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Acc 301 Chapter 2
Investing and Financing Decisions and the Balance Sheet
49
Accounting
Undergraduate 3
01/26/2013

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Cards

Term
Objective of external financial reporting:
Definition
To provide useful economic information to external users for decision making.
Term
Qualitative characteristics of financial information:
Definition
  1. Relative
  2. Reliable
  3. Comparable
  4. Consistent
Term
Elements to be measured and reported:
Definition
  1. Assets
  2. Liabilities
  3. Stockholders' Equity
  4. Revenues
  5. Expenses
  6. Gains
  7. Losses
Term
Concepts for measuring and reporting informatio:
Definition
  1. Assumptions 
  2. Principles
  3. Exceptions
Term
Assumptions
Definition
  1. Seperate-entity
  2. Unit-of-measure
  3. Continuity
  4. Time Period
Term
Principles
Definition
  1. Historical Cost
  2. Revenue Recognition
  3. Matching 
  4. Full Disclosure
Term
Exceptions
Definition
  1. Cost-benefit
  2. Materiality
  3. Conservatism
  4. Industry Practices
Term
Relevancy:
Definition
  1. predictive value
  2. feedback value
  3. timeliness
Term
Reliability:
Definition
  1. verifiability,
  2.  representational faithfulness,
  3.  and neutrality.
Term
Primary charateristics of useful economic informatio:
Definition
  1. Relevant
  2. Reliable
Term
Secondary characteristics of useful econoic information:
Definition
  1. Comparability
  2. Consistency
Term
External parties:
Definition
the users of accounting information (aka decision makers) include average investors, creditors, and experts who provide financial advice; expected to have a reasonable understanding of accounting concepts and procedures; need to be able to use financial information to help them predict future cash flows related to investing and financing
Term
Asset:
Definition
economic resource with probable future benefits.
Term
Liability:
Definition
probable future sacrifices of economic resources.
Term
Stockholders’ Equity:
Definition
financing provided by owners and business operations.
Term
Revenue:
Definition

increase in assets or settlement of liabilities from ongoing

operations.

Term
Expense:
Definition

decrease in assets or increase in liabilities from ongoing

operations.

Term
Gain:
Definition

increase in assets or settlement of liabilities from peripheral

activities.

Term
Loss:
Definition

decrease in assets or increase in liabilities from peripheral

activities.

Term
Three of the four basic _______ that underlie accounting measurement and reporting relate to the balance sheet and one of the four basic ______ relates to the _____ _____ .
Definition
  • assumptions
  • principles
  • balance sheet
Term
Separate entity assumption:
Definition
business transactions are accounting for separately from the transactions of owners
Term
Unit-of-measure assumption:
Definition
accounting information should be measured and reported in the national monetary unit (i.e. dollars ($) in the US
Term
Continuity (or going-concern) assumption:
Definition
states that businesses are assumed to continue to operate into the foreseeable future
Term
Cost principle:
Definition
requires assets to be recorded at historical cost, that on the date of the transaction, is cash paid plus the current dollar value of all noncash considerations also given in the exchange
Term
The ________ ________ also contains exceptions to measurement and reporting rules that allow for variations in practice while continuing to provide relevant and reliable information to users.
Definition
Conceptual Framework
Term
The ___________exception suggests that when relatively small (immaterial) dollar amounts are not likely to influence a user's decision, the item can be accounted for in the most cost-beneficial manner.
Definition
materiality 
Term
The _______ ________ suggests that, when options in measurement exist and no option is better than any other, accountants should apply the methods that do not overstate assets and revenues or understate liabilities and expenses—that is, they should choose conservative methods.
Definition
conservatism exception
Term
Objective of Financial Reporting: 
Definition
To provide financial information about the reporting entity that is useful to present and potential equity investors, lenders, and other creditors in making decisions in their capacity as capital providers.
Term

Qualitative Characteristics (limited by materiality and costs):

 

Definition

Fundamental (to be useful):

 Relevance 

 Faithful representation

 

Enhancing (degrees of usefulness):

 Comparability

 Verifiability

 Timeliness

 Understandability

Term
Contributed Capital: 
Definition
results from owners’ providing assets to the company in exchange for stock (evidence of ownership); investments of the owners
Term
Retained Earnings: 
Definition
the cumulative earnings that are not distributed to the owners and are reinvested in the business (Increased by net income and reduced by declared dividends)
Term
___________ are certain recorded economic “events” which impact an entity.
Definition
TRANSACTIONS 
Term
External events: 
Definition
exchanges of assets, goods or services by one party for assets, services, or promises to pay (liabilities) by one or more parties (i.e. sale of merchandise to customers)
Term
Internal events: 
Definition
certain events that are not exchanges between the business and other parties but nevertheless have a direct and measurable effect on the entity (recording the usage of assets – depreciation)
Term
An ________ is standardized format that organizations use to accumulate the dollar effects of transactions on each financial statement item.
Definition
ACCOUNT
Term
Because business decisions often involve an element of risk, managers should understand exactly how transactions impact the financial statements. The process for determining the effects of transactions is called ___________ _________.
Definition
transaction analysis
Term
_______________ ___________ is the process of studying a transaction to determine its economic effect on the business in terms of the accounting equation.
Definition
TRANSACTION ANALYSIS
Term

Two principles underlie the transaction analysis process:

 

Definition

1.Dual effect: Every transaction affects at least two accounts; correctly identifying those accounts and the direction of the effect (whether increase or decrease) is critical.

2.Accounting equation: The accounting equation must remain in balance after each transaction.

Term
Journal entry: 
Definition
an accounting method for expressing the effects of a transaction on accounts in a debits = credits format.
Term
General journal: the book of original entry.
Definition
 All transactions are recorded in the journal in chronological order and show the debit and credit effects on specific accounts.
Term
The journal makes several significant contributions to the recording process:
Definition

1. It discloses in one place the complete effects of a transaction

2. It provides a chronological record of transactions.

3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared

Term
Simple Entry –
Definition
Two accounts, one debit and one credit.
Term
Compound Entry
Definition
Three or more accounts.
Term

_______contains the entire group of

accounts maintained by a company.

Definition
Ledger 
Term

A ________ _______ contains all the asset,

liability, owner’s equity, revenue, and

expense accounts and their balances.

Definition
general ledger
Term

Account balances are found in the _____

(a group of accounts). The _____ is

referred to as the “final” book of entry.

Definition
ledger
Term
_________ _________ measures the ability of the company to pay its short-term obligations with current assets. Although a ratio between 1.0 and 2.0 indicates sufficient current assets to meet obligations when they come due, many companies with sophisticated cash management systems have ratios below 1.0.
Definition
Current ratio
Term
Current Ratio=
Definition

Current Assets


Current Liabilities

 

 

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