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Financial Accounting

Chapter 2

TermDefinition
Faithful representation Information that accurately depicts what really happened.
Economic entity assumption An assumption that every economic entity can be separately identified and accounted for.
Going concern assumption The assumption that the company will continue in operation for the foreseeable future.
Historical cost principle An accounting principle that states that companies should record assets at their cost.
Classified balance sheet A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.
Current ratio A measure of liquidity computed as current assets divided by current liabilities.
Full disclosure principle Accounting principle that dictates that companies disclose sufficient details regarding circumstances and events that would make a difference to financial statement users.
Liquidity The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.
Consistency Use of the same accounting principles and methods from year to year within a company.
Comparability Ability to compare the accounting information of different companies because they use the same accounting principles.
Current assets Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.
Understandability Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.
Current liabilities Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.
Intangible assets Assets that do not have physical substance.
Relevance The quality of information that indicates the information makes a difference in a decision.
Solvency ratios Measures of the ability of the company to survive over a long period of time.
Verifiable The quality of information that occurs when independent observers, using the same methods, obtain similar results.
Solvency The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
Operating cycle The average time required to purchase inventory, sell it on account, and then collect cash from customers-that is, go from cash to cash.
Monetary unit assumption An assumption that requires that only those things that can be expressed in money are included in the accounting records.
Periodicity assumption An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.
Materiality Whether omitting or misstating an item could influence the decision of a financial statement user.
Ratio An expression of the mathematical relationship between one quantity and another.
Liquidity ratios Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
Cost constraint Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.
Working capital The difference between the amounts of current assets and current liabilities.
Fair value principle Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
Timely Information that is available to decision-makers before it loses its capacity to influence decisions.
Ratio analysis A technique that expresses the relationship among selected items of financial statement data.
Profitability ratios Measures of the operating success of a company for a given period of time.
Created by: ServiceDogGolden
 

 



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