ACCT 2001 EXAM 1 (Chapters 1-4) Kimberly Peters

Accounting

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

Annual report

A report prepared by corporate management that presents financial information including financial statements, a management discussion and analysis section, notes, and an independent auditor's report.

Assets

Resources owned by a business.

*Auditing

The examination of financial statements by a certified public accountant in order ro express an opinion as to the fairness of presentation.

Auditor's report

A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

Balance sheet

A financial statement that reports the assets and claims to those assets at a specific point in time.

Basic accounting equation

Assets = Liabilities + Stockholders' Equity.

Certified public accountant (CPA)

An individual who has met certain criteria and is thus allowed to perform audits of corporations.

Common stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Corporation

A business organized as a separate legal entity owned by stockholders.

Data analytics

The evaluation of data, often employing both software and statistics, to draw inferences.

Dividends

Payments of cash from a corporation to its stockholders.

Expenses

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

*Forensic accounting

An area of accounting that uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud.

Income statement

A financial statement that reports a company's revenues and expenses and resulting net income or net loss for a specific period of time.

Liabilities

Amounts owed to creditors in the form of debts and other obligations.

*Management consulting

An area of public accounting ranging from development of accounting and computer systems to support services for marketing projects and merger and acquisition activities.

Management discussion and analysis (MD&A)

A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.

Net income

The amount by which revenues exceed expenses.

Net loss

The amount by which expenses exceed revenues.

Notes to the financial statements

Notes that clarify information presented in the financial statements and provide additional detail.

Partnership

A business owned by two or more persons associated as partners.

Retained earnings

The amount of net income retained in the corporation.

Retained earnings statement

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

Revenue

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

Sarbanes-Oxley Act (SOX)

Regulations passed by Congress to reduce unethical corporate behavior.

Sole proprietorship

A business owned by one person.

Statement of cash flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time.

Stockholders' equity

The owners' claim to assets.

*Taxation

An area of public accounting involving tax advice, tax planning, preparing tax returns, and representing clients before governmental agencies.

Classified balance sheet

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Comparability

Ability to compare the accounting information of different companies because they use the same accounting principles.

Consistency

Use of the same accounting principles and methods from year to year within a company.

Cost constraint

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Current assets

Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.

Current liabilities

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

Current ratio

A measure of liquidity computed as current assets divided by current liabilities.

Debt to assets ratio

A measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors.

Earnings per share (EPS)

A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the weighted-average number of common shares outstanding during the year.

Economic entity assumption

An assumption that every economic entity can be separately identified and accounted for.

Fair value principle

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Faithful representation

Information that accurately depicts what really happened.

Financial Accounting Standards Board (FASB)

The primary accounting standard-setting body in the United States.

Full disclosure principle

Accounting principle that dictates that companies disclose sufficient details regarding circumstances and events that would make a difference to financial statement users.

Generally accepted accounting principles (GAAP)

A set of accounting standards that have substantial authoritative support and which guide accounting professionals.

Going concern assumption

The assumption that the company will continue in operation for the foreseeable future.

Historical cost principle

An accounting principle that states that companies should record assets at their cost.

Intangible assets

Assets that do not have physical substance.

International Accounting Standards Board (IASB)

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

International Financial Reporting Standards (IFRS)

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.

Liquidity

The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.

Liquidity ratios

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Long-term investments

Generally, (1) investments in stocks and bonds of other corporations that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations; and (3) long-term notes receivable.

Long-term liabilities (long-term debt)

Obligations that a company expects to pay after one year.

Materiality

Whether omitting or misstating an item could influence the decision of a financial statement user.

Monetary unit assumption

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Operating cycle

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Periodicity assumption

An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Profitability ratios

Measures of the operating success of a company for a given period of time.

Property, plant, and equipment

Assets with relatively long useful lives that are currently used in operating the business.

Public Company Accounting Oversight Board (PCAOB)

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Ratio

An expression of the mathematical relationship between one quantity and another.

Ratio analysis

A technique that expresses the relationship among selected items of financial statement data.

Relevance

The quality of information that indicates the information makes a difference in a decision.

Securities and Exchange Commission (SEC)

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

Solvency

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Solvency ratios

Measures of the ability of the company to survive over a long period of time.

Timely

Information that is available to decision-makers before it loses its capacity to influence decisions.

Understandability

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Verifiable

The quality of information that occurs when independent observers, using the same methods, obtain similar results.

Working capital

The difference between the amounts of current assets and current liabilities.

Account

An individual accounting record of increases and decreases in specific asset, liability, stockholders' equity, revenue, or expense items.

Accounting information system

The system of collecting and processing transaction data and communicating financial information to decision-makers.

Accounting transactions

Events that require recording in the financial statements because they affect assets, liabilities, or stockholders' equity.

Chart of accounts

A list of the names of a company's accounts.

Credit

The right side of an account.

Debit

The left side of an account.

Double-entry system

A system that records the two-sided effect of each transaction in appropriate accounts.

General journal

The most basic form of journal.

General ledger

A ledger that contains all asset, liability, stockholders' equity, revenue, and expense accounts.

Journal

An accounting record in which transactions are initially recorded in chronological order.

Journalizing

The procedure of entering transaction data in the journal.

Ledger

A record of all accounts maintained by a company and their amounts.

Posting

The procedure of transferring journal entry amounts to the ledger accounts.

T-account

The basic form of an account.

Trial balance

A list of accounts and their balances at a given time.

Accrual-basis accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

Accruals

Expenses or revenues that are recognized at a date earlier than the point when cash is exchanged.

Accrued expenses

Expenses incurred but not yet paid in cash or recorded.

Accrued revenues

Revenues for services performed but not yet received in cash or recorded.

Adjusted trial balance

A list of accounts and their balances after all adjustments have been made.

Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash.

Closing entries

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

Contra asset account

An account that is offset against an asset account on the balance sheet.

Deferrals

Expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

Earnings management

The planned timing of revenues, expenses, gains, and losses to reduce volatility in reported net income.

Expense recognition principle

The principle that dictates that efforts (expenses) be recognized with results (revenues) in the period when the company makes efforts to generate those revenues.