Chapter 1 Glossary

Question 1

Accounting Equation

Answer 1

expressed as Assets = Liabilities + Owner’s Equity; a description of the relationship between a company’s assets, liabilities, and equity; also called the balance sheet equation.

Question 2

Accounts Payable

Answer 2

liabilities created by buying goods and services on credit. It is an obligation to pay cash to a supplier in the future.

Question 3

Accounts Receivable

Answer 3

assets created by selling goods and services on credit; customers promise to pay cash in the future.

Question 4

AcSB

Answer 4

the Accounting Standards Board; the authoritative committee of the CICA that identifies generally accepted accounting principles.

Question 5

ASB

Answer 5

the Auditing Standards Board; the authoritative committee of the CICA that identifies generally accepted auditing standards.

Question 6

Assets

Answer 6

items (economic resources) owned by the business and expected to benefit future operations.

Question 7

Balance Sheet

Answer 7

a financial statement that lists the types and dollar amounts of assets, liabilities, and equity as of a specific date; also called the statement of financial position. provides information that helps users understand a company’s financial status.

Question 8

Balance Sheet Equation

Answer 8

another name for the accounting equation.

Question 9

Business Entity Principle (economic entity concept)

Answer 9

the principle that requires every business to be accounted for separately and distinctly from its owner or owners; based on the goal of providing relevant information about the business.

Question 10

Business Transaction

Answer 10

an exchange between two parties of economic consideration, such as goods, services, money, or rights to collect money.

Question 11

CICA Handbook

Answer 11

the publication of the CICA that establishes generally accepted accounting principles in Canada.

Question 12

Common Shares

Answer 12

the name given to a corporation’s shares when it issues only one kind or class of shares, also known as common stock.

Question 13

Continuing-Concern Principle

Answer 13

another name for the going-concern principle.

Question 14

Contributed Captial

Answer 14

the category of shareholders’ equity created by the shareholders’ investments, also called paid-in capital.

Question 15

Corporation

Answer 15

a business chartered or incorporated as a separate legal entity under federal or provincial law; ownership divided into transferable shares.

Question 16

Cost Principle

Answer 16

principle that states that assets should be recorded at their original cost.

the accounting principle that requires financial statement information to be based on costs incurred in business transactions; it requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange.

Question 17

Creditors

Answer 17

individuals or organizations that the company owes money to; entitled to receive payments from a company.

Question 18

Debtors

Answer 18

individuals or organizations that owe amounts to a business.

Question 19

Dividends

Answer 19

payments of cash by a corporation to its shareholders.

Question 20

Equity

Answer 20

the difference between a company’s assets and its liabilities; more precisely, the residual interest in the assets of an entity that remains after deducting its liabilities; also called net assets.

Question 21

Expenses

Answer 21

costs incurred by a firm in the process of earning revenue; measured by the cost of goods and services consumed in the operation of the business.

Question 22

GAAS

Answer 22

the abbreviation for generally accepted auditing standards.

Question 23

Generally Accepted Auditing Standards

Answer 23

rules adopted by the accounting profession as guides for conducting audits of financial statements.

Question 24

Going-Concern Principle (going concern assumption)

Answer 24

the rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue; also called the continuing-concern principle.

Question 25

IASC

Answer 25

International Accounting Standards Committee; a committee that attempts to create more harmony among the accounting practices of different countries by identifying preferred practices and encouraging their worldwide acceptance.

Question 26

Income Statement

Answer 26

the financial statement that shows whether the business earned a profit or suffered a loss; it lists the types and amounts of the revenues and expenses over a specific period of time.

Question 27

Liabilities

Answer 27

debts owed by a business or organization; normally require future payments in assets or the rendering of services, or both.

current obligations arising from past events, to make future payments of assets or services.

Question 28

Net assets

Answer 28

assets minus liabilities; another name for equity.

Question 29

Net income

Answer 29

the excess of revenues over expenses for a period.

Question 30

Net loss

Answer 30

the excess of expenses over revenues for a period.

Question 31

Objectivity Principle

Answer 31

the accounting guideline that requires financial statement information to be supported by evidence other than someone’s opinion or imagination; objectivity adds to the reliability and usefulness of accounting information.

Question 32

Paid-in Capital

Answer 32

another name for contributed capital.

Question 33

Partnership

Answer 33

a business that is owned by two or more people that is not organized as a corporation.

Question 34

Realization Principle

Answer 34

another name for the revenue recognition principle.

Question 35

Retained Earnings

Answer 35

the category of shareholders’ equity created by a corporation’s profitable activities.

Question 36

Return on Equity Ratio

Answer 36

the ratio of net income to beginning owner’s equity; used to judge a business’s success compared to other activities or investments; may be modified for proprietorship’s or partnerships by subtracting the value of the owner’s efforts in managing the business from the reported income.

Question 37

Revenue Recognition Principle

Answer 37

the rule that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash, and (3) measures the amount of revenue as the cash plus the cash equivalent value of any noncash assets received from customers in exchange for goods or services.

Question 38

Revenues

Answer 38

inflows of cash or other assets received in exchange for providing goods or services to customers; may also occur as decreases in liabilities.

the increase in assets, or decrease in liabilities, that result from business activities that are done to earn profit; result in an increase in owner’s equity.

Question 39

Shareholders

Answer 39

the owners of a corporation; also called stockholders.

Question 40

Shares

Answer 40

units of ownership in a corporation; also called stock.

Question 41

Single Proprietorship

Answer 41

a business owned by one individual that is not organized as a corporation.

Question 42

Sole Propriotorship

Answer 42

another name for a single proprietorships.

Question 43

Statements of Changes in Financial Position

Answer 43

a financial statement that describes where a company’s cash came from and where it went during the period.

Question 44

Statements of Changes in Owner’s Equity

Answer 44

a financial statement that shows the beginning balance of owner’s equity, the changes in equity that resulted from new investments by the owner, net income (or net loss), and withdrawals, and the ending balance. (specific period of time)

Question 45

Statement of Financial Position

Answer 45

another name for the balance sheet.

Question 46

Withdrawal

Answer 46

a payment from a proprietorship or partnership to its owner or owners.

Question 47

Accounting

Answer 47

the information system that identifies records, and communicates the economic events of an organization to a wide variety of interested users.

Question 48

Accounting Standards for Private Enterprises (ASPE)

Answer 48

A set of standards developed by the accounting standards board (AcSB) that may be used for financial reporting by private enterprises in Canada.

Question 49

Accounting transaction

Answer 49

an economic event that is recorded in the accounting records because it changes the assets, liabilities, or owner’s equity items of the organization

Question 50

Annual Report

Answer 50

information that a corporation gives each year to its shareholders and the other interested parties about its operations and financial position. It includes the financial statements and auditors’ report, in addition to information and reports by management.

Question 51

Cash flow statement

Answer 51

financial statement that provides information about the cash receipts and cash payments for a specific period of time

Question 52

Drawings

Answer 52

withdrawals of cash or other assets from an unincorporated business for the owner’s personal use. drawings result in a decrease in an assets and a decrease in owner’s equity.

Question 53

Fair Value

Answer 53

Generally the amount the asset could be sold for in the market assuming the company is a going concern, not the amount that a company would receive in an involuntary liquidation or distress sale.

Question 54

generally accepted accounting principles (GAAP)

Answer 54

an accepted set of accounting standards that includes broad principles and practices, as well as rules and procedures. These standards indicate how to report economic events.

Question 55

international financial reporting standards (IFRS)

Answer 55

a set of global standards developed by the international accounting standards board (IASB) used for financial reporting by publicly accountable enterprises.

Question 56

investments by the owner

Answer 56

the increase in owner’s equity hat results from assets put into the business by the owner.

Question 57

investors

Answer 57

owners or potential owners of a business.

Question 58

limited liability

Answer 58

the legal principle that the owner’s liability for the debts of the business is limited to the amount they invested in the business.

Question 59

loss

Answer 59

the amount by which expenses are greater than revenues. a loss decreases owner’s equity

Question 60

measurement

Answer 60

the process by determining the amount that should be recognized.

Question 61

monetary unit assumption

Answer 61

an assumption that states that only transaction data that can be expressed as an amount of money may be included in the accounting records. it is also assumed that the monetary unit is stable.

Question 62

note payable

Answer 62

a liability supported by a written promise to pay a specific amount, with interest, at a specific time , in the future.

Question 63

onwer’s equity

Answer 63

the owner’s claim on the assets of the company, which is equal to total assets minus total liabilities.

Question 64

prepaid expense

Answer 64

the asset created when a business pays cash for costs incurred in advance of being used or consumed.

Question 65

profit

Answer 65

the amount by which revenues are greater than expenses. profit increases owner’s equity.

Question 66

proprietorship

Answer 66

a small business owned by one person.

Question 67

publicly accountable enterprises

Answer 67

publicly traded companies, as well as securities brokers and dealers, banks, and credit unions whose role is to hold assets for the public as part of their primary business.

Question 68

recognition

Answer 68

the process of recording a transaction in the accounting records.

Question 69

unearned revenue

Answer 69

the liability created when a customer pays in advance of being provided a service or product.

Question 70

unlimited liability

Answer 70

the principle that the owners of a business are personally liable (responsible) for all debts of the business.

Question 71

current assets

Answer 71

assets that are reasonably expected to be realizes in cash or to be sold or consumed within one year or one operating cycle of the business, whichever is longer; cash, temporary investments, accounts receivable, notes receivable, merchandise, inventory, prepaid expenses, office supplies. Recorded in order of liquidity.

Question 72

investments

Answer 72

long-term assets such as shares, bonds, promissory notes, and land held for future expansion.