Accounting: Tools for Business Decision Making - Chapters 1 & 2

Vocabulary flashcards covering fundamental accounting concepts, forms of business organization, financial statements, annual report components, and classified balance sheet classifications.

Sole Proprietorship

A business organization owned and controlled by one person, which is simple to establish and offers tax advantages.

Partnership

A business organization owned by two or more people, featuring shared control, simple establishment, broader skills and resources, and tax advantages.

Corporation

A separate legal entity owned by stockholders with transferable shares, lack of personal liability, easier ability to raise funds, but subject to higher income taxes.

Accounting

The information system that identifies, records, and communicates the economic events of an organization to interested users.

Internal Users

Managers who plan, organize, and run a business from within the organization.

External Users

Individuals and groups outside the company—such as investors, creditors, taxing authorities, customers, labor unions, and regulatory agencies—who use financial information.

Data Analytics

The process of analyzing data, often employing software and statistics, to draw inferences about a company's economic events, suppliers, and customers.

Sarbanes-Oxley Act (SOX)

Legislation passed by Congress to reduce unethical corporate behavior, increase top management accountability, and decrease the likelihood of future corporate scandals.

Financing Activities

Business activities involved in raising money from outside sources, including borrowing funds (debt financing) or issuing stock (equity financing).

Investing Activities

Business activities involving the purchase or sale of resources (assets) needed to operate the business, such as property, plant, equipment, or securities of other companies.

Operating Activities

Day-to-day actions undertaken by a business to produce and sell a product or provide a service.

Revenue

The increase in assets or decrease in liabilities resulting from the sale of goods or performance of services in the normal course of business.

Expenses

The cost of assets consumed or services used in the process of generating revenues.

Net Income

The amount by which total revenues exceed total expenses for a specific period.

Net Loss

The amount by which total expenses exceed total revenues for a specific period.

Accounts Receivable

The right to receive money in the future from a customer as the result of a sale.

Accounts Payable

Obligations to pay suppliers in the future for goods or services purchased on credit.

Income Statement

A financial statement that reports a company's revenues and expenses to show its success or profitability during a specific period of time.

Retained Earnings Statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period.

Balance Sheet

A financial statement that presents a picture at a specific point in time of what a business owns (assets) and what it owes (liabilities and stockholders' equity).

Statement of Cash Flows

A financial statement that provides information about cash receipts and cash payments for a specific period, classified by operating, investing, and financing activities.

Management Discussion and Analysis (MD&A)

A section of an annual report presenting management's views on the company's ability to pay near-term obligations, fund operations, and discuss results of operations.

Notes to the Financial Statements

Explanations and detailed descriptions that clarify items in the financial statements and describe significant accounting policies.

Auditor's Report

A report prepared by an independent certified public accountant (CPA) stating an opinion on the fairness of the financial statement presentation.

Unqualified Opinion

An auditor's expressed opinion indicating satisfaction that financial statements present fairly the financial position and results of operations in conformity with GAAP.

Classified Balance Sheet

A balance sheet that groups similar assets and similar liabilities together based on economic characteristics.

Current Assets

Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer.

Operating Cycle

The average time required to purchase inventory, sell it on account, and collect cash from customers.

Property, Plant, and Equipment

Assets with relatively long useful lives that are currently used in operating the business, recorded at cost less accumulated depreciation.

Depreciation

The systematic allocation of the cost of an asset to expense over a number of years.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded to date for a specific asset.

Intangible Assets

Non-current assets that do not have physical substance but convey rights and privileges, such as patents, copyrights, trademarks, and goodwill.

Current Liabilities

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Long-Term Liabilities

Obligations that a company expects to pay after one year, such as bonds payable or long-term notes payable.

Stockholders' Equity

The owners' claim to total assets, comprising common stock (investment by owners) and retained earnings (net income retained in the business).