Chapter 2: A further look at financial statements

Question 1

classified balance sheet

Answer 1

a balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Question 2

comparability

Answer 2

ability to compare the accounting information of different companies because they use the same accounting principles

Question 3

consistency

Answer 3

use of the same accounting principles and methods from year to year within a company.

Question 4

cost constraint

Answer 4

constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Question 5

current assets

Answer 5

assets that companies expect to convert to cash or use up within one year of the operating cycle, whichever is longer.

Question 6

current liabilities

Answer 6

obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Question 7

current ratio

Answer 7

a measure of liquidity computed as current assets divided by current liabilities

Question 8

debt to asset ratio

Answer 8

a measure of solvency calculated as total liabilites divided by total assets. it measures the percentage of total financing provided by creditors.

Question 9

earnings per share (EPS)

Answer 9

a measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the average number of common shares outstanding during the year.

Question 10

economic entity assumption

Answer 10

as assumption that every economic entity can be separately identified and accounted for.

Question 11

fair value principle

Answer 11

assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Question 12

faithful representation

Answer 12

information that is complete, neutral, and free from error.

Question 13

financial accounting standards board (FASB)

Answer 13

the primary accounting standard-setting body in the US.

Question 14

free cash flow

Answer 14

net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.

Question 15

full disclosure principle

Answer 15

accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Question 16

generally accepted accounting principles (GAAP)

Answer 16

a set of accounting standards that have substantial authoritative support, that guide accounting professionals.

Question 17

going concern assumption

Answer 17

the assumption that the company will continue in operation for the forseeable future.

Question 18

historical cost principle

Answer 18

an accounting principle that states that companies should record assets at their cost.

Question 19

intangible assets

Answer 19

assets that do not have physical substance (patents)

Question 20

international accounting standards board (IASB)

Answer 20

an accounting standard-setting body that issues standards adopted by many counties outside of the US.

Question 21

international financial reporting standards (IFRS)

Answer 21

accounting standards, issued by the IASB that have been adopted by many countries outside the US.

Question 22

liquidity

Answer 22

the ability of a company to pay obligations that are expected to become due withing the next year or operating cycle.

Question 23

liquidity ratios

Answer 23

measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Question 24

long-term investments

Answer 24

generally, (1) investments in stocks and bond of other corporations that companies hold for more than one year;
(2) long-term assets, such as land and buildings, not currently being used in the company’s operations; and (3) long-term notes receivable.

Question 25

long-term liabilities (long-term debt)

Answer 25

obligations that a company expect to pay after one year.

Question 26

materiality

Answer 26

whether an item is large enough to likely influence the decision of an investor or creditor.

Question 27

monetary unit assumption

Answer 27

as assumption that requires that only those things that can be expressed in money are included in the accounting records.

Question 28

operating cycle

Answer 28

the average time required to purchase inventory, sell it on account, and then collect cash from customers– that is, go from cash to cash.

Question 29

periodicity assumption

Answer 29

an assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Question 30

profitability ratio

Answer 30

measures of the operating success of a company for a given period of time.

Question 31

property, plant, and equipment (PPE)

Answer 31

assets with relatively long useful lives that are currently used in operating the business.

Question 32

Ratio

Answer 32

an expression of the mathematical relationship between one quantity and another.

Question 33

ratio analysis

Answer 33

a technique that expresses the relationship among selected items of financial statement data.

Question 34

relevnace

Answer 34

the quality of information that indicates the information makes a difference in a decision.

Question 35

securities and exchange commission (SEC)

Answer 35

the agency of the U.S government that oversees US financial markets and accounting standard-setting bodies.

Question 36

solvency

Answer 36

the ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Question 37

solvency ratios

Answer 37

measures of the ability of the company to survive over a long period of time.

Question 38

statement of stockholders equity

Answer 38

a financial statement that presents the causes of changes to stockholder’s equity during the period, including those that caused retained earnings to change.

Question 39

timely

Answer 39

information that is available to decision makers before it loses its capactiy to influence decisions

Question 40

understandability

Answer 40

information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Question 41

verifiable

Answer 41

the quality of information that occurs when independent observers, using the same methods, obtain similar results.

Question 42

working capital

Answer 42

the difference between the amounts of current assets and current liabilities