subtotals that separates gross profit and operating income before calculating net income.

Gross Profit

The key income statement metric calculated as revenue minus cost of goods sold ($\text{Sales} - \text{Cost of Goods Sold} = \text{Gross Profit}$).

Operating Income

The income calculated by subtracting operating expenses from gross profit ($\text{Gross Profit} - \text{Operating Expenses} = \text{Operating Income}$).

Dividends

Distributions of profit paid out to stockholders that are declared and authorized by the board of directors and reduce retained earnings upon declaration.

Cash Dividends

A cash payout of earnings to stockholders that requires sufficient retained earnings, sufficient cash, and formal action by the board of directors.

Retained Earnings Statement

A financial report showing how retained earnings grow with net income and shrink with declared dividends during a period using the formula $\text{Beginning RE} + \text{Net Income} - \text{Dividends} = \text{Ending RE}$.