Accounting 101-Chapter 2

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  1. Understandability
    The quality of accounting information that makes it comprehensible to those willing to spend the necessary time.
  2. Relevance
    The capacity of information to make a difference in a decision.
  3. Faithful Representation
    The quality of information that makes it complete, neutral, and free from error.
  4. Comparability
    For accounting information, the quality that allows a user to analyze two or more companies and look for similarities and differences.
  5. Depreciation
    The process of allocating the cost of a long-term tangible asset over its useful life.
  6. Consistency
    For accounting information, the quality that allows a user to compare two or more accounting periods for a single company.
  7. Materiality
    The magnitude of an accounting information omission or misstatement that will affect the judgement of someone relying on the information.
  8. Conservatism
    The practice of using the least optimistic estimate when two estimates of amounts are about equally likely
  9. Current Assets
    An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year.
  10. Noncurrent Assets
    Any asset not meeting the definition of a current asset is classified as long term or noncurrent.  Three common categories of long-term assets are investments;property,plant, and equipment; and intangibles.
  11. Intangibles
    Trademarks, copyrights, franchise rights, patents, and goodwill.
  12. Current Liabilities
    An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year.
  13. Operating Cycle
    The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory.
  14. Long-Term Liabilities
    Any obligation that will not be paid or otherwise satisfied within the next year or the operating cycle, whichever is longer, is classified as a long-term liability, or long-term debt.  Notes payable and bonds payable, both promises to pay money in the future, are two common forms of long-term debt.
  15. Stockholders' Equity
    Represents the owners' claims on the assets of the business that arise from two sources:  Contributed capital and earned capital.
  16. Capital stock
    Indicates the owners' investment in the business.
  17. Retained earnings
    Represents the accumulated earnings, or net income, of the business since its inception less all dividends paid during that time.
  18. Liquidity
    The ability of a company to pay its debts as they come due.
  19. Working Capital
    Current assets minus current liabilities
  20. Current Ratio
    Current assets divided by current liabilities
  21. Single-step income statement
    An income statement in which all expenses are added together and subtracted from all revenues.
  22. Multiple-step income statement
    An income statement that shows classifications of revenues and expenses as well as important subtotals.  Indicates four important subtotals.  (1) Gross profit. (2) Income from operations.  (3) Income before income taxes.  (4) Net Income
  23. Gross profit
    Sales less costs of goods sold.
  24. Income from operations
    This is found by subtracting total operating expenses from the gross profit
  25. Income before income taxes
    Other revenue and expenses is subtracted from Income from Operations total.
  26. Net Income
    Income before taxes minus Income tax expense
  27. Profit margin
    Net income divided by sales.
  28. Gross Profit Ratio
    Gross profit/Net Sales(%)
  29. The Statement of Retained Earnings
    The purpose of the statement of stockholders' equity is to explain the changes in the components of owners' equity during the period.  Retained earnings and capital stock are the two primary components of stockholders' equity
  30. The Statement of Cash Flows
    The purpose of the statement is to summarize the cash-flow effects of a company's operating, investing, and financing activities for the period.
  31. Operating activities
    Involve the purchase and sale of products or services.
  32. Investing Activities
    Involve the acquisition and sale of long-term assets.
  33. Financing activities
    Involve the issuance and repayment of long-term liabilities and stock and the payment of dividends.
Card Set
Accounting 101-Chapter 2
Financial Statements and the Annual Report.
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