Intermediate Accounting Exam Review - Chapters 1-4

Comprehensive vocabulary flashcards covering financial reporting environments, GAAP standard setting, the accounting cycle, balance sheet disclosures, income statement components, earnings quality, and cash flows.

Financial Accounting

The branch of accounting focused on providing financial information to external users, such as investors and creditors, to evaluate future cash flows and make investment or credit decisions.

Cash Basis Accounting

An accounting measurement model that calculates net operating cash flow as the direct difference between cash receipts and cash disbursements from operating transactions during a period.

Accrual Basis Accounting

An accounting measurement model that measures revenues when earned and expenses when incurred, regardless of when cash is actually received or paid.

Generally Accepted Accounting Principles (GAAP)

A dynamic set of broad and specific guidelines that companies must follow when measuring and reporting financial information in financial statements and disclosure notes.

Securities and Exchange Commission (SEC)

The U.S. federal agency created by Congress following the stock market crash of 1929 to restore investor confidence and regulate financial reporting for publicly traded companies.

Committee on Accounting Procedure (CAP)

The first private-sector standard-setting body in the U.S. (1938–1959), which operated as a committee of the AIA/AICPA and issued 51 Accounting Research Bulletins (ARBs).

Accounting Principles Board (APB)

The private-sector standard-setting body from 1959 to 1973 that issued 31 Opinions, 4 Statements, and various Interpretations before being replaced by the FASB.

Financial Accounting Standards Board (FASB)

The independent private-sector body established in 1973 to set U.S. accounting standards, supported by the Financial Accounting Foundation (FAF) and composed of 7 full-time members.

Emerging Issues Task Force (EITF)

A group created in 1984 under the FASB, consisting of approximately 15 members, to identify and resolve emerging financial reporting implementation issues rapidly.

FASB Accounting Standards Codification

The single, exclusive source of authoritative nongovernmental U.S. GAAP, organizing thousands of pronouncements into roughly 90 accounting topics.

International Accounting Standards Board (IASB)

The independent global standard-setting body established in 2001 to develop International Financial Reporting Standards (IFRS).

Hierarchy of Accounting Standard-Setting Authority

The framework establishing standard-setting authority flowing from Congress to the SEC, which delegates private-sector standard setting sequentially to CAP, APB, and FASB.

FASB Standard-Setting Process

The 7-step due process mechanism through which the FASB identifies issues, deliberates at public meetings, issues Exposure Drafts, holds public roundtables, and publishes Accounting Standards Updates.

Economic Entity Assumption

The GAAP underlying assumption presumes that economic events can be identified specifically with a particular economic entity.

Going Concern Assumption

The GAAP underlying assumption anticipating that a business entity will continue to operate indefinitely into the foreseeable future.

Periodicity Assumption

The GAAP underlying assumption allowing the life of a company to be divided into artificial time periods to provide timely financial reports.

Historical Cost

A measurement attribute basing asset or liability values on the original exchange transaction value adjusted subsequently for depreciation or amortization.

Net Realizable Value

A measurement attribute defined as the estimated selling price in the ordinary course of business minus reasonably predictable costs of completion, disposal, and transportation.

Fair Value

The measurement attribute defining the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

External Events

Economic transactions that involve an exchange between the enterprise and another separate external entity.

Internal Events

Economic events that directly alter the financial position of a company but do not involve an exchange transaction with an outside entity.

Double-Entry System

An accounting system referring to the dual effect that every transaction has on the fundamental accounting equation.

General Ledger

The complete collection of all asset, liability, shareholders' equity, revenue, expense, gain, loss, and dividend accounts maintained by a business.

Expanded Accounting Equation

The detailed expansion of the accounting equation showing that Assets equal Liabilities plus Paid-In Capital plus Retained Earnings (modified by Revenues, Gains, Expenses, Losses, and Dividends).

Prepaid Expenses

Assets created when cash is paid in one period for goods or services that will be consumed and expensed in a future reporting period.

Deferred Revenues

Liabilities created when cash is received from customers in advance of providing goods or services.

Accrued Liabilities

Liabilities recognized for expenses that have been incurred during a reporting period but have not yet been paid in cash.

Accrued Receivables

Assets recognized when revenue has been earned during a period prior to receiving cash payment from the customer.

Perpetual Inventory System

An inventory system in which inventory and cost of goods sold account balances are continuously updated for every purchase, sale, and return.

Periodic Inventory System

An inventory system where inventory and cost of goods sold account balances are calculated and adjusted only at the end of the reporting period.

Balance Sheet Classifications

The formal grouping of financial statement elements on the balance sheet into current assets, long-term assets, current liabilities, long-term liabilities, paid-in capital, and retained earnings.

Liquidity

The ability of a company to convert its assets into cash to satisfy short-term financial obligations as they come due.

Long-Term Solvency

An assessment of a company's ability to pay all of its financial obligations, including long-term debt liabilities.

Financial Flexibility

The capability of a company to alter its cash flows to take advantage of unexpected investment opportunities and operational needs.

Cash Equivalents

Short-term, highly liquid investments with original maturity dates of three months or less from the date of purchase.

Working Capital

A measure of short-term liquidity calculated as $\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities}$.

Current Ratio

A fundamental liquidity ratio computed as $\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$.

Acid-Test Ratio

A stringent liquidity ratio calculated as $\text{Acid-Test Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}$, where quick assets include cash, short-term investments, and accounts receivable.

Debt to Equity Ratio

A solvency ratio comparing creditor financing to owner financing, calculated as $\text{Debt to Equity Ratio} = \frac{\text{Total Liabilities}}{\text{Shareholders' Equity}}$.

Times Interest Earned Ratio

A solvency ratio measuring income coverage of interest obligations, calculated as $\text{Times Interest Earned Ratio} = \frac{\text{Net Income} + \text{Interest Expense} + \text{Income Tax Expense}}{\text{Interest Expense}}$.

Management's Discussion and Analysis (MD&A)

A required annual report section providing management's perspective on results of operations, liquidity, capital resources, off-balance sheet arrangements, and critical accounting estimates.

Proxy Statement

A document sent annually to all shareholders inviting them to the annual meeting and disclosing compensation and stock option information for directors and top executives.

Single-Step Income Statement

An income statement format that lists all revenues and gains together, then subtracts all expenses and losses together (except income taxes) in one single step.

Multiple-Step Income Statement

An income statement format that classifies items into operating and nonoperating categories and highlights intermediate subtotals like gross profit and operating income.

Restructuring Costs

Costs associated with management plans to materially change the scope of business operations, recognized in the period the exit or disposal obligation is incurred.

Earnings Quality

The degree to which reported earnings (income) serve as an accurate predictor of a company's future earnings.

Permanent Earnings

Income components resulting from transactions that are likely to generate similar profits in the future, included in income from continuing operations.

Temporary Earnings

Income components resulting from transactions that are not likely to recur in the foreseeable future or will have a different impact on future earnings.

Income Smoothing

The practice of altering estimates and assumptions within GAAP rules to create a smooth, stable pattern of reported earnings over time.

Classification Shifting

The improper practice of shifting operating expenses into nonoperating expense categories to artificially report higher operating income.

Discontinued Operations

The sale or held-for-sale disposal of a business component that represents a strategic shift with a major effect on operations, reported net of tax below continuing operations.

Retrospective Approach

An accounting change implementation method that revises prior financial statements as if the new accounting principle had always been applied.

Prospective Approach

An accounting change implementation method where the change is applied only to current and future reporting periods without revising past financial statements.

Prior Period Adjustment

A direct correction to the beginning retained earnings balance recorded when a material error from a previously published financial statement is discovered.

Basic Earnings Per Share

A key profitability ratio reported on the face of the income statement, calculated as $\text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Stock Dividends}}{\text{Weighted-Average Common Shares Outstanding}}$.

Comprehensive Income

The total change in equity during a reporting period from nonowner transactions, calculated as $\text{Comprehensive Income} = \text{Net Income} + \text{Other Comprehensive Income}$.

Accumulated Other Comprehensive Income (AOCI)

A permanent component of shareholders' equity on the balance sheet that accumulates nonowner gains and losses excluded from net income over time.

Statement of Cash Flows

A required primary financial statement detailing cash receipts and cash disbursements categorized into operating, investing, and financing activities.