Financial Accounting Flashcards

Flashcards from Financial Accounting: Tools for Business Decision Making Tenth Edition Kimmel ● Weygandt ● Mitchell Chapter 2

Current Assets

Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer. Common types are cash, short-term investments, receivables, inventories, and prepaid expenses.

Operating Cycle

The average time it takes from the purchase of inventory, to the sale of goods, and then to the collection of cash from customers.

Accounts Receivable

Outstanding IOUs (“I owe you”) by a customer from selling goods or providing services. Typically considered as current assets.

Notes Receivable

Balance due on a promissory note, legally binding IOUs. Can be short-term (Current assets) or long-term (Long-term investments). Refers to the principal component ($ borrowed), with a separate interest component.

Inventories

Goods held for sale. Company expects to sell the inventory within one year.

Supplies

Assets used in day-to-day operation. Company expects to use up the supply within one year.

Prepaid Expenses

Payments made in advance for items such as rents and insurance. Classified as assets.

Long-Term Investments

Investments in stocks and bonds of other corporations that are held for more than one year. Investments in long-term assets such as land or buildings that a company is NOT currently using in its operating activities. Long-term notes receivable.

Property, Plant, and Equipment

Long useful lives, currently used in operations. Includes land, buildings, equipment, delivery vehicles, and furniture.

Depreciation

Allocating the cost of assets to a number of years (“useful life” of an asset).

Depreciation Expense

Amount of the allocation for one accounting period.

Accumulated Depreciation

Total amount of depreciation expensed thus far in the asset’s life. Contra-asset account (contra means “reduction of”)

Intangible Assets

Assets that do NOT have physical substance. Includes goodwill, patents, copyrights, and trademarks or trade names.

Current Liabilities

Obligations the company is to pay within the next year or operating cycle, whichever is longer. Examples are accounts payable, salaries and wages payable, notes payable, interest payable, income taxes payable, and unearned revenue.

Accounts Payable

Arising from operating activities such as purchasing goods on credit from suppliers and is classified as a current liability.

Notes Payable

Arising from financing activities, and can be current or long-term liabilities.

Unearned Revenue

A debt owed to a customer who has prepaid for goods or services because the company has not earned the revenue yet! Classifed as a liability.

Long-Term Liabilities

Obligations a company expects to pay after one year. Include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.

Common Stock

Investments of assets into the business by the stockholders.

Retained Earnings

Income retained for use in the business

Ratio Analysis

Expresses the relationship among selected items of financial statement data; used for Intracompany, Industry-average, and Intercompany comparisons

Profitability Ratios

Measure the income or operating success of a company for a given period of time.

Liquidity Ratios

Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Solvency Ratios

Measure the ability of the company to survive over a long period of time.

Earnings per Share (EPS)

Measures the net income earned on each share of common stock. Used to compare earnings per share of a single company over time.

Working Capital

The difference between the amounts of current assets and current liabilities; measures liquidity.

Solvency

The ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.

Debt to Assets Ratio

Measures the percentage of total financing provided by creditors (debt financing) rather than stockholders (equity financing)

Free Cash Flow

Net cash provided by operating activities after adjusting for capital expenditures and dividends paid.

Generally Accepted Accounting Principles (GAAP)

A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes in the USA.

Financial Accounting Standards Board (FASB)

Primary accounting standard-setting body in the U.S.

International Accounting Standards Board (IASB)

Creates international accounting standards (called IFRS) used by over 115 countries

Relevance

Makes a difference in a business decision, provides information that has predictive value, or has confirmatory value.

Faithful Representation

Information accurately depicts what really happened, is complete, neutral, and free from error.

Materiality

An item is material when its size makes it likely to influence the decision of an investor or creditor.

Comparability

Results when different companies use the same accounting principles.

Consistency

Means that a company uses the same accounting principles and methods from year to year.

Monetary Unit Assumption

Requires that only those things that can be expressed in money are included in the accounting records

Economic Entity Assumption

States that every economic entity can be separately identified and accounted for

Periodicity Assumption

States that the life of a business can be divided into artificial time periods

Going Concern Assumption

States that the business will remain in operation for the foreseeable future

Historical Cost Principle

Dictates companies record assets at cost; also called the cost principle

Fair Value Principle

Indicates that assets and liabilities should be reported at fair value

Full Disclosure Principle

Requires discloser of all circumstances and events that would make a difference to financial statement users

Revenue Recognition Principle

Revenue is recognized (recorded in the books) when it is earned (work is done or product is delivered) and realized (assets are received and are readily convertible into cash).

Expense Recognition (Matching) Principle

expenses should be recognized in the same period as the revenues to which they relate.