Acct 203 - Chapter 2

Front 1

accounting cycle

Back 1

for a given time period, the cycle of recording accounting data, adjusting the acounts, preparing the financial statements, and closing the temporary accounts; when one accounting cycle ends, a new one begins

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accounts receivable

Back 2

expected futures cash receipts arising from permitting customers to buy now and pay later; typically relatively small balances due within a short time period.

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accrual

Back 3

accounting recognition of revenue or expense in a period before cash is exchanged

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accrual accounting

Back 4

accounting system which recognizes revenues when earned and expenses when incurred regardless of when the related cash is exchanged

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adjusting entry

Back 5

entry that updates account balances prior to preparing financial statements; a bookkeeping tool. Adjusting entries never affect the cash account.

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adverse opinion

Back 6

opinion issued by a certified public accountatnt that means one or more departures from GAAP in a company's fiancial statements are so very material the auditors believe the financial statements do not fairly represent the company's status; contrast with unqualified opinion

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American Institute of Certified Public Accountants

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National association that serves the educational and professional interests of members of the public accounting profession; membership is voluntary.

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Asset exchange transaction

Back 8

A transaction, such as the purchase of land with cash, that decreases one asset and increases another asset; total assets remain unchanged.

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asset source transaction

Back 9

A transaction that increases both an asset and a claim on assets; the three source transactions are acquisitions from owners (equity), borrowings from creditors (liabilities), or earnings from operations (revenues).

Front 10

asset use transaction

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A transaction that decreases both an asset and a claim on assets; the three types of asset use transactions are distributions (transfers to owners), liability payments (to creditors), or expenses (costs incurred to operate the business).

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audit

Back 11

detailed examination of some aspect of a company's accounting records or operating procedures in order to report the results to interested parties.

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Certified Public Accountant (CPA)

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accountant who, by meeting certain educational and experiential requirements, is licensed by the state government to provide audit services to the public

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Claims

Back 13

owners' and creditors' interests in a business's assets

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Claims exchange transaction

Back 14

A transaction that decreases one claim and increases another claim; total claims remain unchanged. For example, accruing interest expense is a claims exchange transaction; liabilities increase, and the expense recognition decreases retained earnings.

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closing or closing the books

Back 15

bookkeeping technique of transferring balances from the temporary accounts (Revenue, Expense, and Dividends) to the permanent account (Retained Earnings).

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Code of Professional Conduct

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Guidelines established by the American Institute of Certified Public Accountants (AICPA) to promote ethical conduct among certified public accountants; AICPA members agree to adhere to this code, which goes beyond legal requirements.

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Conservatism Disclaimer of audit opinion

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The auditor is unable to obtain enough information to confirm compliance with GAAP

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Expense

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An economic sacrifice (decrease in assets or increase in liabilities) that is incurred in the process of generating revenue

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Financial audit

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Detailed examination of a company's accounting records and the documents that support the information reported in the financial statements; includes testing the reliability of the underlying accounting system used to produce the financial reports

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independent auditor

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licensed certified public accountant engaged to audit a company's financial statements; not an employee of the audited company

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internal controls

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Policies and procedures companies establish to provide reasonable assurance of reducing fraud, providing reliable accounting records, and accomplishing organization objectives.

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investment

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commitment of assets (usually cash) by a business to acquire other assets that will be used to produce revenue

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issuer

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the borrower who receives money from the bank

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Matching concept

Back 24

accounting principles of recognizing expenses in the same accounting period as the revenues they produce, using one of the three methods: match expenses directly with revenues (e.g cost of goods sold); match expenses to the period in which they are incurred (e.g rent expense), and match expenses systematically with the revenues (e.g depreciation expense)

Front 25

material error

Back 25

error or other reporting problem that, if known, would influence the decision of an average prudent investor

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notes payable

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Liability represented by a legal document called a note that describes pertinent details such as principal amount, interest charges, maturity date, and collateral.

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opportunity

Back 27

an element of the fraud triangle that recognizes weaknesses in internal controls that enable the occurrence of fraudulent or unethical behavior

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period costs

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expenses recognized in the period in which they are incurred regardless of when cash payments for them are made; costs that can't be directly traced to products

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pressure

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an element of the fraud triangle that recognizes conditions that motivate fraudulent or unethical behavior

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Qualified opinion

Back 30

opinion issued by a certified public accountant that means the company's financial statments are, for the most part, in compliance with GAAP, but there is some circumstance (explained in the auditor's report) about which the auditor has reservations; contrast with unqualified opinion

Front 31

rationalization

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an element of the fraud triangle that recognizes a human tendency to justify fraudulent or unethical behavior

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recognition

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reporting an accounting event in the financial statements

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revenue

Back 33

the economic benefit (increase in assets or decrease in liabilities) gained by providing goods or services to customers

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salaries payable

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amounts owed but not yet paid to employees for services they have already performed

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unqualified opinion

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where auditors believes the financial statements are in compliance with GAAP without qualification, reservation, or exception.

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voluntarily disclosing

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professional responsibility to clients that prohibits CPAs, in most circumstances, from revealing information obtained as a result of their client-accountant relationships