Chapter 2 GLOSSARY REVIEW

Question 1

Classified Balance Sheet

Answer 1

A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections.

Question 2

Comparability

Answer 2

Ability to compare the accounting information of different companies because they use the same accounting principles.

Question 3

Consistency

Answer 3

Use of the same accounting principles and methods from year to year within a company.

Question 4

Cost Constraint

Answer 4

Constraint that weighs the cost that com- panies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Question 5

Current Assets

Answer 5

Assets that companies expect to convert to cash or use up within one year or the operating cycle, whichever is longer.

Question 6

Current Liabilities

Answer 6

Obligations that a company expects to pay within the next year or operating cycle, whichever is longer.

Question 7

Current Ratio

Answer 7

A measure of liquidity computed as current assets divided by current liabilities.

Question 8

Debt to Assets Ratio

Answer 8

A measure of solvency calculated as total liabilities divided by total assets. It measures the percentage of total financing provided by creditors.

Question 9

Earnings Per Share (EPS)

Answer 9

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.

Question 10

Economic Entity Assumption

Answer 10

An assumption that every economic entity can be separately identified and accounted for.

Question 11

Fair Value Principle

Answer 11

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Question 12

Faithful Representation

Answer 12

Information that is complete, neutral, and free from error.

Question 13

Financial Accounting Standards Board (FASB)

Answer 13

The primary accounting standard-setting body in the United States.

Question 14

Free Cash Flow

Answer 14

Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.

Question 15

Full Disclosure Principle

Answer 15

The accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Question 16

Generally Accepted Accounting Principles (GAAP)

Answer 16

A set of accounting standards that have substantial authoritative support and which guide accounting professionals.

Question 17

Going Concern Assumption

Answer 17

The assumption that the company will continue in operation for the foreseeable future.

Question 18

Historical Cost Principle

Answer 18

Anaccountingprinciplethatstates that companies should record assets at their cost.

Question 19

Intangible Assets

Answer 19

Assets that do not have physical substance.

Question 20

International Accounting Standards Board (IASB)

Answer 20

An accounting standard-setting body that issues standards adopted by many countries outside of the United States.

Question 21

International Financial Reporting Standards (IFRS)

Answer 21

Accounting standards, issued by the IASB, that have been adopted by many countries outside of the United States

Question 22

Working Capital

Answer 22

The difference between the amounts of current assets and current liabilities.

Question 23

Verifiable

Answer 23

The quality of information that occurs when independent observers, using the same methods, obtain similar results.

Question 24

Understandability

Answer 24

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Question 25

Timely

Answer 25

Information that is available to decision-makers before it loses its capacity to influence decisions.

Question 26

Solvency Ratios

Answer 26

Measures of the ability of the company to survive over a long period of time.

Question 27

Solvency

Answer 27

The ability of a company to pay interest as it comes due and to repay the balance of debt due at its maturity.

Question 28

Securities and Exchange Commission (SEC)

Answer 28

The agency of the U.S. government that oversees U.S. financial markets and accounting standard-setting bodies.

Question 29

Relevance

Answer 29

The quality of information that indicates the information makes a difference in a decision.

Question 30

Ratio Analysis

Answer 30

A technique that expresses the relationship among selected items of financial statement data.

Question 31

Ratio

Answer 31

An expression of the mathematical relationship between one quantity and another.

Question 32

Public Company Accounting Oversight Board (PCAOB)

Answer 32

The group charged with determining auditing standards and reviewing the performance of auditing firms.

Question 33

Property, Plant, and Equipment

Answer 33

Assets with relatively long useful lives that are currently used in operating the business.

Question 34

Profitability Ratios

Answer 34

Measures of the operating success of a company for a given period of time.

Question 35

Periodicity Assumption

Answer 35

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.

Question 36

Operating Cycle

Answer 36

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash.

Question 37

Monetary Unit Assumption

Answer 37

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Question 38

Materiality

Answer 38

Whether an item is large enough to likely in- fluence the decision of an investor or creditor.

Question 39

Long-term Liabilities (long-term debt)

Answer 39

Obligations that a company expects to pay after one year.

Question 40

Long-term Investments

Answer 40

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 receiv- able.

Question 41

Liquidity Ratios

Answer 41

Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.

Question 42

Liquidity

Answer 42

The ability of a company to pay obligations that are expected to become due within the next year or operating cycle.