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98 terms

Financial Accounting Test One

Key Terms
STUDY
PLAY
Business
All of the activities necessary to provide the members of an economic system with goods and services
Business Entity
An organization operated to earn a profit
Sole Proprietorship
A form of organization with a single owner
Economic Entity Concept
The assumption that a single, identifiable unit must be accounted for in all situations
Partnership
A business owned by two or more individuals; the organization form often used by accounting firms and law firms
Corporation
A form of entity organized under the laws of a particular state; ownership evidenced by shares of stock
Share of Stock
A certificate that acts as evidence of ownership in a corporation
Bond
A certificate that represents a corporation's promise to repay a certain amount of money and interest in the future
Non-business Entity
An organization operated for some purpose other than to earn a profit
Liability
An obligation of a business
Capital Stock
Indicates the owners' contributions to a corporation
Stockholder
One of the owners of a corporation
Creditor
Someone to whom a company or person has a debt
Asset
A future economic benefit
Revenue
An inflow of assets resulting from the sale of gods and services
Expense
An outflow of assets resulting from the sale of goods and services
Accounting
The process of identifying measuring, and communicating economic information to various users
Management Accounting
The branch of accounting concerned with providing management with information to facilitate planning and control
Financial Accounting
The branch of accounting concerned with the preparation of financial statements for outsider use
Owners' Equity
The owners' claims on the assets of an entity
Stockholders' Equity
The owners' equity in a corporation
Retained Earnings
The part of owners' equity that represents the income earned less dividends paid over the life of an entity
Balance Sheet
The financial statement that summarizes the assets, liabilities, and owners' equity at a specific point in time
Income Statement
A statement that summarizes revenues and expenses
Net income
The excess of revenues over expenses
Dividends
A distribution of the net income of a business to its owners
Statement of Retained Earnings
The statement that summarizes the income earned and dividends paid over the life of a business
Statement of Cash Flows
The financial statement that summarizes a company's cash receipts and cash payments during the period from operating, investing, and financing activities
Cost Principle
Assets are recorded at the cost to acquire them
Going Concern
The assumption that an entity is not in the process of liquidation and that it will continue indefinitely
Monetary Unit
The yardstick used to measure amounts in financial statements; the dollar in the United States
Time Period
An artificial segment on the calendar used as the basis for preparing financial statements
Generally Accepted Accounting Principles (GAAP)
The various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements
Securities and Exchange Commission (SEC)
The federal agency with ultimate authority to determine the rules for preparing statements for companies whose stock is sold to the public.
Financial Accounting Standards Board (FASB)
The group in the private sector with authority to set accounting standards.
American Institute of Certified Public Accountants (AICPA)
The professional organization of certified public accountants.
Certified Public Accountant (CPA)
The designation for an individual who has passed a uniform exam administered by the AICPA and has met other requirements as determined by individual states
Public Company Accounting Oversight Board (PCAOB)
A five-member body created by an act of Congress in 2002 to set auditing standards
International Accounting Standards Board (IASB)
The organization formed to develop worldwide accounting standards
Auditing
The process of examining the financial statements and the underlying records of a company to render an opinion as to whether the statements are fairly presented
Understandability
The quality of accounting information that makes it comprehensible to those willing to spend the necessary time
Relevance
The capacity of information to make a difference in a decision
Reliability
The quality that makes accounting information dependable in representing the events that it purports to represent
Comparability
For accounting information, the quality that allows a use to analyze two or more companies and look for similarities and differences
Depreciation
The process of allocating the cost of a long-term tangible asset over its useful life
Consistency
For accounting information, the quality that allows a user to compare two or more accounting periods for a single company
Materiality
The magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information
Conservatism
The practice of using the least optimistic estimate when two estimates of amounts are about equally likely
Operating Cycle
The period of time between the purchase of inventory and the collection of any receivable from sales of the inventory
Current Asset
An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year
Current Liability
An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year
Liquidity
The ability of a company to pay its debts as they come due
Working Capital
Current assets minus current liabilities
Current Ratio
Current assets divided by current liabilities
Single-Step Income Statement
An income statement in which all expenses are added together and subtracted from all revenues
Multiple-Step Income Statement
An income statement that shows classifications of revenues and expenses as well as important subtotals
Gross Profit
Sales less cost of goods sold
Profit Margin
Net income divided by sales (Operating Revenues)
Auditors' Report
The opinion rendered by a public accounting firm concerning the fairness of the presentation of the financial statements
Event
A happening of consequence to an entity
External Event
An event involving interaction between an entity and its environment
Internal event
An event occurring entirely within an entity
Transaction
Any event that is recognized in a set of financial statements
Source Document
A piece of paper that is used as evidence to record a transaction
Account
A record used to accumulate amounts for each individual asset, liability, revenue, expense, and component of stockholders' equity
Chart of Accounts
A numerical list of all accounts used by a company
General Ledger
A book, a file, a hard drive, or another device containing all of the accounts
Debit
An entry on the left side of an account
Credit
An entry on the right side of an account
Doubt-Entry System
A system of accounting in which every transaction is recorded with equal debits and credits and the accounting equation is kept in balance
Journal
A chronological record of transactions
Posting
The process of transferring amounts from a journal to the ledger accounts
Journalizing
The act of recording journal entries
General Journal
The journal used in place of a specialized journal
Trial Balance
A list of each account and its balance; used to prove equality of debits and credits
Recognition
The process of recording an item in the financial statements as an asset, a liability, a revenue, an expense, or the like.
Historical Cost
The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets
Current Value
The amount of cash or its equivalent that could be received by selling an asset currently
Cash Basis
A system of accounting in which revenues are recognized when cash is received and expenses are recognized when cash is paid
Accrual Basis
A system of accounting in which revenues are recognized when earned and expenses are recognized when incurred
Revenues
Inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or conducting other activities
Revenue recognition principle
Revenues are recognized in the income statement when they are realized, or realizable, and earned
Matching Principle
The association of revenue of a period with all of the costs necessary to generate that revenue
Expenses
Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities
Adjusting Entries
Journal entries made at the end of a period by a company using the accrual basis of accounting
Straight-Line Method
The assignment of an equal amount of deprecation to each period
Contra Account
An account with a balance that is opposite that of a related account
Deferral
Cash has been paid or received but expense or revenue has not yet been recognized
Deferred Expense
An asset resulting from the payment of cash before the incurrence of expense
Deferred Revenue
A liability resulting from the receipt of cash before the recognition of revenue
Accrual
Cash has not yet been paid or received but expense has been incurred or revenue earned
Accrued Liability
A liability resulting from the recognition of an expense before the payment of cash
Accrued Asset
An asset resulting from the recognition of a revenue before the receipt of cash
Accounting Cycle
A series of steps preformed each period and culminating with the preparation of a set of financial statements
Work Sheet
A device used at the end of the period to gather the information needed to prepare financial statements without actually recording and posting adjusting entries
Real Accounts
The name given to balance sheet accounts because they are permanent and are not closed at the end of the period
Nominal accounts
The name given to revenue, expense, and dividend accounts because they are temporary and are closed at the end of the period
Closing Entries
Journal entries made at the end of the period to return the balance in all nominal accounts to zero and transfer the net income or loss and the dividends to Retained Earnings