Constructing Financial Statements - Chapter 2

Comprehensive vocabulary flashcards covering the fundamental concepts of financial statements, asset and liability categorization, equity types, and recording transactions using the FSET framework recorded in the Chapter 2 lecture notes.

Economic assets

Resources that are expected to provide a company with future economic benefits.

Balance sheet assets

Economic assets that also have characteristics to be capitalized on the balance sheet, including being owned or controlled by the company and possessing measurable future benefits.

Current assets

Assets expected to be converted into cash or used in operations within the year, or within the operating cycle if it is longer than a year.

Noncurrent assets

Also known as long-term assets, these are not expected to expire or be converted into cash within one year or the next operating cycle.

Operating Cycle

The time between paying cash for goods or employee services rendered and receiving cash from the customers.

Marketable securities

Short-term investments that can be quickly sold to raise cash.

Accounts receivable

Amounts due to the company from customers arising from the sale of products or services on credit.

Inventory

Goods purchased or produced for sale to customers.

Prepaid expenses

Costs paid in advance for rent, insurance, or other services.

Property, plant and equipment (PPE)

Land, factory buildings, warehouses, office buildings, machinery, office equipment, and other items used in the operations of the company.

Intangible assets

Patents, trademarks, franchise rights, goodwill, and other items that provide future benefits but do not possess physical substance.

Mixed-attribute system

A GAAP system that permits the use of various measurement bases for assets, such as historical cost and current fair value.

Historical cost

A measurement base that reports assets at their original cost; it offers faithful representation but typically undervalues assets relative to future benefits.

Fair value

A measurement base obtained from real-time quotes, such as for marketable securities, which is considered both faithful and relevant.

Liabilities

Probable future sacrifices of economic benefits arising from present obligations.

Current liabilities

Obligations due within one year or within the operating cycle; they are usually non-interest-bearing and listed in order of maturity.

Accounts payable

Amounts owed to suppliers for goods and services purchased on credit.

Accrued liabilities

Obligations for expenses that have been recorded but not yet paid, such as wages, utilities, taxes, and interest.

Deferred (unearned) revenue

An obligation created when the company accepts payment in advance for goods or services that it will deliver in the future.

Contributed capital

Cumulative cash inflows received from the issuance of stock less the net cash paid out to repurchase the company’s own stock.

Earned capital

Equity consisting of retained earnings and accumulated other comprehensive income.

Retained earnings

Cumulative profits less any dividends to shareholders.

Accumulated other comprehensive income

Changes to equity that are not part of income and are not reflected in retained earnings.

Treasury stock

The amount paid to reacquire the company’s own common stock.

Accounting Equation

$$Assets = Liabilities + Equity$$

Account

A record of increases and decreases for each asset, liability, equity, revenue, or expense.

Income statement

A report of the results of operations as net income or loss for a period of time, formatted as: $\text{Revenues} - \text{Cost of goods sold} = \text{Gross profit}$, and then subtracting expenses to reach Net income.

Revenue recognition

The principle that revenue be recognized (recorded) only when earned, regardless of when cash is collected.

Matching principle

The accrual accounting practice where expenses are matched when incurred against the related revenue amounts.

Articulation

The linkage of financial statements within and across accounting periods; notably, net income links the income statement to the balance sheet via retained earnings.