2. Financial statements and the annual report Flashcards
Understandability
The quality of accounting information that makes it comprehensible to those willing to spend the necessary time.
Relevance
The capacity of information to make a difference in a decision.
Faithful representation
The quality of information that makes it complete, neutral, and free from
error.
Comparability
For accounting information, the quality that allows a user to analyze two or more companies and look for similarities and differences.
Consistency
For accounting information, the quality that allows a user to compare two or more accounting periods for a single company.
Materiality
The magnitude of an accounting information omission or misstatement that will affect the judgment of someone relying on the information.
Conservatism
The practice of using the least optimistic estimate when two estimates of amounts are about equally likely.
Operating cycle
The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory.
Current asset
An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year.
Noncurrent/long-term asset
An asset that is not expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year, i.e. property, plant, equipment, intangibles.
Current liability
An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year.
Long-term liability
An obligation that will not be satisfied within one year or the current operating cycle.
Liquidity
The ability of a company to pay its debts as they come due. Measured to some extend by the amount of working capital and the current ratio.
Working capital
Current assets minus current liabilities.
Current ratio
Current assets divided by current liabilities.
