Chapter 2 - Financial Statements And Accounting Concepts/principles

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Account

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A record in which transactions affecting individual assets, liabilities, stockholders’ equity, revenues, and expenses are recorded.

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Accounting Equation

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Assets = Liabilities + Stockholders’ equity (A = L + SE). The fundamental relationship represented by the balance sheet and the foundation of the bookkeeping process.

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Accounts Payable

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A liability representing an amount payable to another entity, usually because of the purchase of merchandise or services on credit.

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Accounts Receivable

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An asset representing a claim against another entity, usually arising from selling goods or services on credit.

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Accrual Accounting

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Accounting that recognized revenues and expenses as they occur, even though the cash receipt from the revenue or the cash disbursement related to the expense may occur before or after the event that causes revenue or expense recognition.

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Accrued Liabilities

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Amounts that are owed by an entity on the balance sheet date.

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Accumulated Depreciation

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The sum of the depreciation expense that has been recognized over time. Accumulated depreciation is a contra asset- an amount that is subtracted from the cost of the related asset on the balance sheet.

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Addition Paid-In Capital

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The excess of the amount received from the sale of stock over the par value of the shares sold.

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Assets

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Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

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Balance Sheet

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The financial statement that is a listing of the entity’s assets, liabilities, and stockholders’ equity at a point in time. Sometimes this statement is called the statement of financial position.

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Balance Sheet Equation

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Another term for accounting equation.

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Cash

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An asset on the balance sheet that represents the amount of cash on hand and balances in bank accounts maintained by the entity.

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Common Stock

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The class of stock that represents residual ownership of the corporation.

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Corporation

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A form of organization in which ownership is evidenced by shares of stock owned by stockholders; its features, such as limited liability of the stockholders, make this the principal form of organization for most business activity.

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Cost of Goods Sold

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Cost of merchandise sold during the period; an expense deducted from net sales to arrive at gross profit. Frequently used synonyms are cost of sales and cost of products sold.

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Current Assets

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Cash and those assets that are likely to be converted to cash or used to benefit the entity within one year of the balance sheet date.

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Current Liabilities

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Those liabilities due to be paid within one year of the balance sheet date.

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Depreciation

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The accounting process of recognizing the cost of an asset that is used up over its useful life to the entity.

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Depreciation Expense

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The expense recognized in a fiscal period for the depreciation of an asset.

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Dividend

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A distribution of earnings to the stockholders of a corporation.

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Earnings Per Share of Common Stock Outstanding

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Net income available to the common stockholders divided by the average number of shares of common stock outstanding during the period. Usually referred to simply as EPS.

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Equity

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The ownership right associated with an asset. See stockholders’ equity.

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Expenses

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Outflows or other using up of assets or incurring a liability during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s major operations.

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Fiscal Year

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The annual period used for reporting to owners.

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Gains

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Increases in net assets from incidental transactions that are not revenues or investments by owners.

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Going Concern Concept

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A presumption that the entity will continue in existence for the indefinite future.

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Gross Profit

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Net sales less cost of goods sold. Sometimes called gross margin.

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Income from Operations

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The difference between gross profit and operating expenses. Also referred to as operating income.

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Income Statement

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The financial statement that summarizes the entity’s revenues, expenses, gains, and losses for a period of time and thereby reports the entity’s results of operations for that period of time.

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Liabilities

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Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

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Losses

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Decreases in net assets from incidental transactions that are not expenses or distributions to owners.

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Matching Concept

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The concept that expenses incurred in generating revenues should be deducted from revenues earned during the period for which results are being reported.

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Merchandise Inventory

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Items held by an entity for sale to customers in the normal course of business.

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Net Assets

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The difference between assets and liabilities; also referred to as stockholders’ equity or owners’ equity.

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Net Income

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The excess of revenues and gains over expenses and losses for a fiscal period.

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Net Sales

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Gross sales, less sales discounts and sales returns and allowances.

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Net Worth

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Another term for net assets or stockholders’ equity or owners’ equity, but not as appropriate because the term worth may be misleading.

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Opportunity Cost

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An economic concept relating to income forgone because an opportunity to earn income was not pursued.

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Owner’s Equity

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Another term for stockholders’ equity. The owners’ claim in the assets of the entity. Sometimes called net assets; the difference between assets and liabilities.

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Paid-In Capital

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The amount invested in the entity by the stockholders.

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Par Value

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An arbitrary value assigned to a share of stock when the corporation is organized. Sometimes used to refer to the stated value or face amount of a security.

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Partnership

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A form of organization indicating ownership by two or more individuals or corporations without the limited liability and other features of a corporation.

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Profit

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The excess of revenues and gains over expenses and losses for a fiscal period; another term for net income.

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Profit and Loss Statement

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Another term for income statement.

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Proprietorship

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A form of organization indicating individual ownership without the limited liability and other features of a corporation.

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Retained Earnings

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Cumulative net income that has not been distributed to the stockholders of a corporation as dividends.

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Revenues

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Inflows of cash or increases in other assets, or the settlement of liabilities during a period, from delivering or producing goods, rendering services, or performing other activities that constitute the entity’s major operations.

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Statement of Cash Flows

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The financial statement that explains why cash changed during a fiscal period. Cash flows from operating, investing, and financing activities are shown.

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Statement of Changes in Capital Stock

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The financial statement that summarizes changes during a fiscal period in capital stock and additional paid-in capital. This information may be included in the statement of changes in stockholders’ equity.

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Statement of Changes in Retained Earnings

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Teh financial statement that summarizes the changes during a fiscal period in retained earnings. This information may be included in the statement of changes in stockholders’ equity.

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Statement of Changes in Stockholders’ Equity

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The financial statement that summarizes the changes during a fiscal period in capital stock, additional paid-in capital, retained earnings, and other elements of stockholders’ equity.

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Statement of Earnings

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Another term of income statement; it shows the revenues, expenses, gains, and losses for a period of time and thereby the entity’s results of operations for that period of time.

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Statement of Financial Position

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Another term for balance sheet; a listing of the entity’s assets, liabilities, and stockholders’ equity at a point in time.

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Statement of Operations

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Another term for income statement.

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Stock

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The evidence of ownership of a corporation.

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Stockholders

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The owners of a corporation’s stock; sometimes called shareholders.

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Stockholders’ Equity

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The stockholders’ claim in the assets of the entity. Sometimes called owners’ equity or net assets; the difference between assets and liabilities.

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Subsidiary

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A corporation whose stock is more than 50 percent owned by another corporation.

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Transactions

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Economic interchanges between entities that are accounted for and reflected in financial statements.