Acg Exam 3 Terms

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Balance sheet

Back 1

reports the amount of assets, liabilities, and stockholders' equity of an accounting entity at a point in time

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Accounting entity

Back 2

organization for which financial data are to be collected

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Basic Accounting Equation

Back 3

(balance sheet) Assets = Liabilities + Stockholders' Equity

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Income statement

Back 4

reports the revenues less the expenses of the accounting period

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Accounting period

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time period covered by financial statements

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Statement of retained earnings

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reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period

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Statement of cash flows

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reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing

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Notes

Back 8

provide supplemental information about the financial condition of a company without which the financial statements cannot be fully understood

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Generally accepted accounting principles

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measurement rules used to develop the information in financial statements

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Securities and exchange commission

Back 10

U.S. government agency that determines the financial statements that public companies must provide to stockholders and the measurement rules that they must use in producing those statements

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Financial Accounting Standards Board

Back 11

the private sector body given the primary responsibility to work out the detailed rules that become generally accepted accounting principles

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Audit

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examination of the financial reports to ensure that they represent what they claim and conform with GAAP

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Public company accounting oversight board

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private sector body given the primary responsibility to issue detailed auditing standards

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Primary objective of external financial reporting

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to provide useful economic information about a business to help external parties make sound financial decisions

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Separate-entity assumption

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business transactions are separate from the transactions of the owners

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Unit-of-measure assumption

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accounting information should be measured and reported in the national monetary unit

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Continuity assumption

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businesses are assumed to continue to operate into the foreseeable future

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Assets

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resources with probable future economic benefits owned by the entity as a result of past transactions

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Current assets

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assets that will be used or turned into cash within one year; inventory is always included

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Historical cost principle

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requires assets to be recorded at historical cash-equivalent cost (cash paid+current dollar value of all noncash considerations in exchange)

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Liabilities

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probable debts or obligations resulting from past transactions

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Current Liabilities

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obligations that will be paid within a year

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Stockholders' Equity

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financing provided by owners and business operations

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Contributed capital

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results from owners providing cash to the business

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Retained earnings

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refers to cumulative earnings of a company that are not distributed to the owners and are reinvested in the business

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Transaction

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1) Exchange between a business and one or more external parties or 2) a measurable internal event such as use of assets

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Account

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standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item

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Transaction analysis

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process of studying a transaction to determine its economic effect on the business in terms of the accounting equation

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Debit

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left side of an account

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Credit

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right side of an account

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Journal entry

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accounting method for expressing the effects of a transaction on accounts in a debits=credits format

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T-account

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tool for summarizing transaction effects for each account, determining balances, and drawing inferences about a company's activities

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Operating (Cash to cash) cycle

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time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers

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Time period assumption

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long life of a company can be reported in shorter time periods

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Revenues

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increases in assets or settlements of liabilities from ongoing operations

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Expenses

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decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during period

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Gain

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increase in assets or decrease in liabilities from peripheral transactions

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Loss

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decrease in assets or increase in liabilities from peripheral transactions

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Cash basis accounting

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records revenue when cash is received and expenses when cash is paid

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Accrual basis accounting

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records revenues when earned and expenses when incurred

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Revenue principle

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revenues are recognized when good or services are delivered, there is evidence of arrangement of customer payment, price is fixed or determinable, and collection is reasonably assured

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Matching principle

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requires that expenses be recorded when incurred in earning revenue

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Accounting cycle

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process followed by entities to analyze and record transactions, adjust the records at the end of the period,, prepare financial statements, and prepare the records for the next cycle

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Trial balance

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a list of all accounts with their balances to provide a check on equality of debits and credits

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Contra-account

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account that is an off-set to, or reduction of, the primary account

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Net book value

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difference between an asset's acquisition cost and accumulated depreciation

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Adjusting Entries

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necessary at the end of the accounting period to measure all revenues and expenses of the period

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Deferred revenues

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previously recorded liabilities that need to be adjusted to reflect amount of revenue earned

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Accrued Revenues

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previously unrecorded revenues that need to be adjusted to reflect amount earned and related receivable

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Deferred expenses

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previously acquired assets that need to be adjusted to reflect amount of expense incurred in using the asset

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Accrued expenses

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previously unrecorded expenses that need to be adjusted to reflect amount incurred and related

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Permanent/Real accounts

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balance sheet accounts that carry ending balances into next accounting period

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Temporary/nominal accounts

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income statement accounts that are close to Retained Earnings at the end of the accounting period

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Closing entry

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transfers balances in temporary accounts to Retained Earnings and establishes zero balances in temporary accounts

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Post-closing trial balance

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last step of accounting cycle to check that debits equal credits and all temporary accounts have been closed

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Credit card discount

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fee charged by the credit card company for services

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Sales discount

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cash discount offered to encourage prompt payment of an account receivable

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Sales returns and allowances

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reduction of sales revenues for return of or allowances for unsatisfactory goods

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Account receivable

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open account owed to the business by trade customers

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Notes Receivable

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written promises that require another party to pay the business under specified conditions

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Allowance method

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bases bad debt expense on an estimate of uncollectible accounts

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Bad debt expense

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expense associated with estimated uncollectible accounts receivable

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Allowance for doubtful accounts

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contra-asset account containing the estimated uncollectible accounts receivable

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Percentage of credit sales method

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bases bad debt expense n the historical percentage of credit sales that result in bad debts

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Aging of accounts receivable method

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estimates uncollectible accounts based on the age of each account receivable

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Cash

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money or any instrument that banks will accept for deposit and immediate credit to a company's account

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Cash equivalents

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short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change

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Internal controls

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processes by which a company safeguards its assets and provides reasonable assurance regarding the reliability of the company's financial reporting, the effectiveness and efficiency of its operations, and its compliance with applicable laws and regulations

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Bank statement

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monthly report from a bank that shows deposits recorded, checks cleared, other debits and credits, and a running bank balance

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Bank reconciliation

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process of verifying the accuracy of both the bank statement and the cash accounts of a business

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Inventory

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tangible property held for sale in the normal course of business or used in producing goods or services for sale

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Merchandise Inventory

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goods held for resale in the ordinary course of business

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Raw materials inventory

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items acquired for processing into finished goods (included until used, then work in process)

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Work in process inventory

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goods in the process of being manufacture but not yet complete

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Finished goods inventory

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manufactured goods that are complete and ready for sale

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Direct labor

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represents earnings of employees who work directly on the products being manufactured

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Factory overhead

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includes all other manufacturing costs

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Goods available for sale

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refers to sum of beginning inventory and purchases for the period

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Cost of goods sold equation

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BI + P - EI = COGS

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Specific identification method

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identifies the cost of the specific item sold

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First-in first-out method

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assumes that earliest goods purchased are the first goods sold

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Last-in, first-out method

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assumes that most recently purchased units are sold first

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Average cost method

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uses weighted average unit cost of goods available for sale for both cost of goods sold ad ending inventory

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Lower of cost or market

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valuation method departing from the cost principle; serves to recognize a loss when replacement cost or net realizable value drops below cost

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Replacement cost

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current purchase price for identical goods

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Net realizable value

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expected sales price less selling costs

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LIFO reserve

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contra-asset for the excess of FIFO over LIFO inventory

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Perpetual inventory system

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detailed inventory record is maintained, recording each purchase and sale during the accounting period

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Periodic inventory system

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ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count

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LIFO liquidation

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sale of a lower-cost inventory item from beginning LIFO inventory

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Long-lived assets

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tangible and intangible resources owned by a business and used in its operations over several years

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Tangible assets

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have physical substance

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Intangible assets

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have special rights but not physical substance

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Acquisition cost

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net cash equivalent amount paid or to be paid out for the asset

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Capitalized interest

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represents interest expenditures included in the cost of a self-constructed asset

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Ordinary repairs and maintenance

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expenditures for normal operating upkeep of long-lived assets

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Revenue expenditures

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maintain the productive capacity of the asset during the current accounting period only and are recorded as expenses

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Additions and improvements

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infrequent expenditures that increase an asset's economic usefulness

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Capital expenditures

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increase productive life, operating efficiency, or capacity of asset and are recorded as increases in assets

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Depreciation

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the process of allocating the cost of buildings and equipment over their productive lives using a systematic and rational method

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Net book (or carrying) value

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acquisition cost of an asset less accumulated depreciation

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Estimated useful life

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expected service life of an asset to its present owner

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Residual (or salvage) value

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estimated amount to be recovered at the end of the company's estimated useful life of an asset

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Straight-line depreciation

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method that allocates the cost of an asset in equal periodic amounts over its useful life

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Units-of-production depreciation

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method to allocate the cost of an asset over its useful life based on the relation of its periodic output to its total estimated output

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Declining-balance depreciation

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method that allocates the cost of an asset over its useful life based on a multiple of the straight line rate

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Natural resources

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assets that occur in nature, such as mineral deposits, timber tracts, oil and gas

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Depletion

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systematic and rational allocation of the cost of a natural resource over the period of exploitation

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Amortization

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systematic and rational allocation of the acquisition cost of an intangible asset over its useful life

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Goodwill

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excess of the purchase price of a business over the fair market value of the business's assets and liabilities

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Trademark

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exclusive legal right to use a special name, image or slogan

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Copyright

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exclusive right to publish, use, and sell a literary, musical, or artistic work

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Patent

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granted by the federal government for an invention

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Technology

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includes costs for computer software and Web development

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Franchise

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contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region

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Licenses and operating rights

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obtained through agreements, with governmental units or agencies, permit owners to use public property in performing their services

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Liquidity

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the ability to pay current obligations

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Accrued liabilities

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expenses that have been incurred before the end of an accounting period but have not been paid

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Time value of money

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interest that is associated with the use of money over time

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Contingent liability

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potential liability that has arisen as the result of a past event

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Working capital

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dollar difference between total current assets and total current liabilities

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Operating lease

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doesn't meet any of four criteria established by GAAP and doesn't cause recording of an asset or liability

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Capital lease

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meets at least one of the four criteria established by GAAP and results in recording of an asset and a liability

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Present value

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current value of an amount to be received in the future (discounted for compound interest)

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Annuity

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series of periodic cash receipts oe payments that are equal in amount each interest period

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Future value

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the sum to which an amount will increase as the result of compound interest

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Bond principal/par value/face amount

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the amount a) payable at the maturity of the bond and b) on which the periodic cash interest payments are computed

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Stated rate

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rate of cash interest per period stated in the bond contract

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Debenture

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unsecured bond

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Callable bonds

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may be called for early retirement at the option of the issuer

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Convertible bonds

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may be converted to other securities of the issuer

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Indenture

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bond contract that specifies the legal provisions of a bond issue

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Bond certificate

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bond document that each bondholder receives

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Trustee

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independent party appointed to represent the bondholders

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Coupon rate

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stated rate of interest on bonds

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Market/yield/effective interest rate

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current rate of interest on a debt when incurred

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Bond premium

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difference between the selling price and par when bond is sold for more than par

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Bond discount

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differences between selling price and par when bond is sold for less than par

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Straight-line amortization

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simplified method that allocates an equal dollar amount to each interest period

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Effective-interest method

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amortizes a bond discount on the basis of effective-interest rate

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Authorized number of shares

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maximum number of shares of a corporation's capital stock that can be issued as specified in the charter

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Issued shares

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total number of shares of stock that have been sold

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outstanding shares

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total number of shares of stock that are owned by stockholders on any particular date

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Common stock

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basic voting stock issued by a corporation

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Par value

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nominal value per share of capital stock specified in the charter

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Legal capital

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permanent amount of capital defined by state law that must remain invested in the business

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No-par value stock

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capital stock that has no par value specified in the corporate charter

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Treasury stock

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corporation's own stock that had been issued but was subsequently reacquired and is still being held by that corporation

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Declaration date

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date on which the board of directors officially approves a dividend

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Record date

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date on which the corporation prepares the list of current stockholders as shown on its records

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Payment date

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date on which a cash dividend is paid to the stockholders of record

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Stock dividend

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distribution of additional shares of a corporation's own stock

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Stock split

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increase in the total number of authorized shares by a specified ratio

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Preferred stock

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stock that has specified rights over common stock

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Current dividend preference

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feature of preferred stock that grants priority on preferred dividends over common dividends

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Cumulative dividend preference

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preferred stock feature that requires specified current dividends not paid in full to accumulate for every year in which they are not paid

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Dividends in arrears

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dividends on cumulative preferred stock that have not been declared in prior years

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Held-to maturity investments

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investments in bonds that management has the intent and ability to hold until maturity

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Amortized cost method

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reports investments in debt securities held to maturity at cost minus any premium or discount

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Market value method

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reports securities at their current market value

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Unrealized holding gains or losses

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amounts associated with price changes of securities that are currently held

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Trading securities

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investments in stocks or bonds held primarily for the purpose of active trading in the near future

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Securities available for sale

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passive investments other than trading securities

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Cash flows from operating activities

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cash inflows and outflows directly related to earnings from normal operations

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Direct method

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reports components of cash flows from operating activities as gross receipts and gross payments

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Indirect method

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adjusts net income to compute cash flows from operating activities

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Cash flows from investing activities

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cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies

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Cash flows from financing activities

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cash inflows and outflows related to external sources of financing for the enterprise

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Noncash investing and financing activities

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transactions that do not have direct cash flow effects; reported as a supplement to the statement of cash flows in narrative or schedule form