Financial Accounting Core Concepts Flashcards

Vocabulary practice flashcards generated from lecture notes on financial accounting, accounting cycles, financial statements, balance sheet classifications, accounting changes, and time value of money.

Accounting Equation

The foundational equality in accounting represented as $\text{Assets} = \text{Liabilities} + \text{Stockholders' Equity}$, which must remain balanced after every transaction.

Asset

A resource owned by a company that provides future economic benefit.

Liability

An obligation owed to an outside party.

Stockholders’ Equity

The owners’ claim on the company’s assets.

DEAD CLIC

A memory rule standing for: Debits increase Dividends, Expenses, Assets; Credits increase Common Stock, Liabilities, Income.

General Journal

A chronological record of transactions showing accounts, debits, and credits.

General Ledger

A collection of all individual company accounts.

Posting

The process of transferring journal entry information to the appropriate ledger accounts.

Chart of Accounts

A list of accounts used by a company, usually with account numbers.

Trial Balance

A list of account balances used to check that total debits equal total credits mathematically.

Adjusting Entry

An entry made at the end of an accounting period to record revenues or expenses in the proper accounting period prior to preparing financial statements.

Deferral

An accounting scenario where cash flow occurs before the related revenue or expense is recognized.

Prepaid Expense

An expense paid in advance before it is used or consumed.

Unearned Revenue

Cash received before the company performs the related service.

Accrual

An accounting scenario where the accounting event occurs before the related cash transaction.

Accrued Revenue

Revenue earned before cash is received or recorded.

Accrued Expense

An expense incurred before it is paid or recorded.

Temporary Accounts

Revenue, expense, and dividend accounts that are closed at period-end.

Permanent Accounts

Asset, liability, and equity accounts that remain open across accounting periods.

Closing Entries

Entries made to reduce temporary accounts to zero and transfer their balances to retained earnings.

Post-Closing Trial Balance

A trial balance prepared after closing entries that contains only permanent accounts.

Cash-Basis Accounting

An accounting method where revenue and expenses are recognized when cash is received or paid.

Accrual-Basis Accounting

An accounting method required by GAAP where revenue and expenses are recognized when economic activity occurs.

Relevance

A qualitative characteristic of accounting information indicating that information is capable of making a difference in a decision.

Faithful Representation

A qualitative characteristic of accounting information indicating that information accurately represents what actually existed or happened.

Materiality

The significance of information in influencing a user's decision.

Single-Step Income Statement

An income statement that groups revenues/gains and expenses/losses without operating subtotals.

Multi-Step Income Statement

An income statement that separates operating and nonoperating activities and displays intermediate income subtotals.

Gross Profit

The intermediate profit calculated as $\text{Gross Profit} = \text{Net Sales} - \text{Cost of Goods Sold}$.

Income from Operations

The operating profitability calculated as $\text{Income from Operations} = \text{Gross Profit} - \text{Operating Expenses}$.

Discontinued Operation

A business component eliminated as part of a major strategic shift affecting operations and financial results, reported net of tax after income from continuing operations.

Basic EPS

An earnings metric measuring earnings per common share, calculated as $\text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted-Average Common Shares}}$.

Diluted EPS

An earnings per share measure that considers potentially dilutive common shares such as convertible securities.

Earnings Management

Actions intended to influence reported earnings, often to meet financial expectations.

Comprehensive Income

Total change in equity from non-owner sources, calculated as $\text{Comprehensive Income} = \text{Net Income} + \text{Other Comprehensive Income}$.

Other Comprehensive Income

Certain gains and losses that bypass net income but directly affect stockholders’ equity.

Change in Accounting Principle

A change from one acceptable accounting principle to another, handled retrospectively.

Retrospective Treatment

An adjustment method where prior-period financial statements are revised as if the new principle had always been used.

Change in Accounting Estimate

A change resulting from new information about an existing estimate, handled prospectively.

Prospective Treatment

An accounting treatment where changes affect current and future periods without adjusting prior periods.

Accounting Error

A mistake involving mathematics, accounting principles, facts, or omissions, corrected by restating affected prior periods.

Balance Sheet

A financial statement reporting financial position at a specific point in time to evaluate liquidity, solvency, capital structure, and risk.

Current Asset

An asset expected to be converted to cash, sold, or consumed within the operating cycle or generally one year.

Cash Equivalents

Short-term, highly liquid investments generally maturing within three months when acquired.

Current Liability

An obligation expected to be settled within the operating cycle or generally one year.

Treasury Stock

A company's own stock that it has repurchased, reported as a contra-equity account that reduces stockholders’ equity.

Outstanding Shares

Issued shares currently held by shareholders, calculated as $\text{Issued Shares} - \text{Treasury Shares} = \text{Outstanding Shares}$.

Par Value

The stated value assigned to each share of stock, used to calculate common stock balance as $\text{Shares Issued} \times \text{Par Value}$.

Level 1 Fair Value

Fair value measurement based on quoted prices for identical assets or liabilities in active markets.

Level 2 Fair Value

Fair value measurement based on observable inputs other than Level 1 quoted prices, such as similar assets.

Level 3 Fair Value

Fair value measurement based on unobservable inputs and internal assumptions.

Time Value of Money

The economic concept that a dollar today is worth more than a dollar received in the future because it can be invested to earn a return.

Present Value

The current value of future cash flows calculated via discounting as $PV = \frac{FV}{(1 + i)^n}$.

Future Value

The amount an investment will be worth at a future date calculated as $FV = PV(1 + i)^n$.

Simple Interest

Interest calculated only on the original principal, expressed as $\text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time}$.

Compound Interest

Interest earned on the original principal plus previously accumulated interest.

Ordinary Annuity

A series of equal payments or receipts occurring at the end of each period.

Annuity Due

A series of equal payments or receipts occurring at the beginning of each period.

Expected Value

A probability-weighted average of possible outcomes calculated as $\text{Expected Value} = \sum (\text{Probability} \times \text{Outcome})$.