ACC Exam #1 Vocab

Ch. 1

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.

Ch. 2

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.

Ch. 3

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.

Ch. 4

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.

Fiscal year- An accounting period that is one year long.

Income Summary- A temporary account used in closing revenue and expense accounts.

Periodicity assumption- An assumption that the economic life of a business can be divided into artificial time periods.

Permanent accounts- Balance sheet accounts whose balances are carried forward to the next accounting period.

Post-closing trial balance- A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Prepaid expenses (prepayments)- Expenses paid in cash before they are used or consumed.

Quality of earnings- Indicates the level of full and transparent information that a company provides to users of its financial statements.

Revenue recognition principle- The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Reversing entry- An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Temporary accounts- Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Unearned revenues- Cash received and a liability recorded before services are performed.

Useful life- The length of service of a productive asset.

Worksheet- A multiple-column form that companies may use in the adjustment process and in preparing financial statements.