CH1-HCA

Vocabulary flashcards covering key terms from the lecture notes on accounting basics, business forms, and financial statements.

GAAP

Generally Accepted Accounting Principles; US standards governing external financial reporting.

FASB

Financial Accounting Standards Board; organization that sets GAAP standards in the United States.

IASB

International Accounting Standards Board; develops and maintains international accounting standards.

Business entity

Principle that business and personal records should be kept separate.

Monetary unit

Principle that financial records are kept in a stable currency (e.g., dollars).

Going concern

Assumes the business will continue to operate for the foreseeable future.

Periodicity

Profits and losses are measured over defined time periods.

Asset

Resource owned by a business with future economic benefits; current or long-term.

Liability

Obligation to transfer resources to others in the future; current or long-term.

Owners’ equity

Net assets belonging to owners; assets minus liabilities; includes common stock and retained earnings.

Revenue

Amounts earned from providing goods or services (recorded on an accrual basis).

Expense

Costs incurred to earn revenues (recorded on an accrual basis).

Net income

Revenues minus expenses for a period; also called profit.

Income statement

Financial statement showing revenues minus expenses over a period.

Balance sheet

Financial statement showing assets, liabilities, and owners’ equity at a point in time.

Statement of cash flows

Financial statement detailing cash inflows and outflows from operating, investing, and financing activities.

Statement of owners’ equity

Statement showing changes in owners’ equity over a period.

Cash basis accounting

Recording revenues and expenses only when cash is received or paid.

Accrual basis accounting

Recording revenues and expenses when earned or incurred, regardless of cash flow.

Current ratio

Current assets divided by current liabilities; measures short-term liquidity; typically ≥ 1.0.

Debt to equity ratio

Total liabilities divided by total owners’ equity; measures solvency.

Return on sales

Net income divided by sales; profitability per dollar of sales.

Four basic financial statements

Income statement, balance sheet, statement of cash flows, and statement of stockholders’ equity (plus auditor’s report).

Auditor’s report

Statement indicating whether the company followed GAAP in preparing its financial statements.

Sole proprietorship

Business owned by one person; easy to form; unlimited liability.

Partnership

Business owned by two or more people; easy to form; unlimited liability; mutual agency.

Corporation

Legal entity owned by one or more persons; limited liability; potential for double taxation.

Limited Partnership

General partners with unlimited liability and limited partners with liability limited to investment.

S Corporation

Small corporation (≤75 shareholders) with pass-through taxation; avoids double taxation.

Limited Liability Partnership (LLP)

Partners are liable only for their own actions; no mutual agency.

Limited Liability Company (LLC)

Business with limited liability for owners and pass-through taxation.

5 basic functions of business

Marketing, Human Resources, Production/Operations, Finance, and Accounting & Information Systems.

eBusiness

Business conducted over the internet and electronic networks.

Hybrid organizational structures

Structures that combine elements of different legal/organizational forms.

Materiality

Info large enough to influence decisions; material vs immaterial importance.

Relevance

Info capable of making a difference in a decision; timely and pertinent.

Reliability

Info that is dependable, verifiable, and consistent.

Benefits > Costs

The benefits derived from information should exceed its costs; information is not free.