Ch 2 Vocabulary

Question 1

Accounts Payable

Answer 1

Amounts owed to suppliers for purchases made on credit (on account) p 59

Question 2

Accounts Receivable

Answer 2

Amounts owed by customers who purchased products or services on credit (on account) p 55

Question 3

Bank indebtedness

Answer 3

A short-term loan up to a maximum amount pre-arranged with a bank to cover cash shortfalls. p 59

Question 4

Comparability

Answer 4

An enhancing qualitative characteristic of useful information that enables users to identify and understand similarities in, and difference among items. p 74

Question 5

Conceptual framework

Answer 5

A coherent system of interrelated elements that guides decisions about what to present in financial statements, alternative ways of reporting economic events, and appropriate ways of communicating this information. P 71

Question 6

Contra asset account

Answer 6

An account that is offset against (reduces) an asset account on the statement of financial position. p 57

Question 7

Cost basis of accounting

Answer 7

A basis of measurement that states that assets and liabilities should be recorded and reported at their cost at the time of acquisition, as well as during the time the asset is held. p 76

Question 8

Cost constraint

Answer 8

The constraint that the costs of obtaining and providing information should not be higher than the benefits that are gained by providing it. p 75

Question 9

Current Assets

Answer 9

Cash and other resources that it is reasonable to expect will be converted into cash, or will be sold or used up within one year of the company’s financial statement date or its operating cycle, whichever is longer. p 55

Question 10

Current Liabilities

Answer 10

Obligations that will be paid or settled within one year of the company’s financial statement date or its operating cycle, whichever is longer. p 55

Question 11

Current maturities of long-term debt

Answer 11

The portion of a non-current or long-term loan that is repayable in the current year. p 59

Question 12

Current ratio

Answer 12

A measure of liquidity used to evaluate a company’s short-term debt-paying ability. It is calculated by dividing current assets by current liabilities. p 66

Question 13

Debt to total assets

Answer 13

A measure of solvency showing the percentage of total financing that is provided by lenders and other creditors. It is calculated by dividing total liabilities by total assets. p 67

Question 14

Earnings per share (EPS)

Answer 14

A measure of profitability showing the profit earned by each common share. It is calculated by dividing profit available to common shareholders by the weighted average number of common shares. p 68

Question 15

Elements of financial statements

Answer 15

A set of definitions of basic terms in accounting, such as assets, liabilities, equity, revenues, and expenses. p75

Question 16

Fair value basis of accounting

Answer 16

A basis of measurement that states that assets should be reported at their fair value (price to sell) p 76

Question 17

Faithful representation

Answer 17

A fundamental qualitative characteristic describing information that represents economic reality. It must be complete, neutral and free from material error. p 73

Question 18

Going concern assumption

Answer 18

The assumption that the business will remain in operation for the foreseeable future. p 75

Question 19

Intangible assets

Answer 19

Assets of long lived nature that do not have physical substance but represent a privilege or a right granted to, or held by, a company. p 57

Question 20

Liquidity ratios

Answer 20

Measures of a company’s short term ability to pay its maturing obligations (usually current liabilities) and to meet unexpected needs for cash. p 65

Question 21

Long-term investments

Answer 21

(also known as investments) investments in debt securities intended to be held for many years to earn interest, and (2) equity securities of other companies held to generate investment revenue or held for strategic reasons. p 56

Question 22

Merchandise inventory

Answer 22

(also known as inventory) Goods held for sale to customers p 55

Question 23

Non-current assets

Answer 23

( also known as long-term assets) Assets that are not expected to be converted into cash, sold, or used up by the business within one year of the statement date or its operating cycle, p 56

Question 24

Non-current liabilities

Answer 24

(also known as long-term liabilities) Obligations that are not expected to be paid or settled within one year or the company’s operating cycle. p 60

Question 25

Note Payable

Answer 25

(also known as loans payable) Amounts owed to suppliers, banks, or others that are supported by a written promise to repay. p 59

Question 26

Notes Receivable

Answer 26

(also known as loans receivable) Amounts owed by customers or others that are supported by a written promise to repay. p 55

Question 27

Objective of financial reporting

Answer 27

The provision of information about a company's financial position, performance, and changes in financial position that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company. p 72

Question 28

Operating cycle

Answer 28

Average period of time it takes for a business to pay cash to obtain products or services and then receive cash from customers for these products or services. This can be one year or longer, depending on the type of business. p 55

Question 29

Prepaid expenses

Answer 29

Costs paid in advance of use (such as rent and insurance) p 55

Question 30

Price-earning (P-E) ratio

Answer 30

A profitability measure of the ratio of the market price of each common share to the earnings per share. It reflects investors' beliefs about a company's future profit potential p 69

Question 31

Profitability ratios

Answer 31

Measures of a company's operating success for a specific period of time. p 68

Question 32

Property, plant and equipment

Answer 32

Tangible assets of a long-lived nature that are being used to operate the business. p 57

Question 33

Relevance

Answer 33

A fundamental qualitative characteristic describing information that makes a difference in a decision. It should have predictive value, confirmatory value, or both, and be material. p 73

Question 34

Solvency ratios

Answer 34

Measures of a company's ability to survive over a long period of time by having enough assets to settle it liabilities as they fall due. p 67

Question 35

Supplies

Answer 35

Consumable items used in running a business, such as office and cleaning supplies. p 55

Question 36

Timeliness

Answer 36

An enhancing qualitative characteristic of useful information that means that information is available to decision makers in time to be capable of influencing their decisions. p 74

Question 37

Trading investments

Answer 37

Investments in debt securities or equity securities of other companies that are bought with the intention of selling them after a short period of time in order to earn a profit from their price fluctuations p 55

Question 38

Understandability

Answer 38

An enhancing qualitative characteristic of useful information that means that information is clearly and concisely classified, characterized, and presented. p 74

Question 39

Unearned revenue

Answer 39

Cash received when a customer pays in advance of being provided with a service or product. P 59

Question 40

Verifiability

Answer 40

An enhancing qualitative characteristic of useful information that means that different knowledgeable and independent users could reach consensus, although not necessarily complete agreement, that the information is a faithful representation. p 74

Question 41

Working capital

Answer 41

A measure of liquidity used to evaluate a company's short-term debt-paying ability. It is calculated by subtracting current liabilities from current assets. p 65