Accounting Midterm Vocab

accounting

a system that collects and processes (analyzes, measures, and records) financial information about an organization and reports that information to decision makers

accounting entity

the organization for which financial data are to be collected

accounting period

the time period covered by financial statements

audit

an examination of the financial reports to ensure that they represent what they claim and conform with generally accepted accounting principles

balance sheet

reports the amount of assets, liabilities, and stockholders’ equity of an accounting equity at a point in time

basic accounting equation

assets = liabilities + stockholders’ equity

faithful representation

requires that the information be complete, neutral, and free from error

generally accepted accounting principles

GAAP: the measurement and disclosure rules used to develop the information in financial statements

income statement

reports the revenues less the expenses of the accounting period

internal controls

processes by which a company provides reasonable assurance regarding the reliability of the company’s financial reporting, effectiveness and efficiency of its operations, and its compliance with applicable laws and regulations

notes (footnotes)

provide supplemental information about the financial condition of a company, which which the financial statements cannot be fully understood

primary objective of financial reporting to external users

to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity

relevant information

information that can influence a decision; it has predictive and/or feedback value

statement of cash flows

reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing

statement of stockholders’ equity

the statement reports the changes in each of the company’s stockholders’ equity during the period

operating activity

Directly related to income; cash received from customers, cash paid for wages, utilities, rent, supplies, and inventory, interest paid, interest and dividends received

investing activity

Buying and selling the long-term assets and investments the company uses to operate, buying or selling equipment, buildings, and land, buying or selling investments, lending money to others and collecting on those loans

financing activity

How the company raises money from owners and lenders, and how it pays them back, borrowing money (notes payable) and repaying the principal, issuing stock, paying dividends

current ratio

measure the ability of a company to pay short-term obligations; current assets / current liabilities

account

standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item

accounting cycle

process used by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle

additional paid in capital

amount contributed to capital - par value of stock

assets

economic resources owned or controlled by company; have measurable value and are expected to benefit the company by producing cash inflows or reducing cash outflows in the future

common stock

basic voting stock issued by a corporation

cost (historical)

cash-equivalent value of an asset on the date of the transaction

credit

increases: liabilities, stockholders’ equity, revenue; decreases: assets, dividends, and expenses

current assets

assets that will be used or turned into cash within a year

current liabilities

short term obligations that will be paid or settled within the coming year in cash, goods, or other current assets/services

debit

increases: assets, dividends, and expenses; decreases: liabilities, revenue, and stockholders’ equity

going concern assumption

businesses are assumed to continue to operate into the foreseeable future

journal entry

accounting method for expressing the effects of a transaction on accounts in a debit-credit format

liabilities

measurable obligations resulting from a past transaction; expected to be settled in the future by transferring assets or providing services

monetary unit assumption

accounting information should be measured and reported in the national monetary unit without any adjustments for changes in purchasing power

par value

nominal value per share of stock as specified in the corporate charter

retained earnings

cumulative earnings of a company that are not distributed to the owners and are reinvested in the business

separate entity assumption

business transactions are separate from the transactions of owners

stockholders’ equity

financing provided by owners and the operations of the business

transaction

exchange between a business and one or more external parties to a business or a measurable internal event such as the use of assets in promotion

transaction analysis

studying transaction to determine its economic effect on the business in terms of accounting equation

trial balance

list of all accounts with their balances to provide a check on the equality of debits and credits

net profit margin

measures the profit generated per dollar of sales (operating revenues); net income / net sales (or operating revenue)

accrual basis accounting

revenues are recognized when goods and services are provided to customers and expenses are recognized in the same period as the revenues to which they relate

expense recognition principle

expenses are recorded in the same time period when incurred to generate revenue

expenses

cost of operating the business that are incurred to generate revenues during the period

gains

result from disposal of assets for less than their cost minus the amount of cost depreciated in the past

operating cycle

time it takes for a company to pay cash to suppliers, sell goods and service to customers, and collect cash from customers

operating income

net sale (operating revenues) - operating expenses (includes cost of goods sold)

revenue recognition principle

revenues are recognized when the company transfers promised goods or service to customers in the amount it expects to receive

revenues

amount earned and recorded from a company’s day-to-day business activities (sell or provide services)

time period assumption

long life of a company can be reported in shorter time periods, such as months, quarters, and years

total asset turnover

measures the sales generated per dollar of assets; net sales (operating revenue) / average total assets

accrued expenses

liabilities payable created when expenses are incurred but cash will be paid in the future; created at the end of the period during adjustment to reflect how much company will pay in the future

accrued revenue

assets (receivables) created when revenues are earned but cash will be collected from customers in the future; created during adjustment period

adjusting entries

entries necessary at the end of the accounting period to measure all revenue and expenses

closing entries

made at the end of accounting period to transfer balances in temporary accounts to retained earnings

contra-account

account that is an offset to or reduction from the primary account of financial statement section

deferred expenses

assets created when purchased in the past before being used to generate revenue

deferred (unearned) revenue

liabilities created from collected cash from customers before providing goods or services to customers

net book value

acquisition cost of an asset less its accumulated depreciation, depletion, or amortization

permanent accounts

balance sheet accounts that carry their ending balances into the next accounting period

post-closing trial balance

to check that debits = credits and all temporary accounts have been closed (have zero balances)

temporary accounts

income statement accounts that are closed to retained earnings at the end of accounting period gross pro

gross profit percentage

measures the excess of sales prices over the costs to purchase or produce the goods or services sold as a percentage; gross profit / net sales

return on assets

measures how much the firm earned for each dollar of investment; net income / average total assets

board of directors

elected by shareholders to represent their interests; its audit committee is responsible for maintaining the integrity of the company’s financial reports

corporate governance

procedures designed to ensure that the company is managed in the interest of the shareholders

earnings forecasts

predictions of earnings for the future accounting period; prepped be financial analysts

financial accounting standards board

private sector body given the primary responsibility to work out the detailed rules that become GAAP

Form 8-K

report used by publicly traded companies to disclose any material event not previously reported that is important to investors

Form 10-K

annual report that publicly traded companies must file with SEC

Form 10-Q

quarterly report that publicly traded companies must file with SEC

gross profit

net sales - cost of goods sold

institutional investors

managers of pension, mutual, endowment, and other funds that invest on behalf of others

lenders (creditors)

suppliers and financial institutions that lend money to companies

material amounts

amounts that are large enough to influence a user’s decision

press release

written public news announcement

private investors

individuals who purchase shares in companies

public company accounting oversight board (PCAOB)

private sector body given the primary responsibility to work out detailed auditing standards

securities and exchange commission (SEC)

US gov’t agency that determines the financial statements and other disclosures that public companies must provide to stockholders and the measurement rules that they must use in producing those statements

unqualified (clean) audit opinion

auditors statement that the financial statements are fair presentations in all material respects in conformity with GAAP and that the company maintained effective internal controls over financial reporting