Accounting
The information system that identifies, records, and communicates the economic events of an organization to interested users
Annual Report
A report by corporate management that presents financial information including financial statements, notes, a management discussion and analyses section, and an independent auditor's report
Assets
Resources owned by a business
Auditor's Report
A report 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 standards
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 stockholders for the shares they purchase
Corporation
A business organized as a separate legal entity having ownership divided into transferable shares of stock
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
Income Statement
A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time
Liabilities
The debts and obligations of a business. Liabilities represent the amounts owed to creditors
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, as well as expand upon it where additional detail is needed
Partnership
A business owned by 2 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 period of time
Revenue
The increase in assets that result from the sale of a product or service in the normal course of business
Sarbanes-Oxley Act
Regulations passed by Congress in 2002 to try to reduce unethical corporate behavior
Sole Proprietorship
A business owned by 1 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 asset
Accrual Basis Accounting
Transactions that change a company's financial statements are recorded in the periods in which the events occur
Classified Balance Sheet
A balance sheet that contains 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 of determining whether the cost that companies will incur to provide the information will outweigh the benefit that financial statement users will gain from having the information available
Cost Principle
An accounting principle that states that companies should record assets at their cost
Current Assets
Cash and other resources that companies reasonably expect to convert to cash or use up within one year or operating cycle, whichever is longer
Current Liabilities
Obligations that a company reasonably expects to pay within the next year or operating cycle, whichever is longer
Current Ratio
A measure used to evaluate a company's liquidity and short term debt paying ability; computed as current assets divided by current liabilities
Debt to Total Assets Ratio
Measures the percentage of total financing provided by creditors; computed as total debit divided by total assets
Earnings Per Share (EPS)
A measure of the net income earned on each share of common stock; computed as net income minus preferred stock dividends divided by the average number of common shares outstanding during the year
Economic Entity Assumption
An assumption that every economic entity can be separately identified and accounting 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 is complete, neutral, and free from error
Financial Accounting Standards Board (FASB)
The primary accounting standard-setting body in the US
Free Cash Flow
Cash remaining from operating activities after adjusting for capital expenditures and dividends paid
Full Disclosure Principle
Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users
Generally Accepted Accounting Principles (GAAP)
A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes
Going Concern Assumption
The assumption that the company will continue in operation for the foreseeable future
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 US
International Financial Reporting Standards (IFRS)
Accounting standards, issued by the IASB, that have been adopted by many countries outside of the US
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, and (2) long-term assets, such as land and buildings, not currently being used in the company's operations
Long-Term Liabilities (Long-Term Debt)
Obligations that a company expects to pay after one year
Materiality Constraint
The constraint of determining whether an item is large enough to likely influence the decision of an investor or creditor
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 go from cash to cash in producing revenue
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 companies use in operating the business
Public Company Accounting Oversight Board (PCAOB)
The group charges 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 for evaluation financial statements that expresses the relationship among selected items of financial statement data
Relevance
The quality of information that indicated the information makes a difference in decision
Securities and Exchange Commission (SEC)
The agency of the US government that oversees US 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 at its maturity
Solvency Ratios
Measures of the ability of the company to survive over a long period of time
Statement of Stockholders' Equity
A financial statement that presents the factors that caused stockholders' equity to change during the period, including those that cause retained earnings to change
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
Information that is proven to be free from error
Working Capital
The difference between the amounts of current assets and current liabilities
Account
An individual accounting record 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 communication 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 lost 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 a 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
The group of accounts maintained by a company
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
Accrued Expenses
Expenses incurred but not yet paid in cash or recorded
Accrued Revenues
Revenues earned but not yet received in cash or recorded
Adjusted Trial Balance
A list of accounts and their trial 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 permanent stockholders' equity account, retained earnings
Contra Asset Account
An account that is offset against an asset account on the balance sheet
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 smooth out bumps in net income
Expense Recognition Principle (Matching Principle)
The principle that dictates that companies math efforts (expenses) with results (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)
Assets that result from the payment of expenses that benefit more than one accounting period
Quality of Earnings
Indicated 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 it is earned
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 accountings whose balances a company transfers to retained earnings at the end of an accounting period
Unearned Revenues
Cash received before a company earns revenues and recorded as a liability until earned
Useful Life
The length of service of a productive asset
Worksheet
A multiple-column form that companies use in the adjustment process and in preparing financial statements