Financial Accounting Terms
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Created by:
elena_newton on June 18, 2009
Subjects:
accounting vocabulary, accounting
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50 terms
Terms | Definitions |
|---|---|
 Sole Proprietorship | A business owned by one person. The owner is legally liable for the business obligations. |
| Partnership | A business owned by two or more people who are both legally liable for the business obligations. |
| Corporation | A business owned by a group of people where the business is legally separate from the owners (owners are not personally liable for the obligations of the business). |
| Limited Liability Corporation | The right of the shareholders to not be held personally liable for the obligations of the business. |
| Net Income | A positive result in the equation: revenue - expenses |
| Opportunity Cost | The amount of profit sacrificed by applying a set of resources elsewhere. |
| Net Loss | A negative result in the equation: revenue - expenses |
| Cost of Goods Sold | Any expenses directly involved in producing or selling a good or service during a given time period. |
| Ratio Analysis | the assessment of a firm's financial condition and performance through calculations and interpretations of financial ratios developed from the firm's financial statements (current ratio= current assets / current liabilities) |
| Liquidity Ratio | = total assets / total liabilities |
| Quick Ratio or Acid Test | = liquid assets / total liabilities |
| Current Ratio | = current assets / current liabilities |
| Straight-line Depreciation | a method of depreciation in which the cost of the item is equally spread over its useful lifetime. |
| Depreciation | The process of allocating the cost of such assets to the periods of time being benefited or the estimated useful life. |
| GAAP | Generally Accepted Accounting Principles. Created by the Financial Accounting Standards Board (FASB). |
| Historical Cost | The price originally paid to acquire an asset. |
| Replacement Cost / Current Cost | The cost to replace a previously acquired asset. |
| Fair Market Value | The expected selling price of an asset. |
| Balance Sheet Elements | Contains: Total Assets <Current Assets, Investments, Property, Plant & Equipment>, Total Liability <Current Liabilities, Non-current Liabilities> and Owner's Equity <Contributed Capital + Retained Earnings> (the Accounting Equation) |
| FASB | Financial Accounting Standards Board |
| MD&A | Management Discussion & Analysis of Operations (Financial Review). Found in a company's Annual Report. |
| Accounting Equation | Total Assets (Current Assets + Investments + PPE) = Total Liabilities (Current Liabilities + Non-Current Liabilities) + Owner's Equity (Contributed Capital + Retained Earnings) |
| Operating Cycle | the average length of time it takes a business to cycle through the three phases of operatios: n |
| Operating Activities | Purchasing, Selling, Collecting |
| Current Assets | Assets that are expected to be converted to cash or used within one year |
| Accrual Basis | Recording revenues and expenses within the timeframe they are incurred rather than when cash is received or paid. |
| Statement of Cash Flows | shows how cash, as reflected in accrual accounting, flowed into and out of a company during a specific period of operation |
| Revenue Recognition Rule | Revenue is earned or realized in that period when goods are sold or services are performed. |
| Cash Budget | a financial statement that projects cash receipts and expenditures over a specified period. Steps are: 1. Estimate Sales Revenue. 2. Estimate Expenses (COGS, Rent, Operating Expenses, Depreciation) |
| Income Statement | financial statement showing the revenue and expenses for a fiscal period (P&L) |
| Net Income | The difference between revenue and expense and is a measure of ROI. |
| Statement of Owners' Equity | Reports the change in the owners' investment and the change in the owners' retained earnings. |
| Balance Sheet, Income Statement (P&L), Statement of Owner's Equity, Statement of Cash Flows | The four basic financial accounting statements. |
| Full Disclosure | means that financial reports include enough information so that the report is complete |
| Business Entity | Assumes that the business is separate from its owners or other businesses. Revenue and expenses should be kept separate from personal expenses. |
| Going Concern | Assumes that the business will be in operation indefinitely. |
| Monetary Unit Principle | Assumes a stable currency is going to be the unit of record. |
| Time-Period Principle | implies that the economic activities of an enterprise can be divided into artificial time periods. |
| Short Term Financing | the money needed to pay for the current liabilities of a business. Intended to be repaid within a single fiscal period. |
| Long Term Financing | The money needed to pay for the fixed assets of a business. Not intended to be repaid in a single fiscal period. |
| Capital Budgeting | The process of identifying which long-lived investment projects a firm should undertake. |
| Systematic Risks | Risk Factors that affect a large number of assets. Also known as Market Risk. Includes such things as changes in GDP, inflation, Interest Rates. |
| Cost Principle | requires companies to account and report based on acquisition costs (historic cost) rather than fair market value |
| Revenue Principle | requires companies to record when revenue is realized and earned, not when received. aka Accrual Basis Accounting |
| Matching Principle | Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized when the work or the product actually makes its contribution to revenue. |
| Objectivity Principle | the company financial statements are based on objective evidence |
| Materiality Principle | the significance of an item should be considered when it is reported. |
| Consistency Principle | The company uses the same accounting principles and methods from year to year |
| Prudent Principle | when choosing between two solutions, the one that will be least likely to overstate assets and income should be picked |
| Capital Asset Pricing Model | Allows a firm to forecast the expected rate of return and potential risk on any capital investment. Expected Return = Risk Free + B (Mkt Risk - Risk Free) |
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