Mod 9 Flashcards
Accrual
When cash follows the economic activity
Accrual basis accounting assumption
Key assumption in financial reporting
Firm records transactions that change its financial statements in the period when the events occur (not when it receives the benefits or pays the costs)
Auditor’s report or Auditor’s opinion
A statement by the auditor expressing its view of a company’s accounting process and the resulting financial statements
Of importance is the auditor’s opinion on whether the accounting process complies with GAAP and if the company’s financials fairly represent the company
Cash basis accounting
An accounting approach where the company records revenue only when it receives cash and records expenses only when it pays cash
Prohibited by GAAP
Classified balance sheet
A balance sheet that groups together similar assets and liabilities
Comparability
An enhancing quality of useful information
Results when different companies use the same accounting principle
Cost constraint
The constraint of determining whether the costs incurred to provide the financial information outweigh the benefit that financial statement users will gain from having the info available
Cost principle or historical cost principle
When companies record assets at their initial cost
Current assets
Assets that a company expects to convert to cash within 1 year or its operating cycle (whichever is longer)
Appear in assets section of balance sheet
Current liabilities
Obligations that a company expects to pay within 1 year or the operating cycle (whichever is longer)
Appear in liabilities section of balance sheet
Deferral
When cash comes before economic activity
Depreciation
Practice of allocating costs of assets across a number of years
Economic entity assumption
Position that company transactions should not intermingle with personal transactions or transactions of other companies
Expense recognition principle or matching principle
Practice of recording expenses in the period in which the firm incurs them (regardless of when they are paid)
Match expenses with revenues in the period when it expends effort to generate revenue
Fair value principle
When a business reports assets and liabilities at their fair market value on the balance sheet
Faithful representation
A fundamental quality of useful information
Accounting info accurately depicts what happened
Financial accounting standards board
Primary accounting standard setting body in the US
Full disclosure principle
Principle that companies must disclose all circumstances and events that would make a difference to financial users
Generally accepted accounting principles
Set of accounting rules and practices in the US that have authoritative support
Going concern assumption
Assumption that the business will not liquidate shortly and that the business will continue to operate and satisfy its obligations
Goodwill
Intangible asset that results from the acquisition of one company by another for a premium (amount equals the difference between what a purchasing company pays for the target company over the target’s book value)
Appears in asset section of balance sheet
Intangible assets
Assets that do not have a physical substance but are very valuable
Brand names, copyright, patent, trademark
Appear in asset section of balance sheet
International accounting standards board
Primary accounting standard setting body for foreign countries
Internal financial reporting standards
Set of accounting rules and practices adopted by most foreign countries that have authoritative support of the IASB
Liquidity
Degree to which you can convert an asset quickly at its fair market value
Long term investments
Assets that are generally
Investment in stock and bonds of other corps held for more than 1 year
Long term assets (land or buildings) not currently used in the company’s operations
Appear in asset section of balance sheet
Long term liabilities
Financial obligations to creditors that a company expect to pay after more than 1 year
Appear in liabilities section of balance sheet
Materiality constraint
Constraint in determining whether a financial statement item is large enough to influence the decision of a creditor or investor
Monetary unit assumption
Requirement that only things expressed in money are included in financial statements
Operating cycle
Average time it takes a company to convert cash invested in inventory back into cash creating revenue
Other assets
Long term assets not classified as property, plant, equipment, investments, or intangible assets
Periodicity assumption
Point of view that life of the business can be divided into artificial time periods and that the company can prepare useful reports covering those periods
Property plant and equipment
Physical asses with relatively long useful lives currently used in operating the business
Buildings, factories, automobiles
Reported in assets section of balance sheet
Public company accounting oversight board
Regulatory body created by SOX that determines auditing standards and oversees performance of auditing firms
Revalence
Fundamental quality of useful info
Accounting info is relevant if it would make a difference in the business decision
Retained earnings
Portion of net income retained by the corporations rather than distributed to shareholders as dividends
Appears in stockholders equity portion of balance sheet
Revenue recognition principle
Accounting requirement that companies recognized revenue in the period in which the business earns it (regardless of when cash is received)
Securities and exchange commission
An agency of the US gov that oversees US financial markets and accounting standard setting bodies
Statement of stockholders equity
A financial statement that presents the factors that changed stockholders equity during the period
Timeliness
An enhancing quality of useful info
Info must be available to decision makers before it loses its capacity to influence decisions
Treasury stock
Shares of the firm’s stock repurchased in the secondary market
Appears in shareholders equity section on the balance sheet
Understandability
An enhancing quality of useful info
Financials should present accounting info in a clear and concise manner
Verifiability
An enhancing quality of useful info
Accounting info is verifiable if we can prove it is free from error
Working capital
A measure of the company’s liquidity
The difference between the amounts of assets and current liabilities
