Chapter 2 Vocabulary Flashcards
Classified balance sheet
A balance sheet that groups together similar assets and similar liabilities, using a number 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 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.
Current assets
Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.
Current liabilities
Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.
Debt to assets ratio
A measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors.
Earnings per share (EPS)
A measure of the net income earned on each share of common stock; computed as net income minus preferred dividends divided by the weighted-average number of common shares outstanding during the year.
Economic entity assumption
An assumption that every economic entity can be separately identified and accounted for.
Fair value principle
Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).
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
Net cash provided by operating activities after adjusting for capital expenditures and cash 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 accounting standards that have substantial authoritative support and which guide accounting professionals.
Going concern assumption
The assumption that the company will continue in operation for the foreseeable future.
Historical cost principle
An accounting principle that states that companies should record assets at their cost.
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 United States.
International Financial Reporting Standards (IFRS)
Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States.
Current ratio
A measure of liquidity computed as current assets divided by current liabilities.
Liquidity
The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.
Liquidity ratios
Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
Long-term investments
Generally, (1) investments in stocks and bonds 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.
Long-term liabilities (long-term debt)
Obligations that a company expects to pay after one year.
Materiality
Whether an item is large enough to likely influence the decision of an investor or creditor.
Monetary unit assumption
An assumption that requires that only those things that can be expressed in money are included in the accounting records.
Operating cycle
The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.
Periodicity assumption
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.
Profitability ratios
Measures of the operating success of a company for a given period of time.
Property, plant, and equipment
Assets with relatively long useful lives that are currently used in operating the business.
Public Company Accounting Oversight Board (PCAOB)
The group charged with determining auditing standards and reviewing the performance of auditing firms.
Ratio
An expression of the mathematical relationship between one quantity and another.
Ratio analysis
A technique that expresses the relationship among selected items of financial statement data.
Relevance
The quality of information that indicates the information makes a difference in a decision.
Securities and Exchange Commission (SEC)
The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.
Solvency
The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.
Solvency ratios
Measures of the ability of the company to survive over a long period of time.
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
The quality of information that occurs when independent observers, using the same methods, obtain similar results.
Working capital
The difference between the amounts of current assets and current liabilities.
