Financial Accounting Exam 1
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103 terms
Terms | Definitions |
|---|---|
 accounts payable | a liability backed by the general reputation and credit standing of the debtor |
| accounting | the information system that measures business activities, processes that information into reports and financial statements, and communicates the results to decision makers |
| accounting equation | Assets= Liabilities + Owners' Equity |
| asset | an economic resource that is expected to be a benefit in the future |
| balance sheet | list of an entity's assets, liabilities, and owners' equity as of a specific date |
| board of directors | group elected by the stockholders to set a policy for a corporation and to appoint its officers |
| cash | money and any medium of exchange that a bank accepts at face value |
| corporation | a business owned by stockholders. a corporation is a legal entity, an "artificial person" in the eyes of the law |
| current asset | an asset that is expected to converted into cash, sold, or consumed during the next 12 months, or within the business's normal operating cycle if longer than a year |
| current liability | a debt due to be paid within one year or within the entity's operating cycle |
| deficit | negative balance in retained earnings caused by net loss over a period of a year |
| dividends | distributions by a corporation to its stockholders |
| entity | an organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit |
| ethics | standards of right and wrong that transcend economic and legal boundaries. ethical standards that deal with the way we treat others and restrain our own actions because of the desire, expectations, or rights of others, or with our obligations to them |
| expenses | decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues |
| fair value | the amount that a business could sell an asset for, or the amount that a business could pay to settle a liability |
| financial accounting | the branch of accounting that provides information to people outside of the firm |
| financial statements | business documents that report financial information about a business entity to decision makers |
| financing activities | activities that obtain from investors and creditors the cash needed to launch and sustain the business; a section of the statement of cash flows |
| generally accepted accounting principles | accounting guidelines, formulated by the financial accounting standards board, that govern how accounting is practiced |
| going-concern assumption | holds that the entity will remain in operation for the foreseeable future |
| historical cost principle | principle that states that assets and services should be recorded as their actual cost |
| income statement | a financial statement listing an entity's revenues, expenses, and net income or net loss for a specific period |
| investing activities | activities that increase or decrease the long-term assets available to the business; a section of the statement of cash flows |
| liability | an economic obligation payable to an individual or an organization outside of the business |
| long-term debt | a liability that falls due beyond one year from the date of the financial statements |
| managerial accounting | the branch of accounting that generates information for the internal decision makers of a business, such as top executives |
| merchandise inventory | the merchandise that a company sells to customers |
| net income | excess of total revenues over total expenses |
| net loss | excess of total expenses over total revenues |
| note payable | a liability evidenced by a written promise to make a future payment |
| operating activities | activities that create revenue or expense in the entity's major line of business; a section of the statement of cash flows |
| owners' equity | the claim of owners of a business to the assets of the business |
| paid-in capital | the amount of stockholders' equity that stockholders have contributed to the corporation |
| partnership | an association of two or more persons who co-own a business for profit |
| proprietorship | a business with a single owner |
| retained earnings | the amount of stockholders equity that the corporation has earned through profitable operation and has not given back to stockholders |
| revenues | increase in retained earnings from delivering goods and services to customers or clients |
| statement of cash flows | reports cash receipts and cash payments classified according to the entity's major activities: operating, investing, and financing |
| statement of retained earnings | summary of the changes in retained earnings of a corporation during a specific period |
| stock | shares into which the owners' equity of a corporation is divided |
| stockholders' equity | the stockholders' ownership interest in the assets of a corporation |
| account | the record of the changes that have occurred in a particular asset, liability, or stockholders' equity during a period. the basic summary device of accounting. |
| accrued liability | a liability for an expense that has not yet been paid by the company |
| chart of accounts | list of a company's accounts and their account numbers |
| credit | the right side of an account |
| debit | the left side of an account |
| journal | the chronological accounting record of an entity's transactions |
| ledger | the book of accounts and their balances |
| posting | copying amounts from the journal to the ledger |
| transaction | any event that has a financial impact on the business and can be measured reliably |
| trial balance | a list of all the ledger accounts with their balances |
| account format | a balance sheet format that lists assets on the left and liabilities and stockholders' equity on the right |
| accrual | an expense or revenue that occurs before the business pays or receives cash |
| accrual accounting | accounting that records the impact of a business event as it occurs, regardless of whether the transaction affected cash or not |
| accrued expense | an expense incurred but not yet paid in cash |
| accrued revenue | a revenue that has been earned but not yet received in cash |
| accumulated depreciation | the cumulative sum of all depreciation expense from the date of acquiring a plant asset |
| adjusted trial balance | a list of all the ledger accounts with their adjusted balances |
| book value | the asset's cost minus accumulated depreciation |
| cash-basis accounting | accounting that records only transactions in which cash is received or paid |
| classified balance sheet | a balance sheet that shows current assets separate from long-term assets, and current liabilities separate from long-term liabilities |
| closing the books | the process of preparing the accounts to begin recording the next period's transactions. |
| closing entries | entries that transfer the revenue, expense, and dividends balances from the respective accounts to the retained earnings account |
| contra account | an account that always has a companion account whose normal balance is opposite that of the companion account |
| current ratio | current assets divided by current liabilities. measures a company's ability to pay current liabilities with current assets |
| debt ratio | ratio of total liabilities to total assets. states the proportion of a company's assets that is finalized with debt |
| deferral | an adjustment for which the business paid or received cash in advance. |
| depreciation | allocation of the cost of a plant asset to expense its useful life |
| liquidity | measure of how quickly an item can be converted to cash |
| matching principle | the basis for recording expenses. directs accountants to identify all expenses incurred during the period, to measure the expenses, and to match them against the revenues earned during the same period |
| multi-step income statement | an income statement that contains subtotals to highlight important relationships between revenues and expenses |
| operating cycle | time span during which cash is paid for goods and services that are sold to customers who pay the business in cash |
| permanent accounts | assets, liabilities, and stockholders' equity accounts that are not closed at the end of the period |
| prepaid expense | a category of miscellaneous assets that typically expire or get used up in the near future |
| revenue principle | the basis of recording revenues; tells accountants when to record revenue and the amount of revenue earned |
| time-period concept | ensures that accounting information is reported at regular intervals |
| unearned revenue | a liability created when a business collects cash from customers in advance to earning the revenue |
| audit | a periodic examination of a company's financial statements and the accounting systems, controls, and records that produce them. audits may be either external or internal. |
| bank collections | collection of money by the bank on behalf of a depositor |
| bank reconciliation | a document explaining the reasons for the difference between a depositor's records and the bank's records about the depositor's cash |
| bank statement | document showing the beginning and ending balances of a particular bank account listing the month's transactions that affected the account |
| budget | a quantitative expression of a plan that helps managers coordinate the entity's activities |
| cash budget | a budget that projects the entity's future cash receipts and cash disbursements |
| cash equivalent | investments such as time deposits, certificated of deposits, or high-grade government securities that are considered so similar that they are combined with cash for financial disclosure purposes on the balance sheet |
| check | document instructing a bank to pay the designated person or business the specified amount of money |
| computer virus | a malicious program that enters a company's computer system via email or other means and destroys program and data files |
| deposits in transit | a deposit recorded by a company, but not yet by its bank |
| electronic fund transfer | system that transfers cash by electronic communication rather than by paper documents |
| encryption | mathematical rearranging of data within an electronic file to prevent unauthorized access to information |
| exception reporting | identifying data that is not within "normal limits" so that managers can follow up and take corrective action. |
| fidelity bond | an insurance policy taken out on employees who handle cash |
| firewall | an electronic barrier, usually provided by passwords, around computerized data files to protect local area networks of computers from unauthorized access |
| fraud | an intentional misrepresentation of facts, made for the purpose of persuading another party to act in a way that causes injury or damage to that party |
| fraud triangle | the three elements that are present in almost all cases of fraud. these elements are motive, opportunity, and rationalization on the part of the perpetrator |
| internal control | organizational plan and related measures adopted by an entity to safeguard assets, encourage adherence to company policies, promote operational efficiency, and ensure accurate and reliable accounting records |
| lapping | a fraudulent scheme to steal cash trough misappropriating certain customer payments and posting payments from other customers to the affected accounts to cover it up. |
| lock-box system | a system of handling cash receipts by mail whereby customers remit payment directly to the bank, rather than through the entity's mail system |
| misappropriation of assets | fraud committed by employees by stealing assets from the company |
| nonsufficient funds check | a check for which the payer's bank account has not enough money to pay the check |
| operating budget | a budget of future net income. projects a company's future revenue and expenses. |
| outstanding checks | a check issued by the company and recorded by its books but not yet paid by its bank |
| password | a special set of characters that must be provided by the user of computerized program or data files to prevent unauthorized access to those files |
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