Chapter 2: Measuring Income to Assess Performance

Question 1

Accounts Receivable

Answer 1

Amounts owed to a company by customers as a result of the company’s delivering goods or services and extending credit in the ordinary course of business (p. 50)

Question 2

Accrual Basis

Answer 2

Accounting method in which accountants record revenue as a company earns it and expenses as the company incurs them - regardless of when cash changes hands (p. 52)

Question 3

Accumulated Deficit

Answer 3

A more descriptive term for retained earnings when the accumulated net losses plus dividends exceed accumulated net income (p. 63)

Question 4

Accumulated Other Comprehensive Income (AOCI)

Answer 4

Stockholders’ equity account that contains a cumulative total of all items classified as other comprehensive income (p. 63)

Question 5

Cash Basis

Answer 5

Accounting method that recognizes revenue when a company receives cash and recognizes expenses when it pays cash (p. 52)

Question 6

Cash Cycle

Answer 6

(Operating Cycle)
The time elapsing between the acquisition of goods and services in exchange for cash and the subsequent sale of products to customers, who in turn pay for their purchases with cash (p. 47)

Question 7

Cash Dividends

Answer 7

Distributions of cash to stockholders that reduce retained earnings (p. 61)

Question 8

Comparability

Answer 8

A characteristic of information produced when all companies use similar concepts and measurements and use them consistently (p. 71)

Question 9

Confirmatory Value

Answer 9

A quality of information that allows it to confirm or contradict existing expectations (p. 71)

Question 10

Consistency

Answer 10

Using the same accounting policies and procedures from period to period (p. 71)

Question 11

Continuity

Answer 11

(Going Concern)

A convention that assumes that an entity will persist indefinitely (p. 72)

Question 12

Cost of Goods Sold

Answer 12

(Cost of Sale, Cost of Revenue)

The original acquisition cost of the inventory that a company sells to customers during the reporting period (p. 51)

Question 13

Cost of Revenue

Answer 13

See Cost of Goods Sold

Question 14

Cost of Sales

Answer 14

See Cost of Goods Sold

Question 15

Cost Effectiveness Constraint

Answer 15

Requirement that standard setting bodies choose rules whose decision-making benefits exceed the cost of providing the information (p. 72)

Question 16

Depreciation

Answer 16

The systematic allocation of the acquisition cost of long-lived assets to the expense accounts of the particular accounting periods that benefit from the use of the assets (p. 54)

Question 17

Dividend-Payout Ratio

Answer 17

Common dividends per share divided by earnings per share (p. 68)

Question 18

Dividend-Yield Ratio

Answer 18

Common dividends per share divided by market price per share (p. 68)

Question 19

Earnings

Answer 19

The excess of revenues over expenses (p. 48)

Question 20

Earnings Multiple

Answer 20

Another name for the P-E ratio (p. 66)

Question 21

Earnings Per Share (EPS)

Answer 21

Basic EPS is net income divided by the weighted-average number of common shares outstanding during the period over which the net income is measured (p. 65)

Question 22

Expenses

Answer 22

Decreases in net assets as a result of consuming or giving up resources in the process of providing products or services to a customer. Expenses decrease owners’ equity (p. 48)

Question 23

Faithful Representation

Answer 23

A quality of information that ensures that it captures the economic substance of the transactions, events, or circumstances it describes. It requires information to be complete, neutral, and free from material errors (p. 71)

Question 24

Fiscal Year

Answer 24

The year established for accounting purposes, which may differ from the calendar year (p. 47)

Question 25

Going Concern

Answer 25

A convention that assumes that an entity will persist indefinitely
(Also called Continuity)

Question 26

Income

Answer 26

The excess of revenues over expenses (p. 48)

Question 27

Income Statement

Answer 27

A report of all revenues and expenses pertaining to a specific time period (p. 57)

Question 28

Interim Periods

Answer 28

The time spans established for accounting purposes that are less than a year (p. 47)

Question 29

Matching

Answer 29

The recording of expenses in the same time period that we recognized the related revenues (p. 53)

Question 30

Materiality

Answer 30

A convention that asserts that an item should be included in a financial statement if its omission or misstatement would tend to mislead the reader of the financial statements under consideration (p. 73)

Question 31

Net Earnings

Answer 31

The remainder after deducting all expenses from revenues (p. 57)
Also called Net Income

Question 32

Net Income

Answer 32

See Net Earnings

The remainder after deducting all expenses from revenues (p. 57)

Question 33

Net Loss

Answer 33

The difference between revenues and expenses when expenses exceed revenues (p. 57)

Question 34

Objective of Financial Reporting

Answer 34

To provide information that is useful to present and potential investors and creditors and others in making investment, credit, and similar resource allocation decisions (p. 70)

Question 35

Operating Cycle

Answer 35

Also known as Cash Cycle
The time elapsing between the acquisition of goods and services in exchange for cash and the subsequent sale of products to customers, who in turn pay for their purchases with cash (p. 47)

Question 36

Other Comprehensive Income (OCI)

Answer 36

Changes in stockholders’ equity that do not result from net income (net loss) or transactions with shareholders (p. 63)

Question 37

Period Costs

Answer 37

Expenses supporting a company’s operations for a given period. We record these expenses in the time period in which the company incurs them (p. 53)

Question 38

Periodicity Convention

Answer 38

Related to the information characteristic of timeliness, this convention requires that a company break up its economic activity into artificial time periods that will provide timely information to users (p. 73)

Question 39

Predictive Value

Answer 39

A quality of information that allows it to help users form their expectations in the future (p. 71)

Question 40

Price-Earnings Ratio

Answer 40

Market price per share of common stock divided by earnings per share of common stock (p. 66)

Question 41

Product Costs

Answer 41

Costs that are linked with revenues and are charged as expenses when the related revenue is recognized (p. 53)

Question 42

Profits

Answer 42

The excess of revenues over expenses (p. 48)

Also called Income

Question 43

Receivables

Answer 43

Also called Accounts Receivable
Amounts owed to a company by customers as a result of the company’s delivering goods or services and extending credit in the ordinary course of business (p. 50)

Question 44

Relevance

Answer 44

The capability of information to make a difference to the decision maker (p. 71)

Question 45

Reliability

Answer 45

A quality of information that assures decision makers that the information captures the conditions or events it purports to represent (p. 73)

Question 46

Retained Earnings

Answer 46

Also called Retained income

Total cumulative owners’ equity generated by income or profits (p. 48)

Question 47

Retained Income

Answer 47

See Retained Earnings

Question 48

Revenue

Answer 48

The increase in net assets resulting from selling products of services. Revenues increase owners’ equity (p. 48)

Question 49

Revenue Recognition

Answer 49

Criteria for determining whether to record revenue in the financial statements of a given accounting period. To be recognized, revenues must be earned and realized or realizable (p. 52)

Question 50

Sales

Answer 50

See Revenue

Question 51

Sales Revenue

Answer 51

See Revenue

Question 52

Stable Monetary Unit

Answer 52

A monetary unit that is not expected to change in value significantly over time. For example, the dollar in the United States, the yen in Japan, and the euro in the European Union (p. 73)

Question 53

Statement of Earnings

Answer 53

See Income Statement (p. 57)

Question 54

Statement of Operations

Answer 54

See Income Statement (p. 57)

Question 55

Statement of Shareholders’ Equity

Answer 55

A statement that shows all changes during the year in each stockholders’ equity account (p. 63)

Question 56

Statement of Stockholders’ Equity

Answer 56

See Shareholders’ Equity

Question 57

Timeliness

Answer 57

A characteristic of information that requires information to reach decision makers while it can still influence their decisions (p. 71)

Question 58

Trade Receivables

Answer 58

See Accounts Receivable

Question 59

Understandability

Answer 59

A characteristic of information that requires information to be presented clearly and concisely (p. 71)

Question 60

Verifiability

Answer 60

A characteristic of information that can be checked to ensure it is correct (p. 71)