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Accounting Chapter Four
Terms and Definitions for Chapter Four
36
Accounting
Undergraduate 1
09/29/2010

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Term
Faithful Representation
Definition
Financial reporting for an entity must be a reliable depiction of what it purports to represent
Term
Comparability
Definition
quality that enables users to identify similarities and differences between two sets of economic phenomena
Term
Verifiability
Definition
helps assure users that information faithfully represents what it purports to depict
Term
Timeliness
Definition
enables users to receive information in time to influence a decision
Term
Understandability
Definition
enables users to comprehend the meaning of the information they receive
Term
Consistency
Definition
requires that once a company has adopted an accounting procedure, it must use if from one period to the next
Term
Materiality
Definition
relative importance of an item or event
Term
Conservatism
Definition
accountants should choose the decision that is least likely to overstate assets and income
Term
Cost-benefit
Definition
the benefits to be gained from providing accounting information should be greater than the costs of providing it
Term
Current Assets
Definition
cash and other assets that a company can expect to convert to cash, sell, or consume
Term
Normal Operating Cycle
Definition
average time a company needs to go from spending cash to receiving cash
Term
Investments
Definition
assets that management does not intend to convert to cash in the next year
Term
Property, Plant, and Equipment
Definition
tangible long-term assets
Term
Intangible Assets
Definition
long-term assets like patents, copyrights, goodwill, franchises, and trademarks
Term
Current Liabilities
Definition
obligations that must be satisfied within the company's normal operating cycle
Term
Long-Term Liabilities
Definition
Debts that fall beyond the operating cycle, such as mortgages payable, long-term, notes, employee pension obligations, and long-term lease liabilities
Term
Merchandising Company
Definition
Buys and sells products
Term
Manufacturing Company
Definition
Makes and sells products
Term
Gross Sales
Definition
total cash sales and total credit sales
Term
Sales Returns and Allowances
Definition
cash refunds, credits on accounts, and discounts
Term
Cost of Goods Sold
Definition
amount a merchandiser paid for the merchandise it sold during an accounting period
Term
Gross Margin
Definition
difference between net sales and the cost of goods sold
Term
Operating Expenses
Definition
expenses incurred in running a business other than the cost of goods sold
Term
Operating Income
Definition
difference between gross margin and operating expenses
Term
Nonoperating Revenues and Expenses
Definition
revenues from investments and interest earned on credit or notes
Term
Income Before Taxes
Definition
amount a company has earned from all activities before taking into account the amount of income taxes it incurred
Term
Income Taxes Expense
Definition
Represent the expense for federal, state, and local taxes
Term
Net Income
Definition
final figure of an income statement
Term
Earnings Per Share
Definition
net income earned on each share of common stock
Term
Working Capital
Definition
amount by which current assets exceed current liabilities
Term
Current Ratio
Definition
ratio of current assets to current liabilities
Term
Profit Margin
Definition
percentage of each sales dollar that results in net income
Term
Asset Turnover
Definition
measures how efficiently assets are used to produce sales
Term
Return on Assets
Definition
net income/ average total assets
Term
Debt to Equity Ratio
Definition
shows the proportion of a company's assets that is financed by creditors and the proportion that is financed by stockholders
Term
Return on Equity
Definition
net income/average stockholders' equity
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