Accounting Chapter 2: Introduction to Financial Statements

Comprehensive vocabulary flashcards covering basic financial statements, accounting elements, equity transactions, and income quality principles based on Chapter 2 accounting notes.

Stakeholders

People or groups interested in a business, including owners, investors, creditors, employees, managers, government, customers, and suppliers.

Income Statement

The first financial statement in order of preparation; answers the key question: 'Did we make money?'

Statement of Owner's Equity

The second financial statement in order of preparation; shows how the owner's equity changed over a specific period of time.

Balance Sheet

The third financial statement in order of preparation; details what the business owns, owes, and what it is worth.

Statement of Cash Flows

The fourth financial statement in order of preparation; shows where cash came from and where it went.

Accounting Equation

The foundational formula of accounting expressed as $\text{Assets} = \text{Liabilities} + \text{Owner's Equity}$ or rewritten as $\text{Equity} = \text{Assets} - \text{Liabilities}$.

Assets

Things or economic resources that the business owns or controls.

Liabilities

Amounts or obligations that the business owes to outside parties.

Owner's Equity

The net worth of the business to the owner, representing what remains after subtracting liabilities from assets.

Revenue

Money or value earned from the main, regular operations and purpose of the business.

Gains

An increase in equity resulting from an extra, unusual, or incidental activity outside normal business operations.

Investment by Owners

An increase in equity occurring when the owner puts money or assets into the business.

Expenses

The regular costs incurred from running normal day-to-day business operations, such as rent, supplies, utilities, and paying employees.

Losses

A decrease in equity resulting from an unusual or incidental activity outside normal operations.

Distribution to Owners

A decrease in equity occurring when the business gives money or assets back to the owner.

Comprehensive Income

Certain changes in equity that result from non-owner sources.

Net Income

The positive financial result when a business earns more than it spent, defined by $\text{Revenue} + \text{Gains} > \text{Expenses} + \text{Losses}$ or basic formula $\text{Revenue} - \text{Expenses} = \text{Net Income}$.

Net Loss

The negative financial result when a business spent or lost more than it earned, defined by $\text{Expenses} + \text{Losses} > \text{Revenue} + \text{Gains}$.

High-Quality Net Income

Income that mostly comes from revenue and normal business operations rather than one-time or infrequent events.

Lower-Quality Net Income

Income where a large portion comes from infrequent or unusual gains that may not happen again.

Statement of Owner's Equity Formula

The calculation used to determine ending owner's equity: $\text{Beginning Equity} + \text{Investments} + \text{Net Income} - \text{Distributions} = \text{Ending Equity}$.