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Financial Accounting (Exam 1 Ch 1-3)

Quiz yourself by thinking what should be in each of the black spaces below before clicking on it to display the answer.
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Term
Definition
Accounting   show
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show equality involving a company’s assets, liabilities, and equity; Assets = Liabilities + Equity; also called balance sheet equation.  
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show resources a business owns or controls that are expected to provide current and future benefits to the business.  
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show analysis and report of an organization’s accounting system, its records, and its reports using various tests.  
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Auditors   show
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Balance sheet   show
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show part of accounting that involves recording transactions and events, either manually or electronically; also called recordkeeping.  
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show principle that requires a business to be accounted for separately from its owner(s) and from any other entity.  
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Common stock   show
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Conceptual framework   show
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Contributed capital   show
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show business that is a separate legal entity under state or federal laws with owners called shareholders or stockholders.  
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Cost-benefit constraint   show
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show accounting principle that prescribes financial statement information to be based on actual costs incurred in business transactions.  
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show corporation’s distributions of assets to its owners.  
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Dodd-Frank Wall Street Reform and Consumer Protection Act   show
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Equity   show
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Ethics   show
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show happenings that both affect an organization’s financial position and can be reliably measured.  
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Expanded accounting equation   show
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show prescribes expenses be reported in the same period as the revenues that were earned as a result of the expenses; also called the matching principle.  
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Expenses   show
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show independent of a company and are hired to assess and evaluate the “fairness” of financial statements (or to perform other contracted financial services).  
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External transactions   show
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show persons using accounting information who are not directly involved in running the organization.  
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show area of accounting aimed mainly at serving external users.  
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show independent group of full-time members responsible for setting accounting rules.  
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show principle that prescribes financial statements (including notes) to report all relevant information about an entity’s operations and financial condition.  
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Generally accepted accounting principles (GAAP)   show
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show principle that prescribes financial statements to reflect the assumption that the business will continue operating.  
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show amount earned after subtracting all expenses necessary for and matched with sales for a period; also called net income, profit, or earning.  
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show financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time; also includes any gains or losses.  
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show a company employee who assess and evaluates its system of internal controls, including the resulting reports.  
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Internal transactions   show
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show persons using accounting information who are directly involved in managing the organization.  
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International Accounting Standards Board (IASB)   show
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show set of international accounting standards explaining how types of transactions and events are reported in financial statements; issued by IASB  
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Liabilities   show
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show area of accounting aimed mainly at serving the decision-making needs of internal users; also called management accounting.  
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show prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses; also called expense recognition.  
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show prescribes that accounting for items that significantly impact financial statement and any inferences from them adhere strictly to GAAP.  
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Measurement principle   show
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show principle that assumes transactions and events can be expressed in money units.  
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show amount earned after subtracting all expenses necessary for and matched with sales for a period; also called income, profit, or earnings.  
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Net loss   show
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Partnership   show
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show business owned by one person that is not organized as a corporation; also called sole proprietorship.  
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show part of accounting that involves recording transactions and events, either manually or electronically; also called bookkeeping.  
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show cumulative income less cumulative losses and dividends.  
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Return   show
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Return on assets   show
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show the principle prescribing that revenue is recognized when earned.  
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show gross increase in equity from a company’s business activities that earn income; also called sales.  
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Risk   show
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Sarbanes–Oxley Act   show
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show Federal agency Congress has charged to set reporting rules for organizations that sell ownership shares to the public.  
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show owners of a corporation; also called stockholders.  
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Shares   show
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show business owned by one person that is not organized as a corporation; also called proprietorship.  
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show a financial statement that lists cash inflows (receipts) and cash outflows (payments) during a period; arranged by operating, investing, and financing.  
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show report of changes in retained earnings over a period; adjusted for increases (net income), for decreases (dividends and net loss), and for any prior period adjustment.  
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Stock   show
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show owners of a corporation; also called shareholders.  
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show assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.  
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show record within an accounting system in which increases and decreases are entered and stored in a specific asset, liability, equity, revenue, or expense.  
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show difference between total debits and total credits (including the beginning balance) for an account.  
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show account with debit and credit columns for recording entries and another column for showing the balance of the account after each entry.  
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Chart of accounts   show
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Common stock   show
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Compound journal entry   show
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Credit   show
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Creditors   show
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show recorded on the left side; increases assets and expense accounts, and decreases liability, revenue, and most equity accounts; abbreviated Dr.  
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Debt ratio   show
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Dividends   show
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show accounting system in which each transaction affects at least two accounts and has a least one debit and on credit.  
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show all-purpose journal for recording the debits and credits of transactions and events.  
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show record containing all accounts (with amounts) for a business; also called a ledger.  
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show record in which transactions are entered before they are posted to ledger accounts; also called book of original entry.  
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show process of recording transactions in a journal.  
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Posting   show
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Posting reference (PR) column   show
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Source documents   show
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T-accounts   show
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Trial balance   show
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show liability created when customers pay in advance for products or services; earned when the products or services are later delivered.  
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Accounting cycle   show
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Accounting periods   show
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Accrual basis accounting   show
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show costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.  
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Accrued revenues   show
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Adjusted trial balance   show
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Adjusting entry   show
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Annual financial statements   show
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Book value   show
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show accounting system that recognizes revenues when cash is received and records expenses when cash is paid.  
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Classified balance sheet   show
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Closing entries   show
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Closing process   show
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Contra account   show
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Current assets   show
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Current liabilities   show
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show ratio used to evaluate a company’s ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.  
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show expense created by allocating the cost of plant equipment to periods in which they are used; represents the expense of using the assets.  
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Expense recognition (or matching) principle   show
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show consecutive 12-month (or 52-week) period chosen as the organization’s annual accounting period.  
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show temporary account only used in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for corporations).  
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Intangible assets   show
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show financial statements covering less than one year; usually based on one-, three-, or six-month periods.  
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show long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.  
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Long-term liabilities   show
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show twelve-month period that ends when a company’s sales activities are at their lowest point.  
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show normal time between paying cash for merchandise or employee services and receiving cash form customers.  
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Permanent accounts   show
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show tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets.  
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show list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.  
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show items paid for in advance of receiving their benefits; classified as assets.  
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show ratio of a company’s net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin.  
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show statements that show the effects of proposed transactions and events as if they had occurred.  
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Reversing entries   show
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Straight-line depreciation method   show
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Temporary accounts   show
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Time period assumption   show
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Unadjusted trial balance   show
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show balance sheet that broadly groups assets, liabilities, and equity accounts.  
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show liability created when customers pay in advance for products or services; earned when the products or services are later delivered.  
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show analyses and other informal reports prepared by accountants and manager when organizing information for formal reports and financial statements.  
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Work sheet   show
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show (1) liquidity and efficiency, (2) solvency, (3) profitability, and (4) market prospects.  
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Explain the purpose and importance of accounting   show
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Identify users and uses of, and opportunities in, accounting   show
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show external users of accounting information are not directly involved in running the organization. They include shareholders (investors), lenders, directors, customers, suppliers, regulators, lawyers, brokers, and the press.  
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Internal Information Users   show
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Explain why ethics are crucial to accounting   show
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show Generally accepted accounting principles are a common set of standards applied by accountants. Accounting principles aid in producing relevant, reliable, and comparable information. Four principles underlying financial statements were introduced  
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show the accounting equation is; Assets = Liabilities + Equity. Assets are resources owned by a company. Liabilities are creditors' claims on assets. Equity is the owner's claim on assets (the residual). The expanded accounting equation is; Assets = Liabilities + [Common Stock − Dividends + Revenues − Expenses].  
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Analyze business transactions using the accounting equation   show
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show four financial statements report on an organization's activities; balance sheet, income statement, statement of retained earnings, and statement of cash flows.  
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Compute and interpret return on assets   show
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Explain the steps in processing transactions and the role of source documents   show
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show identify and describe transactions and events entering the accounting process. They are the sources of accounting information and can be in either hard copy or electronic form. Examples are sales tickets, checks, purchase orders, bills from suppliers, employee earnings records, and bank statements.  
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Describe an account and its use in recording transactions   show
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Describe a ledger and a chart of accounts   show
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Define debits and credits and explain double-entry accounting   show
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Double-entry accounting requires that for each transaction   show
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show One way to assess the risk associated with a company's use of liabilities is to compute the debt ratio. Debt ratio = Total Liabilities/Total assets.  
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show Accrual accounting recognizes revenue when earned and expenses when incurred—not necessarily when cash inflows and outflows occur. This information is valuable in assessing a company's financial position and performance.  
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Explain how accounting adjustments link to financial statements   show
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show An adjusted trial balance is a list of accounts and balances prepared after recording and posting adjusting entries. Financial statements are often prepared from the adjusted trial balance.  
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Prepare financial statements from an adjusted trial balance   show
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Describe and prepare closing entries   show
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Explain and prepare a post-closing trial balance   show
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Identify steps in the accounting cycle   show
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show Classified balance sheets report assets and liabilities in two categories; current and noncurrent. Noncurrent assets often include long-term investments, plant assets, and intangible assets. A corporation separates equity into common stock and retained earnings.  
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show Profit margin is defined as the reporting period's net income divided by its net sales. Profit margin reflects on a company's earnings activities by showing how much income is in each dollar of sales.  
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Compute the current ratio and describe what it reveals about a company's financial condition   show
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