ch13 vocab

Question 1

accrual basis of accounting

Answer 1

revenues are recorded when they are earned(when the sale takes place), rather than when cash is received on the sale. Likewise, expenses are recorded when they are incurred, rather than when they are paid

Question 2

cash equivalents

Answer 2

very safe, highly liquid assets that are readily convertible into cash, such as money market funds, certificates of deposit that mature in less than three months, and U.S. treasury bills

Question 3

comparative balance sheets

Answer 3

a comparison of the balance sheets from the end if two fiscal periods; usually highlighting the changes in each account

Question 4

direct method

Answer 4

a method of presenting cash flows from operating activities that separately lists the receipt and payment of cash for specific operating activities

Question 5

financing activities

Answer 5

activities that either generate capital for the company or pay it back:

• issuing stock or long-term debt
• paying dividends
• repaying principal

Question 6

free cash flow

Answer 6

the amount of excess cash a business generates after taking into consideration the capital expenditures necessary to maintain its business. It is calculated as cash flows from operating activities minus capital expenditures

Question 7

indirect method

Answer 7

a method of presenting the cash flows from operating activities that begins with the company’s net income; which is prepared on an accrual basis, and then reconciles it back to the cash basis through a series of adjustments

Question 8

investing activities

Answer 8

activities that involve buying or selling long-term assets:

• buying or selling property, plant, or equipment
• buying or selling stock in other companies (if the stock is meant to be held for the long term)
• loaning money to other companies with the goal of earning interest income from the loan

Question 9

net book value

Answer 9

the original cost of plant or equipment less its accumulated depreciation

Question 10

operating activities

Answer 10

the day-to-day profit-making activities of the company:
* making or buying inventory
* selling inventory
* selling services
* paying employees
* advertising 
* and so forth
this also includes any other activities that affects net income (not just operating income), current assets, or current liabilities

Question 11

statement of cash flows

Answer 11

one of the four basic financial statements; the statement shows the overall increase or decrease in cash during the period as well as how the company generated and used cash during the period