Ch2 flashcards

Classified statement of financial position

A statement that groups together similar assets and liabilities using standard classifications.

Comparability

An enhancing qualitative characteristic that allows users to understand similarities and differences among items.

Conceptual framework

A coherent system of interrelated objectives and fundamentals leading to consistent standards for financial accounting.

Contra asset account

An account that reduces another related asset account on the statement of financial position.

Cost constraint

The constraint ensuring that the value of information in financial reporting exceeds the cost of providing it.

Current assets

Assets expected to be converted into cash, sold, or used up within one year.

Current liabilities

Obligations to be paid or settled within one year.

Current portion of long-term debt

The part of a non-current loan that is repayable within the current year.

Current ratio

A liquidity measure assessing a company's short-term debt-paying ability, calculated as current assets divided by current liabilities.

Debt to total assets

A solvency measure showing the percentage of total financing provided by lenders, calculated as total liabilities divided by total assets.

Deferred revenue

A liability representing cash receipts from customers that have not yet met revenue recognition criteria.

Elements of financial statements

Broad categories used to group financial information for presentation, such as assets, liabilities, and equity.

Fair value

An estimate of the price for purchasing an asset or settling a liability today under normal conditions.

Fair value basis of accounting

Accounting method where assets are recognized at their fair values.

Faithful representation

Information that reflects economic reality; must be complete, neutral, and free from material error.

Going concern assumption

Assumption that a business will continue operating for the foreseeable future.

Goodwill

The value of favorable, unidentifiable attributes related to a company, calculated during acquisitions.

Historical cost basis of accounting

Basis stating that assets and liabilities are recorded at their acquisition cost.

Intangible assets

Long-lived assets without physical substance, representing privileges or rights.

Inventory

Goods held for sale to customers.

Liquidity ratios

Measures of a company's short-term ability to pay its maturing obligations.

Long-term investments

Investments in debt and equity securities held for many years.

Non-current assets

Assets not expected to be converted to cash or used up within one year.

Non-current liabilities

Obligations not expected to be paid or settled within one year.

Notes payable

Amounts owed to suppliers or banks, typically with interest, supported by a written promise.

Notes receivable

Amounts owed by customers, typically interest-bearing with a written promise.

Objective of financial reporting

To provide financial information useful for decision-making by investors and creditors.

Operating cycle

Time taken to pay cash for goods and services and then receive cash from customers.

Prepaid expenses

Costs paid in advance that benefit more than one period, initially recorded as assets.

Price-earnings (P-E) ratio

A profitability measure ratio of market price of each share to earnings per share.

Profitability ratios

Measures of operating success for a specific period, including gross profit margin and return on assets.

Property, plant, and equipment

Tangible assets with long useful lives used to operate the business.

Relevance

Information that influences a user's decision, possessing predictive and confirmatory value.

Solvency ratios

Measures of a company's ability to meet long-term obligations.

Supplies

Consumable items used in running a business.

Timeliness

Information available in time to influence decisions.

Trading investments

Investments acquired for the purpose of quick resale.

Understandability

Information that is clearly and concisely classified and presented.

Verifiability

Characteristic ensuring that different knowledgeable users agree information is faithfully represented.

Working capital

Liquidity measure calculated by subtracting current liabilities from current assets.