Financial Accounting Exam 1

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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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