Chapter 2 Flashcards
Accrual-basis accounting
Transactions that change a company’s financial statements are recorded in the periods in which the events occur
Classified balance sheet
A balance sheet that contains anumber of standard classifications and sections
Comparability
Ability to compare the accounting information of different companies because they use the same accounting principles
Consistency
Use of the same accounting principles and methods from year to year within a company
Cost constraint
Constraint of determining whether the cost that companies will incur to provide the information will outweigh the benefit that financial statement users will gain from having the information avilable
Cost principle
An accounting principle that states that companies should record assets at their cost
Current assets
Cash and other resources that companies reasonably expect to convert to cash or use within one year or the operating cycle, whichever is longer
Current liabilities
Obligations that a company reasonably expects to pay within the next year or operating cycle, whichever is longer
Current ratio
a measure used to evaluate a company’s liquidity and short-term debt-paying ability; computed as current assets divided by current liabilities
Debt to total assets ratio
Measures the percentage of total financing provided by creditors; computed as total debt divded by total assets
Earings per share
A measure of the net income earned on each share of common stock
Economic entity assumption
An assumption that every economic entity can be seperately identified and accounted for
Fair value principle
Assets and liabilities should be reported at fair value
Faithful representation
Information that is complete, neutral, and free from error
Financial Accounting Standards Board (FASB)
The primary accounting standard-setting body in the United States
Free cash flow
Cash remaining from operating activities after adjusting for capital expenditures and dividends paid
Full disclosure principle
Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users
Generally accepted accounting principles (GAAP)
A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes
Going concern assumption
The assumption that the company will continue in operation for the foreseeable future
Intangible assets
Assets that do not have physical substance
International Accounting Standards Board (IASB)
An accounting standard-setting body that issues standards adopted by many countries outside of the U.S.
IFRS
Accounting standards, issued by the IASB, that have been adopted by international countries
Timely
Information that is available to decision makers before it loses its capacity to influence decisions
Understandability
Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning
Verifiable
Information that is proven to be free from error
Alternative term for Property, plant, and equpment
Fixed assets or plant assets
China international note
China adopted IFRS in 2007
-under these, many items are reported at current fair values
Other term for intangible assets
“Other assets”
Alternative terminology for long-term investments
“investments”
Alternative terminology for common stock
“capital stock”
Debt to equity ratio
Total liabilities
Stockholder’s equity
The higher this ratio is, the lower a company’s solvency
International note: IFRS
Over 100 countries use international standards.
All companies in the European Union follow international standards
Ethics note: Adelphia
Senior company employees entered into transactions that blurred the line between the employees’ financial interests and those of the company
Ex. Adelphia guranteed over 2 billion of loans to the founding family
Alternative terminology for Stockholders
Shareholders
Ethincs Note: Circus
Circus-founder, Barnum is alleged to have said, “Trust everyone, but cut the deck.”
The Sarbanes-Oxley provides measures that help ensure that fraud will not occur
PP&E is sometimes called what?
fixed assets
International Note: IFRS and GAAP
Generally accepted accounting principles are the same
Neither has specific rformat requirements
However, sometimes format differences do exist in presentations commonly employed by IFRS
