Chapter 17: Understanding Accounting and Financial Information

Question 1

accounting

Answer 1

The recording, classifying, summarizing, and interpreting of financial events and transactions to provide management and other interested parties the information they need to make good decisions.

Question 2

accounting cycle

Answer 2

A six-step procedure that results in the preparation and analysis of the major financial statements.

Question 3

accounts payable

Answer 3

Current liabilities involving money owed to others for merchandise or services purchased on credit but not yet paid for.

Question 4

annual report

Answer 4

A yearly statement of the financial condition, progress, and expectations of an organization.

Question 5

assets

Answer 5

Economic resources (things of value) owned by a firm.

Question 6

auditing

Answer 6

The job of reviewing and evaluating the information used to prepare a company’s financial statements.

Question 7

balance sheet

Answer 7

Financial statement that reports a firm’s financial condition at a specific time and is composed of three major accounts: assets, liabilities, and owners’ equity.

Question 8

bonds payable

Answer 8

Long-term liabilities that represent money lent to the firm that must be paid back.

Question 9

bookkeeping

Answer 9

The recording of business transactions.

Question 10

cash flow

Answer 10

The difference between cash coming in and cash going out of a business.

Question 11

certified public accountant (CPA)

Answer 11

An accountant who passes a series of examinations established by the American Institute of Certified Public Accountants (AICPA).

Question 12

cost of goods sold (or cost of goods manufactured)

Answer 12

A measure of the cost of merchandise sold or cost of raw materials and supplies used for producing items for resale.

Question 13

current assets

Answer 13

Items that can or will be converted into cash within one year.

Question 14

depreciation

Answer 14

The systematic write-off of the cost of a tangible asset over its estimated useful life.

Question 15

double-entry bookkeeping

Answer 15

The practice of writing every business transaction in two places.

Question 16

financial accounting

Answer 16

Accounting information and analyses prepared for people outside the organization.

Question 17

financial statement

Answer 17

A summary of all the transactions that have occurred over a particular period.

Question 18

fixed assets

Answer 18

Assets that are relatively permanent, such as land, buildings, and equipment.

Question 19

fundamental accounting equation

Answer 19

Assets = Liabilities + Owners’ equity; this is the basis for the balance sheet.

Question 20

government and not-for-profit accounting

Answer 20

Accounting system for organizations whose purpose is not generating a profit but serving ratepayers, taxpayers, and others according to a duly approved budget.

Question 21

gross profit (or gross margin)

Answer 21

How much a firm earned by buying (or making) and selling merchandise.

Question 22

income statement

Answer 22

The financial statement that shows a firm’s profit after costs, expenses, and taxes; it summarizes all of the resources that have come into the firm (revenue), all the resources that have left the firm, expenses, and the resulting net income or net loss.

Question 23

independent audit

Answer 23

An evaluation and unbiased opinion about the accuracy of a company’s financial statements.

Question 24

intangible assets

Answer 24

Long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value.

Question 25

journal

Answer 25

The record book or computer program where accounting data is first entered.

Question 26

ledger

Answer 26

A specialized accounting book or computer program in which information from accounting journals is accumulated into specific categories and posted so that managers can find all the information about one account in the same place.

Question 27

liabilities

Answer 27

What the business owes to others (debts).

Question 28

liquidity

Answer 28

The ease with which an asset can be converted into cash.

Question 29

managerial accounting

Answer 29

Accounting used to provide information and analyses to managers within the organization to assist them in decision making.

Question 30

net income or net loss

Answer 30

Revenue left over after all costs and expenses, including taxes, are paid.

Question 31

notes payable

Answer 31

Short-term or long-term liabilities that a business promises to repay by a certain date.

Question 32

operating expenses

Answer 32

Costs involved in operating a business, such as rent, utilities, and salaries.

Question 33

owners’ equity

Answer 33

The amount of the business that belongs to the owners minus any liabilities owed by the business.

Question 34

private accountant

Answer 34

An accountant who works for a single firm, government agency, or nonprofit organization.

Question 35

public accountant

Answer 35

An accountant who provides accounting services to individuals or businesses on a fee basis.

Question 36

ratio analysis

Answer 36

The assessment of a firm’s financial condition using calculations and interpretations of financial ratios developed from the firm’s financial statements.

Question 37

retained earnings

Answer 37

The accumulated earnings from a firm’s profitable operations that were reinvested in the business and not paid out to stockholders in dividends.

Question 38

statement of cash flows

Answer 38

Financial statement that reports cash receipts and disbursements related to a firm’s three major activities: operations, investments, and financing.

Question 39

tax accountant

Answer 39

An accountant trained in tax law and responsible for preparing tax returns or developing tax strategies.

Question 40

trial balance

Answer 40

A summary of all the financial data in the account ledgers that ensures the figures are correct and balanced.