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Financial Accounting CLEP - Chap 2 Getting Started

Terms in this set (25)

Assets
Economic resources that the business plans to use in the future to make money.
Balance sheet
The financial report that shows business assets, liabilities, and owner's equity as of a particular day.
Balanced books
When "Where did it go?" equals "Where did it come from?" of when a company's assets equal its liabilities plus the owner's equity.
Capital
Assets that help a business or a person make money.
Capitalized
When money is changed into another asset that helps the business make money.
Creditors
Outsiders to whom the company owes money.
Current assets
Assets that can be used to pay current liabilities.
Current liabilities
Debts that must be paid within one year or one operating cycle, whichever is longer.
Financial accounting
The skill of producing financial statements from business transactions.
Fiscal year
The 12-month period a business uses to report the results of its operations.
Heading
All financial statements have a standard 3-line heading as follows:
Name of the Company
Name of the Report
Date (balance sheet) or Period of Time (all other statements)
Liabilities
Debts owed to people outside of the company.
Liquid
The easier it is to change an asset into cash, the more liquid that asset is.
Operating cycle
The natural period of time before certain business activities tend to repeat - normally one year.
Owner's equity
That portion of the business the owner gets to keep after paying off all creditors.
Sole proprietor
The individual owner (without partners) of an unincorporated business.
Basic accounting equation.
Assets = Liabilities + Owner's equity
Owner's equity = Assets - Liabilities
Liabilities = Assets - Owner's equity
Business entity
The financial statements report about a single business. Every business gets it own set of books. Accountants do not mix in the owner's personal financial information.
Current
"Current" liabilities are those debts that must be paid within one year or one operating cycle, whichever is longer.
Current ratio
Current assets
------------------------ = Current Ratio
Current Liabilities
Debt ratio
Total liabilities
------------------------ = Debt Ratio
Total assets
or
100% - Equity Ratio = Debt Ratio
Double entry accounting
Recording business transactions twice: once to show where the money came from, and another time to show where the money went.
Equity ratio
Total equity
------------------------ = Equity Ratio
Total assets
or
100% - Debt Ratio = Equity Ratio
CLEP CLUE
Every time you see the word "payable", the CLEP exam is talking about a liability.
CLEP CLUE
If given one of these ratios (debt or equity) on the CLEP test, subtract that number from 100% to quickly find the other.

If the debt ratio is 55%, the equity ratio is 100% - 55% = 45%.
The equity ratio is 45%.
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